###### **SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

###### **FORM 10-Q**

 

| **(Mark  one)**                                        |
|--------------------------------------------------------|
|                                                   |   |   |
| **ý**                                             |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                   |   |   |
| **For  the quarterly period ended September 30, 2001** |

 

**OR**

 

| **o**                               |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                |   |                                                                                          |
| **For  the transition period from** |   | **to**                                                                                        |   |   |
|                                     |        |                                                                                               |  |  |  |  |

 

**Commission filenumber  1-13025**

| **AIRNET SYSTEMS, INC.**                                |
|---------------------------------------------------------|
| (Exact  name of registrant as specified in its charter) |

 

| **Ohio**                                                        |   | **31-1458309**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |   | (I.R.S.  Employer 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 filedall reports required to be filed by Section 13 or 15 (d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ý No o

 

Common Shares, $.01 ParValue,

        Outstanding as of  November 9, 2001 – 10,124,723

 

**AIRNET SYSTEMS, INC.**

 

** FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2001**

 

 

 

 
| **PART I:   FINANCIAL INFORMATION** |
|------------------------------------------|
|                                     |   |
| Item  1                                  | Financial  Statements (Unaudited) |
|                                     |   |
|                                     | Condensed Consolidated  Balance Sheets as of September 30, 2001 and December 31, 2000 |
|                                     |   |
|                                     | Condensed  Consolidated Statements of Operations for the three months and nine months  ended September 30, 2001 and 2000 |
|                                     |   |
|                                     | Condensed Consolidated  Statements of Cash Flows for the nine months ended September 30, 2001 and  2000 |
|                                     |   |
|                                     | Notes to Condensed Consolidated  Financial Statements |
|                                     |   |
| Item  2                                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                     |   |
| Item 3                                   | Quantitative and  Qualitative Disclosures About Market Risk |
|                                     |   |
| **PART II: OTHER INFORMATION**           |
|                                     |   |
| Items 1 through 6                        |
|                                     |   |
| Signatures                               |
|                                          |  |  |

 

 

 
| **AIRNET  SYSTEMS, INC.**                  |
|--------------------------------------------|
|                                       |
| **CONDENSED  CONSOLIDATED BALANCE SHEETS** |

 
| In thousands,  except share data                                                                                                             |   | **September  30,** |        | **December  31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-------------|-------------------|--------|
|                                                                                                                                         |   | **2001**           |        | **2000**          |   |
| **ASSETS**                                                                                                                                   |   | **(Unaudited**)    |        |              |   |
| Current  assets:                                                                                                                             |   |               |        |              |   |
| Cash and  cash equivalents                                                                                                              |   | **$**              | **3,488**   |              | $      | 1,118 |   |
| Accounts  receivable:                                                                                                                        |   |               |        |              |   |
| Trade, less  allowances                                                                                                                      |   | **19,068**         |        | 16,279            |   |
| Shareholders,  affiliates, and associates                                                                                                    |   | **45**             |        | 99                |   |
| Inventory and  spare parts                                                                                                                   |   | **7,449**          |        | 6,618             |   |
| Taxes  receivable                                                                                                                            |   | **-**              |        | 283               |   |
| Deferred  taxes                                                                                                                              |   | **314**            |        | 314               |   |
| Deposits and  prepaids                                                                                                                       |   | **1,683**          |        | 1,473             |   |
| Total current  assets                                                                                                                        |   | **32,047**         |        | 26,184            |   |
|                                                                                                                                         |   |               |        |              |   |
| Net property  and equipment                                                                                                                  |   | **89,258**         |        | 86,600            |   |
|                                                                                                                                         |   |               |        |              |   |
| Other assets:                                                                                                                                |   |               |        |              |   |
| Goodwill, net  of accumulated amortization                                                                                                   |   | **7,166**          |        | 7,705             |   |
| Other  intangibles, net of accumulated amortization                                                                                          |   | **93**             |        | 233               |   |
| Other                                                                                                                                        |   | **589**            |        | 1,811             |   |
| **Total assets**                                                                                                                             |   | **$**              | **129,153** |              | $      | 122,533 |   |
|                                                                                                                                         |   |               |        |              |   |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                                                                                     |   |               |        |              |   |
| Current  liabilities:                                                                                                                        |   |               |        |              |   |
| Accounts  payable                                                                                                                            |   | **$**              | **4,834**   |              | $      | 4,456 |   |
| Salaries and  related liabilities                                                                                                            |   | **4,794**          |        | 3,271             |   |
| Accrued  expenses                                                                                                                            |   | **2,479**          |        | 1,873             |   |
| Taxes payable                                                                                                                                |   | **1,421**          |        | -                 |   |
| Current  portion of notes payable                                                                                                            |   | **33**             |        | 33                |   |
| Total current  liabilities                                                                                                                   |   | **13,561**         |        | 9,633             |   |
|                                                                                                                                         |   |               |        |              |   |
| Other  liabilities                                                                                                                           |   | **366**            |        | -                 |   |
| Notes  payable, less current portion                                                                                                         |   | **27,210**         |        | 22,686            |   |
| Deferred tax  liability                                                                                                                      |   | **11,220**         |        | 11,369            |   |
|                                                                                                                                         |   |               |        |              |   |
| Shareholders'  equity:                                                                                                                       |   |               |        |              |   |
| Preferred  shares, $.01 par value; 10,000,000 sharesauthorized;  and no shares issued and outstanding                                        |   | **-**              |        | -                 |   |
| Common  shares, $.01 par value; 40,000,000 shares authorized;and  12,753,000  shares issued at September  30, 2001and December 31, 2000 |   | **128**            |        | 128               |   |
| Additional  paid-in-capital                                                                                                                  |   | **77,440**         |        | 77,702            |   |
| Retained  earnings                                                                                                                           |   | **25,529**         |        | 22,462            |   |
| Accumulated other comprehensive  loss                                                                                                        |   | **(217**           | )           | -                 |   |
| Treasury shares, 2,634,000 and  1,840,000 shares held at cost at September 30, 2001 and December 31, 2000,  respectively                     |   | **(26,084**        | )           | (21,447           | )      |
| Total  shareholders' equity                                                                                                                  |   | **76,796**         |        | 78,845            |   |
|                                                                                                                                         |   |               |        |              |   |
| **Total liabilities and shareholders' equity**                                                                                               |   | **$**              | **129,153** |              | $      | 122,533 |   |
|                                                                                                                                         |   |               |        |              |   |
| See notes to  condensed consolidated financial statements                                                                                    |   |               |        |              |   |

  ****

** **
| **AIRNET  SYSTEMS, INC.**                                      |
|----------------------------------------------------------------|
|                                                           |
| **CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**- Unaudited |
|                                                           |
| In thousands, except per share data                            |

 
|                                                      |   | **Three  Months Ended  September 30,** |       | **Nine  Months Ended  September 30,** |       |
|-----------------------------------------------------------|--------|----------------------------------------|------------|---------------------------------------|------------|
|                                                      |   |                                   |       |
|                                                      |   | **2001**                               | ** ** | **2000**                              | ** ** | **2001** | ** ** | **2000** | ** ** |
| **NET REVENUES**                                          |   |                                   | ** ** |                                  | ** ** |   | ** ** |   | ** ** |
| Air  transportation, net of excise tax                    |   |                                   |       |                                  |       |   |   |   |   |
| Bank services                                             |   | **$**                                  | **26,646** |                                  | $          | 24,809 | ** ** | **$** | **79,402** |   | $ | 75,714 |   |
| Express  services                                         |   | **8,137**                              |       | 8,794                                 | ** ** | **24,342** |   | 26,095 |   |
| Aviation  services and other operations                   |   | **544**                                |       | 172                                   | ** ** | **1,264** |   | 556 |   |
| **Total net revenues**                                    |   | **35,327**                             |       | 33,775                                | ** ** | **105,008** |   | 102,365 |   |
|                                                      |   |                                   |       |                                  |       |   |   |   |   |
| **COSTS AND EXPENSES**                                    |   |                                   | ** ** |                                  | ** ** |   | ** ** |   | ** ** |
| Air  transportation                                       |   |                                   |       |                                  |       |   |   |   |   |
| Wages and  benefits                                       |   | **4,831**                              |       | 4,238                                 | ** ** | **14,490** |   | 13,897 |   |
| Aircraft fuel                                             |   | **3,314**                              |       | 2,874                                 | ** ** | **9,549** |   | 8,825 |   |
| Aircraft  maintenance                                     |   | **2,600**                              |       | 2,372                                 | ** ** | **8,475** |   | 6,905 |   |
| Contracted  air costs                                     |   | **4,003**                              |       | 4,248                                 | ** ** | **12,022** |   | 12,355 |   |
| Ground  courier                                           |   | **5,537**                              |       | 6,513                                 | ** ** | **17,002** |   | 19,374 |   |
| Depreciation                                              |   | **3,557**                              |       | 3,398                                 | ** ** | **10,799** |   | 10,349 |   |
| Other                                                     |   | **2,845**                              |       | 2,565                                 | ** ** | **8,294** |   | 7,838 |   |
| Selling,  general and administrative                      |   | **4,660**                              |       | 3,720                                 | ** ** | **14,954** |   | 12,195 |   |
| **Total costs and expenses**                              |   | **31,347**                             |       | 29,928                                | ** ** | **95,585** |   | 91,738 |   |
| Income from  operations                                   |   | **3,980**                              |       | 3,847                                 | ** ** | **9,423** |   | 10,627 |   |
| Impairment on  investment                                 |   | **-**                                  |       | -                                     | ** ** | **1,744** |   | - |   |
| Interest  expense                                         |   | **438**                                |       | 563                                   | ** ** | **1,304** |   | 1,779 |   |
| Income before  income taxes                               |   | **3,542**                              |       | 3,284                                 | ** ** | **6,375** |   | 8,848 |   |
| Provision for  income taxes                               |   | **1,441**                              |       | 1,313                                 | ** ** | **3,308** |   | 3,536 |   |
|                                                      |   |                                   | ** ** |                                  | ** ** |   | ** ** |   | ** ** |
| **Net income**                                            |   | **$**                                  | **2,101**  |                                  | $          | 1,971 | ** ** | **$** | **3,067** |   | $ | 5,312 |   |
|                                                      |   |                                   |       |                                  |       |   |   |   |   |
| Net income  per common share                              |   |                                   |       |                                  |       |   |   |   |   |
| - basic and  assuming dilution                            |   | **$**                                  | **0.20**   |                                  | $          | 0.18 | ** ** | **$** | **0.29** |   | $ | 0.48 |   |
|                                                      |   |                                   |       |                                  |       |   |   |   |   |
| See notes to condensed consolidated financial  statements |   |                                   |       |                                  |       |   |   |

** **

** **

 

** **

** **
| **AIRNET  SYSTEMS, INC.**                                      |
|----------------------------------------------------------------|
|                                                           |
| **CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**- Unaudited |

 
|                                                                               |   | **Nine  Months Ended** |           |
|------------------------------------------------------------------------------------|--------|------------------------|----------------|
| In thousands                                                                       |   | **September  30,**     |           |
|                                                                               |   | **2001**               |           | **2000** |   |
| **Operating activities:**                                                          |   |                   |           |   |   |
| Net income                                                                         |   | **$**                  | **3,067**      |   | $ | 5,312 |   |
| Non-cash  charge for investment impairment                                         |   | **1,744**              |           | - |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |                   |           |   |   |
| Depreciation                                                                       |   | **10,799**             |           | 10,349 |   |
| Amortization  of intangibles                                                       |   | **397**                |           | 394 |   |
| Deferred taxes                                                                     |   | **-**                  |           | 394 |   |
| Provision for losses on accounts receivable                                        |   | **374**                |           | 127 |   |
| Loss on disposition of assets                                                      |   | **40**                 |           | 83 |   |
| Cash provided by (used in) operating assets and  liabilities:                      |   |                   |           |   |   |
| Accounts receivable                                                                |   | **(3,109**             | )              | (2,225 | ) |
| Inventory and spare parts                                                          |   | **(831**               | )              | 883 |   |
| Prepaid expenses                                                                   |   | **(210**               | )              | (49 | ) |
| Accounts payable                                                                   |   | **378**                |           | (27 | ) |
| Accrued expenses                                                                   |   | **606**                |           | 1,262 |   |
| Taxes payable                                                                      |   | **1,704**              |           | 1,768 |   |
| Salaries and related liabilities                                                   |   | **1,523**              |           | 514 |   |
| Other, net                                                                         |   | **(239**               | )              | 311 |   |
| **Net cash provided by operating activities**                                      |   | **16,243**             |           | 19,096 |   |
|                                                                               |   |                   |           |   |   |
| **Investing activities:**                                                          |   |                   |           |   |   |
| Purchases of property and equipment                                                |   | **(13,772**            | )              | (9,288 | ) |
| Payments for covenants not  to compete                                        |   | **-**                  |           | (15 | ) |
| Proceeds from sales of property and equipment                                      |   | **274**                |           | 382 |   |
| **Net cash used in investing activities**                                          |   | **(13,498**            | )              | (8,921 | ) |
|                                                                               |   |                   |           |   |   |
| **Financing activities:**                                                          |   |                   |           |   |   |
| Proceeds from 1996 Incentive Stock Plan programs                                   |   | **83**                 |           | 162 |   |
| Net borrowings (repayments) under the revolving credit  facility                   |   | **4,549**              |           | (6,500 | ) |
| Repayment of long-term debt                                                        |   | **(24**                | )              | (22 | ) |
| Purchase of treasury shares, net of issuances                                      |   | **(4,983**             | )              | (2,418 | ) |
| **Net cash used in financing activities**                                          |   | **(375**               | )              | (8,778 | ) |
|                                                                               |   |                   |           |   |   |
| Net increase in cash                                                               |   | **2,370**              |           | 1,397 |   |
| Cash and cash equivalents at beginning of period                                   |   | **1,118**              |           | 1,667 |   |
|                                                                               |   |                   |           |   |   |
| **Cash and cash equivalents at end of period**                                     |   | **$**                  | **3,488**      |   | $ | 3,064 |   |
|                                                                               |   |                   |      |   |      |
| See notes to  condensed consolidated financial statements                          |   |                   |           |   |   |

 

**AIRNETSYSTEMS, INC.**

 

**NOTES****TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.     Basis of Presentation**

 

AirNetSystems, Inc. and its subsidiaries (“AirNet” or the “Company”) operate a fullyintegrated national air transportation network which provides delivery servicefor time-critical shipments for customers in the U.S. banking industry andother industries requiring the express delivery of packages.  AirNet also offers passenger charterservices and retail aviation fuel sales and related ground services forcustomers at its Columbus, Ohio facility. 

 

Theaccompanying unaudited condensed consolidated financial statements include theaccounts of AirNet Systems, Inc. and its subsidiaries.  These financial statements have beenprepared in accordance with generally accepted accounting principles forinterim financial information and with the instructions for Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all information and footnotes requiredby generally accepted accounting principles for complete financial statements.  These financial statements should be read inconjunction with the year ended December 31, 2000 consolidated financialstatements of AirNet Systems, Inc. included in Item 8 of the Annual Report onForm 10-K for the fiscal year ended December 31, 2000 (File No. 1-13025) whichcontain additional disclosures including a summary of AirNet’s accountingpolicies.  

 

Thefinancial information included herein reflects all adjustments (consisting ofnormal 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 endedSeptember 30, 2001 are not necessarily indicative of the results to be expectedfor the year ending December 31, 2001.  

 

Thepreparation of the condensed consolidated financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the amounts reported in those financialstatements and accompanying notes thereto. Actual results could differ from those estimates.  

 

Certain2000 balances have been reclassified to conform with the 2001presentation.  

 

**2.    Segment Reporting**  

 

AirNetdivides its business into three operating segments: Bank services, Expressservices, and Aviation services. The Bank services segment transports canceledchecks and related information for the U.S. banking industry. The Expressservices segment provides specialized, high priority delivery service forcustomers requiring late pick-ups and early deliveries combined with prompt,on-line delivery information.  TheAviation services segment includes fixed base operations, passenger and cargocharter services, and aircraft brokerage services.  

 

AirNethas no inter-segment sales.  AirNet’sassets are not allocated among segments due to significant overlap in usage ofthe aircraft fleet, vehicles and facilities. Management evaluates the performance of each segment based on operatingincome.  

 

Summarizedfinancial information concerning AirNet’s reportable segments is shown in thefollowing table for the three and nine months ended September 30, 2001.  The Aviation services and other categoryincludes AirNet’s Aviation services division and income and expense notallocated to the other reportable segments.

EffectiveJanuary 1, 2001, AirNet changed its method for allocating costs amongsegments.  Management believes the newmethod more accurately reflects the actual cost structure that would beemployed if each segment operated independently.  Segment data for the three and nine months ended September 30,2000 have been restated to conform to the new cost allocation method. 

 

** **
|                        |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|-----------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                        |   | **2001**                               |   | **2000**                              |   | **2001** |   | **2000** |   |
|                        |   |                                   |   |                                  |   |   |   |   |   |
| **Revenue**                 |   |                                   |   |                                  |   |   |   |   |   |
|                        |   |                                   |   |                                  |   |   |   |   |   |
| Bank services               |   | $                                      | 26,646 |                                  | $      | 24,809 |   | $ | 79,402 |   | $ | 75,714 |   |
| Express services            |   | 8,137                                  |   | 8,794                                 |   | 24,342 |   | 26,095 |   |
| Aviation services and other |   | 544                                    |   | 172                                   |   | 1,264 |   | 556 |   |
| Total                       |   | 35,327                                 |   | 33,775                                |   | 105,008 |   | 102,365 |   |
|                        |   |                                   |   |                                  |   |   |   |   |   |
| **Income from operations**  |   |                                   |   |                                  |   |   |   |   |   |
|                        |   |                                   |   |                                  |   |   |   |   |   |
| Bank services               |   | $                                      | 5,339  |                                  | $      | 3,607 |   | $ | 14,582 |   | $ | 10,854 |   |
| Express services            |   | (1,405                                 | )      | 370                                   |   | (3,741 | ) | 209 |   |
| Aviation services and other |   | 46                                     |   | (130                                  | )      | (1,418 | ) | (436 | ) |
| Total                       |   | 3,980                                  |   | 3,847                                 |   | 9,423 |   | 10,627 |   |

 

 

 

**3.    Derivative and Hedging Activities**  

 

InSeptember 1999, AirNet entered into two interest rate swap agreements with abank as a hedge against the interest rate risk associated with borrowing at avariable rate.  The objective of thehedge is to eliminate the variability of cash flows in the interest rate paymentsfor $10.0 million of the variable rate debt. The swap agreements each have a notional amount of $5.0 million andeffectively locked in a portion of AirNet’s variable rate revolving creditliability at fixed rates of 6.3% and 6.5% plus a margin based on AirNet’sfunded debt ratio.  These swapagreements are in effect for a period of three years ending in September 2002and are accounted for as cash flow hedges. AirNet does not use derivative financial instruments for speculativepurposes.  

 

InJune 1998, the Financial Accounting Standards Board issued Statement No. 133, *Accountingfor Derivative Instruments and Hedging Activities,*and itsamendments, Statements 137 and 138, in June 1999 and June 2000,respectively.  The Statement requiresthe Company to recognize all derivatives on the balance sheet at fairvalue.  Derivatives that are not hedgesmust be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge,changes in the fair value of the derivative are either offset against thechange in fair value of assets, liabilities, or firm commitments throughearnings or recognized in other comprehensive income until the hedged item isrecognized in earnings.  The ineffectiveportion of a derivative’s change in fair value will be immediately recognizedin earnings.  The Company’s adoption ofStatement No. 133 on January 1, 2001 resulted in a cumulative effect of anaccounting change charge of $62,155, net of tax, to accumulated othercomprehensive income.  Additionalcharges related to the interest rate swaps since adoption have increased theloss on comprehensive income to $217,000. At September 30, 2001, the aggregate fair value of the interest rateswaps was approximately ($366,000) and is recorded in other liabilities on thecondensed, consolidated balance sheet. **4.    Net Income Per Share**

 

Thefollowing table sets forth the computation of basic and diluted net income percommon share (in thousands, except per share data):

 
|                                                             |   | **Three  Months Ended September 30,** |   | **Nine  Months Ended September 30,** |   |
|------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                             |   | **2001**                              |   | **2000**                             |   | **2001** |   | **2000** |   |
| Numerator:                                                       |   |                                  |   |                                 |   |   |   |   |   |
| Net  income                                                      |   | $                                     | 2,101  |                                 | $      | 1,971 |   | $ | 3,067 |   | $ | 5,312 |   |
|                                                             |   |                                  |   |                                 |   |   |   |   |   |
| Denominator:                                                     |   |                                  |   |                                 |   |   |   |   |   |
| Basic  – weighted average shares outstanding                |   | 10,341                                |   | 10,893                               |   | 10,728 |   | 11,123 |   |
|                                                             |   |                                  |   |                                 |   |   |   |   |   |
| Diluted                                                          |   |                                  |   |                                 |   |   |   |   |   |
| Stock  options – associates, officers, and directors        |   | 98                                    |   | -                                    |   | 48 |   | - |   |
| Adjusted  weighted average shares outstanding                    |   | 10,439                                |   | 10,893                               |   | 10,776 |   | 11,123 |   |
|                                                             |   |                                  |   |                                 |   |   |   |   |   |
| Net  income per common share – basic and assuming dilution: |   | $                                     | 0.20   |                                 | $      | 0.18 |   | $ | 0.29 |   | $ | 0.48 |   |

 

For thethree months and nine months ended September 30, 2001, 717,560 and 781,730  common shares subject to outstanding stockoptions were excluded from the diluted weighted average shares outstandingcalculation, as the exercise prices exceeded the average fair market value ofthe underlying common shares for the period.

 

**5.    Impairment onInvestment in Subsidiary**

 

AirNet Systems, Inc.wholly owns Float Control, Inc., which holds a 19% interest in The CheckExchange System Co. (CHEXS).  FloatControl accounts for its investment in CHEXS under the equity method ofaccounting.  CHEXS received noticeduring the first quarter of 2001 that one of its significant customers, whoalso accounted for a significant portion of CHEXS’s revenue, would not renewits contract with CHEXS beyond August 2001. CHEXS continued to negotiate thecontract during the second quarter. However, such negotiations were terminated.  As a result, Float Control recognized a $1,744,000 impairment onits investment in CHEXS in the second quarter, which includes approximately$300,000 of goodwill.  As of September30, 2001, Float Control’s remaining recorded investment in CHEXS totaled $150,000and is included in Other Assets – Other on the balance sheet, which representsexpected final distributions from the partnership.  

 

**6.    SAB 74Disclosure**

 

In June 2001, the FASBissued Statements of Financial Accounting Standards No. 141, *BusinessCombinations*, effective for business combinations initiated afterJune 30, 2001, and No. 142, *Goodwill and Other Intangible Assets*,effective for fiscal years beginning after December 15, 2001.  Under the new rules, goodwill and intangibleassets deemed to have indefinite lives will no longer be amortized but will besubject to annual impairment tests in accordance with the Statements. Otherintangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and otherintangible assets beginning in the first quarter of 2002.  Application of the nonamortizationprovisions of the Statement is expected to result in an increase in net incomeof approximately $350,000 ($0.03 per share) per year.  During 2002, the Company will perform the first of the requiredimpairment tests of goodwill as of January 1, 2002 and has not yet determinedwhat the effect of these tests will be on the earnings and financial positionof the Company.   

 

**AIRNETSYSTEMS, INC.**

 

**ITEM 2 - MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL****CONDITION AND RESULTS OF OPERATIONS**

 

 

**Safe Harbor Statement**

 

Except for thehistorical information contained in this Form 10-Q, the matters discussed,including information regarding future economic performance and plans and objectivesof AirNet’s management, are forward-looking statements which involve risks anduncertainties. When used in this document, the words “anticipate”, “estimate”,“expect”, “may”, “plan”, “project” and similar expressions are intended to beamong statements that identify forward-looking statements.  Such statements involve risks anduncertainties including the following which could cause actual results todiffer materially from any such forward-looking statement:  potential regulatory changes by the FederalAviation Administration (“FAA”), which could increase the regulation ofAirNet’s business, or the Federal Reserve, which could change the competitiveenvironment of transporting canceled checks; potential changes in federally andlocally mandated security requirements; potential limitations on theavailability of adequate insurance coverage at reasonable rates in light ofSeptember 11, 2001 and subsequent events; the impact of a potentially weakeningU.S. economy on time-critical shipment volumes; the acceptance of the Company’stime-critical transportation service offerings by target markets in the Expressservices segment; adverse weather conditions; technological advances andincreases in the use of electronic funds transfers; as well as other economic,competitive and domestic and foreign governmental factors affecting AirNet’smarkets, prices and other facets of its operations.  Should one or more of these risks or uncertainties materialize,or should underlying assumptions prove incorrect, actual outcomes may varymaterially from those indicated.  AirNetundertakes no responsibility to update for changes related to these or anyother factors that may hereafter occur. Refer to Item 7 of the Annual Report on Form 10-K  for the fiscal year ended December 31, 2000,for additional detail relating to risk factors expressed in forward-lookingstatements.

 

**Results of Operations**  

 

*Three months ended September 30, 2001 compared to threemonths ended September 30, 2000*  

 

Net revenues were $35.3million for the three months ended September 30, 2001, an increase of $1.6million, or 4.6%, over the same period of 2000.  

 

Revenues from Bankservices increased $1.8 million, or 7.4%, as a result of rate increasesaveraging 2.5% and incorporated in January 2001, and additional volumetransported during the days immediately following the September 11thtragedies.

 

Express servicesrevenues decreased $0.7 million, or 7.5% primarily as a result of reducedvolume from a key customer, which is expected to continue.  To a lesser extent, the current economicenvironment and the inability to transport packages on the commercial airlinesfor several days following the September 11th tragedies, alsoimpacted Express services revenues. These decreases were offset by a 37.7% increase in revenues from themedical product line.  

 

Aviation servicesrevenues increased $0.4 million, or 216.6%, to $0.5 million for the thirdquarter, primarily as a result of new initiatives in the passenger andon-demand cargo charter product line.

Total costs and expenseswere $31.3 million for the three months ended September 30, 2001, an increaseof $1.4 million, or 4.7%, over the same period in 2000, resulting in incomefrom operations of $4.0 million for the third quarter of 2001, compared to $3.8million over the same period last year, a 3.5% increase.

 

Air transportationexpenses were up $0.5 million, or 1.8%, for the quarter ended September 30,2001 compared to the same period in 2000. Courier costs were down almost $1.0 million due to less Express servicesvolume from a significant customer and AirNet’s initiatives to reduce suchcosts and align them under a more variable cost structure.  Fuel costs increased $0.4 million due tohigher aviation fuel prices and additional flying hours during thequarter.  Maintenance costs grew by $0.2million due to increased labor and parts costs. Forty additional pilotscompared to a year ago, plus increased incentive compensation expense increasedexpense in wages and benefits by $0.6 million. The increase in pilotseliminated a shortage that existed last year and enabled the Company to expandthe number of dedicated crews available for on-demand charters.  Contracted air costs decreased primarily dueto a reduced volume from a key customer and the inability to utilize servicesfor several days following the September 11th tragedies.  

 

The operating margin forBank services improved to 20.0% for the quarter ended September 30, 2001 from14.5% for the third quarter ended September 30, 2000.  The $1.7 million increase is partly attributable to rateincreases, which were effective January 1, 2001, and reduced ground couriercosts, offset partly by increased fuel and maintenance costs and pilot costs,as discussed above.

 

The operating margin forExpress services decreased from 4.2% for the third quarter of 2000 to negative17.3% for the same period in 2001.  The$1.8 million decrease is primarily attributable to the $0.7 million decrease inExpress service revenues and increased costs associated with the addition ofregional and sales personnel added to target sales efforts in the Expressservices market.  

 

Selling, general andadministrative expense increased $0.9 million, or 25.3%, over the same periodin the prior year primarily due to additional personnel in the sales andregional management areas.  Travelrelated to the implementation of a regional structure in the current year alsocontributed to the increase.  

 

Interest expense was$0.4 million for the three months ended September 30, 2001, which is a $0.1 milliondecrease from the three months ended September 30, 2000.  The notes payable balance has increased by$4.5 million since December 31, 2000 as a result of the repurchase of $5.0million of the former Chairman’s common shares and the purchase of an aircraftin August 2001.  Interest rates onvariable debt decreased approximately 1.6% on average for the third quarter2001 compared to the third quarter 2000, resulting in the overall decrease tointerest expense.  

 

The tax provisiontotaled $1.4 million for the third quarter ended September 30, 2001, or 40.7%of pre-tax income.  The provision forthe three months ended September 30, 2000 totaled $1.3 million, or 40.0% ofpre-tax income.  

 

Net income for the thirdquarter ended September 30, 2001 totaled $2.1 million.  This compared to net income of $2.0 millionfor the quarter ended September 30, 2000. 

 

*Nine months ended September 30, 2001 compared to nine monthsended September 30, 2000*  

 

Revenues increased $2.6million, or 2.6%, to $105.0 million for the nine months ended September 30,2001 compared to $102.4 million for the same period in 2000. Bank services revenues increased $3.7 million, or 4.9%, to $79.4 million.  This increase is primarily the result ofrate increases averaging 2.5% and effective January 1, 2001, and additionalvolume transported during the days immediately following the September 11thtragedies.  

 

Express servicesrevenues decreased $1.8 million, or 6.7%, due to substantially reduced volumefrom a key customer over a year ago. These decreases were partially offset by growth in our medical productline, particularly in the area of dedicated charters.  Revenues from Mercury Business Services have increasedapproximately $40,000, or 0.6%, for the first nine months in 2001 compared to2000 due to an increase in shipment volume. 

 

Aviation servicesrevenues increased $0.7 million compared to the prior year primarily due to theimplementation of new passenger and on-demand cargo charter operations, and thecommission earned on the sale of an aircraft in the first quarter.  

 

Total costs and expenseswere $95.6 million for the nine months ended September 30, 2001, an increase of$3.8 million, or 4.2%, over the same period in 2000 resulting in income fromoperations of $9.4 million for the nine months ended September 30, 2001compared to $10.6 million for the same period of 2000.  

 

Air transportationexpenses were up $1.1 million, or 1.4%. The majority of the increase can be attributed to a $1.6 millionincrease in maintenance costs.  Thisincrease is primarily due to timing issues related to routine maintenance,increased utilization of jet aircraft and ongoing activities to maintainsuperior safety standards for the aircraft fleet.  These increases in maintenance costs were offset by a $2.4million decrease in ground courier expenses primarily due to better managementof operations, decreased ground shipment volume from a key customer, andAirNet’s initiatives to reduce such costs and align them under a more variablecost structure.  Contracted air costswere also down $0.3 million primarily due to reduced volume from a key customerand the inability to utilize services for several days following the September11th tragedies.  Fuel costsincreased by $0.7 million due to higher aviation fuel prices, but werepartially offset by income from the fuel surcharge program.  Wages and benefits expense increased $0.6million due to the addition of 40 new pilots. The increase in pilots eliminated a shortage that existed last year andenabled the Company to expand the number of dedicated crews available foron-demand charters.  Other operationalcosts increased primarily as a result of travel due to the new regionalstructure and addition of sales staff.

 

The operating margin forBank services improved to 18.4% for the nine months ended September 30, 2001from 14.3% for the same period in 2000. The $3.7 million increase is partly attributable to rate increases,which were effective January 1, 2001, and reduced ground courier costs, offsetin part by increased fuel and maintenance costs and pilot costs, as discussedabove.  

 

The operating margin forExpress services decreased from  0.8%for the nine months ended September 30, 2000 to negative 15.4% for the sameperiod ended in 2001.  The $4.0 milliondecrease is primarily attributable to the $1.8 million decrease in Expressservice revenues and increased costs associated with the addition of regionaland sales personnel added to target sales efforts in the Express market.  

 

Selling, general and administrativeexpenses increased $1.8 million, or 22.6%, for the nine month period.  The addition of executives to the Expressand Aviation services groups, as well as regional management, increased payrolland related expenses.  Computer rentaland expense increased $0.2 million due to the placement of computers, printers,and scales at the banks to improve data collection for shipment routingpurposes. During the second quarter 2001, AirNet established a $1.0 millionaccrual for the retirement package of its Founder and then Chairman.  

 

As described in Note 5of the Notes to Condensed Cosolidated Financial Statements, AirNet recognized a$1.7 million impairment charge on its investment in The Check Exchange SystemCo. (“CHEXS”) during the second quarter of 2001.

Interest expense totaled$1.3 million for the nine months ended September 30, 2001, which is a $0.5million, or 2.8% decrease from expense for the nine months ended September 30,2000.  The notes payable balance hasincreased by $4.5 million since December 31, 2000, due to the repurchase of $5million of the former Chairman’s common shares as well as the purchase of a newaircraft in August 2001. Interest rates on variable debt decreasedapproximately 0.8% on average for the nine months ended 2001 compared to thenine months ended 2000, resulting in the overall decrease to interest expense.

 

The tax provisiontotaled $3.3 million for the nine months ended September 30, 2001, or 40.7% ofpre-tax income prior to inclusion of the $1.7 million impairment on investment,which is expected to have no tax benefit. The provision for the nine months ended September 30, 2000 totaled $3.5million, or 40.0% of pre-tax income.

 

Net income for the ninemonths ended September 30, 2001 totaled $3.1 million. After excluding theeffects of the two non-recurring charges of $1.0 million related to theretirement package and $1.7 million related to the impairment on investment,net income totaled $5.8 million.  Thiswas an increase of $0.5 million, or 9.9%, from net income of $5.3 million forthe nine months ended September 30, 2000. 

 

**Liquidity and Capital Resources**  

 

*Cash flow from operating activities.*  Net cash provided by operating activitieswas $16.2 million for the nine months ended September 30, 2001, compared to $19.1million for the same period in 2000.  

 

*Current credit arrangements.*  AirNet maintains a credit agreement with abank that provides a $50.0 million unsecured revolving credit facility. Thecredit agreement limits the availability of funds to designated percentages ofaccounts receivable, inventory and the wholesale value of aircraft andequipment.  In addition, the creditagreement requires the maintenance of minimum net worth and cash flow levels,imposes limits on payments of dividends to 50% of net income and restricts theamount of additional debt which may be incurred.  AirNet’s outstanding balance at September 30, 2001 was $27.2million, which is a $4.5 million increase from the balance at December 31, 2000.  

 

*Investing activities.*  Capital expenditures totaled $13.8 millionfor the nine months ended September 30, 2001 compared to $9.3 million for thesame period in 2000.  Of the 2001expenditures, $3.5 million was for the purchase of three aircraft.  Substantially all of the remaining 2001expenditures were incurred for aircraft inspections, major engine overhauls andrelated flight equipment.  AirNetanticipates it will have between $22.0 and $24.0 million in total capitalexpenditures in 2001.  The Company addedone Learjet in October 2001 and anticipates adding two more Cessna Caravans bythe end of the year.  AirNet anticipatesit will continue to acquire aircraft and flight equipment as necessary tomaintain growth and continue offering quality service to its customers.  

 

During the second quarterof 2001,  AirNet announced it hadentered into an agreement to purchase five Cessna Caravan Super Cargomasteraircraft through the year 2003.  Theseaircraft will replace twin engine piston aircraft currently being utilized inthe fleet.  The acquisition of theaircraft is expected to be financed through cash flows and debt.  

 

AirNet announced a stockrepurchase program in February 2000 allowing AirNet to purchase up to $3.0million of its common shares. Management and the Board of Directors believethat AirNet’s common shares represent an excellent value and an appropriateinvestment.  There was no additionalrepurchase activity in the third quarter ending September 30, 2001.  As such, purchases of approximately $0.6million of the Company’s common shares may be still be made over time in theopen market or through privately negotiated transactions.

In addition, in thethird quarter of 2001, AirNet purchased 818,330 common shares from its formerChairman at a total cost of $5.0 million. The privately negotiated transaction closed on July 27, 2001.  AirNet intends to hold the common shares intreasury.  

 

AirNet anticipates thatoperating cash and capital expenditure requirements will continue to be fundedby cash flow from operations, cash on hand and bank borrowings.  

 

**Seasonality and Variability in Quarterly Results**  

 

AirNet’s operationshistorically have been somewhat seasonal and somewhat dependent on the numberof banking holidays falling during the week. Because financial institutions are currently AirNet’s principalcustomers, AirNet’s air system is scheduled primarily around the needs offinancial institution customers.  Whenfinancial institutions are closed, there is no need for AirNet to operate afull system.  AirNet’s fiscal quarter endingDecember 31, is often the most impacted by bank holidays (includingThanksgiving and Christmas) recognized by its primary customers.  When these holidays fall on Monday throughThursday, AirNet’s revenue and net income are adversely affected. AirNet’sannual results fluctuate as well.  

 

Operating results arealso affected by the weather.  AirNetgenerally experiences higher maintenance costs during its fiscal quarter endingMarch 31.  Winter weather often requiresadditional costs for de-icing, hangar rental and other aircraft services.  

 

**Item3.    Quantitative and Qualitative DisclosuresAbout Market Risk.**  

 

##### **Inflation and Interest Rates**

 

AirNet is exposed tocertain market risks from transactions that are entered into during the normalcourse of business.  AirNet’s primarymarket risk exposure relates to interest rate risk.  AirNet’s revolving credit facility bears interest at AirNet’soption, at a fixed rate determined by the Eurodollar rate, a negotiated rate ora floating rate.  Based on borrowings of$27.2 million at September 30, 2001, a one hundred basis point change ininterest rates would impact net interest expense by approximately $172,000 peryear.  

 

Refer to Item 3 in theNotes to Condensed Consolidated Financial Statements for detail concerningAirNet’s two interest rate swap agreements. At September 30, 2001, the aggregate fair value of these interest rateswaps was approximately $(366,000).  

 

**Derivative and Hedging Activities**  

 

Refer to Item 3 in theNotes to Condensed Consolidated Financial Statements for detail concerning theCompany’s adoption of the Financial Accounting Standards Board Statement No.133 and the aggregate fair value of the related derivative.

 

 

 

**AIRNETSYSTEMS, INC.**

** **

**PART II - OTHER INFORMATION**

 
|     |                                                                                                                                                                                                                                                                                                                                 |
|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Item  1. | Legal Proceedings.                                                                                                                                                                                                                                                                                                                   |
|     |                                                                                                                                                                                                                                                                                                                                 |
|     | There are no pending  legal proceedings involving AirNet other than routine litigation incidental  to its business.  In the opinion of  AirNet’s management, these proceedings should not, individually or in the  aggregate, have a material adverse effect on AirNet’ results of operations or  financial condition |
|     |                                                                                                                                                                                                                                                                                                                                 |
| 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 10 AirNet Systems,  Inc. Amended and Restated 1996 Incentive Stock Plan                                                                                                                                                                                                                                 |
|     |                                                                                                                                                                                                                                                                                                                                 |
|     | (b)  Reports on Form 8-K:                                                                                                                                                                                                                                                                                                            |
|     |                                                                                                                                                                                                                                                                                                                                 |
|     | No  reports on Form 8-K were filed during the three months ended September 30,  2001.                                                                                                                                                                                                                                                |
|     |                                                                                                                                                                                                                                                                                                                                 |

 

 

**AIRNETSYSTEMS, INC.**

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
| Dated:  November 13, 2001 |   | By:    |   | /s/ William R. Sumser          |   |
|--------------------------------|--------|--------|--------|--------------------------------|--------|
|                           |   |   |   | William R. Sumser,             |   |
|                           |   |   |   | Chief Financial  Officer       |   |
|                           |   |   |   | (Duly Authorized  Officer)     |   |
|                           |   |   |   | (Principal Financial  Officer) |   |
|                                |        |        |        |                                |        |  |