UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission File Number 1-13025 |
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AirNet Systems, Inc.
(Exact name of registrant as specified in its charter)
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31-1458309 |
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(STATE
OR OTHER JURISDICTION
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(I.R.S. EMPLOYER IDENTIFICATION NO.) |
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3939 International Gateway
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(Address of principal executive offices) (Zip Code) |
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614-237-9777 |
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(Registrant’s telephone number, including area code) |
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
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Common Shares, $.01 par value |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
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 ý No o
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. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act ). Yes o No ý
The aggregate market value of the common shares (the only common equity of the registrant) held by non-affiliates of the registrant based on the price at which the common shares were last sold as of June 30, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, was $45,080,293.
The number of the registrant’s common shares outstanding as of March 28, 2005: 10,118,583.
INDEX
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PART I |
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Item 1: |
Business |
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Item 2: |
Properties |
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Item 3: |
Legal Proceedings |
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Item 4: |
Submission of Matters to a Vote of Security Holders |
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PART II |
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Item 5: |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
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Item 6: |
Selected Financial Data |
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Item 7: |
Management’s Discussion and Analysis of Financial Condition and Results of Operation |
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Item 7A: |
Quantitative and Qualitative Disclosures About Market Risk |
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Item 8: |
Financial Statements and Supplementary Data |
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Item 9: |
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
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Item 9A: |
Controls and Procedures |
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Item 9B: |
Other Information |
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PART III |
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Item 10: |
Directors and Executive Officers of the Registrant |
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Item 11: |
Executive Compensation |
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Item 12: |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13: |
Certain Relationships and Related Transactions |
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Item 14: |
Principal Accountant Fees and Services |
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PART IV |
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Item 15: |
Exhibits and Financial Statement Schedules |
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Signatures |
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Exhibit Index |
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2
General
AirNet Systems, Inc. (“AirNet”) is a specialty air carrier for time-sensitive deliveries, operating between most U.S. cities each working day. AirNet is the leading transporter of cancelled checks and related information for the U.S. banking industry. AirNet also provides specialized, high-priority delivery services to customers, primarily those involved in the medical, critical parts and entertainment industries. AirNet also provides passenger charter services through its wholly-owned subsidiary, Jetride, Inc.
AirNet operates a fleet of 115 aircraft (including 33 Learjets and 15 Cessna Caravan turboprops) that depart from over 120 cities and complete more than 480 flights per night, primarily Monday through Thursday. In addition, Jetride, Inc. operates 13 Learjets and 2 Challengers that offer private passenger charter services. To supplement its air transportation network, AirNet uses commercial airlines during daytime and weekend hours when its aircraft are operating under a limited flight schedule.
In addition to regularly scheduled delivery services, AirNet offers on-demand cargo charter delivery services. AirNet provides ground pick-up and delivery services throughout the nation seven days per week, using a combination of company personnel and a network of vendors and independent contractors.
AirNet’s integrated air and ground network provides dependable, time-critical delivery services to its customers. Later pick-up and earlier delivery times than those offered by other national carriers is one of the primary differentiating characteristics of AirNet’s time-critical delivery network. AirNet’s flight schedule is designed to provide delivery times between midnight and 8:00 a.m., providing earlier delivery times than those generally available through other national carriers. AirNet uses a number of proprietary customer service and management information systems to track, sort, dispatch and control the flow of packages throughout AirNet’s delivery system. AirNet provides customer service 24 hours per day, seven days a week to handle any inquiries, discrepancies or supply requests, as well as to provide proof of delivery documentation, all of which are value-added features of AirNet’s service.
AirNet Systems, Inc. was incorporated as a C-corporation under the laws of the State of Ohio on February 15, 1996. AirNet’s principal executive offices are located at 3939 International Gateway, Columbus, Ohio 43219, and can be reached at (614) 237-9777. AirNet’s Internet web site address is www.airnet.com (this uniform resource locator (URL) is an inactive textual reference only and is not intended to incorporate AirNet’s web site into this Annual Report on Form 10-K).
AirNet makes available free of charge, on or through its Internet web site, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after AirNet electronically files such material with, or furnishes it to, the Securities and Exchange Commission (the “SEC”).
As further described in “Note 3 – Segment Reporting” of the Notes to Consolidated Financial Statements included in “Item 8 – Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, AirNet operates two distinct reportable segments, Delivery Services and Passenger Charter Services. AirNet’s Delivery Services segment provides delivery service of time-critical shipments for Bank customers and other Express customers. AirNet’s Passenger Charter Services segment provides passenger charter service. Financial information for AirNet’s reportable segments is provided in “Note 3 – Segment Reporting” of the Notes to Consolidated Financial Statements and is incorporated herein by reference.
Delivery Services
Bank services
Bank services, primarily consisting of cancelled check delivery, generated approximately 61%, 69% and 72% of AirNet’s revenues for the fiscal years ended December 31, 2004, 2003 and 2002, respectively. AirNet’s time-critical cancelled check delivery service allows its banking customers to reduce their float costs and related processing fees. AirNet also transports other items, such as proof of deposit transactions and interoffice mail, for many of the same bank customers. AirNet has historically priced its Bank services based on the tier of service, and by the pound, on a customer-by-customer basis. The U.S. banking industry, including commercial banks and third party processors, represents AirNet’s largest category of customers. AirNet’s bank customers represent over 100 of the nation’s largest bank holding companies.
Express services
Express services, which focus on customers with time-critical delivery needs, generated approximately 28%, 25% and 24% of AirNet’s revenues for the fiscal years ended December 31, 2004, 2003 and 2002, respectively. Express
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services are primarily targeted at customers involved in the medical, critical parts and entertainment industries. In the medical industry, Express services are offered to customers shipping packages that require specialized handling, the transportation of which is often highly regulated by various governmental authorities. Targeted markets within the medical industry include producers and recipients of radioactive pharmaceuticals, diagnostic specimens, blood, umbilical cord blood, human tissue and organs.
Express services are also marketed to customers whose shipment needs are highly time sensitive or time definite, including critical parts suppliers and customers involved in the media and entertainment industries.
For those customers requiring time-critical delivery options not available on AirNet’s regularly scheduled routes, on-demand cargo charter services are available 24 hours per day, seven days a week. On-demand charters may be scheduled in advance or on an as-needed basis.
Passenger Charter Services
Jetride, Inc., a wholly-owned subsidiary of AirNet which generated approximately 11%, 5% and 3% of AirNet’s revenues for the fiscal years ended December 31, 2004, 2003 and 2002, respectively, provides private passenger charter services that offer customers a safe, fast, and convenient way to travel. Jetride’s private passenger charter service is available 24 hours a day, 7 days a week primarily within the continental United States and neighboring countries. Jetride provides charter services arranged through third-party charter brokers and, to a lesser extent, to retail customers. Jetride operates its 13 passenger Learjets and 2 passenger Challengers from ten locations across the country. Jetride’s fleet consists of nine owned aircraft and six aircraft that are managed for other owners. Jetride’s fleet of Learjets and Challengers are configured to comfortably carry eight to twelve passengers. All passenger charter pilots are Airline Transport Pilot rated – the highest Federal Aviation Administration (“FAA”) rating possible. Jetride, Inc. is certified by the Wyvern Network of Charter Operators and holds an Aviation Research Group/US Platinum rating, the highest rating in the industry. Further expansion of the Jetride fleet in 2005 is projected to be through managed aircraft.
Aviation Services
AirNet operates a fixed base operation from AirNet’s Columbus, Ohio facility, offering retail aviation fuel sales and related ground support services.
Business Strategy
AirNet continues to transition and diversify by pursuing growth opportunities for its Express and Passenger Charter services. AirNet is focusing on expanding its Express services to customers in time-critical markets and time-definite delivery markets, such as medical, radioactive pharmaceutical and on-demand cargo charters.
AirNet believes that demand for private passenger charter services will continue to grow as commercial airlines continue to tighten schedules and require long boarding times due to security concerns. To capitalize on the increased demand, Jetride has increased the number of owned and managed aircraft. In the fourth quarter of 2004, Jetride increased its managed aircraft fleet by adding two large cabin Challenger jet aircraft to its charter offering.
AirNet believes that its Bank services revenue will decline in future periods as a result of the continuing evolution of electronic alternatives to the physical movement of cancelled checks. The Check 21 Act, which became effective in October 2004, requires that all financial institutions accept either the physical cancelled check, or an image replacement document in lieu of a physical cancelled check. AirNet believes that this will accelerate the transition in the banking industry to the electronic clearing of cancelled checks.
AirNet continues to evaluate its operational structure and associated costs to more closely align them with the expected volume and revenue changes. Given the high fixed cost nature of AirNet’s national airline network, it will be difficult to reduce costs in proportion to decreases in bank revenues. AirNet continues to evaluate its pricing for Bank customers and may introduce pricing that contains additional fixed fees that would be impacted to a lesser degree by decreasing volume.
The continuing diversification of AirNet’s business will likely require significant changes in its air transportation network, including a reduction in its current route schedule, additional investment in sales and marketing during the transition, and investment in additional service capabilities and technologies to serve a more diverse customer group.
Fast Forward Solutions
Fast Forward Solutions, LLC, a wholly-owned subsidiary of AirNet, was formed to explore growth opportunities associated with existing and emerging image replacement platforms and technologies. Fast Forward Solutions and NetDeposit, Inc. signed a term sheet in 2003 regarding their intent to finalize an agreement related to the joint development and marketing of image replacement products and services. Fast Forward Solutions is no longer actively pursuing an agreement with NetDeposit, Inc. Fast Forward Solutions will continue to explore opportunities in the image replacement market as they
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arise, focusing on image replacement solutions that require both technology and the physical movement of image replacement documents.
Operations
Air operations
AirNet’s air operations are headquartered in Columbus, Ohio. AirNet and Jetride utilize an extensive screening process to evaluate potential pilots prior to hiring. New pilots must meet stringent company qualifications, as well as mandated FAA requirements. New pilots must satisfactorily complete a five-week training program conducted by AirNet’s flight training staff prior to assignment of pilot duties. This training program includes flight simulator training prior to any actual flight time in an aircraft, as well as intensive ground instruction. Additionally, new pilots gain operating experience in a structured setting prior to assignment in order to gain a familiarity with AirNet’s route system and the unique demands of the flight environment. In addition to FAA requirements, pilots providing Passenger Charter services for Jetride must also meet additional in-flight experience requirements specifically related to the types of Learjets and Challengers operated by Jetride.
AirNet’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 monitored. AirNet dispatchers remain in contact with pilots, out-based hub managers, fuelers, maintenance technicians and ground delivery personnel to identify and minimize any potential delays in the delivery process. AirNet also uses commercial airlines, primarily to transport shipments during the daytime and weekend hours when its aircraft are operating under a limited flight schedule.
Capacity management is an important factor in achieving profitable growth of AirNet’s package delivery services. AirNet’s air transportation network is positioned around a flexible national route structure designed to facilitate late pick-up and early delivery times, minimize delays and simplify flight scheduling. AirNet’s flexible route structure allows it to respond to the changing volume needs of its customers or to take advantage of emerging opportunities in its Express services business. AirNet’s primary hub in Columbus, Ohio, and several mini-hubs across the nation, are located primarily in less congested regional airports. These locations, in conjunction with AirNet’s off-peak departure and arrival times, provide easy take-off and landings, convenient loading and unloading and fast refueling and maintenance.
AirNet employs approximately 80 aircraft and avionics technicians in eight separate locations across the country performing maintenance on AirNet’s fleet of aircraft. AirNet has an in-house engine shop at the Columbus facility where some of the piston engines are overhauled on-site, thereby reducing aircraft downtime and controlling costs. AirNet also performs avionics troubleshooting and repair at the Columbus facility to provide for maximum efficiency and minimum aircraft downtime for the fleet. AirNet’s aircraft maintenance center at its Columbus hub has received ISO 9001:2000 certification.
Shipment processing
Bank shipments are pre-sorted by bank personnel and packaged in AirNet-supplied bags with three letter city identifier tags to show final destination. Express shipments are packaged in either AirNet-provided packaging or the customers’ packaging. Shipments transported on AirNet’s air transportation network are typically picked up by a courier and transported to the local airport where an airbill is either scanned using bar code technology or entered manually. Information on each airbill pertaining to the shipper, receiver, airbill number and applicable deadline is captured and downloaded into AirNet’s computer system, where it is available to AirNet’s customer service representatives (“CSRs”). Upon arrival at AirNet’s Columbus hub or one of its mini-hubs, the shipment is off-loaded, sorted by destination and reloaded onto an aircraft. At the destination city, the shipment is off-loaded for the final time and delivered by courier to the receiver. When delivered, information from the airbill is once again captured and downloaded into AirNet’s computer system. Delivery information for all shipments is then available on-line to the customers and AirNet’s CSRs.
For banking customers meeting daytime banking deadlines and Express customers requiring next-flight-out timing, shipments are typically picked up by a courier and transported via commercial airlines or other integrators to destination cities where couriers accept the packages and deliver them to their final destinations.
Ground support
AirNet manages its ground delivery services through the combined use of employees and a network of independent contractors and vendor couriers. Independent contractors and vendor couriers perform the majority of ground delivery services, allowing AirNet to better match its ground costs with its volume requirements. In some situations, employees are used for ground delivery services on scheduled routes where volume requirements economically justify employing full-time couriers. Dispatching functions related to ground delivery services occur at both the Columbus, Ohio hub and on a regional basis in some of the major cities served.
Mercury Business Services
On August 11, 2003, AirNet sold the assets of its Mercury Business Services division to Mercury Business Services, Inc., a Delaware corporation owned by a group that includes the original owners of the Mercury business. AirNet had acquired Mercury Business Services in August of 1998.
5
Regulation
AirNet holds an air carrier operating certificate granted by the FAA pursuant to Part 135 of the Federal Aviation Regulations. In addition, Jetride holds its own air carrier operating certificate granted by the FAA pursuant to Part 135. These certificates are of unlimited duration and remain in effect so long as AirNet and Jetride maintain the required standards of safety and meet the operational requirements of the Federal Aviation Regulations. The FAA’s regulatory authority relates primarily to operational aspects of air transportation, including aircraft standards and maintenance, personnel, and ground facilities.
The U. S. Department of Transportation (“DOT”) and Transportation Security Administration (“TSA”) have regulatory authority concerning operational and security concerns in transportation, respectively, including safety, insurance and hazardous materials. AirNet holds various operational certificates issued by these agencies, including party status to DOT E-7060, which permits AirNet to transport higher volumes of time-critical radioactive pharmaceuticals than is allowed by the DOT for most carriers. Party status to DOT E-7060 is renewed every two years, with AirNet’s next renewal due August 2006.
AirNet is also subject to Food and Drug Administration regulation of AirNet’s transportation of pharmaceuticals.
In addition to federal regulations, AirNet’s operations are subject to various state and local regulations, and in many instances, require permits and licenses from state authorities.
Other than as described below, AirNet believes that both AirNet and Jetride have all permits, approvals and licenses required to conduct their respective operations and that they are in compliance with applicable regulatory requirements relating to their operations including all applicable noise level regulations. Current noise level regulations require that AirNet modify its three Model 25 Learjets. AirNet can continue limited use of these aircraft; however, AirNet intends to retire the Learjet 25’s prior to the end of the second quarter of 2005. AirNet is working proactively with various local governments to minimize noise issues; however, future noise pollution regulations could require the modification or replacement of other AirNet aircraft.
AirNet conducts a portion of its operations under an Indirect Air Carrier Standard Security Program (“IACSSP”) approved by the TSA. The IACSSP permits AirNet to tender shipments to commercial airlines. A significant portion of AirNet’s Express services packages and, to a lesser extent, a portion of its Bank services packages, are transported on commercial airlines.
The TSA recently informed AirNet that the TSA would no longer approve AirNet’s IACSSP based upon the definition of an “indirect air carrier” provided under 49 CFR §1540.5. Section 1540.5 excludes from the definition of an “indirect air carrier” any person or entity in possession of an FAA air carrier operating certificate. AirNet possesses a Part 135 air carrier operating certificate issued by the FAA. The TSA has requested that AirNet submit an application for a new IACSSP under the name of an affiliated company. By letter to the TSA dated February 18, 2005, AirNet has proposed to submit an application for a new IACSSP under the name of AirNet Management, Inc., a wholly-owned subsidiary of AirNet. The letter sets forth the steps AirNet intends to follow to transition commercial airline shipments to the new IACSSP and requests certain guidance from the TSA regarding the transition.
As of the date of this Annual Report on Form 10-K, the TSA had not responded to AirNet’s request for guidance. In the event the TSA approves the steps outlined in AirNet’s February 18, 2005 letter, AirNet Management, Inc. will submit an application to the TSA seeking approval of a new IACSSP. Upon receipt of such approval, AirNet will begin processing its commercial airline shipments under the new IACSSP. It is uncertain at this time whether the TSA will approve the proposed steps for transitioning AirNet’s commercial shipments to a new IACSSP. In the event the TSA does not approve such steps, AirNet may need to consider other modifications to its operating procedures in order to secure TSA approval of an IACSSP. AirNet’s current IACSSP approval expires on August 28, 2005. If AirNet is unable to comply with the TSA’s directives with respect to the approval and operation of a new IACSSP, AirNet may be unable to secure approval of a new IACSSP. It is also uncertain whether the TSA would attempt to withdraw AirNet’s current IACSSP approval prior to the August 28, 2005 expiration date. The loss of AirNet’s current IACSSP approval, or AirNet’s failure to secure approval of a new IACSSP, would have a significant and immediate adverse effect on AirNet’s operations.
The DOT has implemented new regulations regarding the transportation of hazardous materials that will go into effect on April 1, 2005. These new regulations require that certain information concerning hazardous materials shipments be maintained by the pilot-in-command of an aircraft and be readily accessible at the airport of departure (including any intervening airport through which the hazardous materials are transported) and the intended airport of arrival for the duration of the each flight leg.
A significant portion of AirNet’s operations are conducted at night at airports where it maintains no ground operations. Many of these airports are small and do not have fixed based operators that are open during AirNet’s night time hours of operation. Consequently, at many airports AirNet does not currently have ground personnel or vendors on site that can receive and maintain the hazardous materials information that is required to be readily accessible at the airport of departure. The new regulations will require that AirNet institute new operating procedures and make arrangements with
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ground vendors and/or fixed based operators to assist AirNet in complying with the new regulations. AirNet is in the process of implementing these new procedures; however, AirNet anticipates that it will not be in complete compliance with the new regulations as of April 1, 2005.
AirNet has submitted a request for exemption from the new hazardous materials regulations and has proposed an alternative method of compliance. The alternative method of compliance would require that AirNet transmit the required hazardous materials information to its control center in Columbus, Ohio where it would be maintained and be readily available in the event of an incident involving hazardous materials.
There can be no assurances the AirNet’s requested exemption will be granted. In the absence of the approval of an alternative method of compliance, AirNet will be required to continue implementation of the procedures described above for complying with the new regulations. Compliance with the new regulations will likely significantly increase AirNet’s cost of transporting hazardous materials. Failure to comply with the new regulations could reduce or otherwise restrict AirNet’s ability to transport hazardous materials, including its ability to transport radioactive pharmaceuticals under its DOT E-7060 permit described above. AirNet is currently evaluating an additional surcharge for transporting hazardous materials that could offset all or a portion of the additional cost of complying with the new regulations. However, there can be no assurances that AirNet will implement such a surcharge, or, if implemented, that AirNet’s customers will accept such surcharge or that such surcharge will fully offset the additional costs of complying with the new regulations.
Seasonality
See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Seasonality and Variability in Quarterly Results” of this Annual Report on Form 10-K for a discussion of the seasonal aspects of AirNet’s business, which discussion is incorporated herein by reference.
Competition
The air and ground courier industry is highly competitive. AirNet’s primary competitor in the transportation of cancelled checks is the Federal Reserve’s Check Relay Network. The actions of the Federal Reserve are regulated by the Monetary Control Act, which requires the Federal Reserve to price its services at actual cost plus a set percentage private sector adjustment factor. AirNet 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 cancelled checks, none of which AirNet believes has a significant interstate market share. The two largest private sector air couriers, FedEx and United Parcel Service (“UPS”), both carry cancelled checks where the deadlines being pursued fit into their existing system. AirNet does not believe that FedEx or UPS represent significant competitors in the time-critical cancelled check market to date. AirNet provides customized service for its customer base, often with later pick-ups and earlier deliveries than the large, national couriers provide.
AirNet competes with commercial airlines and numerous other carriers in its Express delivery business and estimates its market share in this industry at less than 1%. AirNet believes that this market represents a significant expansion opportunity for time-critical shipments requiring later pick-ups or earlier deliveries than are typically provided by major integrators and freight forwarders. AirNet believes that it is in an excellent position to leverage the use of its national air network system, AirNet’s proprietary information technology and its historically high on-time performance level to compete in this market.
In the Passenger Charter business, AirNet competes with other owner/operators and charter brokers of small business jets. AirNet believes its nationwide network of maintenance and related support facilities provides added flexibility in deploying and servicing the Passenger Charter fleet to meet customer demands.
Environmental matters
In 2004, AirNet commenced construction of a new corporate and operational facility on land leased from the Columbus Regional Airport Authority. Portions of the leased land, as well as portions of the aircraft ramp, on which AirNet intends to conduct a significant portion of its Columbus operations, contain known pollution conditions. The appropriate amended post closure plan and no further action letters addressing these sites were obtained by AirNet from the Columbus Regional Airport Authority prior to beginning construction. No additional pollution conditions on the leased land have been noted to date during construction of the facility.
AirNet believes that compliance with applicable laws and regulations governing environmental matters has not had, and is not expected to have, a material effect on AirNet’s capital expenditures, operations or competitive position.
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Employees
As of December 31, 2004, AirNet employed approximately 870 persons, which includes approximately 250 pilots. AirNet’s employees are not represented by any union or covered by any collective bargaining agreement. AirNet has experienced no work stoppages and believes that its relationship with employees is good.
Operating facilities
AirNet leases its corporate and operational headquarters at 3939 International Gateway in Columbus, Ohio (the “Port Columbus Facility”). The Port Columbus Facility has 80,000 square feet and sits on land owned by the Columbus Regional Airport Authority (the “Authority”). AirNet’s headquarters is currently used for operations, training, aircraft maintenance, vehicle maintenance and general and administrative functions. In addition, AirNet leases additional space at 555 Morrison Road in Gahanna, Ohio, for administrative support personnel. The Gahanna lease agreement will terminate on May 30, 2005.
On January 20, 2004, AirNet entered into a Land Lease with the Authority to lease approximately 8 acres located within the Rickenbacker International Airport (“Rickenbacker”). Rickenbacker is located in Franklin and Pickaway Counties, Ohio, southeast of Columbus, Ohio, approximately fifteen miles from AirNet’s current Port Columbus Facility. AirNet is constructing a new corporate and operational headquarters at Rickenbacker (the “Rickenbacker Facility”). Construction and relocation to the Rickenbacker Facility is anticipated to be completed in the second quarter of 2005. Upon completion of the Rickenbacker Facility, AirNet’s current corporate and operational functions that are conducted at the Port Columbus Facility, and the administrative functions being conducted at 555 Morrison Road, will be consolidated at the new Rickenbacker Facility.
On January 20, 2004, in anticipation of AirNet’s move to its new Rickenbacker Facility, AirNet also entered into an agreement to sell its Port Columbus Facility to the Authority for $3.9 million. Closing of the sale of the Port Columbus Facility to the Authority took place on December 15, 2004. Concurrently with the sale, AirNet entered into a new lease agreement with the Authority (the “New Port Columbus Lease”). Pursuant to the New Port Columbus Lease, AirNet will lease the real property associated with the Port Columbus Facility and the buildings and all other improvements thereon pending completion of the construction of the Rickenbacker Facility. The term of the New Port Columbus Lease commenced on December 15, 2004 and will terminate on the earlier to occur of (i) the date AirNet moves into the Rickenbacker Facility or (ii) August 31, 2005. The New Port Columbus Lease will be rent free until May 15, 2005 and commencing May 16, 2005, the rent will be $30,000 per month. The New Port Columbus Lease is a net lease under which AirNet is responsible for all costs of operating the Port Columbus Facility. AirNet intends to move its operations at the Port Columbus Facility as well as its administrative functions to the Rickenbacker Facility during the second quarter of 2005.
AirNet also operates at approximately 40 additional locations throughout the country. These locations, which are leased from unrelated third parties, generally include office space and/or a section of the lessor’s hangar or ramp.
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Fleet
Cargo aircraft
The following table shows information about AirNet’s cargo aircraft fleet used in its Delivery Services reportable segment as of December 31, 2004:
(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 maximum payload.
(3) Maximum speed in knots, assuming maximum payload
The Learjet 35 and 31 are among the fastest and most reliable small jet aircraft available in the world and meet all Stage Three noise requirements currently being implemented across the United States. The Learjet 25 is a smaller jet aircraft with slightly smaller payload and range capabilities. The Learjet 25 aircraft are currently being used on a limited basis primarily as spares and will be completely phased out of operations prior to the end of the second quarter 2005.
The Cessna Caravan Super Cargomaster aircraft is a turbo-prop aircraft.
The Piper Navajo, Beech Baron and Cessna 310 are twin-engine piston aircraft.
Passenger Charter aircraft
The following table shows information about Jetride’s Passenger Charter aircraft fleet as of December 31, 2004:
(1) Maximum number of passengers
(2) Maximum range in nautical miles, assuming zero wind, full fuel and full payload.
(3) Maximum speed in knots, assuming full payload
The Learjet 60 is a midsize business jet with transcontinental range and meets all Stage Three noise requirements.
The Challenger is a large cabin business jet with transcontinental range and meets all Stage Three noise requirements.
Vehicles
AirNet operated a fleet of approximately 65 ground transportation vehicles as of December 31, 2004. Vehicles range in size from passenger cars to full sized vans. AirNet also rents lightweight trucks for certain weekend ground routes. In
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2001, AirNet entered into a leasing agreement with a third party provider and began replacing owned vehicles with leased vehicles, as replacement became necessary. AirNet leased 41 vehicles as of December 31, 2004.
There are no pending legal proceedings involving AirNet other than routine litigation incidental to its business. In the opinion of AirNet’s management, these proceedings should not, individually or in the aggregate, have a material adverse effect on AirNet’s results of operations or financial condition.
ITEM 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 2004.
The common shares of AirNet Systems, Inc. trade on the New York Stock Exchange under the symbol “ANS”. The table below sets forth the high and low sales prices of the common shares reported for the periods indicated.
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2004 |
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2003 |
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Quarter ended |
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High |
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Low |
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High |
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Low |
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March 31 |
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$ |
4.99 |
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$ |
3.75 |
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$ |
5.35 |
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$ |
2.20 |
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June 30 |
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4.95 |
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3.80 |
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4.47 |
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2.05 |
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September 30 |
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6.20 |
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3.81 |
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5.18 |
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3.80 |
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December 31 |
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4.50 |
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2.73 |
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4.16 |
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3.23 |
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||||
AirNet has not paid any dividends on its common shares and does not intend to pay any dividends in the foreseeable future. AirNet anticipates using future earnings to finance operations and future growth and development.
The payment of any future dividends on common shares will be determined by the AirNet Board of Directors in light of conditions then existing, including earnings, financial condition and capital requirements, restrictions in financing agreements, business conditions and other factors.
On March 28, 2005 there were approximately 860 record holders of AirNet’s common shares.
Neither AirNet nor any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, purchased any common shares of AirNet during the fourth quarter of the fiscal year ended December 31, 2004. On February 18, 2000, AirNet announced a stock repurchase plan under which up to $3.0 million of AirNet common shares may be repurchased from time to time. These repurchases may be made in open market transactions or through privately negotiated transactions. As of December 31, 2004, AirNet had the authority to repurchase approximately $0.6 million of AirNet common shares under this stock repurchase plan.
10
ITEM 6 - SELECTED FINANCIAL DATA
Statement of Operations Data
(in thousands, except
per share data)
|
|
|
Years Ended December 31, |
|
|||||||||||||
|
|
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|||||
|
Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Bank services |
|
$ |
106,117 |
|
$ |
103,399 |
|
$ |
102,626 |
|
$ |
106,716 |
|
$ |
102,611 |
|
|
Express services |
|
$ |
49,096 |
|
36,963 |
|
33,958 |
|
26,252 |
|
26,272 |
|
||||
|
Passenger Charter services |
|
$ |
18,494 |
|
7,599 |
|
4,316 |
|
737 |
|
— |
|
||||
|
Aviation services and other |
|
$ |
1,243 |
|
1,261 |
|
1,044 |
|
1,499 |
|
751 |
|
||||
|
Total net revenues |
|
174,950 |
|
149,222 |
|
141,944 |
|
135,204 |
|
129,634 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Costs and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Operating costs and expenses |
|
168,554 |
|
142,991 |
|
134,236 |
|
121,313 |
(1) |
115,800 |
|
|||||
|
Impairment charges |
|
47,009 |
(2) |
— |
|
— |
|
1,744 |
(3) |
— |
|
|||||
|
Total costs and expenses |
|
215,563 |
|
142,991 |
|
134,236 |
|
123,057 |
|
115,800 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income (loss) from operations |
|
(40,613 |
) |
6,231 |
|
7,708 |
|
12,147 |
|
13,834 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Interest expense |
|
2,468 |
|
1,340 |
|
1,649 |
|
1,668 |
|
2,283 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income (loss) from continuing operations before income taxes and cumulative effect of accounting change |
|
(43,081 |
) |
4,891 |
|
6,059 |
|
10,479 |
|
11,551 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Provision (benefit) for income taxes |
|
(8,935 |
) |
2,103 |
|
2,429 |
|
5,035 |
|
4,690 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income (loss) from continuing operations before cumulative effect of accounting change |
|
(34,146 |
) |
2,788 |
|
3,630 |
|
5,444 |
|
6,861 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income (loss) from discontinued operations, net of taxes (Note 4) |
|
— |
|
(8 |
) |
(259 |
) |
(251 |
) |
394 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cumulative effect of accounting change, net of tax benefit (Note 5) |
|
— |
|
— |
|
(1,868 |
) |
— |
|
— |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net income (loss) |
|
$ |
(34,146 |
) |
$ |
2,780 |
|
$ |
1,503 |
|
$ |
5,193 |
|
$ |
7,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income (loss) per common share - basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Continuing operations |
|
$ |
(3.39 |
) |
$ |
0.28 |
|
$ |
0.36 |
|
$ |
0.51 |
|
$ |
0.62 |
|
|
Discontinued operations |
|
$ |
— |
|
$ |
— |
|
$ |
(0.03 |
) |
$ |
(0.02 |
) |
$ |
0.04 |
|
|
Cumulative effect of accounting change |
|
$ |
— |
|
$ |
— |
|
$ |
(0.18 |
) |
$ |
— |
|
$ |
— |
|
|
Net income (loss) |
|
$ |
(3.39 |
) |
$ |
0.28 |
|
$ |
0.15 |
|
$ |
0.49 |
|
$ |
0.66 |
|
Balance Sheet Data
(in thousands)
|
Total assets |
|
$ |
137,470 |
|
$ |
153,273 |
|
$ |
153,273 |
|
$ |
133,079 |
|
$ |
122,533 |
|
|
Total debt |
|
62,245 |
|
37,776 |
|
41,794 |
|
28,235 |
|
22,719 |
|
|||||
|
Shareholders’ equity |
|
50,466 |
|
84,280 |
|
80,796 |
|
78,946 |
|
78,845 |
|
|||||
Note 1 2001 includes a $1.0 million non-recurring charge related to the retirement agreement of Gerald G. Mercer (see Note 7 - Related Party Transactions of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.)
Note 2 Represents 2004 charge related to the impairment of AirNet’s cargo assets and related goodwill (See Note 2 - Impairment of Property and Equipment and Goodwill of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.)
Note 3 Represents 2001 non-recurring charge related to the impairment of Float Control, Inc.’s investment in The Check Exchange System Co. partnership
Note 4 In August 2003, AirNet sold the assets of its Mercury Business Services unit, resulting in discontinued operations.
Note 5 See Note 2 - Impairment of Property and Equipment and Goodwill of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a discussion of the 2002 charge related to the impairment of goodwill in accordance with the adoption of SFAS No. 142.
11
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
General
AirNet’s Bank services revenues are expected to decline as a result of the continuing evolution of electronic alternatives to the physical movement of cancelled checks and other market forces. This expected decline in Bank services revenues requires that AirNet restructure its existing transportation network which was originally established to service its bank customers. AirNet continues to expand its Express and Passenger Charter services to offset the expected decline in Bank services revenues. In addition, AirNet continues to evaluate and adjust its aircraft mix and fleet size in response to these changing business conditions as well as review its ground operations for efficiencies and cost reductions. For example, Jetride increased and diversified its fleet of owned and managed aircraft in 2004.
The following management’s discussion and analysis describes the principal factors affecting the results of operations, liquidity and capital resources, as well as the critical accounting policies of AirNet. This discussion should be read in conjunction with the accompanying audited consolidated financial statements, which include additional information about AirNet’s significant accounting policies, practices and the transactions that underlie its financial results.
Results of Operations
Net Revenues
|
In ‘000’s
|
|
2004 |
|
2003 |
|
2002 |
|
$ Increase
|
|
% Increase
|
|
$ Increase
|
|
% Increase
|
|
|||||
|
Delivery Services Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Bank Services |
|
$ |
106,117 |
|
$ |
103,399 |
|
$ |
102,626 |
|
$ |
2,718 |
|
3 |
% |
$ |
773 |
|
1 |
% |
|
Express Services |
|
49,096 |
|
36,963 |
|
33,958 |
|
12,133 |
|
33 |
% |
3,005 |
|
9 |
% |
|||||
|
Total Delivery Services Revenues |
|
$ |
155,213 |
|
$ |
140,362 |
|
$ |
136,584 |
|
$ |
14,851 |
|
11 |
% |
$ |
3,778 |
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Passenger Charter Services Revenues |
|
18,494 |
|
7,599 |
|
4,316 |
|
10,895 |
|
143 |
% |
3,283 |
|
76 |
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Aviation Services and Other Revenues |
|
1,243 |
|
1,261 |
|
1,044 |
|
(18 |
) |
(1 |
)% |
217 |
|
21 |
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total Net Revenues |
|
$ |
174,950 |
|
$ |
149,222 |
|
$ |
141,944 |
|
$ |
25,728 |
|
17 |
% |
$ |
7,278 |
|
5 |
% |
AirNet has experienced overall net revenue growth each of the last three years. This can be attributed to several factors including increased Express Services and growth in Passenger Charter services as well as additional fuel surcharge revenues.
AirNet assesses its customers a fuel surcharge which is based on the Oil Price Index Summary – Columbus, Ohio (OPIS-CMH index). As index rates increase above a set threshold, surcharge rates increase. The 2004 average annual price on the OPIS index increased approximately 17% from the 2003 average annual price. The 2003 average annual price increased approximately 21% from the 2002 annual price.
Bank Services Revenues
|
In ‘000’s
|
|
2004 |
|
2003 |
|
2002 |
|
$ Increase
|
|
% Increase
|
|
$ Increase
|
|
% Increase
|
|
|||||
|
Bank Weekday |
|
$ |
94,994 |
|
$ |
94,517 |
|
$ |
95,327 |
|
$ |
477 |
|
1 |
% |
$ |
(810 |
) |
(1 |
)% |
|
Bank Weekend |
|
7,569 |
|
7,397 |
|
8,545 |
|
172 |
|
2 |
% |
(1,148 |
) |
(13 |
)% |
|||||
|
Fuel Surcharge |
|
6,058 |
|
3,939 |
|
1,602 |
|
2,119 |
|
54 |
% |
2,337 |
|
146 |
% |
|||||
|
Federal Excise Tax |
|
(2,504 |
) |
(2,454 |
) |
(2,848 |
) |
(50 |
) |
(2 |
)% |
394 |
|
14 |
% |
|||||
|
Total Net Bank Services Revenues |
|
$ |
106,117 |
|
$ |
103,399 |
|
$ |
102,626 |
|
$ |
2,718 |
|
3 |
% |
$ |
773 |
|
1 |
% |
Bank services revenues (excluding the impact of the fuel surcharge and federal excise taxes) increased slightly during 2004 as AirNet continues to focus on additional services for banks beyond cancelled check transportation, such as proof of deposit and interoffice mail delivery services. Because the density of cancelled check shipments is much greater than the typical Express shipment, profit margins on Bank shipments are substantially higher than Express shipments after considering cubic dimensions. From 2003 to 2004, weekday and weekend shipment volume per flying day increased approximately 1.4% and 5.6%, respectively. The increase in shipment volume was offset by a decrease in the number of pounds per shipment. Increased fuel prices during 2004 resulted in significantly higher fuel surcharge revenues compared
12
to 2003. AirNet believes that lower check delivery volume as a result of the declining use of checks and electronic alternatives to the physical movement of cancelled checks will contribute to a significant reduction in Bank services revenues in future periods.
Weekday and weekend shipment volume decreased approximately 1.3% and 9.8%, respectively, from 2002 to 2003. Lower check delivery volume as a result of historically low interest rates and the declining use of checks contributed to the reduction in revenues, as did increased competitive factors from regional carriers and transportation cost reduction initiatives by AirNet’s bank customers. The decreases in weekly shipment volume were offset by increased fuel surcharges in 2003 as compared to 2002.
Express Services Revenues
|
In ‘000’s
|
|
2004 |
|
2003 |
|
2002 |
|
$ Increase
|
|
% Increase
|
|
$ Increase
|
|
% Increase
|
|
|||||
|
Express Revenues – Non Charter |
|
$ |
34,890 |
|
$ |
28,035 |
|
$ |
25,100 |
|
$ |
6,855 |
|
24 |
% |
$ |
2,935 |
|
12 |
% |
|
Express Revenues – Charters |
|
13,557 |
|
9,046 |
|
9,534 |
|
4,511 |
|
49 |
% |
(488 |
) |
(5 |
)% |
|||||
|
Fuel Surcharge |
|
2,142 |
|
1,007 |
|
369 |
|
1,135 |
|
113 |
% |
638 |
|
173 |
% |
|||||
|
Federal Excise Tax |
|
(1,493 |
) |
(1,125 |
) |
(1,045 |
) |
(368 |
) |
(33 |
)% |
(80 |
) |
(8 |
)% |
|||||
|
Total Net Express Services Revenues |
|
$ |
49,096 |
|
$ |
36,963 |
|
$ |
33,958 |
|
$ |
12,133 |
|
33 |
% |
$ |
3,005 |
|
9 |
% |
Express services revenues continue to increase as a percentage of total revenues, increasing from 24.8% in 2003 to 28.1% in 2004. This increase includes fuel surcharge revenues of approximately $2.1 million for 2004 versus approximately $1.0 million for the prior year. Point-to-point surface shipments and air cargo charters increased approximately $3.1 million and $4.5 million, respectively, for the year 2004 compared to the year 2003. Charter revenues have increased primarily due to a significant increase in the number of scheduled and unscheduled charters, primarily for life sciences customers.
The increase in revenues from 2002 to 2003 was primarily due to increased shipment volume in select Express markets, such as life sciences. Revenues from medical and related companies increased 6.8% in 2003 compared to 2002 and AirNet increased its revenues for services in the media and entertainment market by 13.1% in 2003 compared to 2002.
Passenger Charter Services Revenues
|
In ‘000’s
|
|
2004 |
|
2003 |
|
2002 |
|
Increase
|
|
% Increase
|
|
Increase
|
|
% Increase
|
|
|||||
|
Passenger Charter services revenues |
|
$ |
17,112 |
|
$ |
7,521 |
|
$ |
4,290 |
|
$ |
9,591 |
|
128 |
% |
$ |
3,231 |
|
75 |
% |
|
Management fee revenues |
|
703 |
|
67 |
|
27 |
|
636 |
|
949 |
% |
40 |
|
148 |
% |
|||||
|
Fuel surcharge |
|
664 |
|
0 |
|
0 |
|
664 |
|
0 |
|
0 |
% |
|
|
|||||
|
Federal excise tax |
|
15 |
|
11 |
|
(1 |
) |
4 |
|
36 |
% |
12 |
|
|
|
|||||
|
Total Passenger Charter services revenues |
|
$ |
18,494 |
|
$ |
7,599 |
|
$ |
4,316 |
|
$ |
10,895 |
|
143 |
% |
$ |
3,283 |
|
76 |
% |
|
Average annual number of owned aircraft |
|
8.9 |
|
6.0 |
|
4.9 |
|
2.9 |
|
48 |
% |
1.1 |
|
22 |
% |
|||||
|
Average annual number of managed aircraft |
|
4.3 |
|
1.2 |
|
1.0 |
|
3.1 |
|
258 |
% |
0.2 |
|
20 |
% |
|||||
|
Average revenues per aircraft |
|
$ |
1,401 |
|
$ |
1,055 |
|
$ |
732 |
|
$ |
346 |
|
33 |
% |
$ |
323 |
|
44 |
% |
Passenger Charter services revenues continue to grow as a percentage of total revenues, as AirNet has invested in additional aircraft to support passenger charter demand. Passenger Charter services revenues increased from 5.1% of total revenues in 2003 to 10.6% of total revenues in 2004. AirNet’s Passenger Charter services allow customers greater control and flexibility in air travel than commercial airlines. AirNet increased its Passenger Charter fleet from seven aircraft at December 31, 2002 to nine at December 31, 2003 and fifteen at December 31, 2004. AirNet’s Passenger Charter services revenues include revenue from both owned and managed aircraft. Management fee revenues include a monthly fee and a specific percentage of revenues earned under each managed aircraft agreement.
Aviation Services and Other Revenues
Aviation services revenues primarily relate to AirNet’s fixed base operation and maintenance services provided in Columbus, Ohio. While these services will continue, no significant future growth is expected. Approximately $0.4 million of other
13
revenues in 2004 relate to royalty revenue earned from the installation by a third party of Reduced Vertical Separation Minimum (“RVSM”). No significant royalty revenue is expected in future years.
Costs and Expenses
|
In ‘000’s
|
|
2004 |
|
2003 |
|
2002 |
|
$ Increase
|
|
% Increase
|
|
$ Increase
|
|
% Increase
|
|
|||||
|
Wages and benefits |
|
$ |
24,823 |
|
$ |
23,297 |
|
$ |
22,167 |
|
$ |
1,526 |
|
7 |
% |
$ |
1,130 |
|
5 |
% |
|
Aircraft fuel |
|
26,865 |
|
19,227 |
|
17,582 |
|
7,638 |
|
40 |
% |
1,645 |
|
9 |
% |
|||||
|
Aircraft maintenance |
|
15,086 |
|
12,242 |
|
12,305 |
|
2,844 |
|
23 |
% |
(63 |
) |
(1 |
)% |
|||||
|
Contracted air costs |
|
13,813 |
|
9,929 |
|
9,069 |
|
3,884 |
|
39 |
% |
860 |
|
9 |
% |
|||||
|
Ground courier |
|
30,285 |
|
25,834 |
|
24,554 |
|
4,451 |
|
17 |
% |
1,280 |
|
5 |
% |
|||||
|
Depreciation |
|
19,513 |
|
17,535 |
|
17,699 |
|
1,978 |
|
11 |
% |
(164 |
) |
(1 |
)% |
|||||
|
Insurance, rent and landing fees |
|
10,115 |
|
9,895 |
|
8,443 |
|
220 |
|
2 |
% |
1,452 |
|
17 |
% |
|||||
|
Travel, training and other |
|
9,359 |
|
8,003 |
|
8,327 |
|
1,356 |
|
17 |
% |
(324 |
) |
(4 |
)% |
|||||
|
Selling, general and administrative |
|
18,660 |
|
17,032 |
|
14,004 |
|
1,628 |
|
10 |
% |
3,028 |
|
22 |
% |
|||||
|
Net (gain) loss on disposition of assets |
|
34 |
|
(3 |
) |
86 |
|
37 |
|
|
|
(89 |
) |
|
|
|||||
|
|
|
168,553 |
|
142,991 |
|
134,236 |
|
25,562 |
|
18 |
% |
8,755 |
|
7 |
% |
|||||
|
Impairment of assets |
|
42,991 |
|
0 |
|
0 |
|
42,991 |
|
|
|
0 |
|
|
|
|||||
|
Impairment of goodwill |
|
4,018 |
|
0 |
|
0 |
|
4,018 |
|
|
|
0 |
|
|
|
|||||
|
Total costs and expenses |
|
$ |
215,562 |
|
$ |
142,991 |
|
$ |
134,236 |
|
$ |
72,571 |
|
51 |
| |||||