**UNITED STATES**

**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** |
|------------|----------------------------------------------------------------------------------------------|

 

**Forthe quarterly period ended June 30, 2002**

 

**OR**

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

 

**Forthe transition periodfrom                     to                    **

 

**Commissionfile 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 markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý  No  o

 

Common Shares, $.01 Par Value,

Outstanding as ofAugust 5, 2002 – 10,143,486

 

 

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**AIRNET SYSTEMS, INC.**

 

**FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 2002**

 
| **PART I:**  | ** FINANCIAL INFORMATION**                                                                                   |                                                                                        |
|-------------------|-------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
|              |                                                                                                              |                                                                                        |   |
|              | Item 1                                                                                                            | Financial Statements (Unaudited)                                                            |   |   |
|              |                                                                                                              |                                                                                        |   |
|              | Condensed Consolidated Balance Sheets as  of June 30, 2002 and December 31, 2001                                  | 3                                                                                           |   |
|              |                                                                                                              |                                                                                        |   |
|              | Condensed Consolidated Statements of  Operations for the three months and six months ended June 30, 2002 and 2001 | 4                                                                                           |   |
|              |                                                                                                              |                                                                                        |   |
|              | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30, 2002  and 2001                 | 5                                                                                           |   |
|              |                                                                                                              |                                                                                        |   |
|              | Notes  to Condensed Consolidated Financial Statements                                                             | 6                                                                                           |   |
|              |                                                                                                              |                                                                                        |   |
|              | Item 2                                                                                                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 9 |   |
|              |                                                                                                              |                                                                                        |   |
|              | Item 3                                                                                                            | Quantitative  and Qualitative Disclosures About Market Risk                                 | 13 |   |
|              |                                                                                                              |                                                                                        |   |   |
| **PART II:** | **OTHER INFORMATION**                                                                                             |                                                                                        |   |
|              |                                                                                                              |                                                                                        |   |
|              | Items  1 through 6                                                                                                | 14                                                                                          |   |
|              |                                                                                                              |                                                                                        |   |
|              | Signatures                                                                                                        | 16                                                                                          |   |
|              |                                                                                                              |                                                                                        |   |
|              | Index  to Exhibits                                                                                                | 17                                                                                          |   |
|                   |                                                                                                                   |                                                                                             |  |  |  |  |  |

 

2

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**AIRNET SYSTEMS, INC.**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| **In thousands, except per share data**                                                                                   |   | **June 30,  2002** |        | **December 31,  2001** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-------------|------------------------|--------|
|                                                                                                                      |   | **(unaudited)**    |        |                   |   |
| **ASSETS**                                                                                                                |   |               |        |                   |   |
| Current assets:                                                                                                           |   |               |        |                   |   |
| Cash and cash equivalents                                                                                                 |   | **$**              | **983**     |                   | $      | 377 |   |
| Accounts receivable, less allowances                                                                                      |   | **18,637**         |        | 16,803                 |   |
| Inventory and spare parts                                                                                                 |   | **8,962**          |        | 6,704                  |   |
| Taxes receivable                                                                                                          |   | **—**         |        | 4                      |   |
| Deferred taxes                                                                                                            |   | **729**            |        | 729                    |   |
| Deposits and prepaids                                                                                                     |   | **1,766**          |        | 1,703                  |   |
| Total current assets                                                                                                      |   | **31,077**         |        | 26,320                 |   |
|                                                                                                                      |   |               |        |                   |   |
| Net property and equipment                                                                                                |   | **107,518**        |        | 98,872                 |   |
| Other assets:                                                                                                             |   |               |        |                   |   |
| Goodwill, net of accumulated amortization                                                                                 |   | **7,080**          |        | 7,080                  |   |
| Other intangibles, net of accumulated  amortization                                                                       |   | **41**             |        | 56                     |   |
|                                                                                                                      |   |               |        |                   |   |
| Other                                                                                                                     |   | **772**            |        | 751                    |   |
| **Total assets**                                                                                                          |   | **$**              | **146,488** |                   | $      | 133,079 |   |
|                                                                                                                      |   |               |        |                   |   |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                            |   |               |        |                   |   |
| Current liabilities:                                                                                                      |   |               |        |                   |   |
| Accounts payable                                                                                                          |   | **$**              | **4,601**   |                   | $      | 4,521 |   |
| Salaries and related liabilities                                                                                          |   | **4,135**          |        | 4,849                  |   |
| Accrued expenses                                                                                                          |   | **3,307**          |        | 2,137                  |   |
| Taxes payable                                                                                                             |   | **381**            |        | —                 |   |
| Current portion of notes payable                                                                                          |   | **1,371**          |        | 33                     |   |
| Total current liabilities                                                                                                 |   | **13,795**         |        | 11,540                 |   |
|                                                                                                                      |   |               |        |                   |   |
| Other liabilities                                                                                                         |   | **155**            |        | 326                    |   |
| Notes payable, less current portion                                                                                       |   | **36,992**         |        | 28,202                 |   |
| Deferred tax liability                                                                                                    |   | **14,132**         |        | 14,065                 |   |
|                                                                                                                      |   |               |        |                   |   |
| Shareholders’ equity:                                                                                                |   |               |        |                   |   |
| Preferred shares, $.01 par value; 10,000  shares authorized; no shares issued and outstanding                             |   | **—**         |        | —                 |   |
| Common shares, $.01 par value; 40,000  shares authorized; 12,753 shares issued at June 30, 2002 and at December 31,  2001 |   | **128**            |        | 128                    |   |
| Additional paid-in-capital                                                                                                |   | **77,315**         |        | 77,440                 |   |
| Retained earnings                                                                                                         |   | **29,906**         |        | 27,656                 |   |
| Accumulated other comprehensive loss                                                                                      |   | **(89**            | **)**       | (194                   | )      |
| Treasury shares, 2,616 and 2,629 shares  held at cost at June 30, 2002 and December 31, 2001, respectively                |   | **(25,846**        | **)**       | (26,084                | )      |
| Total shareholders’ equity                                                                                           |   | **81,414**         | ** **  | 78,946                 |   |
|                                                                                                                      |   |               |        |                   |   |
| **Total liabilities and  shareholders’ equity**                                                                      |   | **$**              | **146,488** |                   | $      | 133,079 |   |

 

See notes tocondensed consolidated financial statements

 

3

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**AIRNET SYSTEMS, INC.**

** **

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS** - Unaudited

** **

 
| **In thousands, except per share data**                           |   | **Three Months Ended  June 30,** |       | **Six Months Ended  June 30,** |   |
|-------------------------------------------------------------------|--------|----------------------------------|------------|--------------------------------|--------|
|                                                              |   | **2002**                         |       | **2001**                       |   | **2002** |   | **2001** | ** ** |
|                                                              |   |                             |       |                           |   |   |   |   |   |
| **NET REVENUES**                                                  |   |                             |       |                           |   |   |   |   |   |
| Air transportation, net of excise tax                             |   |                             |       |                           |   |   |   |   |   |
| Bank services                                                     |   | **$**                            | **25,771** |                           | $      | 26,972 |   | **$** | **50,523** |   | $ | 52,755 |   |
| Express services                                                  |   | **10,447**                       |       | 8,032                          |   | **20,075** |   | 16,205 |   |
| Aviation services and other operations                            |   | **1,207**                        |       | 354                            |   | **2,307** |   | 720 |   |
| **Total net revenues**                                            |   | **37,425**                       |       | 35,358                         |   | **72,905** |   | 69,680 |   |
|                                                              |   |                             |       |                           |   |   |   |   |   |
| **COSTS AND EXPENSES**                                            |   |                             |       |                           |   |   |   |   |   |
| Air transportation                                                |   |                             |       |                           |   |   |   |   |   |
| Wages and benefits                                                |   | **5,616**                        |       | 4,608                          |   | **10,757** |   | 9,659 |   |
| Aircraft fuel                                                     |   | **4,145**                        |       | 3,171                          |   | **7,594** |   | 6,235 |   |
| Aircraft maintenance                                              |   | **3,267**                        |       | 3,145                          |   | **6,131** |   | 5,874 |   |
| Contracted air costs                                              |   | **3,355**                        |       | 4,090                          |   | **6,969** |   | 8,018 |   |
| Ground courier                                                    |   | **5,915**                        |       | 5,456                          |   | **11,739** |   | 11,465 |   |
| Depreciation                                                      |   | **4,360**                        |       | 3,715                          |   | **8,710** |   | 7,243 |   |
| Other                                                             |   | **3,577**                        |       | 2,815                          |   | **6,908** |   | 5,449 |   |
| Selling, general and administrative                               |   | **4,982**                        |       | 5,621                          |   | **9,661** |   | 10,294 |   |
| **Total costs and expenses**                                      |   | **35,217**                       |       | 32,621                         |   | **68,469** |   | 64,237 |   |
| Income from operations                                            |   | **2,208**                        |       | 2,737                          |   | **4,436** |   | 5,443 |   |
| Impairment on investment                                          |   |                             |       | 1,744                          |   |   |   | 1,744 |   |
| Interest expense                                                  |   | **392**                          |       | 392                            |   | **747** |   | 866 |   |
| Income before income taxes                                        |   | **1,816**                        |       | 601                            |   | **3,689** |   | 2,833 |   |
| Provision for income taxes                                        |   | **708**                          |       | 955                            |   | **1,438** |   | 1,867 |   |
|                                                              |   |                             |       |                           |   |   |   |   |   |
| **Net income (loss)**                                             |   | **$**                            | **1,108**  |                           | $      | (354 | ) | **$** | **2,251** |   | $ | 966 |   |
|                                                              |   |                             |       |                           |   |   |   |   |   |
| Net income (loss) per common share - basic  and assuming dilution |   | **$**                            | **0.11**   |                           | $      | (0.03 | ) | **$** | **0.22** |   | $ | 0.09 |   |

 

See notes tocondensed consolidated financial statements

 

4

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**AIRNET SYSTEMS, INC.**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS** - Unaudited

 
| **In thousands**                                                                             |   | **Six Months Ended  June 30,** |       |
|----------------------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                                         |   | **2002**                       |       | **2001** | ** ** |
|                                                                                         |   |                           | ** ** |   |   |
| **Operating activities:**                                                                    |   |                           | ** ** |   |   |
| Net income                                                                                   |   | **$**                          | **2,251**  | ** ** | $ | 966 |   |
| Non-cash charge for investment impairment                                                    |   |                           | ** ** | 1,744 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |   |                           | ** ** |   |   |
| Depreciation                                                                                 |   | **8,710**                      | ** ** | 7,243 |   |
| Amortization of intangibles                                                                  |   | **14**                         | ** ** | 265 |   |
| Provision for losses on accounts receivable                                                  |   | **192**                        | ** ** | 209 |   |
| Gain (loss) on disposition of assets                                                         |   | **(19**                        | **)**      | 27 |   |
| Cash provided by (used in) operating assets  and liabilities:                                |   |                           | ** ** |   |   |
| Accounts receivable                                                                          |   | **(2,026**                     | **)**      | (463 | ) |
| Inventory and spare parts                                                                    |   | **(2,258**                     | **)**      | (837 | ) |
| Prepaid expenses                                                                             |   | **(63**                        | **)**      | 55 |   |
| Accounts payable                                                                             |   | **81**                         | ** ** | 1,723 |   |
| Accrued expenses                                                                             |   | **1,170**                      | ** ** | 72 |   |
| Taxes payable                                                                                |   | **381**                        | ** ** | 282 |   |
| Salaries and related liabilities                                                             |   | **(714**                       | **)**      | 1,320 |   |
| Other, net                                                                                   |   | **(17**                        | **)**      | (235 | ) |
| **Net cash provided by  operating activities**                                               |   | **7,702**                      | ** ** | 12,371 |   |
|                                                                                         |   |                           | ** ** |   |   |
| **Investing activities:**                                                                    |   |                           | ** ** |   |   |
| Purchases of property and equipment                                                          |   | **(17,636**                    | **)**      | (9,180 | ) |
| Proceeds from sales of property and  equipment                                               |   | **299**                        | ** ** | 209 |   |
| **Net cash used in investing  activities**                                                   |   | **(17,337**                    | **)**      | (8,971 | ) |
|                                                                                         |   |                           | ** ** |   |   |
| **Financing activities:**                                                                    |   |                           | ** ** |   |   |
| Proceeds from Incentive Stock Plan programs                                                  |   | **72**                         | ** ** | 32 |   |
| Net borrowings (repayments) under the  revolving credit facility                             |   | **4,350**                      | ** ** | (2,700 | ) |
| Net borrowings (repayments) of long-term  debt                                               |   | **5,778**                      | ** ** | (16 | ) |
| Purchase of treasury shares                                                                  |   | **41**                         | ** ** | 0 |   |
| **Net cash provided by (used  in) financing activities**                                     |   | **10,241**                     | ** ** | (2,684 | ) |
|                                                                                         |   |                           | ** ** |   |   |
| Net increase in cash                                                                         |   | **606**                        | ** ** | 716 |   |
| Cash and cash equivalents at beginning of  period                                            |   | **377**                        | ** ** | 1,118 |   |
| **Cash and cash equivalents  at end of period**                                              |   | **$**                          | **983**    | ** ** | $ | 1,834 |   |

 

See notes tocondensed consolidated financial statements

 

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**AIRNETSYSTEMS, INC.**

** **

**NOTES TO****CONDENSEDCONSOLIDATED 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 charter servicesfrom various locations throughout the United States as well as retail aviationfuel sales and related ground services for customers at its Columbus, Ohiofacility.

 

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, 2001 consolidatedfinancial statements of AirNet Systems, Inc. included in Item 8 of the AnnualReport on Form 10-K for the fiscal year ended December 31, 2001 (File No.1-13025) which contains additional disclosures including a summary of AirNet’saccounting 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 the sixmonths ended June 30, 2002 are not necessarily indicative of the results to beexpected 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 Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards (SFAS) 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 are no longer amortized but are subjectto annual impairment tests in accordance with SFAS 142.  Other intangible assets continue to beamortized over their useful lives.

 

The Company adopted the new standards in the first quarter of 2002.Application of the nonamortization provisions of SFAS 142 resulted in anincrease in net income of approximately $86,000  ($52,000, net of tax), or less than $0.01 per share, for thethree months ending June 30, 2002 and approximately $171,000 ($104,000, net oftax), or less than $.02 per share, for the six months ending June 30, 2002.

 

The Company has conducted the required preliminary review of itsgoodwill and other intangible assets in accordance with the transitionprovisions for adoption of SFAS 142. Under SFAS 142, the Company is required to assess goodwill and otherintangibles with indefinite lives for

 

6

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impairment at least annually, based on the fair value of the relatedreporting unit.  Based on itspreliminary review, the Company concluded that potential transition impairmentmay exist related to the Mercury Business Services reporting unit.  The net book value of recorded goodwillrelated to Mercury totaled $3.1 million at December 31, 2001 and June 30, 2002**. **As required by SFAS 142,management plans to complete the second phase of the transition analysis laterthis year and compute the ultimate amount of the non-cash impairmentcharge.  In accordance with thetransition provisions of SFAS 142, any such charge will be reflected as acumulative effect of a change in accounting method as of the beginning of 2002.

 

**3.             Net Income Per Share**

 

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

** **
|                                                                    |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                    |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
| Numerator:                                                              |   |                              |   |                            |   |   |   |   |   |
| Net income  (loss)                                                      |   | $                                 | 1,108  |                            | $      | (354 | ) | $ | 2,251 |   | $ | 966 |   |
|                                                                    |   |                              |   |                            |   |   |   |   |   |
| Denominator:                                                            |   |                              |   |                            |   |   |   |   |   |
| Basic – weighted  average shares outstanding                       |   | 10,137                            |   | 10,929                          |   | 10,134 |   | 10,925 |   |
|                                                                    |   |                              |   |                            |   |   |   |   |   |
| Diluted                                                                 |   |                              |   |                            |   |   |   |   |   |
| Stock options –  associates, officers, and directors               |   | 159                               |   | 43                              |   | 167 |   | 29 |   |
| Adjusted  weighted average shares outstanding                           |   | 10,296                            |   | 10,972                          |   | 10,301 |   | 10,954 |   |
|                                                                    |   |                              |   |                            |   |   |   |   |   |
|                                                                    |   |                              |   |                            |   |   |   |   |   |
| Net income  (loss) per common share – basic and assuming dilution: |   | $                                 | 0.11   |                            | $      | (0.03 | ) | $ | 0.22 |   | $ | 0.09 |   |

 

For the three months andsix months ended June 30, 2002,  681,000and  680,000 common shares subject tooutstanding stock options were excluded from the diluted weighted averageshares outstanding calculation, as the exercise price of the stock optionsexceeded the average fair market value of the underlying common shares for theperiod.

 

**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 approximately $5,951,000 at June 30, 2002.

 

The Company had borrowings as follows (in thousands):

 
|                                |   | **June 30,  2002** |   | **December  31,  2001** |   |
|-------------------------------------|--------|--------------------|--------|-------------------------|--------|
| Revolving credit  facility          |   | $                  | 32,499 |                    | $      | 28,149 |   |
| Term notes                          |   | 5,864              |   | 86                      |   |
|                                |   | 38,363             |   | 28,235                  |   |
| Current portion  of notes payable   |   | 1,371              |   | 33                      |   |
| Long-term  portion of notes payable |   | $                  | 36,992 |                    | $      | 28,202 |   |

 

7

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**5.****                                      AircraftLeases**

 

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.

 

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**AIRNET SYSTEMS, INC.**

 

**ITEM 2****- MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL**

**CONDITION AND RESULTS OF OPERATIONS**

 

**SafeHarbor 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; increases in aviation fuel costs notfully offset by AirNet’s fuel surcharge program; changes in check processingand shipment patterns of bank customers; the acceptance of AirNet’stime-critical service offerings by targeted Express customers; technologicaladvances and increases in the use of electronic funds transfers; as well asother economic, competitive and domestic and foreign governmental factors affectingAirNet’s markets, prices and other facets of its operations.  Should one or more of these risks oruncertainties materialize, or should underlying assumptions prove incorrect,actual outcomes may vary materially from those indicated.  AirNet undertakes no responsibility toupdate for changes related to these or any other factors that may hereafteroccur.  Please refer to Item 7 of theAnnual Report on Form 10-K for the fiscal year ended December 31, 2001 for additionaldetails relating to risk factors that could affect AirNet’s results and causethose results to differ materially from those expressed in forward-lookingstatements.

 

**Resultsof Operations**

 

*Threemonths ended June 30, 2002 compared to three months ended June 30, 2001*

 

Total net revenues were $37.4 million for the three months ended June30, 2002, an increase of $2.1 million, or 5.8%, over the same period of 2001.

 

Despite rate increases implemented in January 2002 averagingapproximately 2.2%, net revenues from Bank services decreased $1.2 million, or4.5%, due to reduced volume and pricing pressures.  Shipment weights decreased 3.9% from second quarter 2001 due tobusiness lost toward the end of first quarter 2002.  The lost volume is partly attributable to a decline in interestrates during the past year.  The declinein interest rates impacts transportation decisions by the Company’s bankcustomers, as the time value of money becomes less significant.

 

Express service net revenues increased $2.4 million, or 30.1%, to $10.4million.  Although shipment volumesdecreased 5.6% in the Mercury Business Services product line, revenues were$2.3 million in the second quarter, which is consistent with the same quarterlast year.  Excluding the Mercuryproduct line, Express service shipments increased 20.3% compared to last year,while net revenue per shipment increased 17.3%, partly due to a 5% rateincrease in February 2002.  Medicalshipments achieved solid sales gains compared to last year with net revenuesincreasing 75.7%.

 

Aviation services revenue, which includes passenger charters, more thantripled to $1.2 million in the first quarter of 2002 compared to $0.4 millionlast year.  Approximately $0.7 millionof the

 

9

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increase was derived from passenger charters.  AirNet operated six Learjets dedicated to passenger charterservices at June 30, 2002, including two Learjet 60’s added during the quarterto support growth of the business, compared to only one Learjet dedicated topassenger charter as of June 30, 2001.

 

Total costs and expenses were $35.2 million for second quarter 2002compared with $32.6 million last year, resulting in income from operations of$2.2 million for the three months ended June 30, 2002, compared to $2.7 millionfor the same period of 2001.

 

Second quarter 2002 wagesand benefits increased $1.0 million, or 21.9% over the same period in2001.  AirNet had 36 more pilots at theend of second quarter 2002 than on the same date last year due to growth in charterservices, the addition of the weekend program for the check delivery businessin the first quarter of 2002 and previously vacant positions that have beenfilled in the past year.  There was alsoadditional operations staff in this year’s second quarter to support growth inthe Express business and the weekend program for the check delivery business.

 

Fuel expense increased$1.0 million over the same quarter in the prior year. Approximately $0.6million of the increase was the result of lower benefits from fuel surcharges.  The Company is currently evaluating itssurcharge program to ensure surcharges are aligned with cost fluctuations. Theremaining portion of the increase was primarily due to a 10.6% increase inoperating hours flown.  The 3.9%increase in maintenance costs is also primarily due to the increase inoperating hours flown.

 

Depreciation expense andaircraft lease expense increased $0.6 million and $0.2 million, respectively,over 2001 due to the addition of aircraft to the fleet.  Fleet size has increased from 117 aircraftat June 30, 2001 to 128 at June 30, 2002 including the six Learjets dedicatedto passenger charter services.  AirNet’sfleet strategy is to have appropriate aircraft to respond to growth and achieveimproved operating performance.  TwelveCessna Caravan aircraft have been purchased or leased over the past twelvemonths, including one purchased and a second one leased during second quarter2002.  The Caravans have substantiallymore capacity and lower overall operating costs than twin engine Aerostaraircraft.  The remaining eight Aerostarswere sold during second quarter 2002.

 

Second quarter 2002contracted air costs, which includes the cost of subcontracted routes, backupcharters and commercial freight costs, decreased $0.7 million, or 18.0%, overthe same period in 2001 largely due to decreased dependency on outsideproviders as a result of adding aircraft and pilots.  Ground costs increased $0.5 million, or 8.4%, over the sameperiod last year reflecting the increase in Express services volume.

 

During the second quarter2001, AirNet recorded a $1.0 million charge for the retirement package of itsFounder and then Chairman.  Excludingthis charge, selling, general and administrative expense increased $0.3 millionin second quarter 2002 over the same quarter in the prior year largely due toan increase in payroll primarily attributed to the completion of staffing ofthe regional support and sales staffs. In accordance with Statement of Financial Accounting Standards (SFAS)No. 142, *Goodwill**and OtherIntangible Assets*, AirNet has eliminated amortization of goodwill,effective January 1, 2002.  The effectof this change on the second quarter 2002 was a reduction of amortizationexpense of approximately $86,000 (or $52,000, net of tax.)

 

During the second quarter of 2001, AirNet’s wholly owned subsidiary,Float Control, Inc., reported a $1.7 million impairment on investment chargerelated to its investment in the Check Exchange System Co. (CHEXS).  The $1.7 million charge includedapproximately $0.3 million of goodwill and was primarily the result of the lossof a significant customer.

 

Total debt outstandingwas $38.4 million at June 30, 2002 compared to $20.0 million at June 30,2001.  The increase of $18.4 million isprimarily due to the repurchase of common shares from AirNet’s Founder andformer Chairman in 2001 and the purchase of additional aircraft during the

 

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current period to provideadditional capacity.  Despite theincrease in debt outstanding, second quarter 2002 interest expense wasconsistent with the same period in 2001, due to lower interest rates on thevariable portion of the Company’s revolving credit facility.

 

*Sixmonths ended June 30, 2002 compared to six months ended June 30, 2001*

 

Total net revenues were $72.9 million for the six months ended June 30,2002, an increase of $3.2 million, or 4.6%, over the same period of 2001.

 

Net revenues from Bank services decreased $2.2 million, or 4.2%, to$50.5 million due to a 4.9% reduction in volume, slightly offset by an average2.2% rate increase effective in January 2002. The lost volume is partly attributable to one less full flying day inthe first half of 2002 than in the first half of 2001 as well as the decline ininterest rates during the past year. The decline in interest rates impacts transportation decisions by theCompany’s bank customers, as the time value of money becomes less significant.

 

Express service net revenues increased $3.9 million, or 23.9%, to $20.1million.  Although shipment volumesdecreased 2.3% in the Mercury Business Services product line, revenues were$4.4 million for the first half of both years. Excluding the Mercury product line, Express service shipments increased11.9% compared to last year, while net revenue per shipment increased 18.6%,partly due to a 5% rate increase in February 2002.  Medical shipments achieved solid sales gains compared to lastyear with revenues increasing 71.6%.

 

Aviation services revenue more than tripled to $2.3 million in thefirst six months of 2002 compared to $0.7 for the same period in 2001 primarilydue to the development of the passenger charter services which began operationsin April 2001.

 

Total costs and expenseswere $68.5 million for the six months ended June 30, 2002, an increase of $4.2million, or 6.5%, over the same period in 2001, resulting in income fromoperations of $4.4 million for the six months ended June 30, 2002, compared to$5.4 million for the same period of 2001.

 

Wages and benefits for thesix months increased $1.1 million, or 11.4%, over the same period in 2001.  AirNet had 36 more pilots at the end ofsecond quarter 2002 than on the same date last year due to growth in charterservices, the addition of the weekend program for the check delivery businessin the first quarter of 2002 and previously vacant positions that have beenfilled in the past year.  There was alsoadditional operations staff in the first half of 2002 to support growth in the Expressbusiness and the weekend program for the check delivery business.

 

Fuel expense increased$1.4 million over the prior year due to a 7.9% increase in operating hoursflown and lower benefits from fuel surcharges. Depreciation expense and aircraft lease expense for the six months endedJune 30, 2002 increased $1.5 million and $0.4 million, respectively, over thesame period last year due to the addition of aircraft to the fleet.  Contracted air costs decreased $1.0 million,or 13.1%, due to decreased dependency on outside providers as a result ofadding aircraft and pilots.  Groundcosts increased $0.3 million, or 2.4%, over the same period last year due tothe increase in Express services volume.

 

During the second quarter2001, AirNet recorded a $1.0 million charge for the retirement package of itsFounder and then Chairman.  Excludingthis charge, selling, general and administrative expense for the six monthsended June 30, 2002 increased $0.3 million over the same period last yearlargely due to an increase in payroll primarily attributed to the completion ofstaffing of the regional support and sales staffs.  In accordance with SFAS 142, AirNet has eliminated amortizationof goodwill, effective January 1, 2002. For the six months ended June 30, 2002, the effect of this changereduced amortization expense by approximately $171,000 (or $104,000 net oftax.)

 

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During the second quarter of 2001, AirNet’s wholly owned subsidiary,Float Control, Inc., reported a $1.7 million impairment on investment chargerelated to its investment in CHEXS.  The$1.7 million charge included approximately $0.3 million of goodwill and wasprimarily the result of the loss of a significant customer.

 

Total debt outstanding was $38.4 million at June 30, 2002 compared to$20.0 million at June 30, 2001.  Theincrease of $18.4 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 current period to provide additionalcapacity.  Despite the increase in debtoutstanding, interest expense decreased $0.1 million due to lower interestrates on the variable portion of the Company’s revolving credit facility.

 

**Liquidityand Capital Resources**

 

*Cashflow from operating activities.*  Net cash provided by operating activities was $7.7 million forthe six months ended June 30, 2002, compared to $12.4 million for the sameperiod in 2001.

 

*Currentcredit arrangements.* AirNet maintains a credit agreement with a bank that provides a $50.0million unsecured revolving credit facility, which is scheduled to expire onAugust 1, 2003. The credit agreement requires the maintenance of minimum networth and cash flow levels, imposes limits on payments of dividends to 50% ofnet income and restricts the amount of additional debt which may beincurred.  AirNet’s outstanding balanceon the credit facility at June 30, 2002 was $32.5 million, which is a $4.4million increase over the balance at December 31, 2001.  The increase is primarily due to theacquisition of aircraft during the quarter.

 

During first quarter 2002, AirNet entered into three term loans withbanks totaling $6.0 million.  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 aircraft.

 

*Investingactivities.*  Capitalexpenditures totaled $17.6 million for the six months ended June 30, 2002compared to $9.2 million for the same period in 2001.  Of the 2002 expenditures, $9.8 million was for the purchase ofaircraft.  Substantially all of theremaining 2002 expenditures were for aircraft inspections, major engineoverhauls and related flight equipment. AirNet anticipates it will have between $27.0 million and $28.0  million in total capital expenditures in2002.  AirNet anticipates it willcontinue to acquire aircraft and flight equipment as necessary to maintaingrowth and continue offering quality service to its customers.  AirNet will also continue to considerwhether future asset acquisitions should be purchased or leased.

 

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 half of 2002.  As such, purchasesof approximately $0.6 million of the Company’s common shares may still be madeover time in the open market or through privately negotiated transactions.  Such future purchases would be consideredbased on current market conditions and the stock price.

 

AirNetanticipates that operating cash and capital expenditure requirements willcontinue to be funded by cash flow from operations, cash on hand and bankborrowings.

 

**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

 

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financial institution customers. When financial institutions are closed, there is no need for AirNet tooperate a full system.  AirNet’s fiscalquarter ending December 31 is often the most impacted by bank holidays(including Thanksgiving and Christmas) recognized by its primarycustomers.  When these holidays fall onMonday through Thursday, AirNet’s revenue and net income are adversely affected.AirNet’s annual results fluctuate as well based on when holidays fall duringthe week over the course of the year.

 

Operating resultsare also affected by the weather. AirNet generally experiences higher maintenance costs during its fiscalquarter ending March 31.  Winter weatheroften requires additional costs for de-icing, hangar rental and other aircraftservices.

 

**Item 3****.            Quantitative and QualitativeDisclosures 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 June 30, 2002, AirNet had a$32.5 million outstanding balance on our revolving credit facility, of which$22.5 million is subject to market rate changes in interest.  This facility bears interest at AirNet’soption of a fixed rate determined by the Eurodollar rate, a negotiated rate ora floating rate.  Assuming borrowinglevels at June 30, 2002, a one hundred basis point change in interest rateswould impact net interest expense by approximately $225,000 per year.

 

In 1999, AirNet entered into two interest rate swapagreements with a bank as a hedge against the interest rate risk associatedwith borrowings under the revolving credit facility.  The swap agreements each have a notional amount of $5.0 millionand effectively 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.  Each swap agreementhas a three-year term.  In February2002, AirNet entered into a third interest rate swap agreement with a bank witha notional amount of $3.0 million and a fixed rate of 4.25% plus a margin basedon AirNet’s funded debt ratio.  At June30, 2002, the aggregate fair value of these three interest rate swaps wasapproximately ($155,000).

 

**Fuel Surcharge**

 

AirNet has historicallymaintained a fuel surcharge/rebate program for its Bank customers.  Under this program, as the OPIS-CMH (OhioPrice Information Service – Columbus, Ohio Station) price of jet fuel exceeds$0.75 per gallon, customers are surcharged. In turn, if the OPIS-CMH price falls below $0.60 per gallon, the samecustomers receive a rebate.  During 2001and through January 2002, AirNet’s Express customers paid a 4% temporary fuelsurcharge on most revenue under a separate program.  In February 2002, AirNet rescinded its 4% fuel surcharge onExpress services and implemented a surcharge program using the OPIS index.

 

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**AIRNET SYSTEMS, INC.**

 

**PART II****- OTHERINFORMATION**

 
| 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.                                                                                                                                                                                                                                                                                                                                     |                                             |      |             |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     |                                             |      |             |   |
|    | (a)    The Annual Meeting of Shareholders (the  “Annual Meeting”) of AirNet Systems, Inc. was held on May 9, 2002.  The number of common shares of AirNet  Systems, Inc. outstanding and entitled to vote at the Annual Meeting was  10,132,238.  The number of common  shares represented in person or by proxy at the Annual Meeting was 8,985,544. |                                             |
|    |                                                                                                                                                                                                                                                                                                                                                                                     |                                             |      |             |   |   |
|    | (b)                                                                                                                                                                                                                                                                                                                                                                                      | Directors elected at  the Annual Meeting:        |      |             |   |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     |                                             |      |             |   |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     | Joel E. Biggerstaff                              |      |             |   |   |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     | For:                                             | 8,966,768 |             |   |   |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     | Withheld:                                        | 18,776    | Broker non-vote: |   | -0- |
|    |                                                                                                                                                                                                                                                                                                                                                                                     |                                             |      |             |   |   |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     | Roger D. Blackwell                               |      |             |   |   |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     | For:                                             | 8,953,809 |             |   |   |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     | Withheld:                                        | 31,735    | Broker non-vote: |   | -0- |
|    |                                                                                                                                                                                                                                                                                                                                                                                     |                                             |      |             |   |   |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     | Russell M. Gertmenian                            |      |             |   |   |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     | For:                                             | 8,967,709 |             |   |   |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     | Withheld:                                        | 17,835    | Broker non-vote: |   | -0- |
|    |                                                                                                                                                                                                                                                                                                                                                                                     |                                             |      |             |   |   |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     | David P. Lauer                                   |      |             |   |   |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     | For:                                             | 8,959,909 |             |   |   |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     | Withheld:                                        | 25,635    | Broker non-vote: |   | -0- |
|    |                                                                                                                                                                                                                                                                                                                                                                                     |                                             |      |             |   |   |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     | James E. Riddle                                  |      |             |   |   |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     | For:                                             | 8,959,909 |             |   |   |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     | Withheld:                                        | 25,735    | Broker non-vote: |   | -0- |
|    |                                                                                                                                                                                                                                                                                                                                                                                     |                                             |      |             |   |   |
|    | (c)                                                                                                                                                                                                                                                                                                                                                                                      | See Item 4(b) for  voting results for directors. |      |             |   |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     |                                             |      |             |   |   |
|    | (d)                                                                                                                                                                                                                                                                                                                                                                                      | Not applicable.                                  |      |             |   |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     |                                             |      |             |   |   |
| Item 5. | Other Information.  Not Applicable                                                                                                                                                                                                                                                                                                                                                       |                                             |      |             |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     |                                             |      |             |   |   |
| Item 6. | Exhibits and Reports on Form 8-K.                                                                                                                                                                                                                                                                                                                                                        |                                             |      |             |   |
|    |                                                                                                                                                                                                                                                                                                                                                                                     |                                             |      |             |   |   |
|    | (a)                                                                                                                                                                                                                                                                                                                                                                                      | Exhibits (filed  herewith):                      |      |             |   |   |
|         |                                                                                                                                                                                                                                                                                                                                                                                          |                                                  |           |                  |        |  |  |  |  |  |  |  |  |  |  |  |

 

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|   | **Exhibit No.**                                                                 |                 | **Description**                                                                                                                                                        |
|--------|---------------------------------------------------------------------------------|----------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 99.1                                                                            |                 | Certification  Pursuant to Title 18, United States Code, Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer) |
|   |                                                                            |                 |                                                                                                                                                                   |
|   | 99.2                                                                            |                 | Certification  Pursuant to Title 18, United States Code, Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer) |
|   |                                                                            |                 |
|   | (b)                                                                             | Reports on Form 8-K: |
|   | No reports on Form  8-K were filed during the three months ended June 30, 2002. |
|        |                                                                                 |                      |                                                                                                                                                                        |  |  |

 

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**AIRNET SYSTEMS, INC.**

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| Dated:  August 12, 2002 | By:    | /s/ William R. Sumser          |   |
|------------------------------|--------|--------------------------------|--------|
|                         |   | William R. Sumser,             |
|                         |   | Chief Financial  Officer       |
|                         |   | (Duly Authorized  Officer)     |
|                         |   | (Principal Financial  Officer) |

 

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**AIRNET SYSTEMS, INC.**

 

**INDEX TO****EXHIBITS**

 
| **Exhibit No.** |   | **Description**                                                                                                                                                         |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 99.1            |   | Certification  Pursuant to Title 18, United States Code, Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)* |
|            |   |                                                                                                                                                                    |
| 99.2            |   | Certification  Pursuant to Title 18, United States Code, Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)* |

 

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*Filed herewith.

 

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