<PAGE>
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 September 30, 1997
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_X_ No___
Common Shares, $.01 Par Value,
Outstanding as of November 7, 1997 - 12,471,850
Index to Exhibits at page 15
<PAGE>
AIRNET SYSTEMS, INC.
FORM 10-Q FOR FISCAL QUARTER ENDED SEPTEMBER 30, 1997
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1997 and
September 30, 1996. . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three months
and nine months ended September 30, 1997 and 1996. . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . . . . 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . 9
Item 3 Quantitative and Qualitative Disclosures About Market Risk. . . . . 12
PART II: OTHER INFORMATION
Items 1 through 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AIRNET SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 1996
----------- ------------
(UNAUDITED)
(note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,729,285 $11,564,191
Accounts receivable:
Trade, less allowances 11,777,716 7,392,648
Shareholder, affiliates, and employees 246,552 260,220
Spare parts and supplies 6,203,793 5,195,917
Deposits and prepaids 7,099,584 3,039,249
----------- -----------
Total current assets 30,056,930 27,452,225
Net property and equipment 55,165,077 40,821,612
Other assets:
Intangibles, net of accumulated amortization 5,376,204 1,741,091
Investment in partnerships and other 3,318,608 48,103
Deferred tax asset - 5,803,057
----------- -----------
Total assets $93,916,819 $75,866,088
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $5,410,235 $3,959,016
Salaries and related liabilities 1,365,303 1,264,338
Accrued expenses 1,626,586 553,359
Deferred taxes 208,995 208,995
----------- -----------
Total current liabilities 8,611,119 5,985,708
Notes payable 5,000,000 196,579
Deferred tax liability 3,397,062 3,397,062
Shareholders' equity:
Preferred shares, $.01 par value; 10,000,000 shares
authorized; and no shares issued and outstanding - -
Common shares, $.01 par value; 40,000,000 shares
authorized; and 12,465,443 and 12,463,788 shares
issued and outstanding at September 30, 1997
and September 30, 1996, respectively 127,450 124,638
Additional paid-in-capital 79,764,030 76,063,102
Retained earnings 2,779,146 (9,901,001)
Treasury shares; 279,600 shares held at cost (note 6) (5,761,988) -
----------- -----------
Total shareholders' equity 76,908,638 66,286,739
----------- -----------
Total liabilities and shareholders' equity $93,916,819 $75,866,088
----------- -----------
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
AIRNET SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(note 1) (note 1)
<S> <C> <C> <C> <C>
Net revenues
Air transportation $25,921,506 $21,066,677 $70,456,193 $60,742,027
Fixed base operations 325,746 287,993 1,088,088 812,414
----------- ----------- ----------- -----------
Total net revenues 26,247,252 21,354,670 71,544,281 61,554,441
Costs and expenses
Air transportation 18,415,904 13,741,029 48,095,673 40,949,813
Fixed base operations 284,370 325,995 860,312 823,753
Selling, general and administrative 1,525,052 2,271,622 5,605,141 8,727,209
----------- ----------- ----------- -----------
Total costs and expenses 20,225,326 16,338,646 54,561,126 50,500,775
----------- ----------- ----------- -----------
Income from operations 6,021,926 5,016,024 16,983,155 11,053,666
Interest expense 24,563 19,145 25,331 695,071
Offering related non-recurring expenses - - - 13,704,398
----------- ----------- ----------- -----------
Income (loss) before income taxes 5,997,363 4,996,879 16,957,824 (3,345,803)
Provision for income taxes (note 4) 2,399,000 2,173,386 6,763,000 4,202,491
----------- ----------- ----------- -----------
Net income (loss) $3,598,363 $2,823,493 $10,194,824 ($7,548,294)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per common share $0.29 $0.23 $0.81 -
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares outstanding 12,579,466 12,463,788 12,611,375 -
Pro forma information (note 5):
Historical loss before income taxes ($3,345,803)
Pro forma adjustments other than income taxes 2,942,320
-----------
Pro forma loss before income taxes (403,483)
Pro forma tax provision on pro forma loss 4,297,026
-----------
Pro forma net loss ($4,700,509)
-----------
-----------
Pro forma net loss per common share ($0.52)
-----------
-----------
Weighted average common shares outstanding 8,981,587
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
AIRNET SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1997 1996
----------- -----------
(note 1)
<S> <C> <C>
Operating activities
Net income (loss) $10,194,824 ($7,548,294)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Offering related non-recurring, non-cash expenses - 13,704,398
Depreciation 6,598,119 6,488,951
Amortization of intangibles 245,878 242,352
Deferred taxes 4,157,994 2,438,000
Provision for losses on accounts receivable 42,481 26,502
Deferred compensation - 403,139
Loss (gain) on disposition of assets (87,593) 79,295
Cash provided by (used in) in operating assets and liabilities:
Accounts receivable (3,519,354) 18,344
Spare parts and supplies (1,155,216) (641,822)
Prepaid expenses (3,255,962) (353,480)
Accounts payable 1,227,860 (2,603,743)
Accrued expenses 1,172,496 (1,014,299)
Salaries and related liabilities (786,871) 127,219
Other, net (288,700) (41,425)
----------- -----------
Net cash provided by operating activities 14,545,956 11,325,137
Investing activities
Acquisition of Pacific Air Charter, Inc. net of cash acquired (Note 3) (209,846) -
Acquisition of Data Air Courier, Inc., net of cash acquired (Note 3) (4,049,216)
Acquisition of Midway Aviation, Inc., net of cash acquired (Note 3) (2,810,416)
Purchases of property and equipment (15,452,352) (10,908,597)
Payments for covenants not to compete (105,000) -
Proceeds from sales of property and equipment 933,037 -
----------- -----------
Net cash used in investing activities (18,883,377) (13,719,013)
Financing activities
Proceeds from the issuance of Common Shares - net (29) 82,697,107
Exercise of stock options 1,757,266 -
Purchase of Donald Wright Warrant - (29,901,785)
Proceeds from shareholder notes receivable - 282,508
Repayment of borrowings under the revolving credit facility - (6,375,000)
Repayment of long-term debt (1,560,206) (12,336,705)
Proceeds from the issuance of long-term debt 5,000,000 1,004,000
Purchase of treasury stock (5,761,988) -
Distributions to shareholders - (23,384,233)
----------- -----------
Net cash provided by (used in) financing activities (564,957) 11,985,892
----------- -----------
Net increase (decrease) in cash (4,902,378) 9,592,016
Cash and cash equivalents at January 1 9,631,663 151,115
----------- -----------
Cash and cash equivalents at September 30 $4,729,285 $9,743,131
----------- -----------
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
AIRNET SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
AirNet Systems, Inc. (the "Company") operates a fully integrated national air
transportation network which provides delivery service of 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.
The accompanying unaudited condensed consolidated financial statements include
the accounts of AirNet Systems, Inc. and its subsidiaries. These financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions for 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 fiscal year ended September 30, 1996 consolidated financial
statements of AirNet Systems, Inc. contained in the Annual Report on Form 10-K
(File No. 0-28428) for additional disclosures including a summary of the
Company's accounting policies, which have not changed.
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 September 30, 1997 are not necessarily
indicative of the results to be expected for the year ending December 31, 1997.
On May 14, 1997, the Board of Directors of the Company approved a change in the
fiscal year end of the Company from September 30 to December 31.
The preparation of the condensed consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes thereto. Actual results could differ from
those estimates.
2. INITIAL PUBLIC OFFERING
In May, 1996, the Company completed its initial public offering (the "Offering")
which raised approximately $83.0 million, net of expenses. Proceeds were used
to repay outstanding debt, repurchase an outstanding warrant, make distributions
to former shareholders and to provide working capital to finance future
acquisitions and internal growth.
3. ACQUISITIONS
Effective July 31, 1997, the Company acquired all of the outstanding common
shares of Data Air Courier, Inc. ("Data Air"), whose primary business involves
the nationwide transportation of canceled checks between clearing banks through
the use of company owned ground vehicles, independent agents and commercial
airlines. The Company accounted for the acquisition under the purchase method
of accounting. The purchase price of the acquisition totaled approximately
$4,049,000 and resulted in goodwill of approximately $3,610,000, which will be
amortized over 25 years. The Company also entered into a five year covenant not
to compete for $50,000. Of the purchase price, $800,000 was placed in escrow
and may be withdrawn in its entirety on July 31, 1998. The acquired assets and
assumed liabilities, including goodwill, have been recorded at their estimated
fair values as of July 31, 1997. The Company's condensed consolidated financial
6
<PAGE>
statements for the three and nine months ended September 30, 1997 include the
results of operations of Data Air since the purchase date. The following are
pro forma results of operations for AirNet and Data Air as though they were
combined as of the beginning of the periods presented (in thousands, except per
share data):
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
--------- ------- --------- ---------
(Pro Forma
See Note 5)
Revenues $ 27,548 $25,232 $ 80,569 $ 73,224
Net Income 3,497 3,001 9,934 (3,901)
Net income per share $ 0.28 $ 0.24 $ 0.79 $ (0.43)
Effective June 6, 1997, the Company acquired all of the outstanding shares of
Pacific Air Charter, Inc. ("PAC") for approximately $400,000 in cash. PAC
operates a fleet of eight aircraft, primarily transporting canceled checks
between clearing banks along the West coast. The results of PAC's operations
since the effective date of the purchase have been included in the Company's
accompanying financial statements.
Effective January 30, 1997, the Company acquired Express Convenience Center,
Inc. d/b/a ECC Worldwide Services ("ECC") in a business combination accounted
for as a pooling of interests. ECC's primary services include small package
delivery services within the United States and certain other countries. All of
the stock of ECC was exchanged for 145,953 Common Shares of the Company. The
financial statements of the Company have been restated to include ECC for all
periods presented.
4. INCOME TAXES
Prior to the Offering, the Company's 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, for the
nine month period ending September 30, 1996, the provision for federal and
certain state income taxes has been included in net income for only for the
portion of operations related to ECC operations and for the period from May 30,
1996, the date of the Offering, to September 30, 1996.
Upon completion of the Offering, the Company ceased to qualify as an S
Corporation and became subject to corporate income taxes. The Company recorded
a current tax benefit of $1,764,491 related to its operations for the period
from May 30, 1996 to September 30, 1996, which includes the deductibility of a
$2,558,362 write-off of a covenant not to compete. In the same period, the
Company also recorded an additional net tax liability of $2,438,00 resulting
from the cumulative effect of deferred income taxes attributable to its change
in tax status. The income tax rate is based on statutory federal and state
rates, and an estimate of annual earnings adjusted for the permanent differences
between reported earnings and taxable income.
7
<PAGE>
5. PRO FORMA INFORMATION
The pro forma statement of operations for the nine months ended September 30,
1996 presents the pro forma effects on the historical financial information of
certain Offering related transactions as if they had occurred on January 1,
1996. The following is a summary of such pro forma adjustments:
<TABLE>
<CAPTION>
Nine months ended
September 30, 1996
------------------
<S> <C>
The elimination of interest expense related to the debt repaid $ 666,383
The elimination of the Wright Agreement not to compete 536,127
The elimination of deferred compensation and employee
stock purchase agreement expense for certain key employees 1,429,799
The reduction of compensation expense for executive officers based on new
employment agreements 310,011
----------
Total pro forma adjustments other than income taxes $2,942,320
----------
----------
</TABLE>
The pro forma section of the statement of operations also includes an
estimate of taxes as if the Company were a C Corporation during the entire
nine months ended September 30, 1996.
Pro forma net loss per share for the nine months ended September 30, 1996 is
based on the weighted average number of Common Shares outstanding during the
period, including the effect of the 2,650,764 Common Shares subject to
certain warrants which were outstanding during the nine months ended
September 30, 1996. One of the warrants was subsequently purchased by the
Company and the second warrant was exercised in conjunction with the Offering.
6. TREASURY STOCK
In August, 1997, the Company implemented a stock repurchase program. During
the quarter, the Company repurchased 279,600 of the 600,000 common shares they
were authorized to repurchase, for $5,762,000. The common shares were purchased
at what management believes were reasonable prices. The repurchase program was
implemented primarily to provide common shares to fund currently outstanding
stock options and the AirNet Systems, Inc. Employee Stock Purchase Program,
without dilution.
7. SUBSEQUENT EVENTS
In October, 1997, subsequent to the close of the quarter, the Company purchased
its current headquarters in Columbus, Ohio from Gerald G. Mercer, the Company's
President and Chief Executive Officer, for $4.1 million.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS
128"). FAS 128 establishes standards for computing and presenting earnings per
share ("EPS"). FAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS which excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding during the period. This statement also requires dual
presentation of basic EPS and diluted EPS on the face of the income statement
for all periods presented. FAS 128 is effective for periods ending after
December 15, 1997. The Company plans to adopt FAS 128 in the period ending
December 31, 1997 and does not expect the impact on EPS to be significant.
8
<PAGE>
The FASB has also recently issued Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" ("FAS 130") and Statement of Financial
Accounting Standard No. 131, "Disclosures about Segments of Enterprise and
Related Information" ("FAS 131"). FAS 130, effective for 1998, will require
separate reporting of certain items affecting shareholders' equity outside of
those included in arriving at net earnings. The Company does not expect FAS 130
to have a material effect on its financial statements. FAS 131, effective for
1998, establishes requirements for reporting information about operating
segments in annual reports and interim statements. The Company has not
determined the impact of FAS 131 on its financial reporting.
AIRNET SYSTEMS, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Quarterly Report on Form 10-Q, including, but
not limited to, information regarding future economic performance and plans and
objectives of the Company's management are forward-looking statements which
involve risks and uncertainties. The following risks and uncertainties, in
addition to the other risks previously disclosed in the Company's filings with
the Securities and Exchange Commission and press releases, could cause actual
results to differ materially from those contemplated in any such forward looking
statement: potential regulatory changes by the Federal Aviation Administration,
the Federal Reserve or foreign governments, which could increase the level of
regulation of the Company's business; adverse weather conditions; the ability to
successfully integrate the operations of acquired companies; technological
advances and other economic, competitive and governmental factors affecting the
Company's markets, prices and other facets of its operations.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Net revenues were $71.5 million for the nine months ended September 30, 1997, an
increase of $10.0 million, or 16.2%, over the same period of fiscal 1996. Net
revenues from check delivery increased $8.4 million, or 16.8%. Of the increase
in revenues from check delivery, $2.5 million is attributable to price increases
effective January 1, 1997, and approximately $4.7 million can be attributed to
the Midway Aviation ("Midway"), Pacific Air Charter, Inc. ("PAC") and Data Air
Courier, Inc. ("Data Air") acquisitions, which were completed in September 1996,
June 1997 and July 1997, respectively. The balance is due to increased business
activity and increases in total weight shipped, despite a slight decrease in the
number of flying days from 151 in the nine months ended September 30, 1996 to
150 for the same period in 1997. Net small package delivery revenues increased
$1.3 million, or 12.0%, due to increased activity from both new and existing
customers. These results and results from comparable periods in fiscal 1996
include Express Convenience Center, Inc.("ECC"), which was acquired in January,
1997 through a pooling of interests. Revenues from fixed base operations
increased $0.3 million, or 33.9%, due to an increase in the retail sale of
aviation parts.
9
<PAGE>
Total costs and expenses were $54.6 million for the nine months ended September
30, 1997, an increase of $4.1 million, or 8.0%, over the same period in fiscal
1996, resulting in income from operations of $17.0 million for the nine months
ended September 30, 1997 compared to $11.1 million for the same period of fiscal
1996. Air transportation expenses were up $7.3 million, or 17.5%, while
selling, general and administrative expenses decreased $3.1 million, or 35.8%,
for the nine month period.
Payroll costs associated with air and ground transportation and customer service
support increased $3.1 million due to the addition of air and ground personnel
required to service a larger fleet of aircraft and the increased volume of
activity. Increased flight hours, offset slightly by lower fuel prices,
contributed to a $1.2 million, or 19.0%, increase in aircraft fuel expense. The
increased fleet size, from 94 aircraft at September 30, 1996 to 111 at September
30, 1997, and increased flight hours resulted in a $0.4 million, or 8.9%,
increase in maintenance expense. The growth in the fleet also contributed to a
$0.2 million increase in aircraft insurance expense. The Company's costs for
shipping packages on commercial airlines increased $0.9 million due to the
addition of Data Air shipments, of which a significant portion are moved during
daytime hours when the Company's aircraft do not fly.
Selling, general and administrative expenses decreased primarily due to the
restructuring of executive compensation plans (which resulted in a $0.9 million
decrease), the termination of stock purchase agreements (which resulted in a
$1.4 million decrease) and the termination of a covenant not to compete (which
resulted in a $0.5 million decrease). All were effective in conjunction with
the Company's initial public offering (the "Offering") in May 1996. The stock
purchase agreements were with certain executive officers and had been tied to
appreciation in the book value of the Common Shares of the Company. The
covenant not to compete required payments based on the Company's cash flow and
debt to equity ratio.
Interest costs decreased $0.7 million as a result of the repayment of all
outstanding debt in September 1996 with proceeds from the Offering.
The Company operated as an S Corporation under the Internal Revenue Code from
1988 until it elected to terminate its S Corporation status in conjunction with
the Offering. Under its Subchapter S election, shareholders of the Company were
taxed directly on the Company's income and, consequently, the Company was not
subject to federal and certain state income taxes at the corporate level for the
nine months ended September 30, 1996, except for the portion of business that
related to the ECC acquisition, which was taxed as a C Corporation, and the
period subsequent to the Offering in May 1996. The Company recorded tax expense
of $6.8 million for the nine months ended September 30, 1997 on income for the
period.
Pro forma information reflects the effects of certain Offering related
transactions on the statement of operations for the nine months ended September
30, 1996 as if they occurred on January 1, 1996. See Note 5 to the Condensed
Consolidated Financial Statements included herein.
Adjusted pro forma net income per share was $0.64 for the nine months ended
September 30, 1996 with the assumptions that the $13.7 million non-cash,
non-recurring expenses incurred in conjunction with the Offering are excluded
and the Common Shares issued in the Offering were outstanding for the entire
period.
10
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Net revenues were $26.2 million for the three months ended September 30,
1997, an increase of $4.9 million, or 22.9%, over the same period of fiscal
1996. Net revenues from check delivery increased $4.3 million, or 24.6%. Of
the increase in revenues from check delivery, $0.9 million is attributable to
price increases effective January 1, 1997 and approximately $3.3 million can
be attributed to the Midway, PAC and Data Air acquisitions. The balance is
due to increased business activity and increases in total weight shipped.
Net small package delivery revenues increased $0.6 million, or 15.5%, due to
increased activity from both new and existing customers. These results and
results from comparable periods in fiscal 1996 include ECC.
Total costs and expenses were $20.2 million for the three months ended
September 30, 1997, an increase of $3.9 million, or 23.8%, over the same
period in fiscal 1996, resulting in income from operations of $6.0 million
for the three months ended September 30, 1997 compared to $5.0 million for
the same period of fiscal 1996. Air transportation expenses were up $4.7
million, or 34.0%, while selling, general and administrative expenses
decreased $0.7 million, or 32.9%, for the three month period.
Payroll costs associated with air and ground transportation and customer
service support increased $2.0 million due to the addition of air and ground
personnel required to service a larger fleet of aircraft and the increased
volume of activity. An increase in flight hours, offset slightly by a
decrease in fuel prices, contributed to a $0.3 million, or 13.5%, increase in
aircraft fuel expense. The increased fleet size, coupled with the increased
flight hours, resulted in a $0.2 million, or 11.7%, increase in maintenance
expense. Aircraft lease expense decreased $0.2 million due to the purchase
of eleven previously leased aircraft. The Company's costs for shipping
packages on commercial airlines increased $0.9 million due to the addition of
Data Air shipments, of which a significant portion are moved during daytime
hours when the Company's aircraft do not fly. Courier vehicle costs
increased $0.2 million due to the increase in the size of the ground fleet
from approximately 100 vehicles at September 30, 1996 to over 300 at
September 30, 1997.
A restructuring of officer compensation, coupled with the fact the Company
employed two less officers in the 1997 quarter contributed to the decrease in
selling, general and administrative expenses. A reduction of staff and
overhead costs associated with the integration of ECC into the Company's
operations also contributed to the decrease. In addition, the Company
incurred less in legal fees in the 1997 quarter, compared to the 1996
quarter.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATING ACTIVITIES. Net cash flow from operating activities
was $14.5 million for the nine months ended September 30, 1997, compared to
$11.3 million for the nine months ended September 30, 1996.
CURRENT CREDIT ARRANGEMENTS. The Company maintains a credit agreement with a
bank that provides a $50.0 million, five year, unsecured revolving credit
facility. The credit agreement limits the availability of funds to certain
specified percentages of accounts receivable, inventory and the wholesale value
of aircraft and equipment. In addition, the credit agreement requires the
maintenance of certain minimum net worth and cash flow levels, imposes certain
limitations on payments of dividends, restricts the amount of additional debt
and requires prior bank approval for certain acquisitions. As of September 30,
1997, the Company had drawn $5.0 million on the line.
11
<PAGE>
INVESTING ACTIVITIES. Capital expenditures totaled $15.5 million for the nine
months ended September 30, 1997 compared to $10.9 million for the same period in
fiscal 1996. Approximately $6.6 million was incurred in connection with the
purchase of 19 new aircraft, ten of which were previously leased by the Company.
The remainder was incurred primarily for flight equipment and delivery vehicles.
The Company anticipates it will spend an additional $5.0 million on capital
items through December 31, 1997, excluding any acquisitions of new businesses.
The Company anticipates it will continue to acquire aircraft and flight
equipment as necessary to maintain growth and continue offering quality service
to its customers
In October, 1997, subsequent to the close of the quarter, the Company purchased
its current headquarters in Columbus, Ohio from Gerald G. Mercer, the Company's
President and Chief Executive Officer, for $4.1 million in cash. In September,
1997, the Company also began leasing additional office space. Currently, the
Company is also considering an expansion of its facilities. However, no
definitive arrangements or agreements have been reached.
For the nine months ended September 30, 1997, the Company has completed three
acquisitions of companies for approximately $4.3 million in cash and 145,953
Common Shares. See Note 3 to the Condensed Consolidated Financial Statements
included herein.
In August, 1997, the Company implemented a stock repurchase program. During
the quarter, the Company repurchased 279,600 of the 600,000 common shares they
were authorized to repurchase, for $5,762,000. The common shares were purchased
at what management believes were reasonable prices. The repurchase program was
implemented primarily to provide common shares to fund currently outstanding
stock options and the AirNet Systems, Inc. Employee Stock Purchase Program,
without dilution.
The Company anticipates that operating cash and capital expenditure requirements
will continue to be funded by cash flow from operations, cash on hand and bank
borrowings.
SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS
The Company's operations historically have been somewhat seasonal and somewhat
dependent on the number of banking holidays falling during the week. Because
financial institutions are currently the Company's principal customers, the
Company's air system is scheduled around the needs of financial institution
customers. When financial institutions are closed, there is no need for the
Company to operate a full system. The Company's fiscal quarter ending December
31, is often the most impacted by bank holidays (including Thanksgiving and
Christmas) recognized by its primary customers. When these holidays fall on
Monday through Thursday, the Company's revenue and net income are adversely
affected. The Company's annual results fluctuate as well.
Operating results are also affected by the weather. The Company generally
experiences higher maintenance costs during its fiscal quarter ending March 31.
Winter weather requires additional costs for de-icing, hangar rental and other
aircraft services. The Company's cash flows are also influenced by the budget
cycles of its primary customers. Many financial institutions have calendar year
budget cycles and desire to pay for December services prior to year end. This
results in increased cash flows for the Company's fiscal quarter ending December
31, but decreased cash flows in January and February.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
12
<PAGE>
AIRNET SYSTEMS, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. Not Applicable
Item 2. Changes in Securities and Use of Proceeds. 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 2(a) Leasehold Interest Purchase Agreement dated
October 31, 1997 by and between Gerald G. Mercer
and AirNet Systems, Inc.
Exhibit 2(b) Assignment and Assumption of Leases dated
October 31, 1997 by and between Gerald G. Mercer
and AirNet Systems, Inc.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended
September 30, 1997.
13
<PAGE>
AIRNET SYSTEMS, INC.
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.
Dated: November 13, 1997 By: /s/ Eric P. Roy
-------------------------------
Eric P. Roy,
Executive Vice President
(Duly Authorized Officer)
(Principal Financial Officer)
14
<PAGE>
AIRNET SYSTEMS, INC.
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- ------------------------------------------------------------
2(a) Leasehold Interest Purchase Agreement dated October 31, 1997
by and between Gerald G. Mercer and AirNet Systems, Inc.
2(b) Assignment and Assumption of Leases dated October 31, 1997
by and between Gerald G. Mercer and AirNet Systems, Inc.
27 Financial Data Schedule
15
<PAGE>
LEASEHOLD INTEREST PURCHASE AGREEMENT
This Leasehold Interest Purchase Agreement ("Agreement") is made this ___
day of October, 1997 by and between Gerald G. Mercer (aka Jerry G. Mercer), an
individual having a mailing address of 700 Ackerman Road, Suite 400, Columbus,
Ohio 43202 ("Seller"), and AirNet Systems, Inc. an Ohio corporation having a
mailing address of 3939 International Gateway Drive, Columbus, Ohio 43219
("Buyer".)
BACKGROUND
A. Seller is the lessee under certain leases which are more particularly
described on EXHIBIT A attached hereto (collectively, the "Leases").
B. Seller desires to sell and assign, and Buyer desires to purchase, all
of Seller's right, title, and interest as lessee under the Leases, and in, to
and under the leasehold interest created thereby (collectively, the "Leasehold
Interest") upon the terms and conditions hereinafter set forth.
AGREEMENT
The parties hereto, in consideration of the mutual covenants contained in
this Agreement, and intending to be legally bound, agree as follows:
Section 1. SALE AND ASSIGNMENT. Seller agrees to sell and assign to
Buyer, and Buyer agrees to purchase from Seller, the Leasehold Interest. The
Leasehold Interest shall include all of the right, title and interest of Seller
in and to all improvements now or hereafter located on the Leased Premises
(defined in the Leases) and any repairs, alterations or improvements thereto.
The Leased Premises is more particularly described on EXHIBIT B attached hereto.
Section 2. PURCHASE PRICE. The purchase price for the Leasehold
Interest (the "Purchase Price") is Four Million One Hundred Five Thousand
Dollars ($4,105,000), payable as follows:
(a) Buyer shall assume and agree to pay an existing mortgage loan
from Columbus Countywide Development Corporation to Seller, as subsequently
assigned to the Small Business Administration (the "SBA Mortgage"), the current
unpaid principal balance of which is approximately $336,000.
(b) the balance of the Purchase Price shall be paid at Closing (as
hereinafter defined) in cash in the form of a
<PAGE>
certified or bank check or wired federal funds.
Section 3. CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place (a) at the offices of Vorys,
Sater, Seymour and Pease, 52 East Gay Street, Columbus, Ohio or such other
place as Seller and Buyer may mutually agree upon in writing, and (b) not
later than October ____, 1997.
Section 4. REPRESENTATIONS AND WARRANTIES OF SELLER. To induce Buyer to
enter into this Agreement to purchase the Leasehold Interest, Seller
represents and warrants to Buyer as follows:
a. There are no liens, restrictions, encumbrances, easements or
other title objections affecting the Leased Premises that are prior in
lien to the Leases, except as identified on the attached EXHIBIT C.
b. There are no leases, subleases, tenancies, licenses, or
other rights of occupancy or use of any portion of the Leased Premises
other than the Leases and the Subleases identified on attached EXHIBIT
D.
c. Seller is the sole legal and beneficial owner of the
Leasehold Interest and Seller has made no prior assignment of Seller's
interest in the Leases.
d. The Leasehold Interest is free and clear of all liens,
security interests, encumbrances, pledges, claims of others, or
equitable interests of any kind whatsoever, except the lien of the SBA
Mortgage.
e. The Leases are valid and subsisting and in full force and
effect in accordance with their terms.
f. The Leases identified on EXHIBIT A have not been modified or
amended except as set forth on EXHIBIT A.
g. The rents payable to Lessor under the Leases are as set
forth in the copies of the Leases previously delivered to Buyer by
Seller.
h. All real property taxes, additions, interest and penalties,
due with respect to the Premises for calendar year 1996 will have been
paid to the appropriate governmental agencies at or prior to the date
of Closing.
i. Neither Lessor nor Seller is in default under
2
<PAGE>
any provision of the Leases, and no event has occurred which, with the
passage of time or the giving of notice, or both, would constitute a
default by Seller.
j. Seller has performed, and at Closing shall have performed,
all obligations that it has under the Leases that shall have accrued
as of Closing.
k. Seller has no management, service, equipment, supply,
maintenance, concession, or other agreements with respect to or
affecting the Leased Premises, which will be binding upon Buyer after
Closing.
l. Neither Seller nor, to Seller's knowledge, Lessor nor any
prior owner of the Leased Premises has disposed of or released any
hazardous substance, contaminant, or pollutant on or in the Leased
Premises, including any release from an underground storage tank on
the Leased Premises, liability for abatement or cleanup of which may
be imposed on Buyer under any applicable law, ordinance, or
regulation.
m. Seller does not know of any pending or threatened
condemnation or eminent domain proceedings that would affect the
Leased Premises.
n. No litigation or proceeding is pending or threatened
relating to Seller or the Leased Premises, or any part thereof, or, to
Seller's knowledge, to Lessor, which could have an adverse effect on
title to or the use and enjoyment or value of the Leased Premises or
the Leasehold Interest or any part thereof, or which could in any way
interfere with the consummation of this Agreement. No claims are
pending against Seller by any user of the Leased Premises, or by any
other person, for which Buyer or Lessor may be liable after Closing.
Section 5. CONTINGENCIES. The obligation of Buyer to purchase the
Leasehold Interest is subject to the satisfaction of each of the following
conditions, any of which may be waived in whole or in part by Buyer at or before
Closing:
a. At the date of Closing, the warranties and representations
of Seller set forth in this Agreement shall be true and correct.
b. At the date of Closing, Seller shall have performed all of
its other obligations under this Agreement.
3
<PAGE>
c. At the date of Closing, no petition in bankruptcy,
insolvency proceeding, or petition for reorganization or for the
appointment of a receiver or trustee shall have been filed by or
against Seller.
If any condition specified in this section is not timely satisfied by
Seller or waived by Buyer, Buyer shall have the right to terminate this
Agreement, in which event neither Buyer nor Seller shall have any further
obligation under this Agreement; provided, that termination of this Agreement
shall not be Buyer's sole remedy if Seller defaults, those additional remedies
being set forth in section 10 of this Agreement.
Section 6. DOCUMENTS TO BE DELIVERED. At Closing, Seller shall deliver
to Buyer the following documents, in form reasonably satisfactory to Buyer:
a. An Assignment of Leasehold Interest, substantially in the
form of the attached EXHIBIT E, duly executed and acknowledged by
Seller and Lessor (the "Assignment").
b. A Non-Foreign Affidavit, in the form reasonably requested by
Buyer, duly executed and acknowledged by Seller.
c. Such other documentation as may be required by Buyer.
Section 7. BROKERS. Seller and Buyer each represents and warrants to
the other that it has not dealt with any broker or other intermediary to whom a
fee or commission is payable in connection with or relating to the transaction
which is the subject of this Agreement. Seller and Buyer shall each defend,
indemnify, and hold the other harmless from and against any and all liability,
claim, charge, or damages, including without limitation attorney fees and court
costs, incurred by the other as a result of any breach of the foregoing
representation.
Section 8. TAXES; PRORATIONS. Real property taxes and all utility
charges are Buyer's responsibility under a Sublease between Buyer and Seller for
the entire Demised Premises. Therefore, there shall be no prorations of real
property taxes or utilities.
Section 9. CASUALTY; CONDEMNATION. If any portion of the Leased Premises
shall be taken, or proposed to be taken, by condemnation or purchase in lieu
thereof, or shall be damaged by fire or other casualty, before Closing,
Seller shall immediately advise Buyer thereof, and shall further advise Buyer
of whether Seller
4
<PAGE>
proposes to repair and restore the Leased Premises, and Buyer shall
thereafter have the option exercisable through the date of Closing, to
terminate this Agreement or to complete Closing.
Section 10. SELLER'S DEFAULT. If Seller shall default hereunder, Buyer
shall have the option of:
a. canceling this Agreement, in which event Seller shall
reimburse Buyer for the cost of any title search and the preparation
of this Agreement; or
b. exercising any rights or remedies as may be provided for or
allowed by law or in equity as a result of such default.
Section 11. ENTIRE AGREEMENT. This is the entire Agreement between the
parties, and there are no other terms, obligations, covenants, representations,
or conditions, oral or otherwise, of any kind whatsoever. Any agreement
hereafter made shall be ineffective to modify this Agreement, unless that
agreement is in writing and signed by the party against whom enforcement is
sought.
Section 12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding on and
shall inure to the benefit of the parties to this Agreement and their respective
heirs, executors, administrators, legal representatives, and assigns.
Section 13. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Ohio.
Section 14. SURVIVAL. Notwithstanding any presumption to the contrary, all
covenants, representations, warranties, and indemnities contained in this
Agreement shall survive Closing.
IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement as of the
date set forth above.
BUYER SELLER
- ----- ------
AIRNET SYSTEMS, INC.
By:___________________________ ______________________________
Eric P. Roy Gerald G. Mercer
Executive Vice President
5
<PAGE>
LIST OF EXHIBITS AND SCHEDULES TO LEASEHOLD INTEREST PURCHASE AGREEMENT
DATED OCTOBER 31, 1997 BY AND BETWEEN GERALD G. MERCER
AND AIRNET SYSTEMS, INC.
Exhibits
--------
Exhibit A Description of the Leases
Exhibit B Description of the Leased Premise
Exhibit C permitted Exceptions
Exhibit D Rights of Occupancy
Exhibit E Assignment of Leasehold Interest
NOTES: AirNet Systems, Inc., hereby agrees to furnish supplementary a copy of
any omitted Exhibits and Schedules to the Securities and Exchange Commission
upon request.
<PAGE>
ASSIGNMENT AND ASSUMPTION OF LEASES
This Agreement is made and entered into to be effective as of
the _____ day of October, 1997 (the "Effective Date"), by and between Gerald
G. Mercer (aka Jerry G. Mercer) ("Assignor"), and AirNet Systems, Inc., an
Ohio corporation ("Assignee").
Preliminary Statements
----------------------
A. Assignor is the tenant under those certain Leases
described as follows:
(a) Fuel Farm Lease Agreement between the City of
Columbus and P.D.Q. Air Service, Inc., dated August 15, 1984, the tenant's
interest in which was subsequently assigned to Assignor. A Memorandum of
said lease is recorded at Official Records Vol. 5954, page E-09, Recorder's
Office, Franklin County, Ohio.
(b) Lease Agreement between the City of Columbus and
Jerry G. Mercer dated October 4, 1984, as modified by (i) Modification #1
dated June 11, 1985, (ii) Modification #2 dated June 11, 1986, (iii)
Modification #3 dated May 15, 1987, (iv) Modification #4 dated August 17,
1989 and (v) Modification #5 dated December 15, 1994. A Memorandum of said
lease is recorded at Official Record Vol. 5317, page I12, and a Modification
is recorded at Official Record Vol. 6394, page A14, both in the Recorder's
Office, Franklin County, Ohio.
B. The Leases demise certain real property and improvements
described more particularly therein and in EXHIBIT A, attached hereto. The
real property is located on the south side of International Gateway Drive in
Columbus, Ohio and is generally known as 3939 International Gateway Drive,
Columbus, Ohio (herein called the "Property"). The permanent tax parcel
number for the Property is 010-200806.
C. Assignor desires to assign all of its right, title and
interest in, to and under the Leases and the leasehold estates in the
Property created thereby to Assignee, and Assignee desires to accept such
assignment and assume the Leases.
<PAGE>
AGREEMENT
NOW THEREFORE, in consideration of the premises as described in the
foregoing Preliminary Statements and of the mutual promises herein set forth,
the parties do hereby agree as follows:
1. ASSIGNMENT. Assignor hereby assigns and transfers to Assignee,
effective as of the Effective Date hereof, all of Assignor's right, title and
interest in, to and under the Leases and the leasehold estates in the
Property created thereby, including the rights-of-first refusal to lease
additional property contained therein.
2. ASSUMPTION. Assignee hereby assumes the Leases as of the Effective
Date hereof, and agrees to perform and observe all of the covenants and
conditions therein contained on the tenant's part to be performed and
observed from and after the Effective Date hereof.
3. INDEMNIFICATION. Assignor agrees to indemnify and hold Assignee
harmless against any loss or liability arising from or in connection with
Assignor's failure to perform and observe any of the covenants and conditions
of the Leases to be performed and observed by the tenant therein prior to the
Effective Date of this assignment.
[The remainder of this page 2 has intentionally been
left blank. The signatures appear on the following
page 3.]
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed and
delivered this Agreement to be effective as of October ____, 1997, regardless
of the actual dates of execution by the parties.
Signed and acknowledged
in the presence of the
following two (2)
witnesses as to each signature:
As to (i):
(i)
- ------------------------- -----------------------
(witness signature) Gerald G. Mercer
- ------------------------
(printed name)
and
- ------------------------
(witness signature)
- ------------------------
(printed name)
As to (ii) and (iii): AIRNET SYSTEMS, INC.
By:
- ------------------------- -----------------------
(witness signature) (signature)
Eric P. Roy
- ------------------------- --------------------------
(printed name) (printed name)
and Its Executive Vice-President
- ------------------------
(witness signature)
- ------------------------
(printed name)
3
<PAGE>
STATE OF OHIO
FRANKLIN COUNTY, ss:
The foregoing instrument was acknowledged before me this ____ day of
October, 1997 by Gerald G. Mercer.
------------------------
Notary Public
STATE OF OHIO
FRANKLIN COUNTY, ss:
The foregoing instrument was acknowledged before me this _____ day of
October, 1997, by Eric P. Roy, Executive Vice-President of AirNet Systems,
Inc., an Ohio corporation, on behalf of the corporation.
------------------------
Notary Public
CONSENT AND AGREEMENT OF LESSOR
-------------------------------
The undersigned, the Lessor under the Leases identified in the foregoing
Assignment and Assumption of Leases, hereby indicates its consent to said
assignment.
COLUMBUS MUNICIPAL
AIRPORT AUTHORITY
By:
---------------------
This Instrument Prepared By:
Gary E. Davis, Esq.
Vorys, Sater, Seymour and Pease
52 East Gay Street
Columbus, Ohio 43215
4
<PAGE>
LIST OF EXHIBITS AND SCHEDULES TO LEASEHOLD INTEREST PURCHASE AGREEMENT
DATED OCTOBER 31, 1997 BY AND BETWEEN GERALD G. MERCER
AND AIRNET SYSTEMS, INC.
Exhibit
-------
Exhibit A Description of the Leased Premise
NOTES: AirNet Systems, Inc., hereby agrees to furnish supplementary a copy of
any omitted Exhibits and Schedules to the Securities and Exchange Commission
upon request.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AIRNET
SYSTEMS, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,729,285
<SECURITIES> 0
<RECEIVABLES> 12,100,950
<ALLOWANCES> 76,682
<INVENTORY> 6,203,793
<CURRENT-ASSETS> 30,056,930
<PP&E> 102,863,113
<DEPRECIATION> 47,698,036
<TOTAL-ASSETS> 93,916,819
<CURRENT-LIABILITIES> 8,611,119
<BONDS> 0
0
0
<COMMON> 127,450
<OTHER-SE> 76,781,188
<TOTAL-LIABILITY-AND-EQUITY> 93,916,819
<SALES> 1,088,088
<TOTAL-REVENUES> 71,544,281
<CGS> 860,312
<TOTAL-COSTS> 48,955,985
<OTHER-EXPENSES> 5,605,141
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,331
<INCOME-PRETAX> 16,957,824
<INCOME-TAX> 6,763,000
<INCOME-CONTINUING> 10,194,824
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,194,824
<EPS-PRIMARY> .81
<EPS-DILUTED> .81
</TABLE>
