<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, 1999
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
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(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 1, 1999 - 11,410,619
<PAGE>
AIRNET SYSTEMS, INC.
FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three months and
nine months ended September 30, 1999 and 1998. . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . .12
PART II: OTHER INFORMATION
Items 1 through 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
</TABLE>
2
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AIRNET SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
In thousands, except share data SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,086 $1,142
Accounts receivable:
Trade, less allowances 16,235 13,077
Shareholders, affiliates, and associates 274 163
Inventory and spare parts 10,822 9,386
Taxes refundable 377 2,001
Deferred taxes 113 -
Deposits and prepaids 2,152 2,748
--------- ---------
Total current assets 31,059 28,517
Net property and equipment 84,086 78,817
Other assets:
Goodwill, net of accumulated amortization 8,008 8,237
Other intangibles, net of accumulated amortization 419 678
Investment in partnerships and other 2,413 2,490
Start-up costs - 4,223
--------- ---------
Total assets $125,985 $122,962
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $6,205 $5,930
Salaries and related liabilities 2,887 1,284
Accrued expenses 2,148 3,889
Deferred taxes - 1,814
Current portion of notes payable 27 26
--------- ---------
Total current liabilities 11,267 12,943
Notes payable, less current portion 36,359 35,480
Deferred tax liability 6,064 4,865
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 12,753,000 shares issued at
September 30, 1999 and December 31, 1998 128 128
Additional paid-in-capital 78,228 78,455
Retained earnings 13,826 11,423
Treasury shares, 1,351,000 and 1,375,000 shares
held at cost at September 30, 1999 and December 31,
1998, respectively (19,887) (20,332)
--------- ---------
Total shareholders' equity 72,295 69,674
--------- ---------
Total liabilities and shareholders' equity $125,985 $122,962
========= =========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
AIRNET SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
<TABLE>
<CAPTION>
In thousands, except per share data
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPEMBER 30,
1999 1998 1999 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
NET REVENUES
Air transportation, net of excise tax
Check delivery $24,980 $24,311 $74,514 $70,097
Express delivery 8,321 5,006 20,504 13,316
Fixed base and other operations 237 327 809 911
--------- --------- --------- --------
Total net revenues 33,538 29,644 95,827 84,324
COSTS AND EXPENSES
Air transportation 25,577 21,478 71,972 60,406
Fixed base operations 288 243 851 616
Selling, general and administrative 5,408 3,399 12,931 8,340
--------- --------- --------- --------
Total costs and expenses 31,273 25,120 85,754 69,362
--------- --------- --------- --------
Income from operations 2,265 4,524 10,073 14,962
Acquisition termination charge - - - 2,350
Interest expense 582 327 1,801 782
--------- --------- --------- --------
Income before income taxes 1,683 4,197 8,272 11,830
Provision for income taxes 690 1,678 3,381 4,704
--------- --------- --------- --------
Income before cumulative effect of a change in
accounting principle 993 2,519 4,891 7,126
Cumulative effect of writing off start-up
costs, net of tax - - (2,488) -
--------- --------- --------- --------
Net income $993 $2,519 $2,403 $7,126
========= ========= ========= ========
Income per common share
Income before cumulative effect of a change
in accounting principle $0.09 $0.20 $0.43 $0.57
Cumulative effect of writing off start-up
costs - - (0.22) -
--------- --------- --------- --------
Net income $0.09 $0.20 $0.21 $0.57
========= ========= ========= ========
Income per common share - assuming dilution
Income before cumulative effect of a change
in accounting principle $0.09 $0.20 $0.43 $0.56
Cumulative effect of writing off start-up
costs - - (0.22) -
--------- --------- --------- --------
Net income $0.09 $0.20 $0.21 $0.56
========= ========= ========= ========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
AIRNET SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
<TABLE>
<CAPTION>
In thousands NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---------- ----------
<S> <C> <C>
Operating activities:
Net income $ 2,403 $ 7,126
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Cumulative effect of writing off start-up
costs 2,488 -
Depreciation 8,438 7,490
Deferred taxes (728) 3,685
Amortization of intangibles 658 610
Provision for losses on accounts receivable 285 105
Loss on disposition of assets 32 39
Cash provided by (used in) operating assets and
liabilities:
Accounts receivable (3,555) (1,475)
Inventory and spare parts (1,435) (3,543)
Prepaid expenses 596 (963)
Start-up costs - -
Accounts payable 276 2,967
Accrued expenses (1,742) (239)
Taxes payable 3,359 (3,922)
Salaries and related liabilities 1,602 (420)
Other, net 77 (1,998)
-------- -------
Net cash provided by operating activities 12,754 9,462
Investing activities:
Acquisition of Mercury Business Services, Inc., net of
cash acquired - (1,761)
Acquisition of Data Air Courier, Inc., net of
cash acquired - (34)
Purchases of property and equipment (13,750) (15,100)
Payments for covenants not to compete (170) (488)
Proceeds from sales of property and equipment 12 49
-------- -------
Net cash used in investing activities (13,908) (17,334)
Financing activities:
Proceeds from 1996 Incentive Stock Plan programs 218 1,837
Net borrowings under the revolving credit facility 900 14,800
Repayment of long-term debt (20) (17)
Purchase of treasury shares - (10,873)
-------- -------
Net cash provided by financing activities 1,098 5,747
-------- -------
Net decrease in cash (56) (2,125)
Cash and cash equivalents at beginning of period 1,142 2,125
-------- -------
Cash and cash equivalents at end of period $1,086 $0
======== =======
</TABLE>
See notes to consolidated financial statements
5
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AIRNET SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
AirNet Systems, Inc. and its subsidiaries ("AirNet" or the "Company") operate 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 requiring the express delivery of packages. AirNet also
offers retail aviation fuel sales and related ground services for customers at
its Columbus, Ohio facility.
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 year ended December 31, 1998 consolidated financial
statements of AirNet Systems, Inc. incorporated by reference in the Annual
Report on Form 10-K (File No. 0-28428) for additional disclosures including a
summary of AirNet's accounting policies, which have not changed except for the
reclassification from prepaid expenses to property and equipment of certain
engine repair and overhaul services under manufacturer service plans.
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. Certain
prior period balances have been reclassified to conform with the current year
presentation. Operating results for the three months and nine months ended
September 30, 1999 are not necessarily indicative of the results to be expected
for the year ending December 31, 1999.
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. WRITE - OFF OF START-UP COSTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) No. 98-5, Reporting the Costs of Start-Up
Activities, which requires that costs related to start-up activities be expensed
as incurred. Prior to 1999, the Company capitalized start-up costs associated
with its premium products line of business. Effective July 1, 1998, the Company
ceased capitalizing these costs and began amortizing the previously capitalized
costs over five years. The Company adopted the provisions of the SOP as of
January 1, 1999. The effect of the adoption of SOP 98-5 was to increase income
before the cumulative effect of a change in accounting principle for the three
months and nine months ended September 30, 1999 by $138,000 ($0.01 per common
share - assuming dilution) and $414,000 ($.02 per common share - assuming
dilution), respectively, and to record a charge for the cumulative effect of a
change in accounting principle, effective January 1, 1999, of $2,488,000, net of
taxes of $1,735,000 ($0.22 per common share, assuming dilution), to write off
costs that had been capitalized prior to 1999.
6
<PAGE>
3. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Numerator:
Income before the cumulative effect of a change
in accounting principle $993 $2,519 $4,891 $7,126
Net income $993 $2,519 $2,403 $7,126
Denominator:
Basic - weighted average shares outstanding 11,402 12,384 11,393 12,499
Diluted
Stock options - associates, officers, and directors 18 55 6 151
------- ------- ------- -------
Adjusted weighted average shares outstanding 11,420 12,439 11,399 12,650
Income per common share - basic:
Income before the cumulative effect of a change
in accounting principle $.09 $.20 $.43 $.57
Net income $.09 $.20 $.21 $.57
Income per common share - assuming dilution:
Income before the cumulative effect of a change
in accounting principle $.09 $.20 $.43 $.56
Net income $.09 $.20 $.21 $.56
</TABLE>
For the three months and nine months ended September 30, 1999, 759,000 and
809,000 stock options, respectively, were excluded from the diluted weighted
average shares outstanding calculation, as their exercise prices exceeded the
average fair market value of the related common shares for the periods.
7
<PAGE>
AIRNET SYSTEMS, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT
Except for the historical information contained in this Form 10-Q, the
matters discussed, including, but not limited to, information regarding
future economic performance and plans and objectives of AirNet's management,
are forward-looking statements which involve risks and uncertainties. When
used in this document, the words "anticipate", "estimate", "expect", "may",
"plan", "project" and similar expressions are intended to be among statements
that identify forward-looking statements. Such statements involve risks and
uncertainties including, but not limited to, the following which could cause
actual results to differ materially from any such forward-looking statement:
potential changes by the FAA, which could increase the regulation of AirNet's
business, or the Federal Reserve, which could change the competitive
environment of transporting canceled checks; adverse weather conditions; the
ability to attract and retain qualified pilots; technological advances and
increases in the use of electronic funds transfers; the effective detection
and remediation of Y2K issues by AirNet and its key third party vendors and
suppliers, including the FAA and local airport air traffic control systems;
as well as other economic and competitive factors affecting the market and
prices of AirNet's Express delivery operations. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated. AirNet
undertakes no responsibility to update for changes related to these or any
other factors that may hereafter occur.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues were $33.5 million for the three months ended September 30, 1999, an
increase of $3.9 million, or 13.1%, over the same period of 1998. Revenues
from check delivery increased $0.7 million, or 2.8%. The increase in check
delivery revenues is primarily the result of new volume in the weekend
program. The effect of price increases in January 1999 of approximately $0.5
million was offset by one less flying day in the 1999 quarter. Express
delivery revenues increased $3.3 million, or 66.2%. Revenues from Mercury
Business Services ("Mercury"), which was acquired by AirNet in August 1999,
accounted for $0.8 million of the increase. Revenues from AirNet's premium
services increased $2.0 million due to the addition of new sales contracts
primarily in the just-in-time parts market and medical industry.
Additionally, the ground transportation and charter services were up $0.8
million and $0.4 million, respectively. These increases were offset by
decreases in other service revenues of $0.7 million.
Total costs and expenses were $31.3 million for the three months ended
September 30, 1999, an increase of $6.2 million, or 24.5%, over the same
period in 1998, resulting in income from operations of $2.3 million for the
three months ended September 30, 1999, compared to $4.5 million for the same
period of 1998. Air transportation expenses were up $4.1 million, or 19.1%.
Selling, general and administrative expenses increased $2.0 million, or
59.1%, for the three month period.
8
<PAGE>
Approximately $1.4 million of the increase in transportation costs, including
ground courier costs, operational wages and related benefits, and commercial
air freight cost, can be directly attributed to the addition of new sales
contracts in the third quarter. In addition, fuel costs increased $0.7
million, or 26.6%, over prior year levels due to price increases. The
addition of Mercury for a full quarter in 1999, versus a half quarter in
1998, accounted for approximately $0.5 million of the increases, and worker
compensation costs are up over 1998 levels due to an increase in personnel
and higher claims activity. Other operational costs increased as a result of
the increase in Express Delivery volumes, particularly in the SDX (shipments
via the commercial airlines) and ground categories, which operate at lower
margins than the check delivery and ANX (shipments via the AirNet airline)
services.
Selling, general and administrative expense increased $2.0 million. Of this
amount, $1.1 million was due to one-time costs associated with management
changes, personnel costs, and professional fees. In addition, AirNet has
increased its Express sales staff and its administrative staff to support new
sales initiatives.
Interest expense was $0.6 million for the quarter ended September 30, 1999,
an increase of $0.3 million, over the 1998 quarter due to increased
outstanding borrowings, of which $20.0 million had been used to fund the
repurchase of common shares in the last half of 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
Revenues were $95.8 million for the nine months ended September 30, 1999, an
increase of $11.5 million, or 13.6%, over the same period of 1998. Revenues
from check delivery increased $4.4 million, or 6.3%. Of the increase in check
delivery revenues, $1.4 million is attributable to price increases on weekday
business effective January 1, 1999. Approximately $1.0 million can be
attributed to volume increases in the weekday business and the remaining
increase is primarily attributable to new volume in the weekend program.
Express delivery revenues increased $7.2 million, or 54.0%. Revenues from
Mercury accounted for $4.3 million of the increase. Revenues from AirNet's
premium services increased $3.7 million. Additionally, the ground
transportation and charter services were up $0.9 million and $0.4 million,
respectively. These increases were offset by decreases in standard,
wholesale, and other service revenues of $2.1 million, which was a result of
AirNet's strategic decision to decrease its wholesale and standard service
business in late 1997 and early 1998, while emphasizing the premium services.
Total costs and expenses were $85.8 million for the nine months ended
September 30, 1999, an increase of $16.4 million, or 23.6%, over the same
period in 1998 resulting in income from operations of $10.1 million for the
nine months ended September 30, 1999 compared to $15.0 million for the same
period of 1998. Air transportation expenses were up $11.6 million, or 19.1%.
Selling, general and administrative expenses increased $4.6 million, or
55.0%, for the nine month period. In addition, in the second quarter of 1998,
AirNet incurred a $2.4 million charge in connection with the write-off of
costs associated with the efforts to acquire Q International Courier, Inc.
("Quick"). The agreement with Quick was terminated in June, 1998.
9
<PAGE>
Prior to the adoption of SOP 98-5, AirNet capitalized approximately $2.0
million of expenses related to start-up activities in the first half of 1998.
Effective July 1, 1998, the Company ceased capitalizing these costs and began
amortizing the previously capitalized costs over five years. The Company
adopted the provisions of the SOP as of January 1, 1999. The effect of the
adoption of SOP 98-5 was to record a charge for the cumulative effect of a
change in accounting principle of $2.5 million, net of taxes of $1.7 million
($0.22 per common share), to expense costs that had been capitalized prior to
1999.
In addition to the effects of capitalizing $1.0 million of operations related
start-up costs in the first half of 1998, the increase in air transportation
costs, including ground courier costs, operational wages and related
benefits, was primarily a result of infrastructure costs incurred in
anticipation of growth in the express delivery area and the acquisition of
Mercury. The costs associated with shipping packages with other integrators
and on commercial airlines increased $3.1 million as a result of the addition
of Mercury, increases in the weekend business, and premium service growth.
The addition of new Express sales contracts in the third quarter of 1999
directly increased operational cost by $1.4 million. The increase in
depreciation expense of $0.9 million, or 12.5%, is a reflection of the higher
use of the jet fleet, thus increasing the depreciation expense on engines.
Workers compensation cost are up over 1998 levels due to the increase in
personnel and higher claims activity.
Selling, general and administrative expense increased partly due to the fact
AirNet capitalized $1.0 million of sales, administrative and marketing costs
associated with the start up of the premium services in the first half of
1998. One-time costs associated with management changes, personnel costs, and
professional fees contributed $1.2 million to the increase, the addition of
Mercury accounted for approximately $0.9 million of the increase, and AirNet
has increased its Express sales staff and its administrative staff to support
new sales initiatives. Amortization of intangibles increased $0.3 million
primarily as a result of the addition of Mercury's goodwill and related
intangibles.
Interest expense was $1.8 million for the nine months ended September 30,
1999, an increase of $1.0 million, over the 1998 period due to increased
outstanding borrowings, of which $20.0 million had been used to fund the
repurchase of common shares in the last half of 1998.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATING ACTIVITIES. Net cash provided by operating
activities was $12.8 million for the nine months ended September 30, 1999,
compared to net cash provided by operating activities of $9.5 million for the
same period in 1998. The increase is primarily the result of the costs
incurred in 1998 associated with the termination of the Quick transaction and
costs associated with start-up activities.
CURRENT CREDIT ARRANGEMENTS. AirNet 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 designated
percentages of accounts receivable, inventory and the wholesale value of
aircraft and equipment. In addition, the credit agreement requires the
maintenance of minimum net worth and cash flow levels, imposes limits on
payments of dividends to 50% of net income and restricts the amount of
additional debt. AirNet's outstanding balance at September 30, 1999 was $36.4
million, which is a $0.9 million increase over the balance at December 31,
1998.
10
<PAGE>
In September 1999 the Company entered into two interest rate swap agreements
with a bank as a hedge against the interest rate risk associated with
borrowings. The swap agreements each have a notional amount of $5 million and
effectively locked in a portion of the Company's variable rate revolving
credit liability at fixed rates of 6.3% and 6.5%, respectively for a period
of three years. The differential to be paid or received is accrued as
interest rates change and is recognized as an adjustment to interest expense
in the statements of operations. The Company does not use derivative
financial instruments for speculative purposes.
INVESTING ACTIVITIES. Capital expenditures totaled $13.8 million for nine
months ended September 30, 1999 compared to $15.1 million for the same period
in 1998. Of the total, $2.3 million was incurred for the purchase of one new
aircraft. Substantially all of the remaining 1999 expenditures were incurred
for aircraft inspections, major engine overhauls and related flight
equipment. AirNet anticipates it will have approximately $17.0 million in
total capital expenditures in 1999. AirNet anticipates it will continue to
acquire aircraft and flight equipment as necessary to maintain growth and
continue offering quality service to its customers.
AirNet 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
AirNet'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 AirNet's principal customers, AirNet's
air system is scheduled primarily around the needs of financial institution
customers. When financial institutions are closed, there is no need for
AirNet to operate a full system. AirNet'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, AirNet's revenue and net income are adversely
affected. AirNet's annual results fluctuate as well.
Operating results are also affected by the weather. AirNet generally
experiences higher maintenance costs during its fiscal quarter ending March
31. Winter weather often requires additional costs for de-icing, hangar
rental and other aircraft services.
YEAR 2000 ("Y2K") IMPACT ON INFORMATION SYSTEMS AND OPERATIONS
AirNet intends this information to constitute notice under the Year 2000
Information and Readiness Disclosure Act as a "Year 2000 Readiness
Disclosure".
AirNet relies heavily on its own information systems, as well as significant
third party vendors, governmental agencies and business partners (including,
but not limited to, utilities, fuel suppliers, commercial airlines, the
Federal Aviation Administration (FAA) and local airport authorities), whose
Y2K non-compliance could have either a material or adverse effect on AirNet's
business, financial conditions or results of operations, or involve a safety
risk to team members and customers.
AirNet has completed assessment, renovation, testing and deployment phases of
its internal systems (Information Technology (IT) and non-IT systems) for Y2K
compliance. No changes or improvements to the systems were required as a
result of the processes, which cost AirNet less than $0.1 million, paid from
the operating cash flows of the Company.
11
<PAGE>
AirNet has assessed the Y2K status and progress of third party vendors and
suppliers that it heavily relies on for operational and administrative
purposes. AirNet's assessment plan included: assessing vendor compliance
status initially through questionnaires, tracking progress toward compliance,
developing contingency plans, including identifying alternate suppliers, and
follow-up to non-responses on questionnaires.
Based on the results of the Company's assessments, AirNet concluded that its
vendors and suppliers, which are significant to AirNet's operations, do not
anticipate interruptions of service to AirNet related to Y2K issues. As a
result, AirNet has developed a contingency plan that focuses on most likely
scenarios such as securing electricity through generators at the main hub
facility in Columbus to ensure key information systems applications and phone
service are available in the event of a power outage; the rerouting of
aircraft from scheduled airport landings due to individual airport air
traffic control failures; and the use of alternative commercial airline
routes in the event commercial airlines reduce their flight schedules.
AirNet has also performed a review of its aircraft to ensure operational
compliance with Y2K date-sensitive components. Based on representations from
manufacturers, AirNet believes its aircraft and related components are in
compliance with such measures. In addition, a recently released statement by
the United States Department of Transportation (US DOT) states that the US
DOT has achieved full Year 2000 compliance for its mission critical systems,
including the FAA's air traffic control system. AirNet will continue to
monitor future statements by the US DOT and FAA to determine the need and
extent of contingency plan adjustments for air operations.
Although AirNet has addressed the potential issues most likely to affect the
Company within its Y2K contingency plan, there can be no assurances that the
plan will accommodate a widespread Y2K failure (including, but not limited to
significant or extended power outages in Columbus, Ohio or nationwide;
significant reduction or elimination of aircraft flights by the FAA or major
commercial airlines; and significant ground traffic delays due to
malfunctioned or overloaded systems). Such a widespread Y2K failure could
have a material adverse impact on AirNet's business. AirNet intends to update
the contingency plan throughout the remainder of 1999 as additional
information regarding FAA and third party readiness is received.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INFLATION AND INTEREST RATES
The Company has not been significantly affected by inflation in recent years
and anticipates that it will not be significantly affected by inflation in
the fourth quarter of 1999. A material change in interest rates could have an
impact on the Company's financial results, as the Company is presently paying
a variable interest rate on a portion of its outstanding debt.
12
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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:
<TABLE>
<CAPTION>
Exhibit No. Description
------------ ---------------------------------------
<S> <C>
Exhibit 27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months
ended September 30, 1999
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 5, 1999 By: /s/ William R. Sumser
-----------------------------------
William R. Sumser,
Acting Chief Financial Officer
(Duly Authorized Officer)
(Principal Financial Officer)
14
<PAGE>
AIRNET SYSTEMS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
27 Financial Data Schedule. Filed herewith.
</TABLE>
15
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,086
<SECURITIES> 0
<RECEIVABLES> 16,983
<ALLOWANCES> 474
<INVENTORY> 10,822
<CURRENT-ASSETS> 31,059
<PP&E> 147,775
<DEPRECIATION> 63,689
<TOTAL-ASSETS> 125,985
<CURRENT-LIABILITIES> 11,267
<BONDS> 0
0
0
<COMMON> 128
<OTHER-SE> 72,167
<TOTAL-LIABILITY-AND-EQUITY> 125,985
<SALES> 809
<TOTAL-REVENUES> 95,827
<CGS> 851
<TOTAL-COSTS> 72,823
<OTHER-EXPENSES> 12,931
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,801
<INCOME-PRETAX> 8,272
<INCOME-TAX> 3,381
<INCOME-CONTINUING> 4,891
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (2,488)
<NET-INCOME> 2,403
<EPS-BASIC> .21
<EPS-DILUTED> .21
</TABLE>
