** **

**SECURITIES AND EXCHANGE 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 March31, 2002**

 

**OR**

 

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For the transition periodfrom                              to                              **

 

**Commission file number  1-13025**

 

**AIRNET SYSTEMS, INC.**

(Exact name of registrantas 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) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 ý  No o

 

Common Shares, $.01 Par Value,

Outstanding as of May 3, 2002 - 10,137,432

 

 

----

 

**AIRNETSYSTEMS, INC.**

 

**FORM10-Q FOR QUARTER ENDED MARCH 31, 2002**

 
| **PART I:  FINANCIAL INFORMATION** |
|-----------------------------------------|
|                                    |   |   |
|                                    | Item 1 | Financial Statements (Unaudited) |
|                                    |   |   |
|                                    |   | Condensed  Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001 |
|                                    |   |   |
|                                    |   | Condensed  Consolidated Statements of Operations for the three months ended March 31,  2002 and 2001 |
|                                    |   |   |
|                                    |   | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2002 and 2001 |
|                                    |   |   |
|                                    |   | 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 |

 

2

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**AIRNETSYSTEMS, INC.**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 

In thousands, except per share data
|                                                                                                                       |   | **March 31,  2002** |        | **December 31,  2001** |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-------------|------------------------|--------|
|                                                                                                                       |   | **(unaudited****)** |        |                   |   |
| **ASSETS**                                                                                                                 |   |                |        |                   |   |
| Current assets:                                                                                                            |   |                |        |                   |   |
| Cash and   cash equivalents                                                                                           |   | **$**               | **2,145**   | ** **             | $      | 377 |   |
| Accounts receivable, less allowances                                                                                       |   | **18,793**          | ** **  | 16,803                 |   |
| Inventory and spare parts                                                                                                  |   | **7,725**           | ** **  | 6,704                  |   |
| Taxes receivable                                                                                                           |   | **—**          | ** **  | 4                      |   |
| Deferred taxes                                                                                                             |   | **729**             | ** **  | 729                    |   |
| Deposits and prepaids                                                                                                      |   | **1,723**           | ** **  | 1,703                  |   |
| Total current assets                                                                                                       |   | **31,115**          | ** **  | 26,320                 |   |
|                                                                                                                       |   |                | ** **  |                   |   |
| Net property and equipment                                                                                                 |   | **99,706**          | ** **  | 98,872                 |   |
|                                                                                                                       |   |                | ** **  |                   |   |
| Other assets:                                                                                                              |   |                | ** **  |                   |   |
| Goodwill, net of accumulated amortization                                                                                  |   | **7,080**           | ** **  | 7,080                  |   |
| Other intangibles, net of accumulated  amortization                                                                        |   | **48**              | ** **  | 56                     |   |
|                                                                                                                       |   |                | ** **  |                   |   |
| Other                                                                                                                      |   | **787**             | ** **  | 751                    |   |
| **Total assets**                                                                                                           |   | **$**               | **138,736** | ** **             | $      | 133,079 |   |
|                                                                                                                       |   |                | ** **  |                   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                              |   |                | ** **  |                   |   |
| Current liabilities:                                                                                                       |   |                | ** **  |                   |   |
| Accounts payable                                                                                                           |   | **$**               | **4,519**   | ** **             | $      | 4,521 |   |
| Salaries and related liabilities                                                                                           |   | **3,731**           | ** **  | 4,849                  |   |
| Accrued expenses                                                                                                           |   | **2,729**           | ** **  | 2,137                  |   |
| Taxes payable                                                                                                              |   | **203**             | ** **  | —                 |   |
| Current portion of notes payable                                                                                           |   | **677**             | ** **  | 33                     |   |
| Total current liabilities                                                                                                  |   | **11,859**          | ** **  | 11,540                 |   |
|                                                                                                                       |   |                | ** **  |                   |   |
| Other liabilities                                                                                                          |   | **191**             | ** **  | 326                    |   |
| Notes payable, less current portion                                                                                        |   | **32,324**          | ** **  | 28,202                 |   |
| Deferred tax liability                                                                                                     |   | **14,118**          | ** **  | 14,065                 |   |
|                                                                                                                       |   |                | ** **  |                   |   |
| Shareholders’ equity:                                                                                                 |   |                | ** **  |                   |   |
| Preferred shares, $.01 par value; 10,000  shares authorized; no shares issued and outstanding                              |   | **—**          | ** **  | —                 |   |
| Common shares, $.01 par value; 40,000  shares authorized; 12,753 shares issued at March 31, 2002 and at December 31,  2001 |   | **128**             | ** **  | 128                    |   |
| Additional paid-in-capital                                                                                                 |   | **77,330**          | ** **  | 77,440                 |   |
| Retained earnings                                                                                                          |   | **28,799**          | ** **  | 27,656                 |   |
| Accumulated other comprehensive loss                                                                                       |   | **(111**            | **)**       | (194                   | )      |
| Treasury shares, 2,621 and 2,629 shares  held at cost at March 31, 2002 and December 31, 2001, respectively                |   | **(25,902**         | **)**       | (26,084                | )      |
| Total shareholders’ equity                                                                                            |   | **80,244**          | ** **  | 78,946                 |   |
|                                                                                                                       |   |                | ** **  |                   |   |
| **Total liabilities and shareholders’ equity**                                                                        |   | **$**               | **138,736** | ** **             | $      | 133,079 |   |

 

See notes to condensed consolidated financialstatements

 

3

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**AIRNETSYSTEMS, INC.**

 

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS - UNAUDITED**

 

In thousands, except pershare data
|                                                   |   | **Three Months Ended  March 31,** |       |
|--------------------------------------------------------|--------|-----------------------------------|------------|
|                                                   |   | **2002**                          |       | **2001** | ** ** |
|                                                   |   |                              | ** ** |   | ** ** |
| **NET REVENUES**                                       |   |                              |       |   |   |
|                                                   |   |                              |       |   |   |
| Air transportation, net of excise tax                  |   |                              |       |   |   |
| Bank services                                          |   | **$**                             | **24,752** |   | $ | 25,783 |   |
| Express services                                       |   | **9,629**                         |       | 8,176 |   |
| Aviation services and other operations                 |   | **1,099**                         |       | 363 |   |
| **Total net revenues**                                 |   | **35,480**                        |       | 34,322 |   |
|                                                   |   |                              |       |   |   |
| **COSTS AND EXPENSES**                                 |   |                              |       |   |   |
| Wages and benefits                                     |   | **5,149**                         |       | 5,050 |   |
| Aircraft fuel                                          |   | **3,448**                         |       | 3,064 |   |
| Aircraft maintenance                                   |   | **2,864**                         |       | 2,730 |   |
| Contracted air costs                                   |   | **3,614**                         |       | 3,928 |   |
| Ground courier                                         |   | **5,817**                         |       | 6,009 |   |
| Depreciation                                           |   | **4,351**                         |       | 3,527 |   |
| Other                                                  |   | **3,331**                         |       | 2,635 |   |
| Selling, general and administrative                    |   | **4,679**                         |       | 4,673 |   |
| **Total costs and expenses**                           |   | **33,253**                        |       | 31,616 |   |
| Income from operations                                 |   | **2,227**                         |       | 2,706 |   |
| Interest expense                                       |   | **354**                           |       | 474 |   |
| Income before income taxes                             |   | **1,873**                         |       | 2,232 |   |
| Provision for income taxes                             |   | **730**                           |       | 912 |   |
|                                                   |   |                              |       |   |   |
| **Net income**                                         |   | **$**                             | **1,143**  |   | $ | 1,320 |   |
|                                                   |   |                              |       |   |   |
| Net income per common share — basic and  dilutive |   | **$**                             | **0.11**   |   | $ | 0.12 |   |

 

See notes to condensed consolidated financialstatements

 

4

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**AIRNETSYSTEMS, INC.**

** **

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED**

 

In thousands
|                                                                               |   | **Three Months ended  March 31,** |       |
|------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                               |   | **2002**                          |       | **2001** |   |
|                                                                               |   |                              | ** ** |   |   |
| **OPERATING ACTIVITIES**                                                           |   |                              | ** ** |   |   |
| Net income                                                                         |   | **$**                             | **1,143**  | ** ** | $ | 1,320 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                              | ** ** |   |   |
| Depreciation                                                                       |   | **4,351**                         | ** ** | 3,527 |   |
| Amortization of intangibles                                                        |   | **7**                             | ** ** | 132 |   |
| Provision for losses on accounts receivable                                        |   | **73**                            | ** ** | 84 |   |
| Loss on disposition of assets                                                      |   | **11**                            | ** ** | 14 |   |
| Cash provided by (used in) operating assets  and liabilities:                      |   |                              | ** ** |   |   |
| Accounts receivable                                                                |   | **(2,064**                        | **)**      | (2,642 | ) |
| Inventory and spare parts                                                          |   | **(1,021**                        | **)**      | (773 | ) |
| Prepaid expenses                                                                   |   | **(20**                           | **)**      | 226 |   |
| Accounts payable                                                                   |   | **(3**                            | **)**      | (825 | ) |
| Accrued expenses                                                                   |   | **593**                           | ** ** | 875 |   |
| Taxes payable                                                                      |   | **207**                           | ** ** | 883 |   |
| Salaries and related liabilities                                                   |   | **(1,118**                        | **)**      | 85 |   |
| Other, net                                                                         |   | **(35**                           | **)**      | (2 | ) |
| **Net cash provided by operating activities**                                      |   | **2,124**                         | ** ** | 2,904 |   |
|                                                                               |   |                              | ** ** |   |   |
| **INVESTING ACTIVITIES**                                                           |   |                              | ** ** |   |   |
| Purchases of property and equipment                                                |   | **(5,211**                        | **)**      | (4,837 | ) |
| Proceeds from sales of property and  equipment                                     |   | **16**                            | ** ** | 85 |   |
| **Net cash used in investing activities**                                          |   | **(5,195**                        | **)**      | (4,752 | ) |
|                                                                               |   |                              | ** ** |   |   |
| **FINANCING ACTIVITIES**                                                           |   |                              | ** ** |   |   |
| Proceeds from 1996 Incentive Stock Plan  programs                                  |   | **72**                            | ** ** | 32 |   |
| Net borrowings (repayments) under the  revolving credit facility                   |   | **(1,150**                        | **)**      | 2,800 |   |
| Repayment of long-term debt                                                        |   | **5,917**                         | ** ** | (8 | ) |
| **Net cash provided by financing activities**                                      |   | **4,839**                         | ** ** | 2,824 |   |
|                                                                               |   |                              | ** ** |   |   |
| Net increase in cash                                                               |   | **1,768**                         | ** ** | 976 |   |
| Cash and cash equivalents at beginning of  period                                  |   | **377**                           | ** ** | 1,118 |   |
|                                                                               |   |                              | ** ** |   |   |
| **Cash and cash equivalents at end of period**                                     |   | **$**                             | **2,145**  | ** ** | $ | 2,094 |   |

 

See notes to condensed consolidated financialstatements

5

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**AIRNETSYSTEMS, INC.**

 

**NOTES TOCONDENSED 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 providesdelivery service of time-critical shipments for customers in the U.S. bankingindustry and other 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.

 

The accompanying unaudited condensed consolidated financial statementsinclude the accounts 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 financialstatements.  These financial statementsshould be read in conjunction with the year ended December 31, 2001consolidated financial statements of AirNet Systems, Inc. included in Item 8 ofthe Annual Report on Form 10-K for the fiscal year ended December 31, 2001(File No. 1-13025) which contains additional disclosures including a summary ofAirNet’s accounting policies.

 

The financial information included herein reflects all adjustments(consisting of normal recurring adjustments) which are, in the opinion ofmanagement, necessary for a fair presentation of the results of interimperiods.  Operating results for thethree months ended March 31, 2002 are not necessarily indicative of the resultsto be expected for the year ending December 31, 2002.

 

The preparation of the condensed consolidated financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the amounts reported in thosefinancial statements and accompanying notes thereto.  Actual results could differ from those estimates.

 

**2.     Goodwill**

 

In June 2001, the FASB issued Statement of Financial AccountingStandards No. 141, *Business Combinations*,effective for business combinations initiated after June 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 Statement No. 142.  Other intangible assets will continue to beamortized over their useful lives.

 

The Company adopted the new rules on accounting for goodwill in thefirst quarter of 2002.  Application ofthe nonamortization provisions of the Statement resulted in an increase in netincome of approximately $87,000 ($53,000 net of tax), or less than $0.01 pershare, for the three months ending March 31, 2002.  By June 30, 2002, the Company will perform the first of the requiredimpairment tests of goodwill as of January 1, 2002.  The Company has not yet determined what the effect of these testswill be on the earnings and financial position of the Company.

 

6

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**3.     Net Income Per Share**

 

The following table sets forth the computation of basic and diluted netincome per common share (in thousands, except per share data):

 
|                                                        |   | **Three  Months Ended  March 31,** |   |
|-------------------------------------------------------------|--------|------------------------------------|--------|
|                                                        |   | **2002**                           |   | **2001** |   |
|                                                        |   |                               |   |   |   |
| Numerator:                                                  |   |                               |   |   |   |
| Net income                                                  |   | $                                  | 1,143  |   | $ | 1,320 |   |
|                                                        |   |                               |   |   |   |
| Denominator:                                                |   |                               |   |   |   |
| Basic - weighted  average shares outstanding                |   | 10,131                             |   | 10,922 |   |
|                                                        |   |                               |   |   |   |
| Diluted                                                     |   |                               |   |   |   |
| Stock options -  associates, officers, and directors        |   | 173                                |   | 11 |   |
| Adjusted  weighted average shares outstanding               |   | 10,304                             |   | 10,933 |   |
|                                                        |   |                               |   |   |   |
| Net income per  common share - basic and assuming dilution: |   | $                                  | 0.11   |   | $ | 0.12 |   |

 

For the three months ended March 31, 2002, a total of 1,103,800 commonshares subject to outstanding stock options were excluded from the dilutedweighted average shares outstanding calculation, as the exercise price of thestock options exceeded the average fair market value of the underlying commonshares for the period.

 

**4.     Long Term Debt**

 

During first quarter 2002, AirNet entered into three term loans withbanks totaling $5,969,000.  The firstnote has a principal amount of $1,249,000 with a 60-month term, a 5 .77% interest rate and a $24,000monthly principal and interest payment. The second note has a principal amount of  $1,720,000 with a 60-month term, a 5.77% interest rate and a$33,000 monthly principal and interest payment.  The third note has a principal amount of $3,000,000 with a 4.25%interest rate and a $50,000 principal payment due monthly over 60 months.  These loans are secured by four aircraftwith a net book value totaling $6,142,000 at March 31, 2002.

 

The Company had borrowings as follows at March 31, (in thousands):

 
|                                |   | **2002** |   | **2001** |   |
|-------------------------------------|--------|----------|--------|----------|--------|
| Term notes                          |   | $        | 6,003  |     | $      | 86 |   |
| Revolving credit facility           |   | 26,998   |   | 28,149   |   |
|                                |   | 33,001   |   | 28,235   |   |
| Current portion  of notes payable   |   | 677      |   | 33       |   |
| Long-term  portion of notes payable |   | $        | 32,324 |     | $      | 28,202 |   |

 

**5.     Aircraft Leases**

 

In February 2002, AirNet entered into operating leases for six CessnaCaravan aircraft.  The lease terms rangefrom 3.0 years to 4.5 years and contain various cancellation privileges.  AirNet is responsible for repair andmaintenance of the aircraft during the term of the lease.  Combined monthly payments on the leasestotal approximately $50,000.

 

7

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**AIRNETSYSTEMS, INC.**

** **

**ITEM 2****- MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL**

**CONDITIONAND RESULTS OF OPERATIONS**

 

**Safe Harbor Statement**

 

Except for the historical information contained in this Form 10-Q, thematters discussed, including, but not limited to, information regarding futureeconomic performance and plans and objectives of AirNet’s management, areforward-looking statements which involve risks and uncertainties. When used inthis document, the words “anticipate”, “estimate”, “expect”, “may”, “plan”,“project” and similar expressions are intended to be among statements thatidentify forward-looking statements. Such statements involve risks and uncertainties including, but notlimited to, the following which could cause actual results to differ materiallyfrom any forward-looking statement: potential regulatory changes by the Federal Aviation Administration(“FAA”), which could increase the regulation of AirNet’s business, or theFederal Reserve, which could change the competitive environment of transportingcanceled checks; adverse weather conditions; potential changes in locally andfederally mandated security requirements; changes in check processing andshipment patterns of bank customers; the acceptance of AirNet’s time-criticalservice offerings by targeted Express customers; 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 any otherfactors that may hereafter occur. Please refer to Item 7 of the Annual Report on Form 10-K for the fiscalyear ended December 31, 2001 for additional detail relating to risk factorsthat could affect AirNet’s results and cause those results to differ materiallyfrom those expressed in forward-looking statements.

 

**Results of Operations**

 

*Three months ended March 31, 2002compared to three months ended March 31, 2001*

 

Total net revenues were $35.5 million for the three months ended March31, 2002, an increase of $1.2 million, or 3.4%, over the same period of 2001.

 

Net revenues from Bank services decreased $1.0 million, or 4.0%.  Rate increases implemented in January 2002averaging approximately 2.2% were more than offset by one less flying day inthe 2002 quarter and a 1.0% decrease in shipment volumes from the first quarterof 2001.  Management believes that thesharp decline in interest rates during the past year combined with additionalcost control initiatives by bank customers impacted overall shipment volumes inthe first quarter of 2002.

 

Express service net revenues increased $1.4 million, or 17.8%. Revenuefrom the Mercury Business Services product line decreased 2.5% to $2.1 millionin the first quarter 2002. Excluding the Mercury product line, Express serviceshipments rose 4.0% for first quarter 2002, while net revenue per shipmentincreased 20.0%, partly due to a 5% rate increase in February 2002.  General weakness in the national economyinfluenced overall growth rates in Express services.  However, Medical and Air Courier shipments achieved solid salesgains during the most recent quarter compared to last year with revenues fromthese product lines increasing 63.1% and 63.0%, respectively.

 

8

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First quarter 2002 revenue for Aviation services, which includeson-demand charters to meet specific cargo shipping requirements and passengercharters, more than doubled to $1.1 million in the first quarter of 2002,versus $0.4 million a year ago. Approximately $0.9 million of the first quarter 2002 revenue was derivedfrom passenger charters as AirNet continues to expand its charter fleet, whichnow includes three Lear 35s and two Lear 60s, one of which is managed by theCompany.

 

Total costs and expenses were $33.3 million for the three months endedMarch 31, 2002, an increase of $1.6 million, or 5.2%, over the same period in2001, resulting in income from operations of $2.2 million for the three monthsended March 31, 2002, compared to $2.7 million for the same period of 2001.

 

Increases in expenses were primarily driven by an increase in the fleetsize and the expansion of a weekend air system.  The fleet size has increased from 119 aircraft at March 31, 2001to 132 at March 31, 2002, and includes the addition of two new aircrafttypes:  the Cessna Caravan and thepassenger Lear 60.  AirNet added 35flight personnel over the past year to complete our previously understaffed flightdepartment and to support new passenger charter operations. Crew training expensesmore than doubled from their level a year ago due to the addition of personneland the introduction of new aircraft types into the fleet.  Despite lower fuel prices in the firstquarter of 2002 compared to a year ago, overall fuel expense increased $0.4million.  The increase is partly due toa 5.1% increase in operating hours and the fact that rising prices during thequarter were not offset by the Companys fuel surcharge program due to timingdifferences between market prices and the index used for determining surchargeamounts.  Maintenance costs were also updue to the additional flight hours. Depreciation expense also increased $0.8 million due to the addition ofaircraft.  The cost of additional flighthours added for the expanded weekend system, which began mid-quarter, wereoffset by a reduction in commercial freight costs (i.e. costs incurred totransport shipments on the commercial airlines) and a reduction in groundcosts, as the Company continues its migration to a more variable ground coststructure. Aircraft lease expense totaled $0.2 million in the first quarter2002 due to the addition of six leased Cessna Caravans to the fleet to supportthe expanded weekend and the weekday systems.

 

Selling, general and administrative expense increased slightly over thesame quarter in the prior year.  UnderStatements of Financial Accounting Standards No. 141, *Business Combinations,* effective forbusiness combinations initiated after June 30, 2001, and No. 142, *Goodwill and Other Intangible Assets*, AirNethas eliminated amortization of goodwill, effective January 1, 2002.  The first quarter 2002 effect of this changereduced amortization by $87,000 (or $53,000, net of tax.)  This decrease was offset by an increase inpayroll primarily attributed to the completion of staffing the regional supportand sales staffs.

 

Total debt outstanding was $33.0 million at March 31, 2002 compared to$25.5 million at March 31, 2001.  Theincrease of $7.5 million is primarily due to the repurchase of common sharesfrom AirNet’s Founder and former Chairman in 2001 and the purchase ofadditional aircraft during the period to provide additional capacity.  Despite the increase in debt outstanding,interest expense decreased $0.1 million due to lower interest rates on the variableportion of the Company’s revolving credit facility.

 

**Liquidity and Capital Resources**

 

*Cash flow from operating activities*. Net cash provided by operating activities was $2.1 million for the threemonths ended March 31, 2002, compared to $2.9 million for the same period in2001.

 

*Current credit arrangements.* AirNet maintains a credit agreement with a bank that provides a$50.0 million unsecured revolving credit facility, which is scheduled to expireon August 1, 2003. The credit agreement limits the availability of funds todesignated percentages of accounts receivable, inventory and the wholesalevalue of aircraft and equipment.  Inaddition, the credit agreement requires the maintenance of minimum net worth andcash flow levels, imposes limits 

 

9

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on payments of dividends to 50% of net income and restricts the amountof additional debt which may be incurred. AirNet’s outstanding balance on the credit facility at March 31, 2002was $27.0 million, which is a $1.1 million increase over the balance atDecember 31, 2001.  The increase isprimarily due to the acquisition of an aircraft during the quarter.

 

During first quarter 2002, AirNet entered into three term loans withbanks totaling $6.0 million.  Interestrates range from 4.25% to 5.77%.  Theloans are secured by four aircraft.

 

*Investing activities*. Capital expenditures totaled $5.2 million for the three months endedMarch 31, 2002 compared to $4.8 million for the same period in 2001.  Of the 2002 expenditures, $2.1 million wasfor the purchase of an aircraft. Substantially all of the remaining 2002 expenditures were for aircraftinspections, major engine overhauls and related flight equipment.  AirNet anticipates it will have between$25.0 million and $26.0  million intotal capital expenditures in 2002. AirNet anticipates it will continue to acquire aircraft and flightequipment as necessary to maintain growth and continue offering quality serviceto its customers.  AirNet will alsocontinue to consider whether future asset acquisitions should be purchased orleased.

 

AirNet announced a stock repurchase program in February 2000 allowingAirNet to purchase up to $3.0 million of its common shares.  There was no repurchase activity in thefirst quarter ending March 31, 2002.  Assuch, purchases of approximately $0.6 million of the Company’s common sharesmay still be made over time in the open market or through privately negotiatedtransactions.  Such future purchaseswould be considered based on current market conditions and the stock price.

 

AirNet anticipates that operating cash and capital expenditurerequirements will continue to be funded by cash flow from operations, cash onhand and bank borrowings.

 

**Seasonality and Variability inQuarterly Results**

 

AirNet’s operations historically have been somewhat seasonal andsomewhat dependent on the number of banking holidays falling during theweek.  Because financial institutionsare currently AirNet’s principal customers, AirNet’s air system is scheduledprimarily 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 mostimpacted by bank holidays (including Thanksgiving and Christmas) recognized byits primary customers.  When theseholidays fall on Monday through Thursday, AirNet’s revenue and net income areadversely affected. AirNet’s annual results fluctuate as well.

 

Operating results are also affected by the weather.  AirNet generally experiences highermaintenance costs during its fiscal quarter ending March 31.  Winter weather often requires additionalcosts for de-icing, hangar rental and other aircraft services.

 

**Item 3****.    Quantitative andQualitative Disclosures About Market Risk**

 

**Inflation and Interest Rates**

 

AirNet is exposed to certain market risks from transactions that areentered into during the normal course of business.  AirNet’s primary market risk exposure relates to interest raterisk.  At March 31, 2002, AirNet had a$27.0 million outstanding balance on our revolving credit facility, of which$17.0 million is subject to market rate changes in interest.  This facility bears interest at AirNet’s optionof a fixed rate determined by the Eurodollar rate, a negotiated rate or afloating rate.  Assuming borrowinglevels at March 31, 2002, a one hundred basis point change in interest rateswould impact net interest expense by approximately $170,000 per year.

 

In 1999, AirNet entered into two interest rate swap agreements with abank as a hedge against the interest rate risk associated with borrowings underthe revolving credit facility.  The swap

 

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agreements each have a notional amount of $5.0 million and effectivelylocked in a portion of AirNet’s variable rate revolving credit liability atfixed rates of 6.3% and 6.5% plus a margin based on AirNet’s funded debtratio.  Each swap agreement has a three-yearterm.  In February 2002, AirNet enteredinto a third interest rate swap agreement with a bank with a notional amount of$3.0 million and a fixed rate of 4.25% plus a margin based on AirNet’s fundeddebt ratio.  At March 31, 2002, theaggregate fair value of these interest rate swaps was approximately ($191,000).

 

**Fuel Surcharge**

 

AirNet has historically maintained a fuel surcharge/rebate program forits Bank customers.  Under this program,as the OPIS-CMH (Ohio Price Information Service - Columbus, Ohio Station) priceof jet fuel exceeds $0.75 per gallon, customers are surcharged.  In turn, if the OPIS-CMH price falls below$0.60 per gallon, the same customers receive a rebate.  During 2001 and through January 2002,AirNet’s Express customers paid a 4% temporary fuel surcharge on most revenueunder a separate program.  In February2002, AirNet rescinded its 4% fuel surcharge on Express services andimplemented a surcharge program using the OPIS index.  When the index exceeds $0.75 per gallon, Express customers willalso be surcharged.

 

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**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’s 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(filed herewith):

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                    |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                               |
| 4.1              |   | Promissory Note among Key Equipment Finance, a  Division of Key Corporation Capital, Inc. and AirNet Systems, Inc., dated  January 29, 2002.                       |
|             |   |                                                                                                                                                               |
| 4.2              |   | Security Agreement among Key Equipment Finance, a  Division of Key Corporation Capital, Inc. and AirNet Systems, Inc.,  dated January 29, 2002.               |
|             |   |                                                                                                                                                               |
| 4.3              |   | Amendment No. 1 to Security Agreement among Key  Equipment Finance, a Division of Key Corporation Capital, Inc. and AirNet  Systems, Inc., dated January 24, 2002. |
|             |   |                                                                                                                                                               |
| 4.4              |   | Promissory Note among Key Equipment Finance, a  Division of Key Corporation Capital, Inc. and AirNet Systems, Inc., dated  January 29, 2002.                       |
|             |   |                                                                                                                                                               |
| 4.5              |   | Security Agreement among Key Equipment Finance, a  Division of Key Corporation Capital Inc. and AirNet Systems, Inc., dated  January 29, 2002.                     |
|             |   |                                                                                                                                                               |
| 4.6              |   | Amendment No. 1 to Security Agreement among Key  Equipment Finance, a Division of Key Corporation Capital, Inc. and AirNet  Systems, Inc., dated January 24, 2002. |

 

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| 4.7    |   | Term Loan Agreement among Bank One, NA, the Lenders  and AirNet Systems, Inc., dated February 19, 2002.         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                            |
| 4.8    |   | Aircraft Security Agreement among Bank One, NA, the  Lenders and AirNet Systems, Inc., dated February 19, 2002. |
|   |   |                                                                                                            |
| 4.9    |   | Term Note among Bank One, NA, and AirNet Systems,  Inc., dated February 19, 2002.                               |

 

(b)           Reportson Form 8-K:

 

No reports on Form 8-K were filed during the threemonths ended March 31, 2002.

 

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**AIRNETSYSTEMS, 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 theundersigned thereunto duly authorized.

 

 

 
| Dated:  May  14, 2002 | By:    | /s/ William R. Sumser         |   |
|----------------------------|--------|-------------------------------|--------|
|                       |   | William R. Sumser,            |
|                       |   | Chief Financial Officer       |
|                       |   | (Duly Authorized Officer)     |
|                       |   | (Principal Financial Officer) |

 

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