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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______________ to ___________________
Commission file number 0-28428
AirNet Systems, Inc.
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(Exact name of registrant as specified in its charter)
Ohio 31-1458309
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3939 International Gateway 43219
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 614-237-9777
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Shares, $0.01
par value (12,475,128 outstanding at December 16, 1996)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at December 16, 1996 was $94,611,775.
DOCUMENT INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Registrant's Annual Meeting of
Shareholders to be held on March 6, 1997, are incorporated by reference into
Part III hereof.
This Report contains 95 pages of which this is Page 1. The Index to Exhibits
begins at page 55.
PART I
ITEM 1 - BUSINESS
Overview of the Company's Business
AirNet Systems, Inc. (the "Company") operates a fully integrated national air
transportation network that operates between 90 cities in more than 40 states
and delivers over 13,000 time-critical shipments each working day. The Company's
bank services division, which generates approximately 86% of the Company's
revenues, is the leading transporter of canceled checks and related information
for the U.S. banking industry, meeting more that 1,100 daily deadlines. The
Company's small package division, which generates approximately 13% of the
Company's revenues, provides specialized, high priority delivery service for
customers requiring late pick-ups and early deliveries combined with prompt,
on-line delivery information. The Company's ground support services division
offers retail aviation fuel sales and related ground services for customers in
Columbus, Ohio.
The Company currently operates a fleet of 98 aircraft (28 Learjets and 70 light
twin engine aircraft), which fly approximately 90,000 miles per night, primarily
Monday through Thursday. The Company also provides ground pick-up and delivery
services throughout the nation, utilizing a fleet of 100 Company-owned ground
vehicles as well as a ground transportation network of over 350 independent
contractors. The Company uses it own air transportation network as well as
commercial airlines, when appropriate, to provide same-day and same-night
delivery service for itself, as well as for certain major overnight document and
parcel delivery companies.
Later pick-ups and earlier deliveries than those offered by other national
carriers are the differentiating characteristics of the Company's time-critical
delivery network. In addition, the Company offers other value-added services to
its customers, such as on-line delivery information. The Company has
consistently achieved on-time performance levels exceeding 95%. In order to
maintain this performance, the Company utilizes a number of proprietary customer
service and management information systems to track, sort, dispatch and control
the flow of checks and small packages throughout the Company's delivery system.
Delivery times and certain shipment information are available on-line and on the
Internet. For example, ComCheck, a unique proprietary software system, provides
bank customers access to delivery time, shipment information and retrieval of
historical proof of delivery information, critical data that enable banks to
manage their cash position and maximize float revenue. OnTime and Ship-Link,
Company-developed software programs, provide scheduling and pricing information,
as well as on-line delivery and shipper acknowledgment data for small package
customers. The Company also has developed several internal software programs to
enhance the dispatch monitoring, cost control and customer service functions.
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The Company believes that the market for reliable, time-critical deliveries is
growing as a result of a number of global trends, including: (i) corporations
requiring just-in-time inventory parts in order to lower production costs; (ii)
medical laboratories requiring same-day deliveries; (iii) consolidating
ground-based small package couriers requiring a national air delivery network;
and (iv) global air freight forwarders requiring a domestic connection for their
international networks that can deliver on a same-day/same-night or pre-8:00
a.m. basis. The Company believes that its flexible and reliable air
transportation network and its demonstrated expertise in providing time-critical
deliveries position the Company to provide such additional services at premium
prices.
The Company was founded under the laws of the State of Michigan in 1974 under
the name "New Creations, Inc." Effective May 1, 1996, the Company was
reincorporated under the laws of the State of Ohio as a result of the merger of
New Creations, Inc. with and into AirNet Systems, Inc., an Ohio corporation
incorporated on February 15, 1996. References in the Annual Report on Form 10-K
to the "Company" refer collectively to AirNet Systems, Inc. and its predecessor
entities.
Industry Overview
The expedited delivery and distribution industry in the U.S. is a highly
fragmented business, composed of thousands of companies providing two-day,
next-day and same-day delivery services. The Company believes that the industry
can be divided into the following market segments: (i) highly specialized
time-critical deliveries, including the delivery of canceled checks; (ii) air
courier document and parcel delivery; (iii) air freight forwarding; and (iv)
corporate transportation and logistics support. While the Company participates
primarily in one niche of the highly specialized, time-critical deliveries
market segment (transportation of canceled bank checks), it believes that its
highly flexible, nationwide air transportation network can be utilized for
expedited delivery of goods within any of the above-mentioned industry segments.
Highly specialized time-critical deliveries. There are a number of special
transportation services required by individuals, professional service firms,
hospitals, scientific laboratories, such as medical samples and canceled bank
checks, which require time-critical and reliable service to avoid the costly
consequences of late or missed deliveries. The Company believes its flexible and
reliable transportation network will be in a position to provide such services.
Other than the Company, the only national provider of air transportation
services to the U.S. banking industry for canceled checks is the Federal
Reserve's Interstate Transportation System ("ITS"). Within the Federal Reserve
districts, the transportation of canceled checks is handled mostly by ground
vehicles operated by regional or local banks, or the ITS. Between Federal
Reserve districts, there are numerous regional carriers who contract with banks
and groups of banks to provide such services. Some of these providers may
include regional air courier and document delivery companies, but none of them
commands a significant share of the national market or is capable of providing
national service. In addition, many banks require a wide variety of pick-up
times, delivery deadlines and available end points, as well as superior on-time
performance and management information systems to enable them to manage float
and make appropriate draw down decisions, which few of these delivery companies
can provide.
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Air courier document and parcel delivery market. Comprised mostly of same-day
and next-day pick-up and delivery services, this market is dominated by several
companies with national hub-and-spoke delivery systems which provide service
based upon established pick-up and delivery schedules rather than those
requested by the customer. These carriers include Federal Express Corporation
("FedEx"), United Parcel Service ("UPS"), the U.S. Postal Service, Airborne
Express and DHL, among others. In addition to these carriers, there are several
multi-regional companies that focus on same-day and early next-day deliveries
custom-tailored to the customers' requested pick-up and delivery times. Numerous
other firms operate only on a regional basis, and provide similar services.
Finally, there are hundreds of small, closely-held owner-operator businesses
which operate in only one location with little or no national market share.
Air freight forwarding market. Traditionally dominated by the large domestic and
international passenger airline companies, who utilize excess cargo space in
their fleet of passenger aircraft to shuttle freight internationally and
domestically, the air freight forwarding market has expanded significantly to
include participants focused solely on international delivery, who then
subcontract for local delivery. This market has grown with the globalization of
world markets, as corporations increasingly source raw materials from multiple
origins throughout the world, contract for or perform manufacturing and assembly
operations in many different countries and distribute their products worldwide.
International freight companies have increasingly been seeking flexible air
distribution networks operating domestically that can connect with the
cross-Pacific and cross-Atlantic delivery routes and meet the custom-tailored
needs of their customers on a same-day or next-day basis.
Corporate transportation and logistics support market. Corporations that have
complex sourcing and distribution systems are seeking to minimize inventory
carrying costs and reduce expenses associated with the movements of raw
materials. The increasingly time-sensitive nature of product delivery schedules
due to shorter product life cycles and "just-in-time" inventory management has
led to growth in this market segment. Many companies are concluding that they
perform transportation logistics functions less effectively than third party
providers. As a result, companies have looked to outsource these functions to
reduce costs while enhancing cost-efficiency and reliability of the logistics
function.
How Banks Clear and Settle Checks
Banks attempt to clear checks expeditiously in order to convert their
non-earning assets into interest-bearing assets. A check deposit cannot begin to
earn interest until the physical item has been routed from the bank where it was
first deposited to the bank on which the funds were drawn. The elapsed time
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between the deposit of the check and the delivery of the check to a Federal
Reserve bank or the bank on which it was drawn results in "float". Banks desire
to minimize float in order to maximize the availability of funds and the
corresponding ability to earn income on those funds.
The National Clearinghouse Association
The National Clearinghouse Association ("NCHA") is a consortium of over 50 bank
holding companies that have joined together to reduce check-clearing costs by
means of a multi-bank, private net settlement arrangement located at The
Huntington National Bank. The NCHA was developed by The Check Exchange System
Co. (the "CHEXS Partnership"). The CHEXS Partnership is owned by affiliates of
The Huntington National Bank and Littlewood, Shain and Company, and by Float
Control, Inc. Float Control, Inc. was a corporation owned, in part, by executive
officers of the Company until October 24, 1996, when the Company acquired all of
the outstanding shares of Float Control, Inc. As a result of the acquisition,
the Company indirectly holds a 19% interest in the CHEXS Partnership.
The bank members of the NCHA benefit from their affiliation with the NCHA by
receiving a quick, convenient and efficient settlement at a single location of
"out-of-district" checks deposited at their banks. Currently, the NCHA clears
approximately 3.5 to 4.0 million checks each working day.
Business Strategy
The principal components of the Company's operating and growth strategy are to
(i) grow the Company's small package delivery service; (ii) focus on unique
aircraft type and route structure; (iii) attract, retain and motivate the
highest quality personnel available; (iv) expand its bank services within the
banking industry; and (v) pursue strategic acquisition opportunities. These
strategies are discussed in more detail below:
Grow the Company's small package delivery service. The Company delivers packages
on a same-day/same-night and pre-8:00 a.m. basis for its small package customers
and certain of the national and regional overnight document and package delivery
companies via its air transportation system and commercial airline systems when
necessary. The Company believes that it offers a more flexible pick-up and
delivery schedule for small packages than those offered by other national and
regional carriers and appeals to customers with time-sensitive delivery
requirements. To date, growth in the small package services business has not
been focused on by the Company. With the purchase of 19 additional aircraft in
1996, the Company is currently expanding its fleet of aircraft to provide
additional load capacity for the delivery of canceled checks and small packages.
The Company believes significant opportunities exist for expanding its small
package delivery business by more aggressive marketing to provide services to
this expanding sector of the industry.
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Focus on unique aircraft type and route structure. The Company's fast and
reliable fleet of 28 Learjets and 70 light twin engine aircraft is positioned
around a highly efficient and flexible national route structure designed to
facilitate late pick-up and early delivery times, minimize delays and simplify
flight scheduling. The Company's hub-and-spoke system, with a primary hub in
Columbus and several mini-hubs across the nation, enables the Company to match
the varying load capacities of its aircraft with the shipment weight and volume
of each destination city and to consolidate shipments at its mini-hubs and
primary hub. The Company's hubs are located primarily in less congested regional
airports. These locations, in conjunction with the Company's off-peak departure
and arrival times, provide easy take-offs and landings, convenient loading and
unloading, fast refueling and maintenance, as well as lower cost distribution
center space. The Company's five strategically located maintenance bases help
minimize aircraft down time. The Company's focus on Learjets and light twin
engine aircraft has also enabled it to develop an in-house expertise in
purchasing, flying, maintaining and operating its fleet.
Attract, retain and motivate the highest quality personnel available. As a
service organization, the Company recognizes the importance of hiring,
retaining, and motivating the highest quality personnel available who are
focused on a set of core values designed by the Company to provide a working
environment where integrity, accountability, open communication, team management
and responsibility and quality performance are explicitly stated goals. The
Company regularly holds team-building sessions, continuing education for its
associates and on-the-job training programs for associates. The Company provides
its associates with competitive compensation and benefits packages, including a
stock option program. The Company believes that its compensation and benefit
package and corporate culture will give the Company a significant competitive
advantage in attracting and motivating its associates.
Expand its bank services within the banking industry. The Company intends to
strengthen its leadership position in the transportation of canceled bank checks
by adding aircraft and routes to its current transportation network to
facilitate even more late pick-up and early delivery times covering a greater
number of cities. These capabilities, combined with the Company's other
value-added services (such as ComCheck) not currently offered by competing
canceled bank check delivery companies, should enable the Company to expand its
position in this market.
Pursue strategic acquisition opportunities. The Company believes it is well
positioned to consolidate the regional air freight operators and ground couriers
through the acquisition of high-quality candidates. The fragmented nature of the
air and ground package delivery industry, outside of the major national
carriers, provides the Company with such opportunities. The Company would like
to expand its delivery network through the acquisition of other delivery
companies and additional aircraft serving new routes. In addition, by acquiring
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companies in markets where the Company already has a presence, management
expects to recognize substantial operating advantages by consolidating
overlapping delivery routes. The Company believes it has demonstrated expertise
in evaluating acquisition opportunities based on the potential of revenue growth
and profitability, as well as a proven track record for efficiently integrating
such acquisitions.
Aircraft Fleet
The Company operates a fleet of 98 aircraft, of which 88 are owned. The 10
Cessna 310's are leased from unrelated third party lessors. The Company's fleet
was comprised of the following aircraft at December 12, 1996:
Maximum Maximum Maximum
Payload(1) Range(2) Speed(3)
Aircraft Type Number (lbs.) (n. miles) (knots)
--------------- --------------- --------------- ---------------
Learjets, Model 35 9 4,200 2,000 440
Learjets, Model 35A 13 4,200 2,000 440
Learjets, Model 25 6 3,500 1,000 440
Piper Navajo Chieftain 11 1,500 800 175
Piper Aerostar 14 1,000 900 190
Beech Baron 35 1,000 700 180
Cessna 310 10 900 600 170
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(1) Maximum payload in pounds for a one-hour flight plus required fuel
reserves.
(2) Maximum range in nautical miles, assuming zero wind, full fuel and full
payload.
(3) Maximum speed in knots, assuming full payload.
The Learjet is among the most reliable, fastest and most fuel efficient small
jet aircraft available in the world. The 30-series Learjets allow the Company to
carry up to 4,200 pounds of cargo in certain lane segments. The 30-series also
allows for non-stop lane segments of up to 2,000 miles within the Company's
network. These Learjets also meet all Stage 3 noise requirements currently being
implemented across the country. The Learjet 25 is a smaller aircraft with
slightly smaller payload and range capabilities. The Company intends to
phase-out these aircraft from scheduled operations and replace them with the
more efficient Learjet 35 or other Stage 3 aircraft.
The Company's Learjet fleet provides it with nationwide connectivity. Long lane
segments from all corners of the nation converge on the Company's hub in
Columbus, as well as "mini-hubs" located in Atlanta, Chicago, Charlotte, Dallas,
Denver, Des Moines, and New York. Smaller, light twin engine aircraft provide
service to the various "spoke" cities in the Company's network, which include
virtually all of the nation's large metropolitan areas.
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The Company acquires and operates pre-owned aircraft, typically between 15 and
20 years old. These aircraft are reasonably priced and are relatively modern, as
they have undergone no significant design changes in the last 20 years. Further,
when appropriately maintained (the Company performs its own major inspections
and overhauls on its aircraft fleet), these aircraft show little or no evidence
of erosion in performance.
Operations
The Company provides to its customers complete transportation and informational
services for national distribution of canceled bank checks and small packages.
Operations include over 13,000 nightly deliveries in over 40 states, flying over
90,000 miles per night. The Company's ground and air infrastructure includes the
following key elements:
Ground Operations
The first major component of the Company's ground operations involves the
pick-up of shipments for delivery, as well as bar code scanning for data entry
into the Company's ComCheck and OnTime management information systems. Upon
delivery to the originating airport, the Company's ground crews load shipments
into aircraft for delivery. The Company's ground personnel are trained in proper
freight handling techniques, and wear safety belts when appropriate to minimize
the risk of injury. At the Company's hub in Columbus, aircraft fueling
operations include trained fuelers and ground support equipment including six
fuel trucks and approximately 86,500 gallons of fuel storage capacity. The
Company provides training for ground support personnel on an ongoing basis,
including emergency procedures. The Company's main sort facility is also in
Columbus, with approximately 80 associates loading and unloading aircraft and
fine sorting shipments to their final destination. These processes are all
controlled by the Company's central dispatch located in Columbus.
Vehicles. The Company operates a fleet of 100 ground transportation vehicles,
all of which are owned by the Company. The Company utilizes a computerized
system for monitoring vehicle maintenance and conducts in-house training
sessions throughout the year to maximize safety. Vehicles range in size from
passenger cars to full-size vans, depending on the market being served. In some
situations, Company personnel may utilize their own vehicles, in which case they
are reimbursed for direct vehicle expenses. In addition, where appropriate, the
Company utilizes over 350 independent contractors to further augment its ground
delivery network.
Drivers. The Company employs over 200 full and part-time drivers. The ground
courier industry has typically experienced a high turnover rate, which the
Company has mitigated by offering health insurance and other benefits to its
drivers.
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Independent Contractors. In certain situations where management has deemed
cost-effective and appropriate, the Company has utilized the services of
independent contractors. From time to time, federal and state authorities have
sought to assert that independent owner/operators in the transportation industry
are employees, rather than independent contractors. The Company believes that
independent contractors utilized by the Company are not employees under existing
interpretations of federal and state laws. The Company will continue to monitor
its arrangements with independent contractors to ensure compliance with
applicable laws and regulations.
Fueling. The Company's ground support division provides aircraft fueling and
parking for certain of its customers at its facility in Columbus. This division
accounts for approximately 1% of the Company's annual revenues.
Flight Operations
The Company's flight operations are headquartered in Columbus. The Company hires
and trains its pilots, requiring each to attend a Company-run, two-week training
program. This flight school includes training on the Company's flight simulator
prior to any actual flight time. Additionally, new pilots typically apprentice
as co-pilots in order to gain a familiarity with the Company's route system and
the unique demands of night flying. Periodic simulator training and ongoing
cockpit resource management training provide the Company's pilots with updated
techniques and safety methods. The Company believes it has the highest level of
training provided by any operator of similar aircraft in the nation.
Aircraft maintenance. Aircraft maintenance is also headquartered in Columbus.
This facility operates 24 hours a day, 365 days a year. The Company employs 67
experienced aircraft and avionics technicians in five separate locations across
the country (Columbus, Dallas, Denver, Hartford and Minneapolis), performing all
levels of maintenance from 100-hour inspections on its light twin engine
aircraft to 7,200-hour/12-year inspections on its fleet of Learjets. These
technicians also perform several types of periodic engine inspections and
overhauls. In conjunction with Learjet, Company personnel have developed revised
and enhanced inspection programs for its Learjet fleet, which the Company
believes has provided a superior inspection process at reduced cost. Avionics
trouble-shooting and repair, done internally by the Company since 1989, provide
for maximum efficiency and minimum aircraft downtime for its entire fleet. The
Company currently utilizes the services of Garrett Aviation exclusively for
major period inspections and core overhauls of its 30-series Learjets.
Dispatch. The Company's central dispatch system ties together all components of
the air operation. Departure and arrival times are continuously updated, and
weather conditions throughout the nation are constantly monitored. Company
dispatchers remain in constant contact with pilots, outbased hub managers,
fuelers, maintenance and ground delivery personnel to ensure that no gaps exist
in the Company's delivery process.
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Route scheduling. The scheduling of aircraft within the Company's route system
is determined by the concentration of the Company's customers in particular
metropolitan areas. Currently, the Company operates between 90 cities each
working day. Revisions, additions and deletions of routes occur when the Company
adds new customers or determines that load factors necessitate additional
aircraft on a particular lane segment.
Delivery Services
The Company provides complete transportation and information services for its
customers in the U.S. banking industry, as well as its small package delivery
customers. Although the services are provided by one air transportation system,
providing significant economies of scale, each customer base receives custom
service to meet its particular delivery needs.
Canceled bank check delivery services. A typical shipment of canceled bank
checks is picked up from the sending bank by a Company courier. Shipments are
pre-sorted by bank personnel and bundled as to final destination using
Company-supplied, color-coded bags. The shipment is then transported to the
local airport where it enters the Company's air transportation system and is
scanned via bar code technology, which reads information pertaining to the
shipper, receiver, airbill number and applicable deadline. This data is then
promptly downloaded into the Company's ComCheck computer system, where it is
available to the Company's customer service representatives ("CSRs").
Upon arrival at the Company's Columbus hub or one of the Company's mini-hubs,
the shipment is off-loaded, sorted by destination and reloaded onto the
Company's aircraft. At the destination city, the shipment is off-loaded for the
final time and delivered by Company courier to the receiving bank or Federal
Reserve Branch. When delivered, the shipment is once again scanned and
downloaded into the Company's computer system. Delivery information for all
shipments is then available on-line to the Company's customer base and all
Company CSRs. The Company's customer service department is available to handle
any inquiries, discrepancies or supply requests, as well as provide proof of
delivery documentation, all of which are value-added features of the Company's
service.
The Company provides delivery service for three sets of banking deadlines. The
"Basic" program which has a 9:30 p.m. - 10:00 p.m. hub time in Columbus,
provides delivery service between 12:01 a.m. and 2:00 a.m. to approximately the
northeastern third of the nation. The "Premium" program, which has an 11:00 p.m.
- - 11:30 p.m. hub time in Columbus and Charlotte, provides delivery service at
approximately 3:00 a.m. to the eastern half of the nation. Finally, the "City"
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program, which has a 4:00 a.m. - 5:30 a.m. hub time in Columbus, provides
delivery service at approximately 8:00 a.m. to all cities served by the network.
The Company prices these services based on the tier of service and by the pound
on a customer by customer basis.
Small package delivery service. The Company's small package delivery service
utilizes the same transportation network as the bank delivery system, which
enables it to offer its customers late pick-up and early delivery times. A
typical shipment is either picked up by a Company courier or delivered to the
airport by the customer, at which point the shipment information, including
shipper, receiver and airbill number, is scanned via bar code technology into
the OnTime computer system. The shipment then enters the Company's air
transportation network. Upon arrival at its destination city (having gone
through sorting and transportation procedures similar to the Company's bank
shipments), the shipment is off-loaded and delivered to its destination by
Company personnel or independent contractors. Upon delivery, the shipment
information is again scanned and downloaded into the OnTime system, which again
provides on-line and Internet access for customers.
The Company also provides airport-to-airport service for certain of its
customers, including national integrated carriers and other consolidating
freight forwarders. This service does not typically require the same level of
information reporting, but fills a significant need for these customers whose
infrastructures cannot be easily modified to meet same-day, same-night or
pre-8:00 a.m. delivery deadlines.
Customers
The highly specialized needs of the Company's customer base combined with the
Company's performance level over the years have resulted in a high level of
customer retention. This customer retention level, in turn, creates a level of
stability in the Company's revenue base that allows for product development and
continued dedication of resources to providing the highest possible level of
service to customers.
U.S. banking industry. The banking industry, including commercial banks, savings
banks and Federal Reserve banks, represents the Company's largest category of
customers and in 1996 accounted for approximately 86% of the Company's revenues.
This customer list represents 92 of the nation's 100 largest bank holding
companies. The Company provides daily service (four nights per week) for its
entire customer base, and has contracts with many of its large customers. The
Company's time-critical canceled check delivery service enables the Company's
banking customers to offer competitive products and pricing.
Small package delivery customers. The Company's small package delivery services
accounted for approximately 13% of the Company's fiscal 1996 revenues. Customers
for this service include industrial and service corporations, medical companies,
national integrated carriers and consolidating freight forwarders. Similar to
the Company's banking industry customers, its small package delivery customers
tend to be nightly shippers with a high level of retention.
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Other customers. The remainder of the Company's revenue base is derived from
fuel sales at the Company's main facility in Columbus.
No single customer accounted for more than 10% of the Company's fiscal 1996
revenues.
Customer Services
The Company's customer service department helps to provide many of the Company's
value-added features. In addition to providing prompt, courteous replies to all
customer inquiries utilizing a common tone of service, the CSRs help provide
proof of delivery documentation when required, assist with the ordering of
supplies and provide prompt shipment tracking information. The Company's
management information systems assist in the customer service function in many
ways, including: (i) shipment and delivery information is available on-line, via
the utilization of bar code technology through the ComCheck and OnTime systems;
(ii) current and historical proof-of-delivery documentation can be requested and
provided on-line through the ComCheck and OnTime systems; (iii) supplies can be
ordered on-line through both systems, providing a user-friendly environment for
the Company's customers; (iv) OnTime performance data is constantly reviewed by
management, graphed and reported quarterly for trend monitoring purposes, so
that any fluctuation in customer service can be addressed immediately; (v) the
Company's dispatch function includes the ability to relay all relevant shipper
information on-line throughout the organization, assuring a smooth dissemination
of information regarding special pick-ups and deliveries; and (vi) internal
management reports include load factor analysis and capacity reporting, so the
Company can modify the network as appropriate to provide additional lift where
demanded by customers. All relevant information referred to above is available
on-line to the Company's CSRs who are then empowered to keep the Company's
customer base fully informed on a prompt basis.
Marketing
The Company has typically marketed to its bank customer base, with little need
for national advertising. Banking industry sales efforts have included assisting
in the design of customized clearing systems for the bank customers which match
the appropriate aircraft with the bank's needs for more processing time or
specific deadlines sought by the sending bank. Marketing efforts in this area
have included promotion of the NCHA. The success of the NCHA has had a
complementary effect on the Company, as more checks are now transported through
the private sector.
The Company has been an exhibitor in numerous industry trade shows such as the
Bank Administration Institute ("BAI") Float Management Conference, the BAI Check
Processing Conference, and the Air Courier Conference of America. This process
has enabled the Company to maintain close contact with its customer base.
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Small package delivery services have historically been directly marketed to
companies requiring this unique, specialized service, as well as to
consolidating freight forwarders and national integrated carriers. This approach
has enabled the Company to direct volume to lane segments with space available.
A focused marketing program is being developed to assist in expanding these
services, emphasizing the Company's abilities to have later pick-up and earlier
delivery services.
Human Resources
The Company believes it has achieved a significant competitive advantage within
its industry through its major commitment to human resources. All levels of the
Company's management strive to operate within the spirit of the Company's core
values, which are: (i) Honesty, Integrity, Trust and Respect - the Company
believes customers expect these qualities and the Company strives to deliver
them; (ii) Accountability - the Company believes its associates are accountable
to the customer in the marketplace, to peers in the workplace and, ultimately,
to God; (iii) Open and Free Communication - the Company strives to communicate
from the bottom to the top, from the top down, and with the marketplace, by
providing a medium for involvement, creativity and encouragement for its people
and customers; (iv) Team Management Style with Shared Responsibilities - the
Company strives to delegate the decision-making process as far down as possible,
encouraging involvement and shared responsibilities; and (v) Quality Performance
- - the Company's goal is simple: to be the best, by focused teamwork with
self-policing, quality-controlled systems and hiring and educating the best
personnel available, and then motivating and compensating them appropriately.
Additionally, representatives of the Company's human resources team periodically
travel throughout the country to the Company's outbase facilities to help ensure
compliance with the Company's core values and other personnel policies. All
Company personnel are part of the Company-wide drug-testing program. Management
believes this program, which goes beyond the requirements of the Company's
regulators, helps to ensure the highest possible performance levels. The Company
also conducts random drug and alcohol testing in compliance with Federal
Aviation Administration regulations. Management training and professional
development seminars are periodically held for, and attended by, all levels of
Company personnel. The Company also aggressively compensates for performance,
with excellent performance recognized and rewarded through incentive-based
compensation.
Associates
The chart below summarizes the Company's workforce at September 30, 1996, 1995
and 1994. The Company's associates are not represented by any unions or covered
by any collective bargaining agreements. The Company has experienced no work
stoppages and believes that its relationship with associates is good.
-13-
September 30,
1996 1995 1994
-------------------------------------
DEPARTMENT
Management/Administration 115 110 115
Flight 137 123 119
Maintenance 82 72 70
Driver/Courier/Ramp/Sort 322 281 251
-------------------------------------
Total 656 586 555
=====================================
Competition
The air and ground courier industry is highly competitive. The Company's primary
competitor is the Federal Reserve's ITS. The actions of the Federal Reserve are
regulated by the Monetary Control Act, which, in summary, requires the Federal
Reserve to price its services at actual cost plus a private sector adjustment
factor. The Company believes that the purpose of the Monetary Control Act is to
curtail the possibility of predatory pricing by the Federal Reserve when it
competes with the private sector. No assurance beyond the remedies of law can be
given that the Federal Reserve will comply with the Monetary Control Act.
In the private sector, there are a large number of smaller, regional carriers
that transport canceled checks, none with a significant interstate market share.
The two largest private sector air couriers, FedEx and UPS, both carry canceled
checks where the deadlines being pursued fit into their existing system, but
this has not represented a significant market share of this industry segment to
date. The Company provides customized service for its customer base, often with
later pick-ups and earlier deliveries than the large, national couriers. Both
FedEx and UPS utilize the Company's transportation network for certain
situations where they require customized service. No assurance can be provided
that FedEx, UPS or any other large national couriers will not attempt to compete
more directly with the Company in the future.
The Company competes with commercial airlines and numerous other carriers in its
small package transportation business. The Company's market share in this
industry is less than 1%. The Company believes that this market represents a
significant expansion opportunity. The Company also has a minor presence in the
same-day or next-flight-out industry. The Company believes that there are a
number of competitors in this industry. To the extent the Company elects to
increase its presence in the same-day industry, it will compete against these
companies. The Company will emphasize its information technology, competitive
pricing and historically high on-time performance levels to compete in this
market.
-14-
Regulation
The Company is regulated under Part 135 of the Federal Aviation Regulations by
the Federal Aviation Administration. In connection with the operation of Company
vehicles and aircraft, the Company is subject to regulation by the U. S.
Department of Transportation with respect to the handling of hazardous
materials. The Company holds nationwide general commodities authority from the
Interstate Commerce Commission to operate as a common carrier on an interstate
basis within the contiguous 48 states. The Company's delivery operations are
subject to various state and local regulations, and in many instances, require
permits and licenses from state authorities.
The Company believes that it has all permits, approvals and licenses required to
conduct its operations and that it is in compliance with applicable regulatory
requirements relating to its operations. Failure of the Company to comply with
the applicable regulations could result in substantial fines or possible
revocation of one or more of the Company's operating permits.
Trademarks
The Company utilizes various service marks, trademarks and tradenames in
connection with its services. While the Company considers its service marks,
trademarks and tradenames to be important in the conduct of its business, the
business of the Company is not dependent on any individual service mark,
trademark or tradename.
Environmental Matters
The Company believes that compliance with environmental matters has not had, and
is not expected to have, a material effect on operations. Although the Company
believes that it is in compliance with all applicable noise level regulations
and is working proactively with various local governments to minimize noise
issues, future noise pollution regulations could require the replacement of
several of the Company's aircraft.
ITEM 2 - PROPERTIES
The Company operates ground courier facilities in 40 locations. The land and
building complex used for the Company's headquarters in Columbus, Ohio, are
leased from Gerald G. Mercer, Chairman, Chief Executive Officer and President of
the Company, under a lease agreement which expires on July 30, 2004. Mr. Mercer
owns the building and leases the land from The Port Authority of Columbus under
a 25-year lease which expires on December 31, 2009, subject to a 20-year renewal
option. The complex currently has 80,000 square feet, of which the Company
utilizes 73,000 square feet. The remainder is subleased to unrelated third
parties. The Company's headquarters is currently used for operations, aircraft
maintenance, vehicle maintenance, general and administrative functions, and
training. In addition, several facilities also contain, or are primarily used
for, storage and warehouse space.
-15-
The Company operates at numerous locations throughout the country. The mini-hub
locations generally include an office and/or a section of the lessor's hangar or
ramp that is allocated to the Company.
For additional information concerning the Company's leases, see the Company's
Consolidated Financial Statements, included with this Annual Report on Form
10-K.
ITEM 3 - LEGAL PROCEEDINGS
There are no pending legal proceedings involving the Company other than routine
litigation incidental to the Company's business. In the opinion of the Company's
management, such proceedings should not, individually or in the aggregate, have
a material adverse effect on the Company's results of operations or financial
condition.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1996.
Executive Officers of the Registrant
The following table sets forth the executive officers of AirNet Systems, Inc.
The executive officers are elected annually and serve at the pleasure of the
Board of Directors.
Name Age Position
- ------ ----- ----------
Gerald G. Mercer 48 Chairman of the Board, President and Chief
Executive Officer
Eric P. Roy 41 Director, Executive Vice President,
Treasurer, Chief Operating Officer and
Chief Financial Officer
Glenn M. Miller 50 Vice President, Operations
Guy S. King 43 Vice President, Sales
Lincoln L. Rutter 40 Vice President, Sales
Kendall W. Wright 48 Vice President, Sales
William R. Sumser 40 Vice President, Finance, Controller and Secretary
Donald D. Strench 40 Vice President, Corporate Development
Gerald G. Mercer has served as Chairman of the Board, President and Chief
Executive Officer of the Company since founding the Company in 1974. He served
as President of the Michigan Association of Aviation Businesses in 1986, and has
been a member of the Young Presidents' Organization since 1986. Mr. Mercer has
been a guest speaker at several major universities throughout the country.
-16-
Eric P. Roy has been a Director of the Company since 1994 and has served as
Chief Financial Officer of the Company since 1986. Mr. Roy was named Executive
Vice President and Chief Operating Officer in 1991.
Glenn M. Miller has served as Vice President, Operations for the Company since
1975.
Guy S. King has served as Vice President, Sales for the Company since 1989.
Prior to 1989, Mr. King served the Company in numerous functions dating back to
1976, including dispatch and pilot, before eventually founding the Company's
small package delivery division in 1984. Mr. King has served on the Board of
Directors of the Air Courier Conference of America since 1993.
Lincoln L. Rutter has served as Vice President, Sales for the Company since
1988.
Kendall W. Wright has served as Vice President, Sales for the Company since
1988.
William R. Sumser has served the Company as Vice President and Secretary since
March 1996, as Controller since 1988 and as Assistant Vice President from 1988
through March 1996. Mr. Sumser has 18 years of financial experience, and is
responsible for the Company's daily cash management, financial reporting and
purchasing functions.
Donald D. Strench has served the Company as Vice President, Corporate
Development since April 1996. Prior to joining the Company, Mr. Strench served
in various financial positions for American Airlines, Inc. between September
1986 and March 1996, including Vice President, Corporate Development (American
Eagle).
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Common Shares of the Company are traded on The Nasdaq National Market under
the symbol "ANSY". The table below sets forth the high and low reported sales
prices of the Common Shares on The Nasdaq National Market for the periods
indicated.
-17-
1996 High Low
-------- -------- -------
Third Quarter (1) $16.00 $14.50
Fourth Quarter 16.00 10.75
- ---------------
(1) Represents the period from May 31,1996 (date of the initial public offering
of the Company's Common Shares) through June 30, 1996.
The Company has not paid any dividends on its Common Shares and does not intend
to pay any such dividends in the foreseeable future. The Company anticipates
utilizing future excess earnings to finance operations and future growth and
development of the Company. Certain restrictive covenants in the Company's
revolving credit facility impose limitations on the payment of dividends by the
Company. Such covenants prohibit the Company from paying cash dividends on its
Common Shares in excess of 50% of net income.
On December 16, 1996, there were approximately 1,200 holders of Common Shares,
based upon the number of holders of record and the number of individual
participants in certain security position listings.
-18-
================================================================================
ITEM 6 - SELECTED FINANCIAL DATA
================================================================================
For the year ended September 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Statement of Operations Data: (in thousands, except per share data)
Revenues
Air Transportation $ 74,632 $66,456 $62,288 $57,325 $56,719
Fixed base operations 1,064 1,006 1,158 1,265 1,335
-------- ------- ------- ------- -------
Total revenues 75,696 67,462 63,446 58,590 58,054
Costs and expenses
Air transportation 50,466 46,111 44,570 43,437 41,806
Fixed base operations 1,033 956 1,081 1,150 1,217
Selling, general and administrative 10,909 12,320 10,484 8,251 8,030
-------- ------- ------- ------- -------
Total costs and expenses 62,408 59,387 56,135 52,838 51,053
-------- ------- ------- ------- -------
Income from operations 13,288 8,075 7,311 5,752 7,001
Interest expense 1,053 1,452 1,093 1,123 1,240
Offering related non-recurring expenses Note 1 13,704 0 0 0 0
Income tax expense, net Note 2 4,202 0 0 0 0
-------- ------- ------- ------- -------
Net income (loss) ($ 5,671) $ 6,623 $ 6,218 $ 4,629 $ 5,761
======== ======= ======= ======= =======
Pro forma information Note 3:
Historical net income (loss) before taxes ($ 1,469) $ 6,623
Pro forma adjustments other than income
taxes 4,429 7,367
Pro forma income taxes 5,642 5,596
-------- -------
Pro forma net income (loss) ($ 2,682) $ 8,394
======== =======
Weighted average common shares outstanding 9,663 8,361
Pro forma net income (loss) per share ($ 0.28) $ 1.00
======== =======
Adjusted pro forma information:
Pro forma net income (loss) ($ 2,682) $ 8,394
Effects of eliminating offering related
non-recurring expenses, net of tax Note 1 12,681 0
-------- -------
Adjusted pro forma net income $ 9,999 $ 8,394
======== =======
Pro forma common shares outstanding Note 4 12,318 12,318
Adjusted pro forma net income per share $ 0.81 $ 0.68
======== =======
Balance Sheet Data:
Total assets $ 75,009 $49,037 $42,141 $35,829 $33,637
Total debt 0 19,228 16,250 13,169 13,850
Shareholders' equity 65,939 20,469 17,931 16,794 14,036
Note 1 Represents non-cash, non-recurring expenses incurred as a result of the
initial public offering, effective May 31, 1996. (See Note 2 to the
Consolidated Financial Statements.)
Note 2 Prior to the Company's initial public offering, it operated as an S
Corporation under the Internal Revenue Code for tax purposes and
consequently, was not subject to federal and certain state income taxes.
Note 3 Includes pro forma adjustments incurred as a result of the initial public
offering. Such adjustments are the result of restructured executive
compensation plans, the elimination of a deferred compensation plan, the
reduction of interest expense and the termination of a covenant not to
compete and corresponding payments. All such changes were effective with
the consummation of the initial public offering on May 31, 1996. (See Note
13 to the Consolidated Financial Statements.)
Note 4 Assumes shares issued in the initial public offering were outstanding for
the entire period.
-19-
================================================================================
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
General
The Company operates a fully integrated national air transportation network that
operates between 90 cities in more than 40 states and delivers over 13,000
time-critical shipments each working day. The Company's bank services division
is the leading transporter of canceled checks and related information for the
U.S. banking industry. The small package delivery division provides specialized,
high priority delivery service for customers requiring a late pick-up and early
delivery service combined with prompt, on-line delivery information. The Company
also offers retail aviation fuel sales and related ground services for customers
in Columbus, Ohio.
On June 5, 1996, the Company successfully completed its initial public offering
(the "Offering") raising net proceeds of approximately $82.7 million. Proceeds
were used to repay outstanding debt, repurchase an outstanding warrant, make
distributions to former shareholders and finance future acquisitions and
internal growth. Pursuant to the terms of the Offering, the Company issued
6,440,000 Common Shares at $14.00 per share.
Impact on Operations
The Company's Consolidated Financial Statements have and will be affected by
several factors, including the following: (i) the corporate strategic decision
to acquire, rather than to lease, aircraft; (ii) S Corporation distributions;
(iii) a change in the Federal Reserve bank regulations affecting the ability of
commercial banks to compete with the Federal Reserve banks; (iv) cancellation of
the Wright International Express, Inc. ("WIE") covenant not to compete and
repurchase of WIE warrants; (v) the incurrence of non-cash, non-recurring
expenses associated with the Company's Offering; (vi) development of a fuel
rebate/surcharge program for the Company's customers; (vii) taxes on income in
connection with the termination of Company's S Corporation status; and (viii)
the tax benefit associated with the exercise of the WIE warrant.
Corporate strategic decision to acquire aircraft. In fiscal 1993, the Company
made a strategic decision to replace leased aircraft, particularly jet aircraft,
with purchased aircraft. The Company was able to pursue this strategy as a
result of its strong financial condition and ability to take on additional debt
to fund such acquisitions. As aircraft leases expired, the Company began
purchasing replacement aircraft. The resulting savings in lease expense were
offset partially by increased interest expense due to increased debt and
increased depreciation expense. In fiscal 1994, the Company decided also to
begin replacing some of its leased light twin engine aircraft with larger twin
engine aircraft with increased payload capacities.
S Corporation Distributions. Since the Company elected S Corporation status in
July 1988, it has made distributions to its shareholders for the purpose of
funding their income tax payments on the income generated by the Company, which
-20-
income is taxable to the shareholders whether or not distributed. In fiscal
1994, the Company began making S Corporation distributions in amounts in excess
of the amounts necessary to pay applicable income taxes. In fiscal 1996, such
distributions totaled approximately $1.0 million. In addition, in connection
with the Offering and the conversion to a C Corporation status, the Company made
distributions of the accumulated adjustments accounts ("AAA distributions")
totaling $21.0 million, which approximated the value of the Company's AAA
account at the time of the Offering.
Modification of Federal Reserve bank regulations. In January, 1994, the banking
industry benefited from the determination that the Federal Reserve banks had an
unfair advantage in the marketplace for check clearing services. Prior to such
determination, Federal Reserve banks were allowed to present checks to the
Federal Reserve for payment in immediately available funds without having to pay
a presentment fee. Commercial banks are often required to pay a presentment fee
to other commercial banks in exchange for the right to draw immediately against
deposits of such banks. The Federal Reserve responded by initiating a regulatory
policy called "Same-Day Settlement", which mandates that if a bank is presented
with a check drawn on its deposits, such bank must pay the presenting bank in
immediately available funds, without charging any additional fees, provided the
check is presented by 8:00 a.m. Same-Day Settlement has allowed commercial banks
to compete more favorably with the Federal Reserve banks and correspondingly,
has increased demand for the Company's delivery services, as the Company can
deliver to most locations in the U.S. prior to the 8:00 a.m. deadline.
WIE covenant not to compete and warrant. In 1988, the Company purchased certain
assets of WIE. In connection with the purchase agreement, the Company entered
into a non-compete agreement that required annual payments to the former WIE
shareholder tied to the cash flows and debt to equity ratios of the Company.
Upon the closing of the Offering, the non-compete agreement was terminated,
resulting in a non-cash, non-recurring expense of $2.6 million. Also in
consideration for the purchase of WIE, the Company issued a warrant to a former
WIE shareholder which was exercisable upon the closing of an initial public
offering. Upon closing of the Offering, the Company purchased the WIE warrant
for $29.9 million and canceled the warrant, resulting in a reduction in
shareholders' equity.
Non-recurring expenses. The Company incurred significant non-cash, non-recurring
expenses in conjunction with its Offering. These expenses included (i) $14.8
million of compensation expense related to the portion of AAA distributions to
certain executive officers not previously recorded as expense in connection with
the termination of the Company's S Corporation status, plus the difference
between the net offering price and the net book value per Common Share held by
the executives under certain stock purchase agreements, which predated the
initial public offering; and (ii) $2.6 million related to the write-off of the
WIE covenant not to compete. These expenses were offset with a $1.7 million
elimination of a deferred compensation liability associated with the stock
purchase agreements and a $2.0 million elimination of a liability related to
deferred compensation agreements with certain executive officers.
-21-
Development of fuel rebate surcharge program. In January 1990, the Company
developed a fuel rebate/surcharge program. Pursuant to this program, as the
OPIS-CMH (Oil Price Information Service - Columbus, Ohio Station) price of jet
fuel exceeds $.75 per gallon, the Company's customers are surcharged. In turn,
as the OPIS-CMH price falls below $.68 per gallon, the Company's customers
receive a rebate.
Taxes on income. In July 1988, the Company elected to be treated as an S
Corporation under Subchapter S of the Internal Revenue Code and comparable
provisions of certain state tax laws, and historically paid no federal income
tax. For reporting purposes, the Company recorded charges for state taxes for
those states which did not recognize the Subchapter S status. Prior to the
closing of the Offering, the Company terminated its Subchapter S status and has
been responsible for federal and state income taxes from the date of the
termination.
Tax benefit from the exercise of the WIE warrant. The Company expects to receive
a tax benefit asset from the repurchase and cancellation of the WIE warrant of
approximately $7.0 million. The tax benefit, which was recorded in the Company's
balance sheet in 1996, may be used to offset taxes payable on future income of
the Company. The tax benefit will have no effect on the Company's income
statement currently, or in the future, but will have a positive impact on cash
flows.
Results of Operations
Fiscal 1996 compared to fiscal 1995
Revenues were a record $75.7 million in fiscal 1996, an increase of $8.2
million, or 12.2%, over fiscal 1995. Of the increase, $2.0 million is
attributable to price increases effective January 1, 1996 and 1995. Revenues
from check delivery increased $6.8 million, or 11.6%, primarily due to increased
business activity and increases in total weight shipped, while small package
delivery revenues increased $1.4 million, or 17.3%, due primarily to increased
activity from both new and existing customers.
Total costs and expenses were $62.4 million in fiscal 1996, an increase of $3.0
million, or 5.1%, over 1995 levels, resulting in income from operations of $13.3
million in fiscal 1996 compared to $8.1 million in fiscal 1995. Air
transportation expenses were up $4.4 million, or 9.4%, while selling, general
and administrative expenses decreased $1.4 million, or 11.4%, for the year.
Air transportation costs increased due, in part, to the addition of air and
ground personnel required to service a larger fleet of aircraft and the
increased volume of activity. In addition, depreciation expense increased $1.1
million, or 15.2%, due to the increased size of the Company's fleet, which grew
from 65 owned aircraft at September 30, 1995 to 83 at September 30, 1996. The
-22-
increase in depreciation expense was offset by a reduction in lease expense as a
result of the Company's strategy to acquire rather than lease aircraft. A rise
in fuel prices coupled with increased flight hours contributed to a $0.7
million, or 9.8%, increase in aircraft fuel expense.
Selling, general and administrative expenses decreased primarily due to the
restructuring of executive compensation plans (which resulted in a $0.5 million
decrease), the termination of stock purchase agreements (which resulted in a
$0.3 million decrease) and the termination of a covenant not to compete (which
resulted in a $1.4 million decrease). All were effective in conjunction with the
Offering in May 1996. The stock purchase agreements were with certain executive
officers and had been tied to the appreciation in the book value of the Common
Shares of the Company. The covenant not to compete required payments based on
the Company's cash flow and debt to equity ratio. These decreases were offset by
an increase in consulting fees incurred with the reconstruction of executive
compensation and employee stock option plans and increased wages related to the
hiring of additional personnel.
Interest costs decreased $0.4 million as a result of the repayment of all
outstanding debt in June 1996 with proceeds from the Offering.
The Company incurred $13.7 million of non-cash, non-recurring expenses in
connection with its Offering. These expenses included (i) $14.8 million of
compensation expense related to the portion of accumulated adjustment accounts,
or AAA, distributions to certain executive officers not previously recorded as
expense in connection with the termination of the Company's S Corporation
Status, plus the difference between the net offering price and the net book
value per Common Share held by the executives under certain stock purchase
agreements, which predated the Offering and (ii) $2.6 million related to the
write-off of a covenant not to compete with former WIE shareholders. These
expenses were offset with a $1.7 million elimination of a deferred compensation
liability associated with the stock purchase agreements and a $2.0 million
elimination of a liability related to deferred compensation agreements with
certain executive officers.
The Company operated as an S Corporation under the Internal Revenue Code from
1988 until it elected to terminate its S Corporation status on May 30, 1996.
Under its Subchapter S election, shareholders of the Company were taxed directly
on the Company's income and, consequently, the Company was not subject to
federal and certain state income tax at the corporate level. In connection with
the termination of the S Corporation status, the Company recorded a net tax
liability of $2.4 million as a result of the cumulative effect of deferred
income taxes attributable to its change in status. In addition, the Company
recorded net deferred tax expense of $1.8 million for fiscal 1996 related to the
income tax expense on operating income since May 30, 1996, offset by the
favorable tax effect of the write-off of the covenant not to compete with former
WIE shareholders.
-23-
Pro forma information reflects the effects of certain Offering related
transactions on the statements of operations as if they occurred at the
beginning of the periods presented. See Note 3 to the Selected Financial Data
table included in Item 6 of this Annual Report on Form 10-K.
Fiscal 1995 compared to fiscal 1994
Revenues were $67.5 million for fiscal 1995, an increase of $4.1 million, or
6.3%, compared to $63.4 million for fiscal 1994. Revenues from check delivery
were $58.3 million for fiscal 1995, an increase of $4.3 million, or 7.8%,
compared to $54.0 million for fiscal 1994. This increase was due to the
increased level of business activity, at least part of which can be attributed
to the implementation of Same-Day Settlement in January 1994. The increase in
revenues from check delivery was also due in part to the increase in the
Company's shipping volume as a result of increased participation the NCHA
throughout 1994 and 1995. Of the overall increase in revenues for fiscal 1995
compared to fiscal 1994, approximately $2.0 million was due to rate increases
implemented by the Company in January, 1995.
Revenues from small package delivery were $8.2 million for both fiscal 1995 and
fiscal 1994. A 4.7% increase in revenues from new business and increased
business from existing customers was offset by a $0.4 million loss of business
from the U.S. Postal Service.
Revenues from fixed base operations were $1.0 million for fiscal 1995, a
decrease of $0.2 million, or 13.1%, compared to $1.2 million for fiscal 1994.
This decrease was due to a $0.3 million decrease in revenues generated from
retail maintenance as a result of the Company's decision to reduce retail work
due to the maintenance demands of its own growing fleet of aircraft. This
decrease was partially off-set by a $0.1 million increase in revenues from
retail fuel sales.
Wages and benefits expense was $9.2 million for fiscal 1995, an increase of $1.0
million, or 12.3%, compared to $8.2 million for fiscal 1994. Of the increase,
$0.6 million was due to increased costs of benefits. The Company increased its
discretionary contribution to the Company's 401(k) plan by $0.2 million, and
group health insurance costs increased by $0.4 million. The Company is
self-insured for health care benefits and such claims were greater in fiscal
1995 than in fiscal 1994.
Aircraft fuel expense was $7.4 million for fiscal 1995, an increase of $0.4
million, or 7.0%, compared to $7.0 million for fiscal 1994. This increase was
due, in part, to an increase in hours flown. The increase in aircraft fuel
expense was also due, in part, to minor increases in aviation fuel prices during
fiscal 1995. Fuel rebates were $0.4 million for fiscal 1995 compared to $0.3
million for fiscal 1994.
Aircraft maintenance expense was $6.0 million for fiscal 1995, an increase of
$0.3 million, or 5.5%, compared to $5.7 million for fiscal 1994. The increase
was due, in part, to higher parts costs and use of outsourced maintenance
facilities for more routine maintenance in fiscal 1995 compared to fiscal 1994.
-24-
Outsourcing maintenance work was necessary because rotating the Company's fleet
to one of the Company's maintenance facilities became increasingly difficult as
the flight hours increased in fiscal 1995.
Aircraft lease expense was $1.0 million for fiscal 1995, a decrease of $2.3
million, or 68.0%, compared to $3.3 million for fiscal 1994. This decrease was
due to the Company's continued strategy of acquiring, rather than leasing
aircraft. During the last month of fiscal 1994 and the first month of fiscal
1995, the Company acquired three Learjets that it had previously leased. By the
end of fiscal 1995, the Company leased only one Learjet and 12 light twin engine
aircraft.
Ground couriers and outside services expenses were $8.6 million for fiscal 1995,
an increase of $0.3 million, or 3.2%, compared to $8.3 million for fiscal 1994.
This increase was due in part to a $0.4 million increase in the cost of ground
agents due to the additional agents needed to handle the increased volume in
shipments, partially offset by a $0.1 million decrease in the cost of
independent contractors due to the loss of the U. S. Postal Service business.
Depreciation and amortization expense was $7.4 million for fiscal 1995, an
increase of $1.1 million, or 16.1%, compared to $6.3 million for fiscal 1994.
Almost all of this increase was due to an increase in the depreciation of flight
equipment as a result of the Company's strategy to acquire rather than lease
aircraft.
Other operating expenses were $6.4 million for fiscal 1995, an increase of $0.6
million, or 11.5%, compared to $5.8 million for fiscal 1994. This increase was
due to an increase in insurance expense in fiscal 1995 compared to fiscal 1994,
partially due to an increase in aircraft insurance of $0.4 million due to a rate
increase and a year-end adjustment for increased fleet value, and partially due
to an increase in workers' compensation insurance of $0.2 million due to a rate
increase and an increase in payroll.
Fixed base operations expense was $1.0 million in fiscal 1995, an decrease of
$0.1 million, or 11.6%, compared to $1.1 million for fiscal 1994. This decrease
was due to a decrease in the cost of retail maintenance and a non-cash charge
taken in 1995 to write down the value of one of the Company's facilities.
Selling, general and administrative expenses were $12.3 million for fiscal 1995,
an increase of $1.8 million, or 17.5%, compared to $10.5 million for fiscal
1994. Executive compensation increased primarily due to a $0.6 million increase
in performance-based bonuses in fiscal 1995 compared to fiscal 1994. Other
executive compensation, which includes the appreciation in the book value of the
Common Shares acquired by certain executive officers pursuant to stock purchase
agreements executed in April 1994, increased due to fiscal 1995 expense being
for a full fiscal year compared to fiscal 1994 expense which related to only a
six month period. A $0.5 million increase was attributable to increased payments
-25-
in fiscal 1995 compared to fiscal 1994 under the WIE covenant not to compete.
Other selling, general and administrative expense decreased $0.4 million due to
a $0.3 million decrease in the loss on disposal of assets and a $0.1 million
decrease in professional fees in fiscal 1995 compared to fiscal 1994, partially
offset by computer-related expenses associated with the development and
implementation of handheld bar code scanners.
Interest expense was $1.5 million in fiscal 1995, an increase of $0.4 million,
or 32.9%, compared to $1.1 million for fiscal 1994. This increase was primarily
due to the Company's increased capital expenditures, including the acquisition
of additional aircraft during the 13 months beginning September 1994 which
increased debt by $5.3 million. The increase in interest expense was partially
offset by a decrease in aircraft lease expense. During fiscal 1995, the Company
also amended its credit agreement to allow the Company to borrow funds at the
variable Eurodollar rates tied to the Company's debt to equity ratio.
Liquidity and Capital Resources
General. Historically, the Company's principal sources of liquidity have been
internally generated funds and credit arrangements. On June 5, 1996, the Company
successfully completed the Offering for 6,440,000 Common Shares at $14.00 per
share. Pursuant to the Offering, the Company received total net proceeds of
approximately $82.7 million. Prior to the Offering, the Company made $21.0
million in distributions to the S Corporation shareholders for the undistributed
earnings in the Company's AAA account associated with the Company's S
Corporation status. These distributions were made through the Company's issuance
of promissory notes to such shareholders, which were subsequently paid off with
the Offering proceeds. The following is a summary of the use of the Offering
proceeds:
(in 000's)
Offering proceeds, net of expenses $82,696
Use of Proceeds:
Repayment of debt (19,000)
Distribution to former shareholders for undistributed
earnings associated with an S Corporation status
(21,000)
Costs associated with the purchase and cancellation of
the WIE warrant (29,902)
------------
Net increase in cash from Offering proceeds $12,794
============
-26-
Current Credit Arrangements. Simultaneously with the closing of the Offering,
the Company entered into a new credit agreement to replace its existing
agreement. The new credit agreement provides the Company with a $50.0 million,
five year, unsecured revolving credit facility. The new credit agreement limits
the availability of funds to certain specified percentages of accounts
receivable, inventory and the wholesale value of aircraft and equipment. In
addition, the agreement requires the maintenance of certain minimum net worth
and cash flow levels, imposes certain limitations on payments of dividends,
restricts the amount of additional debt and requires prior bank approval for
certain acquisitions. There were no borrowings under the new credit agreement at
September 30, 1996.
Investing activities. Capital expenditures totaled $17.1 million for fiscal
1996, compared to $14.2 million and $12.8 million for fiscal 1995 and fiscal
1994, respectively. Of the total incurred in fiscal 1996, $2.8 million was for
the acquisition of the assets of Midway Aviation, Inc. ("Midway"), a regional
air freight courier engaged primarily in the business of canceled check
transportation. The remainder was incurred for aircraft and flight equipment,
delivery vehicles and facility improvements. The Company anticipates it will
incur approximately $17.0 million for capital expenditures in fiscal 1997,
excluding any acquisitions of new businesses. The Company anticipates it will
continue to acquire aircraft and flight equipment as necessary to maintain
growth and continue offering quality service to its customers. The Company is
also anticipating an additional expansion to its facilities beginning in fiscal
1997, at an estimated cost of $4.0 million.
Subsequent to the end of the fiscal year, the Company purchased all of the
shares of Float Control Inc. in exchange for 157,293 Common Shares and
approximately $0.7 million. As a result of this acquisition, the Company will
indirectly hold a 19% interest in the CHEXS Partnership, an industry leader in
payment initiatives. In addition, the Company signed a letter of intent to
acquire a small package air freight forwarder for approximately $2.1 million. If
a final agreement is reached, the acquisition will not only add to the Company's
revenue base, but will also add approximately 1,800 new customers and 1,000
nightly shipments to the Company's air transportation system.
Cash flow from operating activities. Net cash flow from operating activities was
$18.2 million for fiscal 1996, compared to $15.3 million and $14.7 million for
fiscal 1995 and fiscal 1994, respectively. The fiscal 1996 cash flow is
primarily the result of operating income before non-cash, non-recurring
expenses.
The Company anticipates that operating cash and capital expenditure requirements
will continue to be funded by cash flow from operations, cash on hand and bank
borrowings.
Seasonality and Variability in Quarterly Results
The Company's operations historically have been somewhat seasonal and somewhat
dependent on the number of banking holidays falling during the week. Because
-27-
financial institutions are currently the Company's principal customers, the
Company's air system is scheduled around the needs of financial institution
customers. When financial institutions are closed, there is no need for the
Company to operate a full system. The Company's first fiscal quarter is often
the most impacted by bank holidays (including Thanksgiving and Christmas)
recognized by its primary customers. When these holidays fall on Monday through
Thursday, the Company's revenue and net income are adversely affected. The
Company's annual results fluctuate as well. There can be a difference of two to
three days of system operation from one year to the next. For example, the
Company operated a full system on 200 days in fiscal 1996, 197 days in fiscal
1995 and 199 days in fiscal 1994. The Company expects to fly a full system 199
days in fiscal 1997.
Operating results are also affected by the weather. The Company generally
experiences higher maintenance costs during its second quarter. Winter weather
also requires additional costs for de-icing, hangar rental and other aircraft
services. The Company's cash flows are also influenced by the budget cycles of
its primary customers. Many financial institutions have calendar year budget
cycles and desire to pay for December services prior to year end. This results
in increased cash flows for the Company's first fiscal quarter but decreased
cash flows in January and February.
Selected Quarterly Data
The following is a summary of the unaudited quarterly results of operations for
the years ended September 30, 1996 and 1995:
Quarter
------------------------------------------------------------------------
First Second Third Fourth Year
- ----------------------------------------------------------------------------------------------------------------
(in thousands except per share data)
Total revenues
1996 $17,341 $18,168 $19,888 $20,299 $75,696
1995 15,635 16,817 17,712 17,298 67,462
Income from operations
1996 2,189 2,240 3,792 5,067 13,288
1995 1,744 1,750 2,296 2,285 8,075
Historical net income (loss)
1996 1,817 1,876 (10,215) 5,053 (1,469)
1995 1,455 1,428 1,856 1,884 6,623
Pro forma net income (loss)
1996 1,983 2,084 (9,780) 3,031 (2,682)
1995 1,638 2,082 2,432 2,242 8,394
Pro forma earnings (loss) per share (Note 1)
1996 $.23 $.25 $(1.02) $.25 $(.28)
1995 .19 .24 .29 .27 1.00
-28-
Adjusted Pro forma net income (Note 2)
1996 $1,983 $2,084 $2,901 $3,031 $9,999
1995 1,638 2,082 2,432 2,242 8,394
Adjusted Pro forma earnings per share (Note 3)
1996 $.16 $.17 $.24 $.25 $.81
1995 .13 .17 .20 .18 .68
- ---------------------
(Note 1) - Calculated based on weighted average common shares outstanding,
including WIE warrants.
(Note 2) - Excludes the effects of the Offering related non-cash, non-recurring
expenses.
(Note 3) - Assumes all common shares issued during the Offering were outstanding
for the entire period.
Inflation
Historically, inflation has not been a significant factor to the Company.
Although the value of the Company's service to its primary customers is enhanced
by higher interest rates, the volume of business has not changed historically
with fluctuating interest rates. The Company has attempted to minimize the
effects of inflation on its operating results though rate increases and cost
controls, including the development of a fuel rebate/surcharge program. Pursuant
to this program, as the OPIS-CMH price of jet fuel exceeds $.75 per gallon, the
Company's customers are surcharged. Inversely, if the OPIS-CMH price falls below
$.68 per gallon, the Company's customers receive a rebate.
Environmental Matters
The Company believes that compliance with environmental matters has not had, and
is not expected to have, a material effect on operations. Although the Company
believes that it is in compliance with all applicable noise level regulations
and is working proactively with various local governments to minimize noise
issues, future noise pollution regulations could require the replacement of
several of the Company's aircraft.
Safe Harbor Statement
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information so long as these statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying factors that could cause actual results to differ materially from
those discussed in the statement. The Company desires to take advantage of the
"safe harbor" provisions of the Act. Certain information, particularly
information regarding future economic performance and finances and plans and
objectives of management, contained, or incorporated by reference, in this Form
10-K is forward-looking. In some cases, information regarding certain important
factors that could cause actual results to differ materially from any such
-29-
forward-looking statement appear together with such statement. Also, the
following factors, in addition to other possible factors not listed, could
affect the Company's actual results and cause such results to differ materially
from those expressed in forward-looking statements:
Competition. The market for scheduled air and ground delivery service is highly
competitive. The Company's bank services division competes primarily against the
Federal Reserve's ITS, which has significantly greater financial and other
resources than the Company. The Federal Reserve is regulated by the Monetary
Control Act of 1980 (the "Monetary Control Act"), which in general requires that
the Federal Reserve price its services on a cost basis plus a set percentage
private market adjustment. Failure by the Federal Reserve to comply with the
Monetary Control Act could have an adverse competitive impact on the Company. In
addition, there can be no assurance that the Monetary Control Act will not be
amended, modified or repealed, or that new legislation affecting the Company's
business will not be enacted. Although the entrance of such major participants
in the next-day and second-day air delivery market as UPS and FedEx into the
business of same-day and early morning delivery has not had a material adverse
effect on the Company's business to date, there can be no assurance that these
competitors will not have such an effect in the future.
Interest rate fluctuations. The value of the Company's canceled check
transportation services to its banking customers is directly related to the
federal funds rate, which is determined by the Federal Reserve and represents
the rate of interest that banks can earn on timely delivered shipments of
canceled checks. If the federal funds rate were to drop to historically low
levels, the resulting diminution in the value of the Company's services to its
banking customers could adversely affect the Company's business.
Technology. Some analysts have predicted that the increased use of electronic
funds transfers will lead to a "checkless society", which could adversely affect
the demand for the Company's delivery services to the financial services
industry. In addition, some banking industry analysts have predicted the
development of various forms of imaging technology that could reduce or
eliminate the need for prompt delivery of canceled checks. Similarly,
technological advances in the nature of "electronic mail" and "telefax" have
affected the demand for on-call delivery services by small package delivery
customers. While none of these technological advance have had a significant
adverse impact on the Company's business to date, there can be no assurances
that these or similar technologies, or other regulatory or technological changes
in the check clearance and national payment systems, will not have an adverse
effect on the Company's business in the future.
Risks related to growth through acquisitions. One of the Company's business
strategies is to increase its revenues, earnings and market share through the
acquisition of companies that will complement its existing operations or provide
it with an entry into markets it does not currently serve. Growth through
acquisition involves substantial risks, including the risk of improper valuation
of the acquired business and the risk of inadequate integration. There can be no
-30-
assurances that the suitable acquisition candidates will be available, that the
Company will be able to acquire or profitably manage such additional companies
or that future acquisitions will produce returns that justify the investment. In
addition, the Company may compete for acquisitions and expansion opportunities
with companies that have significantly greater resources than the Company.
The Company currently intends to finance future acquisitions by using Common
Shares for all or a portion of the consideration to be paid, which may result in
substantial dilution to the current holders of the Common Shares. In the event
the Common Shares do not maintain a sufficient valuation, or potential
acquisition candidates are unwilling to accept the Common Shares as part of the
consideration for the sale of their businesses, the Company may be required to
utilize more of its cash resources, if available, in order to pursue its
acquisition strategy. If the Company does not have sufficient cash resources,
its growth potential could be limited and its existing operations could be
impaired unless its is able to obtain additional capital through future debt or
equity financing. There can be no assurance that the Company will be able to
obtain such financing or that, if available, such financing will be on terms
acceptable to the Company.
Dependence on key supplier. The Company currently utilizes the services of
Garrett Aviation exclusively for major period inspections and core overhauls of
its 30-series Learjets. This reliance on a sole supplier involves several risks,
including a risk of the unavailability of these services and a reduced control
of pricing and completion times for such services. Failure to receive such
services from Garrett Aviation or an alternative supplier on a timely basis or a
substantial increase in the prices of such services could have an adverse effect
on the Company's business.
Permits and licensing; regulation. The Company's delivery operations are subject
to various federal, state and local regulations that in many instances require
permits and licenses. Failure by the Company to maintain required permits or
licenses, or to comply with the applicable regulations, could result in
substantial fines or possible revocation of the Company's authority to conduct
certain of its operations. Furthermore, acquisitions by the Company could be
impeded by delays in obtaining approvals for the transfer of permits or
licenses, or failure to obtain such approvals
The Company's flight operations are regulated by the Federal Aviation
Administration (the "FAA") under Part 135 of the Federal Aviation Regulations.
Among other things, these regulations govern permissible flight and duty time
for aviation flight crews. The FAA is currently contemplating certain changes in
flight and duty time guidelines, which, if adopted, could increase the Company's
operating costs. These changes, if adopted, could also require the Company and
-31-
other operators regulated by the FAA to hire additional flight crew personnel.
No changes of this nature have been adopted at this time. In addition, Congress,
from time to time, has considered various means, including excise taxes, to
raise revenues directly from the airline industry to pay for air traffic control
facilities and personnel. There can be no assurances that Congress will not
change the current federal excise tax rate or enact new excise taxes, which
could adversely affect the Company's business.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Auditors..................................... Page 37
Consolidated Balance Sheets as of September 30, 1996 and 1995...... Page 38
Consolidated Statements of Operations for the years ended
September 30, 1996, 1995 and 1994.................................. Page 39
Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1995 and 1994.................................. Page 40
Consolidated Statements of Changes in Shareholders' Equity
for the years ended September 30, 1996, 1995 and 1994.............. Page 41
Notes to Consolidated Financial Statements......................... Page 42-53
Quarterly Results of Operations are included in ITEM 7 - MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS under the caption
"Selected Quarterly Data".
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's accountants on
matters of accounting or financial disclosure.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In accordance with General Instruction G(3), the information required by Items
401 and 405 of Regulation S-K which will be included in the Company's definitive
Proxy Statement for its Annual Meeting of Shareholders to be held on March 6,
1997, to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A promulgated under the Securities Exchange Act of 1934 (the "Proxy
Statement"), is incorporated herein by reference.
-32-
The information concerning the Company's executive officers required by Item 401
of Regulation S-K is included in Part I hereof under the caption "Executive
Officers of the Registrant".
ITEM 11 - EXECUTIVE COMPENSATION
In accordance with General Instruction G(3), the information required by Item
402 of Regulation S-K which will be included in the Company's definitive Proxy
Statement, is incorporated by reference. Neither the report on executive
compensation nor the performance graph included in the Company's Proxy Statement
shall deemed to be incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In accordance with General Instruction G(3), the information required by Item
403 of Regulation S-K which will be included in the Company's definitive Proxy
Statement, is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with General Instruction G(3), the information required by Item
404 of Regulation S-K which will be included in the Company's definitive Proxy
Statement is incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report
1. The response to this portion of Item 14 is submitted as a separate
section of this Annual Report on Form 10-K. See Item 8 above.
2. Schedule II - Valuation and Qualifying Accounts............... page 54
Schedules not listed above have been omitted because they are not
required or the information required to be set forth therein is
included in the Consolidated Financial Statements or Notes thereto.
-33-
3. Exhibits
Exhibits filed with this Annual Report on Form 10-K are attached
hereto. For a list of such exhibits, see "Index to Exhibits" at page
55. The following table provides certain information concerning
executive compensation plans and arrangements required to be filed as
exhibits to this Annual Report on Form 10-K.
Executive Compensation Plans and Arrangements
Exhibit No. Description Location
- ----------- ----------- --------
10.1 Deferred Compensation Incorporated herein by
Agreement dated as of reference to Exhibit 10.2 to
December 18, 1986 between the Company's Registration
the Company and Glenn M. Statement on Form S-1
Miller, as amended (Registration No. 333-3092)
filed on April 2, 1996 (the
"Form S-1")
10.2 Deferred Compensation Incorporated herein by
Agreement dated as of reference to Exhibit 10.3 to
December 19, 1986 between the Company's Form S-1
the Company and Charles A.
Renusch, as amended
10.3 Deferred Compensation Incorporated herein by
Agreement dated as of reference to Exhibit 10.4 to
February 10, 1989 between the Company's Form S-1
the Company and Eric P.
Roy, as amended
10.4 Deferred Compensation Incorporated herein by
Agreement dated as of reference to Exhibit 10.5 to
February 10, 1989 between the Company's Form S-1
the Company and Guy S.
King, as amended
10.5 Deferred Compensation Incorporated herein by
Agreement dated as of reference to Exhibit 10.6 to
October 17, 1990 between the Company's Form S-1
the Company and Lincoln L.
Rutter, as amended
10.6 Deferred Compensation Incorporated herein by
Agreement dated as of reference to Exhibit 10.7 to
July 18, 1991 between the the Company's Form S-1
Company and William R.
Sumser, as amended
10.7 Deferred Compensation Incorporated herein by
Agreement dated as of reference to Exhibit 10.8 to
October 1, 1991 between the the Company's Form S-1
Company and Kendall W.
Wright, as amended
10.8 Form of Amendment and Incorporated herein by
Waiver to Deferred reference to Exhibit 10.9 to
Compensation Agreement the Company's Amendment
dated as of May 2, 1996 No. 1 to Form S-1
between the Company and Registration Statement
each of Messrs. Miller, (Registration No. 333-3092)
Renusch, Roy, King, Rutter, filed on May 7, 1996
Sumser and Wright (each ("Amendment No. 1")
separate amendment is
substantially identical in
all respects)
-34-
10.9 AirNet Systems, Inc. 1996 Incorporated herein by
Incentive Stock Plan reference to Exhibit 10.10
to the Company's Amendment
No. 1
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fiscal quarter ended
September 30, 1996.
(c) Exhibits
See Item 14(a) (3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this Report.
-35-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AIRNET SYSTEMS, INC.
Dated: December 19, 1996 By: /s/ Gerald G. Mercer
________________________________________
Gerald G. Mercer, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
----------- ------- ------
/s/ Gerald G. Mercer Chairman of the Board, President, December 19, 1996
________________________ Chief Executive Officer and Director
Gerald G. Mercer (Principal Executive Officer)
/s/ Eric P. Roy Director, Executive Vice President, December 19, 1996
________________________ Chief Operating Officer, Chief
Eric P. Roy Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
*Roger D. Blackwell Director December 19, 1996
________________________
Roger D. Blackwell
*Tony C. Canonie, Jr. Director December 19, 1996
________________________
Tony C. Canonie, Jr.
*Russell M. Gertmenian Director December 19, 1996
________________________
Russell M. Gertmenian
*J. F. Keeler, Jr. Director December 19, 1996
________________________
J. F. Keeler, Jr.
*By /s/ Gerald G. Mercer
________________________
Gerald G. Mercer
Attorney-in-Fact
-36-
Report of Independent Auditors
Shareholders and Board of Directors
AirNet Systems, Inc.
We have audited the accompanying consolidated balance sheets of AirNet Systems,
Inc. and subsidiary (the Company), formerly New Creations, Inc., as of September
30, 1996 and 1995, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended September 30, 1996. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of AirNet
Systems, Inc. and subsidiary at September 30, 1996 and 1995, and the
consolidated results of its operations and cash flows for each of the three
years in the period ended September 30, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Columbus, Ohio
November 22, 1996
-37-
AirNet Systems, Inc.
Consolidated Balance Sheets
September 30,
------------------------------
1996 1995
-------- --------
ASSETS
Current assets:
Cash $ 11,405,672 $ 238,394
Accounts receivable:
Trade, less allowances of $14,000 and $2,000 in
1996 and 1995, respectively 6,849,606 6,057,987
Shareholder, affiliates, and employees 260,220 303,490
Spare parts and supplies 5,195,917 3,932,956
Deposits and prepaids 2,979,580 2,195,115
------------ ------------
Total current assets 26,690,995 12,727,942
Net property and equipment (Note 3) 40,721,952 32,833,612
Other assets:
Intangibles, net of accumulated amortization of $1,267,000
and $3,404,000 in 1996 and 1995, respectively 1,741,091 3,418,276
Other 51,860 57,060
Deferred tax asset (Notes 2 and 9) 5,803,057 0
------------ ------------
Total assets $ 75,008,955 $ 49,036,890
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,686,733 $ 3,937,894
Salaries and related liabilities 1,223,820 556,778
Accrued expenses 553,359 1,605,619
Deferred taxes (Note 9) 208,995 0
Current portion of notes payable (Note 4) 0 5,565,706
------------ ------------
Total current liabilities 5,672,907 11,665,997
Notes payable, less current portion (Note 4) 0 13,662,633
Deferred tax liability (Note 9) 3,397,062 0
Deferred compensation (Note 2) 0 3,238,856
Shareholders' equity (Note 2):
Preferred stock, $.01 par value; 10,000,000 shares
authorized; and no shares issued and outstanding 0 0
Common stock, $.01 par value; 40,000,000 shares
authorized; and 12,317,835 and 5,710,608 shares
issued and outstanding in 1996 and 1995, respectively 123,178 57,106
Additional paid-in-capital 75,929,927 349,534
Retained earnings (10,114,119) 20,385,860
Notes receivable from shareholders 0 (323,096)
------------ ------------
Total shareholders' equity 65,938,986 20,469,404
------------ ------------
Total liabilities and shareholders' equity $ 75,008,955 $ 49,036,890
============ ============
See notes to financial statements
-38-
AirNet Systems, Inc.
Consolidated Statements of Operations
Years Ended September 30,
---------------------------------------------
1996 1995 1994
-------- -------- --------
Revenues
Air transportation, net of excise tax
of $716,000, $1,810,000 and $1,841,000
for the years ended September 30, 1996,
1995 and 1994:
Check delivery $ 65,024,522 $58,263,706 $54,046,381
Small package delivery 9,608,279 8,191,723 8,241,332
Fixed base operations 1,063,583 1,006,529 1,158,044
------------ ----------- -----------
Total revenues 75,696,384 67,461,958 63,445,757
Costs and expenses
Air transportation
Wages and benefits 9,862,436 9,195,208 8,185,759
Aircraft fuel 8,177,970 7,444,878 6,958,282
Aircraft maintenance 6,551,792 6,033,739 5,720,763
Aircraft leases 772,900 1,042,653 3,260,273
Ground couriers and other outside services 9,390,174 8,611,022 8,346,805
Depreciation and amortization 8,472,864 7,353,753 6,332,667
Other 7,237,271 6,429,319 5,765,303
Fixed base operations 1,033,068 955,792 1,081,502
Selling, general and administrative
Executive compensation 3,452,336 3,952,388 3,284,619
Other executive compensation (Note 2) 2,124,386 2,635,157 1,598,176
Noncompetition agreements (Note 2) 919,675 2,327,726 1,813,114
Other 4,413,014 3,404,796 3,787,703
------------ ----------- -----------
Total costs and expenses 62,407,886 59,386,431 56,134,966
------------ ----------- -----------
Income from operations 13,288,498 8,075,527 7,310,791
Interest expense 1,053,169 1,452,066 1,092,990
Offering related non-recurring expenses (Note 2) 13,704,398 0 0
------------ ----------- -----------
Income (loss) before taxes ( 1,469,069) 6,623,461 6,217,801
Income tax provision 1,764,000 0 0
Tax provision due to change in tax status (Note 9) 2,438,000 0 0
------------ ----------- -----------
Net Income (loss) ($ 5,671,069) $ 6,623,461 $ 6,217,801
============ =========== ===========
Pro forma information (Note 13):
Historical income (loss) before taxes ($ 1,469,069) $ 6,623,461
Proforma adjustments other than income taxes 4,429,470 7,367,337
----------- -----------
Pro forma income before taxes 2,960,401 13,990,798
Pro forma taxes on income 5,642,575 5,596,319
----------- -----------
Pro forma net income (loss) ($ 2,682,174) $ 8,394,479
=========== ===========
Pro forma net income (loss) per common share ($ 0.28) $ 1.00
=========== ===========
Weighted average common shares outstanding 9,663,453 8,361,359
=========== ===========
See notes to financial statements
-39-
AirNet Systems, Inc.
Consolidated Statements of Cash Flows
Year ended September 30
------------------------------------------------
1996 1995 1994
-------- -------- --------
Operating activities
Net income (loss) ($ 5,671,069) $ 6,623,461 $ 6,217,801
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Offering related non-recurring, non-cash expenses 13,704,398 0 0
Depreciation and amortization 8,547,537 7,435,602 6,394,898
Amortization of intangibles 351,327 435,902 435,902
Deferred taxes 4,202,000 0 0
Provision for losses on accounts receivable 12,170 (38,384) (63,436)
Deferred compensation 445,147 275,465 1,009,826
Loss on disposition of assets 81,931 73,472 287,468
Change in operating assets and liabilities:
Accounts receivable (451,833) 495,011 (760,059)
Spare parts and supplies (892,318) (441,864) 151,609
Prepaid expenses (752,509) (701,046) (118,210)
Accounts payable (729,721) 657,241 989,483
Accrued expenses (1,300,261) 180,154 (25,339)
Salaries and related liabilities 637,531 266,210 119,825
Other, net 5,200 49,100 81,950
------------ ------------ ------------
Net cash provided by operating activities 18,189,530 15,310,324 14,721,718
Investing activities
Purchase of property and equipment - net (14,294,109) (14,222,791) (12,814,436)
Purchase of Midway Aviation, net of cash acquired (Note 10) (2,810,416) 0 0
------------ ------------ ------------
Net cash used in investing activities (17,104,525) (14,222,791) (12,814,436)
Financing activities
Proceeds from issuance of common stock 82,697,107 0 0
Proceeds from shareholder notes receivable 323,096 41,287 0
Net proceeds (repayment) of borrowings under the revolving
credit facility (7,525,000) 1,350,000 875,000
Repayment of long-term debt (14,451,339) (10,311,899) (2,280,021)
Proceeds from the issuance of long-term debt 2,748,000 11,940,000 4,486,000
Distributions to shareholders (23,807,806) (4,125,946) (5,080,924)
Purchase of Donald Wright warrant (29,901,785) 0 0
------------ ------------ ------------
Net cash provided by (used in) financing activities 10,082,273 (1,106,558) (1,999,945)
------------ ------------ ------------
Net increase (decrease) in cash 11,167,278 (19,025) (92,663)
Cash at beginning of period 238,394 257,419 350,082
------------ ------------ ------------
Cash at end of period $ 11,405,672 $ 238,394 $ 257,419
============ ============ ============
See notes to the financial statements
-40-
AirNet Systems, Inc.
Consolidated Statements of Changes in Shareholders' Equity
Common Stock
-------------------------------------- Additional
Number of Paid-in Retained
Shares Amount Capital Earnings
------------------ ----------------- ----------------- -----------------
Balance October 1, 1993 4,225,700 $42,257 -- $16,751,468
Year ended September 30, 1994 -
Net income -- -- -- 6,217,801
Issued stock 1,484,908 14,849 $349,534 --
Shareholder distributions -- -- -- (5,080,924)
------------------ ----------------- ----------------- -----------------
Balance September 30,1994 5,710,608 57,106 349,534 17,888,345
Year ended September 30, 1995 -
Net income -- -- -- 6,623,461
Repayment of notes -- -- -- --
Shareholder distributions -- -- -- (4,125,946)
------------------ ----------------- ----------------- -----------------
Balance September 30, 1995 5,710,608 57,106 349,534 20,385,860
Year ended September 30, 1996 -
Net loss -- -- -- (5,671,069)
Repayment of notes (Note 2) -- -- -- --
Shareholder distributions -- -- -- (2,807,806)
Issuance of common stock, net
of IPO related expenses (Note 1) 6,440,000 64,400 82,632,507 --
AAA distributions related to S Corp
shareholders (Note 2) -- -- -- (21,000,000)
Purchase of Donald Wright warrant (Note 2) -- -- (29,901,785) --
Exercise of Jeffrey Wright warrant (Note 2) 167,227 1,672 (1,472) --
Reclassification of undistributed S Corp
retained earnings -- -- 1,021,104 (1,021,104)
Tax benefit related to cancellation
of Donald Wright warrant (Note 2) -- -- 7,000,000 --
Compensation expense related to
stock purchase agreements (Note 2) -- -- 14,830,039 --
------------------ ----------------- ----------------- -----------------
Balance September 30, 1996 12,317,835 $123,178 $75,929,927 ($10,114,119)
================== ================= ================= =================
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
ABOVE TABLE IS SPLIT AT RIGHT MARGIN AND CONTINUED BELOW:
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Notes
Receivable
From
Shareholders Total
----------------- ----------------
Balance October 1, 1993 -- $16,793,725
Year ended September 30, 1994 -
Net income -- 6,217,801
Issued stock ($364,383)
Shareholder distributions -- (5,080,924)
----------------- ----------------
Balance September 30,1994 (364,383) 17,930,602
Year ended September 30, 1995 -
Net income -- 6,623,461
Repayment of notes 41,287 41,287
Shareholder distributions -- (4,125,946)
----------------- ----------------
Balance September 30, 1995 (323,096) 20,469,404
Year ended September 30, 1996 -
Net loss -- (5,671,069)
Repayment of notes (Note 2) 323,096 323,096
Shareholder distributions -- (2,807,806)
Issuance of common stock, net
of IPO related expenses (Note 1) -- 82,696,907
AAA distributions related to S Corp
shareholders (Note 2) -- (21,000,000)
Purchase of Donald Wright warrant (Note 2) -- (29,901,785)
Exercise of Jeffrey Wright warrant (Note 2) -- 200
Reclassification of undistributed S Corp
retained earnings -- --
Tax benefit related to cancellation
of Donald Wright warrant (Note 2) -- 7,000,000
Compensation expense related to
stock purchase agreements (Note 2) -- 14,830,039
----------------- ----------------
Balance September 30, 1996 $0 $65,938,986
================= ================
See notes to financial statements
-41-
AIRNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. Significant Accounting Policies
AirNet Systems, Inc. and its subsidiary (the "Company"), formerly New
Creations, Inc., operates a fully integrated national air transportation network
which provides delivery service for time-critical shipments for customers in the
U.S. banking industry and other industries. The Company also offers retail
aviation fuel sales and related ground services for customers at its Columbus,
Ohio facility.
On May 29, 1996, the registration statement related to the Company's
initial public offering (the "Offering") was declared effective by the SEC and
its stock began trading on The NASDAQ National Market System on May 31, 1996.
Pursuant to the terms of the Offering, the Company issued 6,440,000 shares of
common stock, including 840,000 shares issued through the underwriters' full
exercise of their over-allotment option on June 11, 1996, at $14.00 per share.
Net proceeds of the offering totaled $83,848,800 before deducting expenses of
$1,151,893. See Note 2 - Initial Public Offering.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
Revenue on air transportation services is recognized when the packages are
picked up for delivery to their destination. Revenue on fixed based operations
is recognized when the maintenance services are complete or fuel is delivered.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments which are
unrestricted as to withdrawal or use, and which have an original maturity of
three months or less. Cash equivalents are stated at cost, which approximates
market value.
-42-
Accounts Receivable
For fiscal 1996, approximately 86% and 77% of the Company's revenues and
related receivables, respectively, were generated from customers within the
banking industry. The Company performs periodic credit evaluations of its
customer's financial condition and generally does not require collateral. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risks of specific customers, historical trends and other
information.
Spare Parts and Supplies
Spare parts and supplies are valued at the lower of cost (weighted average
method) or market.
Property and Equipment
Property and equipment are stated at cost. Engine, overhauls and major
inspections, which have been capitalized and included in flight equipment, are
depreciated and amortized on the basis of hours flown. Airframes, other flight
equipment and other property and equipment (primarily furniture and equipment,
leasehold improvements and vehicles) are depreciated using the straight-line
method over estimated useful lives of the assets, as summarized below:
Airframes 7 - 15 years
Other flight equipment 2 - 3 years
Other property and equipment 3 - 7 years
Leasehold improvements are amortized over the lease terms or the estimated
useful lives of the assets, whichever is less.
Prepaid Expenses
The Company prepays certain engine repair and overhaul services under
manufacturer service plans. Such prepaid balances were $1,252,920 and $1,026,571
at September 30, 1996 and 1995, respectively, and are included with prepaid
expenses on the balance sheet.
-43-
Income Taxes
Prior to the Offering, the Company's income was taxed under the provisions
of Subchapter S of the Internal Revenue Code of 1986, which provides that in
lieu of corporate income taxes, the shareholders of the S Corporation are taxed
on their proportionate share of the Company's taxable income. Therefore, no
provision or liability for federal income tax has been included in historical
financial statements prior to May 31, 1996, the date of the Offering.
Upon completion of the Offering, the Company ceased to qualify as an S
Corporation and was subject to corporate income taxes. The Company accounts for
income taxes under the liability method pursuant to Statement of Financial
Accounting Standard No. 109 "Accounting for Income Taxes". Under the liability
method, deferred tax liabilities and assets are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates and laws that will be when the differences
were expected to reverse.
Intangibles
Intangibles include non-competition agreements with former competitors and
goodwill generated through the acquisition of companies. The balances are being
amortized on the straight-line method over periods ranging from one to 25 years.
Stock-Based Compensation
The Company measures compensation cost for stock options issued to
employees using the intrinsic value based method of accounting prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees". In October 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (Statement No.
123). Pursuant to the new standard, companies are encouraged, but not required,
to adopt the fair value method of accounting for stock options and similar
equity instruments. The Company has elected to continue to measure compensation
cost in accordance with APB Opinion No. 25 and will adopt the additional
disclosure requirements of Statement No. 123 in fiscal 1997.
-44-
Statement of Cash Flows
Cash paid for interest was $1,239,871, $1,264,522 and $1,078,470 for the
years ended September 30, 1996, 1995 and 1994, respectively. With respect to
non-cash activities, the Company converted a $550,000 note receivable under a
land contract to property during the year ended September 30, 1995.
2. Initial Public Offering
The following is a summary of transactions related to the Company's
public offering:
AAA Distributions
Prior to the Offering, the Company made $21,000,000 in distributions to the
S Corporation shareholders for the undistributed earnings associated with the
Company's S Corporation status (referred to as "AAA distributions"). These
distributions were made through the Company's issuance of promissory notes to
such shareholders. The notes were subsequently paid off with the offering
proceeds.
Termination of Stock Purchase Agreements
On April 1, 1994, the Company entered into stock purchase agreements with
seven executive officers, in which these officers purchased an aggregate of
1,484,908 shares of common stock for an aggregate purchase price of $364,000,
paid through the delivery of promissory notes. Upon completion of the Offering,
the stock purchase agreements were terminated and the seven officers repaid the
balances due on the notes totaling $283,856. The transaction resulted in a
decrease in notes receivable from shareholders and a corresponding increase in
cash.
In addition, as a result of the termination of the stock purchase
agreements, the Company incurred a non-recurring, non-cash charge of
$14,830,039, which increased paid-in capital. The charge is not tax deductible
and represents a portion of the $21,000,000 of AAA distributions to the seven
executive officers not previously recorded as compensation expense, plus the
difference between the net offering price and the net book value of the
1,484,908 shares of common stock held by the officers at the termination date of
the agreements. This distribution of undistributed earnings to the former S
Corporation shareholders also eliminated a $1,654,328 deferred compensation
liability related to the stock purchase agreements and resulted in a
non-recurring, non-cash reduction of expense in the statement of operations.
-45-
Termination of Deferred Compensation Agreements
Prior to the Offering, the Company entered into deferred compensation
agreements with certain executive officers, pursuant to which the Company was
obligated to pay these officers deferred compensation equal to a percentage of
the increase on the Company's net book value. Upon completion of the Offering,
the officers agreed to terminate the agreements and forgive the remaining
balances totaling $2,029,675 due to them. This transaction resulted in a
decrease of the deferred compensation liability and a non-recurring, non-cash
reduction of expense in the statement of operations.
Termination of the Wright Agreement and Purchase of Warrants
In 1988, the Company purchased Wright International Express, Inc. (WIE). In
consideration for the agreement of WIE and Donald Wright not to compete with the
Company, the Company entered into the Wright Agreement. The Wright Agreement, as
amended, required annual payments tied to the cash flows and the debt to equity
ratio of the Company, to Donald Wright and certain designees. In addition, the
Company issued a warrant to Donald Wright to purchase 2,483,537 shares of common
stock and a warrant to Jeffrey Wright (Donald Wright's son) to purchase 167,227
shares of common stock. Both warrants were exercisable upon the closing of a
public offering. Upon the closing of the Offering, the Company purchased the
Donald Wright warrant for $29,901,785 and canceled the warrant. Gerald G.
Mercer, the Company's Chairman and Chief Executive Officer purchased the Jeffrey
Wright warrant for $2,013,413 and exercised it subsequent to the completion of
the Offering.
In connection with the repurchase and cancellation of the Donald Wright
Warrant and the corresponding tax treatment, the Company has recognized a
related tax benefit asset estimated to be approximately $7,000,000. The benefit
from this asset is expected to be realized as cash savings by offsetting future
tax liabilities. The tax benefit will have no effect on the Company's current or
future statements of operations. The benefit has been reflected as additional
paid-in capital on the balance sheet.
Upon cancellation of the Donald Wright warrant, the Wright Agreement was
also terminated in its entirety and no further payments will be made. In
addition, the remaining net book value of a covenant not to compete totaling
$2,558,362, which was recorded at the inception of the Wright Agreement, was
also written off, resulting in a non-recurring, non-cash expense.
-46-
Statement of Operations Impact of Offering Transactions
The following is a summary of the offering related transactions and their
effect on the statement of operations for the year ended September 30, 1996:
Increase / (Decrease)
to Income
-------------------------
Compensation expense related to
the stock purchase agreements $(14,830,039)
Write-off of Wright Agreement covenant
not to compete (2,558,362)
Elimination of deferred compensation
liability related to the stock purchase
agreements 1,654,328
Elimination of the liability for the deferred
compensation agreements 2,029,675
-------------------------
$(13,704,398)
=========================
3. Property and Equipment
Property and equipment consist of the following:
September 30,
1996 1995
-------- --------
Flight equipment $75,038,091 $62,021,356
Other property and equipment 6,368,788 5,060,676
----------- -----------
81,406,879 67,082,032
Less accumulated depreciation 40,684,927 34,248,420
----------- -----------
$40,721,952 $32,833,612
=========== ===========
4. Notes Payable
The Company had borrowings from a bank as follows:
September 30, 1995
------------------
Term notes $11,703,339
Revolving credit facility 7,525,000
-----------
19,228,339
Current portion of notes payable 5,565,706
-----------
$13,662,633
===========
-47-
Prior to the Offering, the Company had various credit arrangements with its
primary lender, including term notes and an $8,000,000 revolving credit loan.
The $18,999,512 balance outstanding on the credit agreements at June 5, 1996,
the closing date of the Offering, was paid off.
Simultaneously with the closing of the Offering, the Company entered into a
new credit agreement to replace the existing agreement. The new credit agreement
provides the Company with a $50,000,000 unsecured revolving credit facility. The
agreement has a five year term and is scheduled to expire on June 5, 2001. The
agreement may be extended in one year increments at any point through June 5,
2001. The agreement bears interest at the Company's option of a fixed rate
determined by the Eurodollar rate or a negotiated rate, or a floating rate. The
floating rate is based on the sum of (a) a margin plus (b) the greater of (i)
the prime rate and (ii) the sum of .5% plus the federal funds rate in effect
from time to time. The new agreement limits the availability of funds to certain
specified percentages of accounts receivable, inventory and the wholesale value
of aircraft and equipment. In addition, the agreement requires the maintenance
of certain minimum net worth and cash flow levels, imposes certain limitations
on payments of dividends, restricts the amount additional debt and requires
prior bank approval of acquisitions with consideration of more than $3,000,000.
Commitment fees totalling $250,000 were paid in fiscal 1996. As of September 30,
1996, no balances had been drawn on the new credit agreement.
5. Lease Obligations
The Company leases certain flight equipment under noncancelable operating
leases expiring through 1997. Total rental expense under the flight equipment
operating leases was $772,900, $1,042,653, and $3,260,273 for the years ended
September 30, 1996, 1995 and 1994, respectively.
The Company leases one facility from its majority shareholder through 2004.
Total rental expense incurred under the facility lease from this shareholder was
$887,053, $707,305 and $622,650 for the years ended September 30, 1996, 1995 and
1994, respectively.
As of September 30, 1996, future minimum lease payments by year and in the
aggregate under noncancelable operating leases with initial or remaining terms
exceeding one year are as follows: 1997 - $1,036,333; 1998 - $1,014,333; 1999 -
$1,014,333; 2000 - $1,014,333; 2001 - $1,014,333; and thereafter - $2,873,952.
-48-
6. Related Party Transactions
Since 1992, the Company has leased four aircraft from Dwarf leasing, Inc.,
a corporation owned by certain executive officers of the Company. Total lease
expenses were $20,800, $99,000 and $129,600 for the years ended September 30,
1996, 1995 and 1994, respectively. In fiscal 1995 the Company purchased two of
the aircraft for $250,000 and in fiscal 1996 purchased the remaining two
aircraft for $205,000. The Company believes the terms of such leases and
purchases were no less favorable than those reasonably available from
unaffiliated third parties.
During fiscal 1996, the Company made improvements to its primary hangar
facility, which is leased from its majority shareholder. The Company paid
approximately $775,000 for the improvements. The balance was repaid, in full, by
the majority shareholder prior to September 30, 1996.
7. 1996 Incentive Stock Plan
Pursuant to the Company's Offering, the Company adopted the AirNet Systems,
Inc. 1996 Incentive Stock Plan (the Plan). The Plan provides for the issuance of
incentive and non-qualified stock options, restricted stock and performance
shares and a stock purchase plan (collectively "Awards"). The Plan also provides
for each outside director to receive 2,000 stock options annually if certain
requirements are met. The maximum number of newly issued shares available for
issuance under the Plan is 1,150,000 through 2006. The Plan is administered by
the Compensation Committee of the Board of Directors, who determines the terms
and conditions applicable to the Awards.
During fiscal 1996, 529,150 options were granted under the Plan at the
following exercise prices: (i) 359,700 at $14.00; (ii) 163,150 at $14.50; and
(iii) 6,300 at $15.95. As of September 30, 1996, no options had been exercised,
600 options had been canceled and 458,850 options were exercisable.
-49-
8. Retirement Plan
The Company has a 401(k) retirement savings plan. All associates who have
completed a minimum of six months of service may contribute up to 15% of their
eligible annual earnings to the plan. The Company may elect, at its discretion,
to make matching and profit-sharing contributions. The Company's contribution
expense related to the plan totaled approximately $393,000, $355,000 and
$210,000 for the years ended September 30, 1996, 1995 and 1994, respectively.
9. Income Taxes
Significant components of the Company's deferred tax liabilities and assets
as of September 30, 1996 are as follows:
Long-term deferred tax assets:
Tax benefit of repurchase of warrants $5,803,057
==========
Long-term deferred tax liabilities:
Property and equipment $3,397,062
==========
Current deferred tax assets:
Health insurance reserves $ 72,000
Other 44,005
----------
Total current assets 116,005
Current deferred tax liabilities:
Prepaid expenses 233,000
Trade receivables 92,000
----------
Total current liabilities 325,000
----------
Net current deferred current tax liabilities $ 208,995
==========
Deferred taxes include differences at the Company's subsidiary arising from the
use of the accrual basis of accounting for financial reporting and the cash
basis of accounting for income tax reporting.
The provision for income taxes for the year ended September 30, 1996 consists of
federal and state deferred taxes. Differences arising between the provision for
income taxes and the amount computed by applying the statutory federal income
tax rate to income (loss) before income taxes for the year ended September 30,
1996 are as follows:
-50-
Benefit at federal statutory rate on pretax loss $ (499,000)
Add (deduct):
Nondeductible offering related expenses 3,790,000
S Corporation status benefit (1,925,000)
State taxes 240,000
Other 158,000
-----------
Total taxes $ 1,764,000
===========
Upon the completion of the initial public offering, the Company ceased to
qualify as an S Corporation and was subject to corporate income taxes. The
Company has recorded current tax expense of $1,764,000 related to its operations
since May 30, 1996, which includes the deductibility of the $2,558,362 write-off
of the Wright Agreement covenant not to compete. In addition, the Company
recorded an additional net tax liability of approximately $2,438,000 resulting
from the cumulative effect of deferred income taxes attributable to its change
in tax status (from S Corporation to C Corporation).
10. Acquisitions
Effective September 26, 1996, the Company acquired all of the outstanding
shares of common stock of Midway Aviation, Inc. (Midway), a regional air courier
located in Dallas, Texas. The Company accounted for the acquisition under the
purchase method accounting. The purchase price of the acquisition totaled
approximately $3,100,000 and resulted in goodwill of $1,148,504, which will be
amortized over 25 years, and covenants not to compete totaling $84,000, which
will be amortized over the terms of the agreements ranging from one to five
years. Of the purchase price, $450,000 was placed into escrow and may be
withdrawn in equal installments 90, 180 and 270 days after the effective
purchase date. The acquired assets and assumed liabilities, including goodwill,
have been recorded at their estimated fair values as of September 26, 1996. The
Company's consolidated financial statements for the year ended September 30,
1996 include the results of operations of Midway since the purchase date.
-51-
11. Contingencies
The Company is subject to claims and lawsuits in the ordinary course of its
business. In the opinion of management, the outcome of these actions, which are
not clearly determinable at the present time, are either adequately covered by
insurance, or if not insured, will not, in the aggregate, have a material
adverse impact upon the Company's financial position or the results of future
operations.
12. Subsequent Events
Effective October 24, 1996, the Company acquired Float Control, Inc. for
approximately $2.80 million of the Company's common stock. Float Control, Inc.
is owned by certain executive officers of the Company, among others, and owns a
19% interest in the Check Exchange System, an industry leader in payment
initiatives.
In October, 1996, the Company executed a letter of intent to acquire a
small package forwarder for approximately $2.1 million. The acquisition is
subject to customary conditions and there can be no assurance that the
acquisition will be completed as currently planned.
In October, 1996 the Company also acquired three aircraft and spare parts
and supplies for approximately $4,800,000.
13. Pro Forma Information (Unaudited)
Pro Forma Statements of Operations Adjustments
The pro forma statements of operations information presents the pro forma
effects on the historical financial information reflecting certain transactions
as if they had occurred on October 1, 1994 and 1995. The following adjustments
have been reflected in the pro forma statements of operations:
-52-
Year ended September 30,
1996 1995
------------------------
The elimination of interest expense
related to the debt repaid
$1,038,710 $1,452,066
The elimination of payments under the
Wright Agreement
750,527 2,074,004
The elimination of amortization
expense related to the covenant
not to compete asset write-off
169,148 253,722
The elimination of deferred compensation
expense for certain key employees 135,041 307,695
A reduction of compensation expense
for executive officers based on
new employment agreements
346,699 952,387
The elimination of employee stock
purchase agreement expense for
certain key employees
1,989,345 2,327,463
---------- ----------
Total pro forma adjustments other than
income taxes $4,429,470 $7,367,337
========== ==========
Pro Forma Earnings (Loss) Per Share
Pro forma earnings (loss) per share amounts are based on the weighted
average number of shares of common stock outstanding during the periods,
including effect of the 2,483,537 and 167,227 shares related to the Donald
Wright and Jeffrey Wright warrants, respectively.
Supplemental pro forma earnings (loss) per share would have been ($0.25)
and $.85 for the years ended September 30, 1996 and 1995, respectively, based on
the weighted average number of shares of common stock outstanding during the
periods, plus the number of shares used to repay debt.
-53-
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
AirNet Systems, Inc.
September 30, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
Description Balance at Beginning Charged to Costs Charged to
of Period and Expenses Other Accounts Deductions Balance at End of Period
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 1996:
Deducted from assets accounts:
Allowance for doubtful accounts $2,000 $35,502 -- $23,332(1) $14,170
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 1995:
Deducted from assets accounts:
Allowance for doubtful accounts $40,384 $9,350 -- $47,734(1) $2,000
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 1994:
Deducted from assets accounts:
Allowance for doubtful accounts $103,822 $51,000 -- $114,438(1) $40,384
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Uncollectible accounts written off, net of recoveries
-54-
INDEX TO EXHIBITS
Exhibit No. Description Page No.
3.1 Amended Articles of AirNet Incorporated herein by
Systems, Inc. (the "Company") reference to Exhibit 2.1 to
the Company's Registration
Statement on Form 8-A (File
No. 0-28428) filed on May 3,
1996 (the "Form 8-A")
3.2 Certificate of Amendment to Incorporated herein by
the Amended Articles of the reference to Exhibit 4(b) to
Company as filed with the Ohio the Company's Registration
Secretary of State on May 28, Statement on Form S-8
1996 (Registration No. 333-08189)
filed on July 16, 1996 (the
"Form S-8")
3.3 Amended Articles of AirNet Incorporated herein by
Systems, Inc. (as amended reference to Exhibit 4(c) to
through May 28, 1996) the Company's Form S-8
3.4 Code of Regulations of the Incorporated herein by
Company reference to Exhibit 2.2 to
the Company's Form 8-A
4.1 Covenant Not to Compete and Incorporated herein by
Asset Purchase Agreement dated reference to Exhibit 4.2 to
as of July 1, 1988 among the Company's Registration
Wright International Express, Statement on Form S-1
Inc. ("WIE"), Donald W. (Registration No. 333-3092)
Wright, Sr. and the Company, filed on April 2, 1996 (the
as amended through March 15, "Form S-1")
1996
4.2 Amendment and Waiver to Incorporated herein by
Covenant Not to Compete and reference to Exhibit 4.3 to
Asset Purchase Agreement dated the Company's Form S-1
as of March 28, 1996 among
WIE, Donald W. Wright, Sr.,
the Wright Trust and the
Company
4.3 Warrant for the Purchase of Incorporated herein by
Shares of Common Stock -- reference to Exhibit 4.4 to
No. 1 (canceled) the Company's Form S-1
4.4 Warrant for the Purchase of Incorporated herein by
Shares of Common Stock -- reference to Exhibit 4.5 to
No. 2 (canceled) the Company's Form S-1
-55-
4.5 Form of Warrant for the Incorporated herein by
Purchase of Shares of Common reference to Exhibit 4.6 to
Stock -- No. 5 (replacing the Company's Form S-1
No. 1)
4.6 Form of Warrant for the Incorporated herein by
Purchase of Shares of Common reference to Exhibit 4.7 to
Stock -- No. 6 (replacing the Company's Form S-1
No. 2)
4.7 Employee Stock Purchase Incorporated herein by
Agreement dated as of April 1, reference to Exhibit 4.8 to
1994 between the Company and the Company's Form S-1
Glenn M. Miller
4.8 Employee Stock Purchase Incorporated herein by
Agreement dated as of April 1, reference to Exhibit 4.9 to
1994 between the Company and the Company's Form S-1
Charles A. Renusch
4.9 Employee Stock Purchase Incorporated herein by
Agreement dated as of April 1, reference to Exhibit 4.10 to
1994 between the Company and the Company's Form S-1
Eric P. Roy
4.10 Employee Stock Purchase Incorporated herein by
Agreement dated as of April 1, reference to Exhibit 4.11 to
1994 between the Company and the Company's Form S-1
Guy S. King
4.11 Employee Stock Purchase Incorporated herein by
Agreement dated as of April 1, reference to Exhibit 4.12 to
1994 between the Company and the Company's Form S-1
Lincoln L. Rutter
4.12 Employee Stock Purchase Incorporated herein by
Agreement dated as of April 1, reference to Exhibit 4.13 to
1994 between the Company and the Company's Form S-1
Kendall W. Wright
4.13 Employee Stock Purchase Incorporated herein by
Agreement dated as of April 1, reference to Exhibit 4.14 to
1994 between the Company and the Company's Form S-1
William R. Sumser
4.14 Form of Amendment to Employee Incorporated herein by
Stock Purchase Agreement dated reference to Exhibit 4.15 to
as of May 2, 1996 between the the Company's Amendment No. 1
Company and each of Messrs. to Form S-1 Registration
Miller, Renusch, Roy, King, Statement (Registration No.
Rutter, Wright and Sumser 333-3092) filed on May 7, 1996
(each separate amendment is ("Amendment No. 1")
substantially identical in all
respects)
-56-
10.1 Deferred Compensation Incorporated herein by
Agreement dated as of reference to Exhibit 10.2 to
December 18, 1986 between the the Company's Form S-1
Company and Glenn M. Miller,
as amended
10.2 Deferred Compensation Incorporated herein by
Agreement dated as of reference to Exhibit 10.3 to
December 19, 1986 between the the Company's Form S-1
Company and Charles A.
Renusch, as amended
10.3 Deferred Compensation Incorporated herein by
Agreement dated as of reference to Exhibit 10.4 to
February 10, 1989 between the the Company's Form S-1
Company and Eric P. Roy, as
amended
10.4 Deferred Compensation Incorporated herein by
Agreement dated as of reference to Exhibit 10.5 to
February 10, 1989 between the the Company's Form S-1
Company and Guy S. King, as
amended
10.5 Deferred Compensation Incorporated herein by
Agreement dated as of reference to Exhibit 10.6 to
October 17, 1990 between the the Company's Form S-1
Company and Lincoln L. Rutter,
as amended
10.6 Deferred Compensation Incorporated herein by
Agreement dated as of July 18, reference to Exhibit 10.7 to
1991 between the Company and the Company's Form S-1
William R. Sumser, as amended
10.7 Deferred Compensation Incorporated herein by
Agreement dated as of reference to Exhibit 10.8 to
October 1, 1991 between the the Company's Form S-1
Company and Kendall W. Wright,
as amended
10.8 Form of Amendment and Waiver Incorporated herein by
to Deferred Compensation reference to Exhibit 10.9 to
Agreement dated as of May 2, the Company's Amendment No. 1
1996 between the Company and to Form S-1 Registration
each of Messrs. Miller, Statement (Registration No.
Renusch, Roy, King, Rutter, 333-3092) filed on May 7, 1996
Sumser and Wright (each ("Amendment No. 1")
separate amendment is
substantially identical in all
respects)
10.9 AirNet Systems, Inc. 1996 Incorporated herein by
Incentive Stock Plan reference to Exhibit 10.10 to
the Company's Amendment No. 1
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10.10 Indemnification Agreement Incorporated herein by
dated as of May 15, 1996, reference to Exhibit 10.11 to
among the Company and Messrs. the Company's Amendment No. 2
Miller, Renusch, Roy, King, to Form S-1 Registration
Rutter, Sumser and Wright Statement (Registration No.
333-3092) filed on May 24,
1996 ("Amendment No. 2")
10.11 Indemnification Agreement Incorporated herein by
dated as of May 15, 1996 reference to Exhibit 10.12 to
between Mr. Mercer and the the Company's Amendment No. 2
Company
10.12 Form of Loan Agreement dated Incorporated herein by
as of May, 1996 among the reference to Exhibit 10.14 to
Company, the banks listed the Company's Amendment No. 2
therein and NBD Bank, as agent
10.13 Sublease Agreement dated Pages 59 through 83
July 1, 1996 between Gerald G.
Mercer and the Company
21.1 Subsidiaries of the Company Page 84
23.1 Consent of Ernst & Young LLP Pages 85 and 86
24.1 Powers of Attorney Pages 87 through 93
27.1 Financial Data Schedule Pages 94 and 95
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