UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number 1-13025 AirNet Systems, Inc. (Exact name of registrant as specified in its charter) An Ohio Corporation I.R.S. Employer Identification No. 31-1458309 3939 International Gateway Columbus, Ohio 43219 (Address of principal executive offices) (Zip Code) 614-237-9777 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: AirNet Systems, Inc. common shares, $.01 par value, are registered on the New York Stock Exchange Based on a closing sales price of $5.875 per share on March 3, 2000, the aggregate market value of the voting stock held by non-affiliates of AirNet Systems, Inc., was approximately $45,162,218. As of that date, 11,393,362 common shares of AirNet Systems, Inc., were issued and outstanding. We have no securities registered under Section 12(g) of the Act. We are and for the past 90 days have been subject to certain filing requirements under Sections 13 and 15(d) of the Securities Exchange Act of 1934 and have filed all required reports during the preceding 12 months. We are not aware of any delinquent filers for which disclosure must be made pursuant to Item 405 of Regulation S-K. Portions of the Registrant's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 12, 2000, are incorporated by reference into Part III of this Annual Report on Form 10-K. PART I ITEM 1 - BUSINESS Overview of AirNet's business AirNet ExpressSM, the integrated national air transportation network of AirNet Systems, Inc., operates between 100 cities and 40 states and delivers over 20,000 time-critical shipments each working day. AirNet's check delivery service, which generates approximately 77% of AirNet's revenues, is the leading transporter of canceled checks and related information for the U.S. banking industry, meeting more than 2,200 daily deadlines. AirNet's Express service, which generates approximately 22% of AirNet's revenues, provides specialized, high priority delivery service for customers requiring late pick-ups and early deliveries combined with prompt, on-line delivery information. AirNet's fixed base operations, which account for approximately 1% of AirNet's revenues, offer retail aviation fuel sales and related ground services for customers in Columbus, Ohio. AirNet currently operates a fleet of 119 aircraft (31 Learjets and 88 light twin engine aircraft), which fly approximately 110,000 miles per operating night, primarily Monday through Thursday. AirNet also provides ground pick-up and delivery services throughout the nation seven days per week, using a combination of company personnel and a network of over 300 independent contractors. AirNet uses its air and ground network to support its banking industry customers, as well as its Express delivery customers. AirNet also uses commercial airlines to provide SameDay delivery service for some of its banking and small package customers. Later pick-ups and earlier deliveries than those offered by other national carriers are the differentiating characteristics of AirNet's time-critical delivery network. In order to maintain this performance, AirNet uses a number of proprietary customer service and management information systems to track, sort, dispatch and control the flow of checks and small packages throughout AirNet's delivery system. Delivery times and selected shipment information are available on-line and through the Internet. AirNet intends to capitalize on time-critical segments, such as medical, radioactive pharmaceutical and just-in-time inventories, in which its airline offers customers competitive advantages in their industries. The company's airline affords unique delivery capabilities to a limited number of shippers and it intends to broaden those capabilities and markets. AirNet believes that its flexible and reliable air network and its demonstrated expertise in providing time-critical deliveries to the banking industry for over 25 years position AirNet to provide these services. AirNet Systems, Inc. was incorporated 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 its telephone number is (614) 237-9777. AirNet's website address is www.airnet.com. Business strategy The principal components of AirNet's operating and growth strategy are as follows: Increase yields on aircraft AirNet's fast and reliable fleet of 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. AirNet's hub-and-spoke system, with a primary hub in Columbus, Ohio and several mini-hubs across the nation, allows AirNet 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 hubs. The hubs are located primarily in less congested regional airports. These locations, in conjunction with AirNet's off-peak departure and arrival times, provide easy take-offs and landings, convenient loading and unloading, and fast refueling and maintenance. AirNet intends to leverage the use of its aircraft by attracting high volume Express customers who benefit from the airline's multiple late night departures and early morning arrivals. 2 Focus on service for the radioactive pharmaceutical industry In 1999, AirNet received an exemption certificate from the Department of Transportation (DOT 7060 Exemption) that allows its aircraft to transport increased volumes of certain radioactive materials. As one of only three carriers in the United States holding such an exemption, AirNet intends to aggressively market its services to producers of radioactive pharmaceuticals. These products have short half-lives, whereby the product's effectiveness and dosage potential are reduced exponentially over time. AirNet believes this 7060 Exemption, coupled with its multiple reflex hub system, gives its radioactive pharmaceutical customers a significant time and cost savings advantage over using other carriers. Regionalize/Localize ground operations AirNet is currently developing plans and procedures to shift a significant portion of the ground operations management to a regional and local basis from the current centralized management. AirNet believes that a more localized approach to the selection, dispatching and management of ground couriers will improve the ground system's efficiencies and help to minimize, and in some instances reduce, costs associated with the ground delivery system. Flight operations AirNet's flight operations are headquartered in Columbus, Ohio. AirNet utilizes an extensive screening process to evaluate potential pilots prior to hiring. These pilots meet stringent company qualifications, as well as all required Federal Aviation Administration requirements. All 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 one week of flight simulator training prior to any actual flight time in an aircraft, as well as intensive ground instruction. Additionally, new pilots typically apprentice as co-pilots in order to gain a familiarity with AirNet's route system and the unique demands of night flying. 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 constantly monitored. AirNet dispatchers remain in constant contact with pilots, outbased hub managers, fuelers, maintenance and ground delivery personnel to ensure that no gaps exist in the delivery process. AirNet also uses commercial airlines, primarily to transport shipments during the daytime and weekend hours when its aircraft typically do not operate. Operations personnel utilize FlightTrax, a computerized flight tracking system that allows them to track the status of every AirNet and commercial flight in the country and schedule ground pick-up and delivery personnel appropriately. 3 Aircraft fleet AirNet owns and operates a fleet of 119 aircraft. AirNet's fleet was comprised of the following aircraft at December 31, 1999: Maximum Maximum Maximum Payload (1) Range (2) Speed (3) Aircraft Type Number (lbs.) (n. miles) (knots) ------------- ------ ------ ---------- ------- Learjets, Model 35/35A 27 4,200 2,000 440 Learjets, Model 25 4 3,500 1,000 440 Piper Navajo Chieftain 17 1,500 800 175 Piper Aerostar 12 1,000 900 190 Beech Baron 43 1,000 700 180 Cessna 310 16 900 600 170 ---------------- (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 fastest, most reliable and most fuel efficient small jet aircraft available in the world. Although not currently required by regulations, the Learjet 35 meets all Stage Three noise requirements currently being implemented across the country. The Learjet 25 is a smaller aircraft with slightly smaller payload and range capabilities. AirNet intends to modify its Learjet 25 aircraft with approved hush kits, allowing them to operate more quietly in respect to the noise-sensitive communities surrounding most airports or phase them out of scheduled operations and replace them with the more efficient Learjet 35 or other Stage Three compliant aircraft. AirNet's Learjet fleet provides it with nationwide connectivity. Long lane segments from all corners of the nation converge on AirNet'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 AirNet's network, which include virtually all of the nation's large metropolitan areas. AirNet acquires and operates pre-owned aircraft, typically between 20 and 25 years old. These aircraft are reasonably priced and are relatively modern, as they have undergone no significant design changes in the last 25 years. Further, when appropriately maintained these aircraft show little or no evidence of erosion in performance. Aircraft maintenance is also headquartered in Columbus. This facility operates 24 hours a day, 365 days a year. AirNet employs over 75 experienced aircraft and avionics technicians in eight separate locations across the country (Columbus, Dallas, Denver, Hartford, Minneapolis, New Orleans, Philadelphia and San Diego), 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. AirNet has an in-house engine shop where some of the piston engines are overhauled on-site, thereby reducing aircraft downtime and controlling costs. Avionics trouble-shooting and repair, performed internally by AirNet since 1989, also provide for maximum efficiency and minimum aircraft downtime for its entire fleet. Ground support operations Shipments are typically picked up by AirNet couriers and delivered to the originating airport where shipments are loaded into aircraft by AirNet ground crews. Upon arrival at the main hub in Columbus, 4 Ohio, packages are off-loaded, fine sorted by destination and reloaded onto the aircraft. During the thirty to forty minute sort period, the aircraft is refueled by AirNet ground support personnel. Fueling operations include trained fuelers and ground support equipment, including six fuel trucks and approximately 86,500 gallons of fuel storage capacity. Outbased fueling of aircraft is typically performed by contracted fixed base operators at the local airports. Delivery services A typical shipment is picked up from the sending bank or an Express customer by an AirNet courier. Canceled check shipments are pre-sorted by bank personnel and bundled as to final destination using AirNet-supplied, color-coded bags. Express shipments are packaged in either AirNet-provided packaging or the customers' packaging. The shipment is then transported to the local airport where it enters AirNet'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 downloaded into AirNet's ComCheck or AirNet Connect computer systems, 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 company aircraft. At the destination city, the shipment is off-loaded for the final time and delivered by company courier to the receiver. When delivered, the shipment is once again scanned and downloaded into AirNet's computer system. Delivery information for all shipments is then available on-line to the customers and all CSRs. AirNet'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 AirNet's service. AirNet provides delivery service for three sets of banking deadlines and customized express deadlines designed around customer needs. Basic deadlines, which have a 9:30 p.m. - 10:00 p.m. hub time in Columbus, provide delivery service between 12:01 a.m. and 2:00 a.m. to approximately the northeastern third of the nation. Premium deadlines, which have an 11:00 p.m. - 11:30 p.m. hub time in Columbus and Charlotte, provide delivery service at approximately 3:00 a.m. to the eastern half of the nation. Finally, City deadlines, which have a 4:00 a.m. - 5:30 a.m. hub time in Columbus, provide delivery service at approximately 8:00 a.m. to all cities served by the network. AirNet prices these services based on the tier of service and by the pound on a customer-by-customer basis. AirNet operates a fleet of approximately 250 ground transportation vehicles, all of which it owns. Vehicles range in size from passenger cars to full-sized vans. AirNet also rents lightweight trucks for certain weekend ground routes. In addition, AirNet uses a network of over 300 vendors and independent contractors to further augment its ground delivery network. Dispatching functions related to ground delivery services have historically been centralized out of the Columbus, Ohio hub. However, in 1999, AirNet began dispatching for some of the larger metropolitan areas out of the local offices. Based on the improved efficiencies obtained, AirNet intends to continue this migration to more localized dispatching in the future. AirNet's SameDay service provides canceled check delivery services to banking customers meeting daytime banking deadlines and to other Express customers requiring next-flight-out timing. These shipments are typically picked up by AirNet couriers and transported via commercial airlines to destination cities, where AirNet couriers accept the packages and deliver them to the destinations. The highly specialized needs of AirNet's customer base combined with AirNet's performance level over the years have resulted in a high level of customer retention in the check delivery area. This customer retention level, in turn, creates a level of stability in AirNet's revenue base that allows for product development and continued dedication of resources to providing the highest possible level of service to customers. The U.S. banking industry, including commercial banks, savings banks and Federal Reserve banks, represents AirNet's largest category of customers and in 1999 accounted for approximately 77% of its revenues. This customer list represents over 50 of the nation's largest bank holding companies. AirNet's time-critical canceled check delivery service allows its banking customers 5 to offer competitive products and pricing. Express delivery customers, which accounted for 22% of AirNet's 1999 revenues, include industrial and service corporations, entertainment companies, medical companies, national integrated carriers and consolidating freight forwarders. Although AirNet maintains a base of Express delivery customers who ship nightly and have a high level of retention, it is also expanding its services to retail customers who tend to ship less frequently. Bank of America represented 10.4% of total net revenues. No other single customer accounted for more than 10% of AirNet's fiscal 1999 revenues. Human Resources AirNet believes it has achieved a significant competitive advantage within its industry through its major commitment to human resources. All levels of AirNet's management strive to operate within the spirit of AirNet's core values, which are: (i) Accountability, (ii) Honesty, Integrity, Trust and Respect, (iii) Quality Performance, (iv) Open and Free Communication, (v) Team Management Style, and (vi) Remember to Enjoy Life It is a Gift! All AirNet personnel are part of the company-wide drug-testing program. Management believes this program, which goes beyond the requirements of AirNet's regulators, helps to ensure the highest possible performance levels. The management training and professional development seminars are periodically held for, and attended by, all levels of company personnel. AirNet also aggressively compensates for performance, with excellent performance recognized and rewarded through a company-wide incentive-based compensation program. Associates The chart below summarizes AirNet's workforce at December 31, 1999, 1998 and 1997. AirNet's associates 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 associates is good. As of December 31, Department 1999 1998 1997 ---------- ----------- ---------- Management/Administration 335 249 206 Flight 160 164 179 Maintenance 77 73 73 Driver/Courier/Ramp/Sort 713 724 765 ---------- ----------- ---------- Total 1,285 1,210 1,223 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 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 canceled checks, none with a significant interstate market share. The two largest private sector air couriers, Federal Express Corporation ("FedEx") and United Parcel Service ("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 market to date. AirNet 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 AirNet's transportation network for certain situations where they require customized service. 6 AirNet competes with commercial airlines and numerous other carriers in its Express delivery business. AirNet estimates its market share in this industry at less than 1%. AirNet believes that this market represents a significant expansion opportunity for ultra 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 unique air network system, its proprietary information technology and its historically high on-time performance level to compete in this market. Regulation AirNet is regulated under Part 135 of the Federal Aviation Regulations by the Federal Aviation Administration. Additionally, AirNet obtained a 7060 exemption from the U.S. Department of Transportation which allows transportation of increased volumes of certain radioactive materials on AirNet's airline. AirNet 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. AirNet's delivery operations are subject to various state and local regulations, and in many instances, require permits and licenses from state authorities. AirNet 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. AirNet's failure to comply with the applicable regulations could result in substantial fines or possible revocation of one or more of AirNet's operating permits. Environmental matters 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. Although AirNet 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 AirNet's aircraft. ITEM 2 - PROPERTIES AirNet owns its corporate and operational headquarters at 3939 International Gateway in Columbus, Ohio. The building sits on land owned by the Port Authority of Columbus. AirNet has a 25-year land lease with the Port Authority, which expires on December 31, 2009 and contains a 20 year renewal option. The complex has 80,000 square feet, of which AirNet utilizes approximately 70,000 square feet. The remainder is subleased to unrelated third parties. AirNet's headquarters is currently used for operations, aircraft maintenance, vehicle maintenance, general and administrative functions, and training. AirNet leases additional space at 4700 East Fifth Avenue, also located on Port Authority land. The space is used for administrative support personnel. AirNet 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. For additional information concerning AirNet's leases, see Note 7 to AirNet's Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data. ITEM 3 - LEGAL PROCEEDINGS On January 29, 1999, AirNet agreed to settle a lawsuit filed by Q International Courier, Inc. and its shareholders (collectively, "Quick") in connection with the termination of the agreement to acquire Quick. Quick had filed an action on August 28, 1998 in the United States District Court for the Southern District of New York (Case No. 98 CIV. 6129) alleging misappropriation of trade secrets and confidential information and breach of the acquisition agreement between the parties. Quick sought injunctive relief, monetary relief and punitive damages. AirNet filed motions to dismiss all of the claims which were pending when the parties settled the action. Under the terms of the settlement, 7 neither AirNet nor Quick admitted any wrongdoing or liability regarding the claims. AirNet recorded a $3.2 million charge as of December 31, 1998 for settlement costs and related litigation fees incurred. There are no other 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 1999. Executive officers of the registrant The following table identifies the executive officers of AirNet as of March 3, 2000. The executive officers serve at the pleasure of the Board of Directors. Name Age Positions ---- --- --------- Gerald G. Mercer 52 Chairman of the Board and Chief Executive Officer Joel E. Biggerstaff 43 President and Chief Operating Officer William R. Sumser 44 Chief Financial Officer, Treasurer, Vice President, Finance and Secretary Jeffery B. Harris 40 Vice President, Bank Sales Guy S. King 47 Vice President, Express Sales Craig A. Leach 43 Vice President, Information Systems Wynn D. Peterson 36 Vice President, Corporate Development Kendall W. Wright 52 Vice President, Bank Sales Gerald G. Mercer has served as Chairman of the Board and Chief Executive Officer of AirNet since founding the company in 1974. He was President of AirNet from 1974 to 1999. He won Ohio's "Entrepreneur of the Year" Award in 1996 and has been a member of the Young Presidents' Organization since 1986. Effective April 1, 2000, Mr. Mercer will transfer his CEO responsibilities to Mr. Biggerstaff, but will remain as Chairman of the Board. Joel E. Biggerstaff has served as AirNet's President and Chief Operating Officer since August 1999. He will replace Mr. Mercer as Chief Executive Officer, effective April 1, 2000. Prior to joining AirNet, Mr. Biggerstaff served as President of the Southern Region of Corporate Express Delivery Systems, a national expedited distribution service, from February 1998 through July 1999. From September 1996 through February 1998, Mr. Biggerstaff provided transportation consulting services and prior to September 1996, he held various positions within Ryder System, Inc., including Regional Vice President and General Manager. William R. Sumser has served AirNet as the Chief Financial Officer since January 1, 2000, as Treasurer since March 1999, as the Vice President, Finance and Secretary since March 1996. He also served as Controller from 1988 through 1999. Jeffery B. Harris has served AirNet as Vice President, Bank Sales since October, 1997. Prior to joining AirNet in June 1996 as the Relationship Manager for Banking Sales, Mr. Harris served as Vice President and Senior Transit Product Manager for Mellon Bank, N.A. from 1994 to 1996. Guy S. King has served as Vice President, Express Sales for AirNet since 1989. Prior to 1989, Mr. King served AirNet in numerous functions dating back to 1976, including dispatcher and pilot, before eventually founding AirNet's Express delivery division in 1984. Mr. King has served on the Board of Directors of the Air Courier Conference of America since 1993. Craig A. Leach was named Vice President of Information Systems effective January 2000. Mr. Leach established AirNet's Information Systems Department in 1985 and was named Director of Information Systems in 1996. 8 Wynn D. Peterson, CFA, has served as Vice President of Corporate Development since February 2000. He joined AirNet in 1997 as Manager of Corporate Development. Prior to joining AirNet, Mr. Peterson served as a Portfolio Manager for Deseret Mutual from 1993 to 1997. Kendall W. Wright has served as Vice President, Bank Sales for AirNet since 1988. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 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. 1999 1998 Quarter ended High Low High Low ------------- ---- --- ---- --- March 31 $14.38 $6.63 $29.38 $20.81 June 30 14.00 7.50 29.19 16.00 September 30 13.88 9.00 17.81 14.12 December 31 9.56 4.63 16.31 11.69 AirNet has not paid any dividends on its common shares and does not intend to pay any such dividends in the foreseeable future. AirNet anticipates using future earnings to finance operations and future growth and development. Restrictive covenants in AirNet's revolving credit facility impose limitations on the payment of dividends. These covenants prohibit AirNet from paying cash dividends on its common shares in excess of 50% of net income. On March 3, 2000, there were approximately 2,000 holders of AirNet common shares, based upon the number of holders of record and the number of individual participants in certain security position listings. 9 ITEM 6 - SELECTED FINANCIAL DATA Three Months Statement of Operations Data Years Ended Years Ended Ended (in thousands, except per share data) December 31, September 30, December 31, ------------------------------ --------------------- ----------- 1999 1998 1997 1996 1995 1996 Net Revenues Check delivery $98,951 $93,206 $80,707 $65,025 $58,264 $16,811 Express delivery 28,714 19,109 15,660 13,864 12,424 3,614 Fixed base and other operations 1,033 1,366 1,395 1,063 1,007 366 ----------------------------------------------------------------------------------------------------------------------------------- Total net revenues 128,698 113,681 97,762 79,952 71,695 20,791 ----------------------------------------------------------------------------------------------------------------------------------- Costs and Expenses Air transportation 97,315 82,793 66,031 53,797 49,246 14,383 Fixed base operations 1,089 853 1,101 1,033 956 309 Selling, general, and administrative 17,237 13,782 8,551 11,875 13,418 1,916 ----------------------------------------------------------------------------------------------------------------------------------- Total costs and expenses 115,641 97,428 75,683 66,705 63,620 16,608 ----------------------------------------------------------------------------------------------------------------------------------- Income from operations 13,057 16,253 22,079 13,247 8,075 4,183 Acquisition termination charge (Note 1) - 5,570 - - - - Interest expense 2,477 1,336 109 1,072 1,469 10 Offering-related, non-recurring expenses (Note 2) - - - 13,704 - - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 10,580 9,347 21,970 (1,529) 6,606 4,173 ----------------------------------------------------------------------------------------------------------------------------------- Income tax expense (benefit), net (Note 3) 4,308 3,711 8,767 4,200 (13) 1,688 ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before cumulative effect of accounting change 6,272 5,636 13,203 (5,729) 6,619 2,485 ----------------------------------------------------------------------------------------------------------------------------------- Cumulative effect of accounting change, net of tax (Note 4) (2,488) - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $3,784 $5,636 $13,203 ($5,729) $6,619 $2,485 ----------------------------------------------------------------------------------------------------------------------------------- Income per common share Income before cumulative effect of accounting change $0.55 $0.46 $1.05 Cumulative effect of accounting change, net of tax (0.22) - - Net income $0.33 $0.46 $1.05 Income per common share - assuming dilution Income before cumulative effect of accounting change $0.55 $0.46 $1.04 Cumulative effect of accounting change, net of tax (0.22) - - Net income $0.33 $0.46 $1.04 Pro forma information - unaudited (Note 5) Net income (loss) before taxes ($1,529) $6,606 Pro forma adjustments, other than income taxes 4,429 7,367 Pro forma income taxes 5,618 5,589 Pro forma net income (loss) ($2,718) $8,384 Pro forma net income (loss) per share - basic and assuming dilution ($0.34) $1.43 Adjusted pro forma information - unaudited Pro forma net income (loss) ($2,718) $8,384 Effects of eliminating offering-related, non-recurring expense, net of tax (Note 2) 12,681 - Adjusted pro forma net income $9,963 $8,384 Adjusted pro forma net income per share (Note 6) $0.80 $0.67 Balance Sheet Data (in thousands) Total assets $127,477 $127,129 $103,986 $75,866 $49,929 $79,495 Total debt 33,948 35,506 9,730 197 19,431 111 Shareholders' equity 73,751 69,674 80,260 66,287 20,875 70,719 Note 1 Represents costs incurred as a result of the termination of a planned acquistion of Q International Courier, Inc. ("Quick"). The agreement was terminated in June, 1998, resulting in a $2.4 million charge related to costs incurred during merger negotiations and a $3.2 million charge related to the settlement of a lawsuit filed by Quick. Note 2 Represents non-cash, non-recurring expenses incurred as a result of the Company's initial public offering (the "Offering"), effective May 31, 1996. Note 3 Prior to the Company's 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, except for the portion of income (loss) related to the operations of Express Convenience Center, Inc. Note 4 See Note 2 to AirNet's Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data for pro forma disclosure relating to prior periods presented. Note 5 Includes pro forma adjustments related to the Offering. Such adjustments reflect 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 as if the events occurred at the beginning of the period. All such changes were effective with the consummation of the Offering on May 31, 1996. Note 6 Assumes shares issued in the Offering were outstanding for the entire period. 10 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION General AirNet's consolidated financial statements have been and will be affected by the following factors: Acquisitions On August 11, 1998, AirNet acquired all of the outstanding common stock of Mercury Business Services, Inc., an Express delivery management service located in Boston, Massachusetts, for 117,647 AirNet common shares and approximately $2.0 million cash. AirNet completed three acquisitions in 1997. On January 30, 1997, all of the outstanding shares of Express Convenience Center, Inc., a national small package forwarder, were acquired for 145,953 AirNet common shares. The transaction was accounted for as a pooling-of-interests. Consequently, all financial data has been restated to reflect the operations of ECC. On June 6, 1997, AirNet acquired all of the outstanding shares of Pacific Air Charter, Inc., a regional airline in the business of transporting canceled checks, for $0.4 million cash. On July 31, 1997, AirNet acquired all of the outstanding shares of Data Air Courier, Inc., a national transporter of canceled checks and small packages through a ground delivery network and commercial airlines, for approximately $4.0 million cash. The results of operations of Mercury, PAC and Data Air have been included in the financial data since the respective dates of the acquisitions. Acquisition Termination Charge On June 17, 1998, AirNet announced that it had terminated an agreement to acquire Q International Courier, Inc. ("Quick"). AirNet incurred $2.4 million of costs in conjunction with this termination, all of which were expensed upon the termination of the agreement. Subsequent to the termination of the agreement, AirNet agreed to settle a lawsuit filed by Quick in connection with the termination of the acquisition. Settlement and litigation costs related to the suit totaled approximately $3.2 million and were fully expensed as of December 31, 1998. Start-Up Costs In April 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) No. 98-5, Reporting on the Costs of Start-Up Activities, which requires that costs related to start-up activities be expensed as incurred. Prior to 1999, AirNet capitalized start-up costs associated with its premium products line of business. Effective July 1, 1998, the company ceased capitalizing these costs and began amortizing the previously capitalized costs over five years. The company adopted the provisions of the SOP in its financial statements as of January 1, 1999. Results of Operations Year ended December 31, 1999 compared to year ended December 31, 1998 Total net revenues were $128.7 million for the twelve months ended December 31, 1999, an increase of $15.1 million, or 13.2%, over the twelve months ended December 31, 1998. Net revenues from check delivery increased $5.7 million, or 6.2%. This increase was comprised of $1.9 million related to price increases in 1999 and $1.6 million related to operating a full year of the Federal Reserve weekend program, which was introduced in the fourth quarter of 1998. In addition, net revenues increased due to one additional flying day in 1999 compared to 1998, and increased business activity from both new and existing customers. 11 Net revenues from Express delivery increased $9.6 million, or 50.3%, from 1998 to 1999. Of this increase, $4.2 million was due to a whole year of Mercury operations versus a partial year in 1998, as Mercury was acquired in August 1998. $5.3 million of the increase in Express revenue was due to growth in premium product shipments requiring specialized AirNet line-haul service, SameDay commercial airline service or hazardous material handling. These increases were offset by lower revenue from wholesale customers (freight forwarders) and customers requiring less time-critical standard service as AirNet continued its sales emphasis on premium services. Total costs and expenses were $115.6 million in 1999, an increase of $18.2 million, or 18.7%, over 1998. This resulted in income from operations of $13.1 million in 1999, compared to $16.3 million in 1998. Air transportation expenses rose $14.5 million, or 17.5%. In addition to the effects of capitalizing $0.8 million of start-up costs related to the Express business in the first half of 1998 and expensing such costs as incurred in 1999, air transportation costs increased to support growth in the Express delivery area and the addition of Federal Reserve shipments to the weekend program. Wages and benefits were up $2.5 million and ground courier costs were up $3.0 million due to additional personnel to support the increased weekend operations and Express business growth. Aircraft fuel costs were up 11.3%, or $1.1 million, compared to 1998 as jet and piston fuel prices rose significantly during 1999. Outside services were up $0.3 million due to outsourced routes related to pilot shortages. Depreciation expense was up $1.3 million, or 12.8%, primarily due to aircraft overhauls, engine additions and inspections in late 1998 and 1999. Other expense increased $5.2 million primarily due to a $1.5 million increase in workers' compensation costs, $2.9 million increase in commercial freight expense related to a full year of Mercury operations and significant increases in bank and Express shipments shipped via the commercial airlines. Selling, general and administrative expenses increased by $3.5 million, or 25.1%, compared to 1998. $0.9 million of this increase was a result of expensing start-up costs as incurred in 1999 compared to capitalizing start-up costs in the first half of 1998. Increased expenses of $2.5 million in the administrative payroll areas were a result of the addition of personnel to support growth in AirNet's Express service, a full year of Mercury operations, and the hiring of a new president. Commission expense increased in conjunction with Express revenue growth. Additionally, bad debt expense increased $0.4 million due to a dispute with one customer. $0.9 million of the selling, general and administrative increase was related to the use of outside consultants. These increases were offset by decreases in officer severance packages and the one-time cost of a consulting study related to the call center in 1998. In 1998, AirNet incurred a $5.6 million charge in connection with the write-off of costs associated with the efforts to acquire Quick and the settlement of a related lawsuit. The impact of the one-time $5.6 million charge decreased fully diluted net income per share by $0.27 in 1998. Settlement of the litigation and write-off of the acquisition costs were recorded as of December 31, 1998 resulting in no impact to the 1999 financial results. Interest costs were $2.5 million in fiscal 1999, compared to $1.3 million in 1998. AirNet increased the average outstanding balance on its revolving credit facility in 1999 primarily as the result of the $20 million stock buyback program executed in the second half of 1998. AirNet recorded tax expense of $4.3 million for fiscal 1999 compared to $3.7 million for fiscal 1998. Year ended December 31, 1998 compared to year ended December 31, 1997 Net revenues were $113.7 million for the twelve months ended December 31, 1998, an increase of $15.9 million, or 16.3%, over the twelve months ended December 31, 1997. Net revenues from check delivery increased $12.5 million, or 15.5%. This included $4.4 million which can be attributed to price increases effective January 1, 1998 and approximately $6.9 million from the Data Air and PAC acquisitions being in place for a full year. The balance of the increase can be attributed to the introduction of a weekend delivery program in April, 1997 and increased business activity from both new and existing customers during 1998. AirNet operated its full air system 199 days in both 1998 and 1997. 12 Net revenues from Express delivery increased $3.4 million, or 22.0%, from fiscal 1997 to fiscal 1998. Approximately $2.8 million of the increase was due to the addition of Mercury in 1998. An increase of $4.0 million in premium product shipments requiring LateNight or SameDay service was offset by a $3.2 million decrease in the services provided to wholesale customers (freight forwarders) and customers requiring less time-critical standard services. This decrease resulted from AirNet's strategic decision to decrease its wholesale and standard service business in late 1997 and early 1998 and emphasize the LateNight and SameDay services. Total costs and expenses, prior to the acquisition termination charge, were $97.4 million in fiscal 1998, an increase of $21.7 million, or 28.7%, over fiscal 1997. This resulted in income from operations of $16.3 million in fiscal 1998, compared to $22.1 million in fiscal 1997. Air transportation expenses rose $16.8 million, or 25.4%, while selling, general and administrative expenses increased $5.2 million, or 61.2%, for the fiscal year. Air transportation costs increased primarily as a result of the acquisitions and infrastructure costs in anticipation of growth in the Express delivery area. The greatest effect of the infrastructure buildup occurred in ground courier operations where overall wages increased $4.9 million, of which approximately $2.1 million can be attributed to the full year of Data Air operations, compared to five months in 1997. Healthcare costs were up $1.5 million over 1997 levels due to the addition of covered personnel and an anomaly of claims experienced in the third and fourth quarter. The costs associated with shipping packages on the commercial airlines increased $4.7 million due to the addition of Mercury, the full year of Data Air operations and the increase in the volume of SameDay shipments experienced in the Express service business. Aircraft maintenance and fuel expenses remained flat over 1997 levels, despite an 11.3% increase in flight hours, due to the unusually good flying weather experienced in 1998 and lower fuel prices. Depreciation increased $1.7 million, or 20.8%, primarily due to the increase in aircraft, from 113 at December 31, 1997 to 119 at December 31, 1998, additional vehicles acquired through the Data Air acquisition and the purchase of AirNet's main operational facility in October, 1997. AirNet also experienced a pilot shortage, which impacted its operations in the last half of 1998, requiring it to charter routes with third party operators. The impact of the pilot shortage was approximately $0.5 million for fiscal 1998. In the selling, general and administrative area, payroll and related expenses increased $1.0 million primarily due to the addition of personnel in fiscal 1998. A commission plan was established in the first quarter for Express delivery sales, resulting in $0.5 million of increased expense over the prior year. AirNet incurred a $0.3 million loss related to the Check Exchange System, Co. and $0.5 million for the defense and ultimate settlement of two lawsuits related to issues surrounding the acquisition of Float Control, Inc. and a non-related covenant not to compete dispute. AirNet also incurred costs associated with the separation package for an officer who announced his resignation in December, 1998. In addition, AirNet utilized outside consultants, especially in the second half of 1998, to assist in the improvement of its Express delivery call center. AirNet also began amortizing start-up costs associated with the Express delivery initiative in the third quarter of 1998. Total amortization for start-up costs in 1998 was $0.5 million. In addition, AirNet incurred a $5.6 million charge in connection with the write-off of costs associated with the efforts to acquire Quick and the settlement of a related lawsuit. The impact of the one-time $5.6 million charge decreased fully diluted net income per share by $0.27 in 1998. Interest costs were $1.3 million in fiscal 1998, compared to $0.1 million in 1997. AirNet began borrowing on its line of credit in late 1997 and utilized a portion of such borrowings to fund the repurchase of $20.0 million of common shares in the second half of 1998. AirNet recorded tax expense of $3.7 million for fiscal 1998 on income for the period compared to $8.8 million for fiscal 1997. 13 Liquidity and Capital Resources Cash flow from operating activities Net cash flow from operating activities was $19.5 million for the year ended December 31, 1999, compared to $12.0 million for the year ended December 31, 1998. Current credit arrangements AirNet maintains a credit agreement with a bank that provides a $50.0 million, three-year, unsecured revolving credit facility. The credit agreement limits the availability of funds to specified percentages of accounts receivable, inventory and the wholesale value of aircraft and equipment. In addition, the credit agreement requires the maintenance of minimum net worth and cash flow levels, imposes limits on payments of dividends to 50% of net income and restricts the amount of additional debt. Investing activities Capital expenditures totaled $17.6 million for the year ended December 31, 1999 compared to $18.7 million for fiscal 1998. Approximately $2.3 million was incurred in connection with the purchase of a new aircraft and approximately $15.0 million was incurred for flight related equipment, engines and inspections. The remainder was incurred primarily for delivery vehicles, furniture and fixtures, and computer equipment and related software. AirNet anticipates it will spend approximately $20.0 million on capital items in 2000 and will continue to acquire aircraft and flight equipment as necessary to maintain growth and continue offering quality service to its customers. The company announced a stock repurchase program in February 2000 for up to $3.0 million of its common shares. Management and the Board of Directors believe that AirNet's common shares represent an excellent value and an appropriate investment. Purchases of these common shares will be made over time in the open market or through privately negotiated transactions. AirNet 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 AirNet's operations historically have been somewhat seasonal and dependent on the number of banking holidays falling during the week. Because financial institutions are currently the company's principal customers, AirNet's air system is scheduled primarily around the needs of financial institution customers. When financial institutions are closed, there is no need for AirNet to operate a full system. AirNet's quarter ending December 31 is often the most impacted by bank holidays (including Thanksgiving and Christmas). When these holidays fall on Monday through Thursday, AirNet's revenues and net income are adversely affected. AirNet's annual results fluctuate in response to the number of banking holidays. Operating results are also affected by the weather. AirNet generally experiences higher maintenance costs during its first quarter ending March 31. Winter weather requires additional costs for de-icing, hangar rental and other aircraft services. 14 Selected Quarterly Data The following is a summary of the unaudited quarterly results of operations for the quarterly periods ended (in thousands, except per share data): Quarters Ended, --------------------------------------------------------- March June September December 31 30 30 31 ------------ ------------ ------------- --------------- 1999 Net revenues $30,522 $31,766 $33,538 $32,872 Income from operations 3,510 4,298 2,265 2,984 Income before cumulative effect of accounting change 1,714 - - - Cumulative effect of accounting change, net of tax (2,488) - - - ------------ ------------ ------------- --------------- Net income (loss) ($774) $2,184 $993 $1,381 Income per share Income before cumulative effect of accounting change $.15 $.19 $.09 $.12 Cumulative effect of accounting change, net of tax (.22) - - - ------------ ------------ ------------- --------------- Net income (loss) (.07) .19 .09 .12 Income per share - assuming dilution Income before cumulative effect of accounting change .15 .19 .09 .12 Cumulative effect of accounting change, net of tax (.22) - - - ------------ ------------ ------------- --------------- Net income (loss) ($.07) $.19 $.09 $.12 1998 Net revenues $26,571 $28,108 $29,644 $29,357 Income from operations 4,910 5,528 4,524 1,291 ------------ ------------ ------------- --------------- Net income (loss) $2,854 $1,753 $2,519 ($1,490) Income per share Net income (loss) $.23 $.14 $.20 ($.13) Income per share - assuming dilution Net income (loss) $.22 $.14 $.20 ($.13) Inflation Historically, inflation has not been a significant factor to AirNet. Although the value of AirNet's service to its primary customers is enhanced by higher interest rates, the volume of business has not changed historically with fluctuating interest rates. AirNet has attempted to minimize the effects of inflation on its operating results through rate increases and cost controls. Fuel Surcharge/Rebate Program AirNet maintains a fuel surcharge/rebate program for its check delivery customers. Under this program, as the OPIS-CMH (Ohio Price Information Service - Columbus, Ohio Station) price of jet fuel exceeds $0.75 per gallon, customers are surcharged. In turn, if the OPIS-CMH price falls below $0.60 per gallon, the same customers receive a rebate. Due to the recent increases in fuel prices, AirNet has implemented a 2% temporary fuel surcharge to its Express customers, effective February 6, 2000. The company intends to rescind the surcharge when fuel prices return to lower, more stabilized levels. 15 Year 2000 Impact on Information Systems and Operations In prior years, AirNet discussed the nature and progress of its plans to become Year 2000 ready. In 1999, the company completed the remediation and testing of its systems. As a result of those planning and implementation efforts, the company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The company is not aware of any material problems resulting from Year 2000 issues, either with its services, its internal systems, or the products and services of third parties. The company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the Year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. Forward-Looking Statements Certain matters discussed in this Form 10-K, including, but not limited to, information regarding future economic performance and plans and objectives of AirNet's management, are forward-looking statements which involve risks and uncertainties. When used in this document, the words "anticipate", "estimate", "expect", "may", "plan", "project" and similar expressions are intended to be among statements that identify forward-looking statements. These statements involve risks and uncertainties such as the following, in addition to other factors not listed, which could cause actual results to differ materially from any forward-looking statement: potential changes by the FAA, which could increase the regulation of AirNet's business, or the Federal Reserve, which could change the competitive environment of transporting canceled checks; adverse weather conditions; the ability to attract and retain qualified pilots; technological advances and increases in the use of electronic funds transfers; AirNet's ability to successfully complete and integrate acquisition targets; as well as other economic, competitive and domestic and foreign governmental factors affecting AirNet's markets, prices and other facets of its operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. AirNet undertakes no responsibility to update for changes related to these or any other factors that may hereafter occur. The following factors, in addition to those factors listed above and other possible factors not listed, could affect AirNet's actual results and cause such results to differ materially from those expressed in forward-looking statements: Competition The market for express air and ground delivery service is highly competitive. AirNet's bank services division competes primarily against the Federal Reserve Bank's Check Relay Network, which has significantly greater financial and other resources than AirNet. The Federal Reserve is regulated by the Monetary Control Act of 1980, which in general requires that the Federal Reserve price its services on a cost basis plus a set percentage private sector market adjustment factor. Failure by the Federal Reserve to comply with the Monetary Control Act could have an adverse competitive impact on AirNet. In addition, there can be no assurance that the Monetary Control Act will not be amended, modified or repealed, or that new legislation affecting AirNet's business will not be enacted. Although major participants in the next-day and second-day air delivery market (such as UPS and FedEx) have also entered the business of SameDay and early morning delivery, they have not had a material adverse effect on AirNet's business to date. However, there can be no assurance that these competitors will not have a material adverse effect in the future. 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 AirNet's check delivery services to the financial services industry. In addition, some financial services 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 express delivery customers. While none of these technological advances have had a significant adverse impact 16 on AirNet'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 affect on AirNet's business in the future. Risks Related to Growth Through Acquisitions AirNet intends to continue to evaluate potential acquisitions, primarily in the check delivery and express delivery areas. 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 assurances that the suitable acquisition candidates will be available, that AirNet will be able to acquire or profitably manage such additional companies or that future acquisitions will produce returns that justify the investment. In addition, AirNet may compete for acquisitions and expansion opportunities with companies that have significantly greater resources than the company. AirNet may 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, AirNet may be required to utilize more of its cash resources, if available, in order to pursue its acquisition strategy. If AirNet does not have sufficient cash resources through working capital or its current credit facility, its growth potential could be limited and its existing operations could be impaired unless it is able to obtain additional capital through future debt or equity financing. There can be no assurance that AirNet will be able to obtain additional financing or that, if available, this financing will be on terms acceptable to the company. Permits and Licensing; Regulation AirNet's delivery operations are subject to various federal, state and local regulations that in many instances require permits and licenses. Failure by AirNet 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 AirNet could be impeded by delays in obtaining approvals for the transfer of permits or licenses, or failure to obtain such approvals. AirNet's flight operations are regulated by 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 AirNet's operating costs. These changes, if adopted, could also require AirNet and other operators regulated by the FAA to hire additional flight crew personnel. 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 AirNet's business. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AirNet is exposed to certain market risks from transactions that are entered into during the normal course of business. AirNet's primary market risk exposure relates to interest rate risk. At December 31, 1999, the company had a balance of $33.9 million on its revolving credit facility. This facility bears interest at the company's option of a fixed rate determined by the Eurodollar rate, a negotiated rate or a floating rate. Assuming borrowings at December 31, 1999, a one hundred basis point change in interest rates would impact net interest expense by approximately $339,000 per year. In 1999, the company entered into two interest rate swap agreements with a bank as a hedge against the interest rate risk associated with borrowings. The swap agreements each have a notional amount of $5.0 million and effectively locked in a portion of the company's variable rate revolving credit liability at fixed rates of 6.3% and 6.5% plus a margin based on the company's funded debt ratio. These swap agreements contain a three year term. 17 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Auditors Shareholders and Board of Directors AirNet Systems, Inc. We have audited the accompanying consolidated balance sheets of AirNet Systems, Inc. as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of AirNet Systems, Inc. at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Columbus, Ohio February 18, 2000 18 AIRNET SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS In thousands, except per share data December 31, 1999 1998 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 1,667 $ 1,142 Accounts receivable: Trade, less allowances of $598 and $290 at 14,919 13,077 December 31, 1999 and 1998, respectively Shareholders, affiliates, and associates 154 163 Inventory and spare parts 10,426 9,386 Taxes refundable 2,382 4,199 Deferred taxes 934 1,969 Deposits and prepaids 1,733 2,748 --------- --------- Total current assets 32,215 32,684 Net property and equipment 84,733 78,817 Other assets: Goodwill, net of accumulated amortization of $715 and $371 at December 31, 1999 and 1998, respectively 7,920 8,237 Other intangibles, net of accumulated amortization of $2,264 and $1,918 at December 31, 1999 and 1998, respectively 375 678 Investment in partnership and other 2,234 2,490 Start-up costs -- 4,223 --------- --------- Total assets $ 127,477 $ 127,129 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,203 $ 5,930 Salaries and related liabilities 2,792 1,284 Accrued expenses 1,206 3,889 Deferred taxes 196 2,282 Current portion of notes payable 29 26 --------- --------- Total current liabilities 9,426 13,411 Notes payable, less current portion 33,919 35,480 Deferred tax liability 10,381 8,564 Shareholders' equity: Preferred shares, $.01 par value; 10,000 shares authorized; and no shares issued and outstanding -- -- Common shares, $.01 par value; 40,000 shares authorized; and 12,753 shares issued at December 31, 1999 and 1998 128 128 Additional paid-in-capital 78,182 78,455 Retained earnings 15,207 11,423 Treasury shares, 1,343 and 1,375 shares held at cost at December 31, 1999 and 1998, respectively (19,766) (20,332) --------- --------- Total shareholders' equity 73,751 69,674 --------- --------- Total liabilities and shareholders' equity $ 127,477 $ 127,129 ========= ========= See notes to consolidated financial statements 19 AIRNET SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS In thousands, except per share data Year Ended December 31, 1999 1998 1997 --------- --------- --------- NET REVENUES Air transportation, net of excise tax of $3,592, $3,106, and $2,113 for the years ended December 31, 1999, 1998, and 1997: Check delivery $ 98,951 $ 93,206 $ 80,707 Express delivery 28,714 19,109 15,660 Fixed base and other operations 1,033 1,366 1,395 --------- --------- --------- Total net revenues 128,698 113,681 97,762 --------- --------- --------- COSTS AND EXPENSES Air transportation Wages and benefits 16,389 13,871 11,253 Aircraft fuel 11,307 10,160 10,176 Aircraft maintenance 7,625 7,407 7,489 Ground couriers and outside services 25,438 21,301 14,817 Depreciation 11,391 10,101 8,363 Other 25,165 19,953 13,933 Fixed base operations 1,089 853 1,101 Selling, general and administrative 17,237 13,782 8,551 --------- --------- --------- Total costs and expenses 115,641 97,428 75,683 --------- --------- --------- Income from operations 13,057 16,253 22,079 Acquisition termination charge -- 5,570 -- Interest expense 2,477 1,336 109 --------- --------- --------- Income before income taxes 10,580 9,347 21,970 Provision for income taxes 4,308 3,711 8,767 --------- --------- --------- Income before cumulative effect of accounting change 6,272 5,636 13,203 Cumulative effect of accounting change, net of tax (2,488) -- -- --------- --------- --------- Net income $ 3,784 $ 5,636 $ 13,203 --------- --------- --------- Income per common share Income before cumulative effect of accounting change $ 0.55 $ 0.46 $ 1.05 Cumulative effect of accounting change, net of tax (0.22) -- -- --------- --------- --------- Net income $ 0.33 $ 0.46 $ 1.05 --------- --------- --------- Income per common share - assuming dilution Income before cumulative effect of accounting change $ 0.55 $ 0.46 $ 1.04 Cumulative effect of accounting change, net of tax (0.22) -- -- --------- --------- --------- Net income $ 0.33 $ 0.46 $ 1.04 --------- --------- --------- See notes to consolidated financial statements 20 AIRNET SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS In thousands Year Ended December 31, 1999 1998 1997 -------- -------- -------- Operating activities Net income $ 3,784 $ 5,636 $ 13,203 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of accounting change 2,488 -- -- Depreciation 11,525 10,209 8,431 Amortization of intangibles 789 1,067 353 Deferred taxes 766 4,218 5,169 Provision for losses on accounts receivable 504 150 84 Loss on disposition of assets 102 55 616 Cash provided by (used in) operating assets and liabilities: Accounts receivable (2,338) (1,574) (2,589) Inventory and spare parts (1,040) (3,333) (1,005) Prepaid expenses 1,015 112 (2,004) Start-up costs -- (2,165) (2,522) Accounts payable (727) 1,448 (149) Salaries and related liabilities 1,508 (324) (546) Accrued expenses (2,684) 2,168 857 Taxes payable 3,553 (6,423) 2,386 Other, net 257 742 (308) -------- -------- -------- Net cash provided by operating activities 19,502 11,986 21,976 Investing activities Acquisition of Mercury Business Services, Inc., net of cash acquired -- (1,827) -- Acquisition of Pacific Air Charter, Inc., net of cash acquired -- -- (240) Acquisition of Data Air Courier, Inc., net of cash acquired -- (34) (4,123) Acquisition of Midway Aviation, Inc., net of cash acquired -- -- (53) Purchases of property and equipment (17,639) (18,706) (30,062) Payments for covenants not to compete (170) (540) (105) Proceeds from sales of property and equipment 96 415 592 -------- -------- -------- Net cash used in investing activities (17,713) (20,692) (33,991) Financing activities Proceeds from 1996 Incentive Stock Plan Programs 293 1,947 2,100 Net borrowings (repayments) under the revolving credit facility (1,500) 25,800 9,500 Repayment of long-term debt (57) (24) (1,560) Proceeds from the issuance of long-term debt -- -- 230 Purchase of treasury stock -- (20,000) (5,762) -------- -------- -------- Net cash provided by (used in) financing activities (1,264) 7,723 4,508 -------- -------- -------- Net increase (decrease) in cash 525 (983) (7,507) Cash and cash equivalents at beginning of year 1,142 2,125 9,632 -------- -------- -------- Cash and cash equivalents at end of year $ 1,667 $ 1,142 $ 2,125 ======== ======== ======== See notes to consolidated financial statements 21 AIRNET SYSTEMS, INC. CONSOLIDATED STATEMENTS OF EQUITY In thousands Common Shares ------------------- Additional Number of Paid-in Retained Treasury Shares Amount Capital Earnings Shares Total -------- -------- -------- -------- -------- -------- Balance December 31, 1996 12,621 $ 126 $ 78,009 ($ 7,416) $ -- $ 70,719 Net income -- -- -- 13,203 -- 13,203 Exercise stock options 128 1 1,821 -- -- 1,822 Exercise stock options with treasury shares -- -- (104) -- 329 225 Issuance of Common Shares - Associate Stock Purchase Program 4 1 52 -- -- 53 Purchase treasury shares -- -- -- -- (5,762) (5,762) -------- -------- -------- -------- -------- -------- Balance December 31, 1997 12,753 128 79,778 5,787 (5,433) 80,260 Net income -- -- -- 5,636 -- 5,636 Exercise stock options with treasury shares -- -- (685) -- 2,184 1,499 Issuance of treasury shares - Associate Stock Purchase Program -- -- (34) -- 315 281 Issuance of treasury shares- acquisition of Mercury -- -- (604) -- 2,427 1,823 Issuance of treasury shares - associate stock bonus -- -- -- -- 175 175 Purchase treasury shares -- -- -- -- (20,000) (20,000) -------- -------- -------- -------- -------- -------- Balance December 31, 1998 12,753 128 78,455 11,423 (20,332) 69,674 Net income -- -- -- 3,784 -- 3,784 Issuance of treasury shares - Associate Stock Purchase Program -- -- (273) -- 566 293 -------- -------- -------- -------- -------- -------- Balance December 31, 1999 12,753 $ 128 $ 78,182 $ 15,207 ($19,766) $ 73,751 ======== ======== ======== ======== ======== ======== See notes to consolidated financial statements 22 1. Significant Accounting Policies AirNet Systems, Inc. and its subsidiaries (the "company") operate 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 requiring the express delivery of packages. The company also offers retail aviation fuel sales and related ground services for customers at its Columbus, Ohio facility. Basis of Presentation The accompanying consolidated financial statements include the accounts of the company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. 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. Certain 1997 and 1998 balances have been reclassified to conform with the 1999 presentation. Revenue Recognition Revenue on air transportation services is recognized when the packages are delivered 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. Accounts Receivable For 1999, approximately 77% and 66% 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 customers' 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. Inventory and Spare Parts Inventory and spare parts are valued at the lower of cost (weighted average method) or market. At December 31, 1999, the balance included a Learjet, valued at $3,891,000, held for resale. Property and Equipment Property and equipment are stated at cost. Engines, 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 the estimated useful lives of the assets, as summarized below: Airframes 15 years Buildings 30 years Other flight equipment 2 - 5 years Other property and equipment 3 - 10 years 23 During 1997, the company made certain changes in its estimated useful lives and the salvage values of its aircraft. The changes increased 1997 net income by $1,050,000, or $.08 per share. These changes were made to better reflect how the aircraft are expected to be used over time and the continued industry trend of increased market values associated with the types and models of aircraft the company owns and operates. The company prepays certain engine repair and overhaul services under manufacturer service plans. Such prepaid balances, which are capitalized at the time the maintenance is performed, are included as other property and equipment and were $2,991,000 and $2,398,000 at December 31, 1999 and 1998, respectively. Investment in Subsidiary AirNet wholly owns Float Control, Inc., which holds a 19% interest in the Check Exchange System Co. ("CHEXS"). Float Control accounts for its investment in CHEXS under the equity method of accounting. At December 31, 1999 and 1998, Float Control's recorded investment in CHEXS was $2,065,000 and $2,337,000, respectively. Income Taxes The company accounts for income taxes under the liability method pursuant to Statement of Financial Accounting Standards 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 in effect when the differences are expected to reverse. Goodwill Goodwill is amortized on a straight-line basis over 25 years. The company's policy is to periodically review its goodwill and other long-lived assets based upon the evaluation of such factors as the occurrence of a significant adverse event of change in the environment in which the business operates or if the expected future cash flows (undiscounted and without interest) would become less than the carrying amount of the asset. An impairment loss would be recorded in the period such determination is made based on the fair value of the related businesses. Financial Instruments The company uses interest rate swaps for the purpose of hedging its exposure to fluctuations in interest rates. The swaps meet the requirements designation and correlation for use of the accrual method of accounting. Differentials in the swapped amounts are recorded as adjustments of the underlying periodic cash flows that are being hedged. The fair values of the Company's financial instruments approximate their carrying values at December 31, 1999 and 1998. Intangibles Intangibles include non-competition agreements, which are being amortized on the straight-line method over periods ranging from one to 15 years. Segment Reporting In 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes annual and interim reporting and disclosure standards for an enterprise's operating segments. SFAS 131 became effective for fiscal years beginning after December 15, 1997. The Company has historically not segregated costs between its bank and Express operations. Management has evaluated the standard and determined that, due to 24 accounting system limitations, it is impracticable to report segment information. The Company is modifying its accounting systems and will begin reporting segment information in the first quarter of fiscal year 2000. Effect of New Accounting Standards The FASB issued SFAS No. 133, Accounting for Derivative Financial Instruments and Hedging Activities, in June 1998 and SFAS No. 137, Accounting for Derivative Financial Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, in June 1999, which are effective for the Company beginning in the first quarter of 2001. The statements require that all derivatives be recorded in the balance sheet as either assets or liabilities and be measured at fair value. The accounting for changes in fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company has not determined what impact these statements will have on its consolidated financial statements. Supplemental Cash Flow Data Cash paid for interest was $2,411,000, $1,236,000 and $109,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Cash paid for taxes was $559,000, $6,078,000 and $1,312,000 for the year ended December 31, 1999, 1998 and 1997. 2. Write Off of Start-up Costs In April 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) No. 98-5, Reporting on the Costs of Start-Up Activities, which requires that costs related to start-up activities be expensed as incurred. Prior to 1999, the company capitalized start-up costs associated with its premium products line of business. Effective July 1, 1998, the company ceased capitalizing such costs and began amortizing the previously capitalized costs over five years. The company adopted the provisions of the SOP in its financial statements as of January 1, 1999, which resulted in the write-off of unamortized start-up costs at that time. Had the company accounted for start-up costs under SOP 98-5 for all years presented, its net income and net income per share would have been the following: 1999 1998 1997 ----------- ------------- ------------ Proforma net income $6,272,000 $4,632,000 $11,715,000 -per share (assuming dilution) $0.55 $0.37 $0.92 3. Acquisitions Effective August 11, 1998, the company acquired all of the outstanding common stock of Mercury Business Services, Inc. ("Mercury"), an express delivery management service located in Boston. The company accounted for the acquisition under the purchase method of accounting. The purchase price of the acquisition included $1,827,000 in cash (net of cash acquired) and approximately 118,000 AirNet common shares and resulted in goodwill of $3,544,000, which is being amortized over 25 years, and covenants not to compete totaling $300,000. The covenants not to compete are amortized over the terms of the agreements, which range from two to three years. The acquired assets and assumed liabilities have been recorded at their estimated fair values as of August 11, 1998. The company's consolidated financial statements include the results of operations of Mercury since the purchase date. The pro forma results of operations for this acquisition would not have been significantly different than those presented for AirNet. Effective July 31, 1997, the company acquired all of the outstanding common stock of Data Air Courier, Inc. ("Data Air"), whose primary business involved the nationwide transportation of canceled checks between clearing banks through the use of company-owned ground vehicles, independent agents and commercial airlines. The company accounted for the acquisition under the purchase method of accounting. The purchase price of the acquisition totaled approximately $4,157,000 and resulted in goodwill of approximately $3,718,000, which is being 25 amortized over 25 years. The company also entered into several covenants not to compete totaling $170,000, which are being amortized over their respective terms, which range from one to five years. The acquired assets and assumed liabilities, including goodwill, have been recorded at their estimated fair values as of July 31, 1997. The company's consolidated financial statements include the results of operations of Data Air since the purchase date. The pro forma results of operations for AirNet and Data Air as though they were combined as of the beginning of the period ended December 31, 1997 are presented as follows: Net revenues of $106,787,000, net income of $12,879,000, net income per share of $1.02 and net income per share assuming dilution of $1.01. Effective June 6, 1997, the company acquired all of the outstanding common stock of Pacific Air Charter, Inc. ("PAC") for approximately $240,000 in cash, net of cash acquired. PAC operated a fleet of eight aircraft, primarily transporting canceled checks between clearing banks along the West Coast. The company accounted for the acquisition under the purchase method of accounting. The purchase resulted in goodwill of approximately $171,000, which is being amortized over 25 years. The company also entered into a five year covenant not to compete for $40,000. The acquired assets and assumed liabilities, including goodwill, have been recorded at their estimated fair values as of June 6, 1997. The company's consolidated financial statements include the results of operations of PAC since the purchase date. The pro forma results of operations for this acquisition would not have been significantly different than those presented for AirNet. Effective January 30, 1997, the company acquired Express Convenience Center, Inc. d/b/a ECC Worldwide Services ("ECC") in a business combination accounted for as a pooling-of-interests. ECC's primary services included small package delivery services within the United States and certain other countries. All of the stock of ECC was exchanged for approximately 146,000 AirNet common shares. The company also entered into three covenant not-to-compete agreements for a total of $205,000, which are being amortized over three- and five-year periods. 4. Property and Equipment Property and equipment consisted of the following at December 31: 1999 1998 ------------ ------------ Flight equipment $130,432,000 $114,494,000 Other property and equipment 20,803,000 20,279,000 ------------ ------------ 151,235,000 134,773,000 Less accumulated depreciation 66,502,000 55,956,000 ============ ============ Net property and equipment $ 84,733,000 $ 78,817,000 ============ ============ 5. Notes Payable The company had borrowings as follows at December 31: 1999 1998 ----------- ----------- Term notes $ 148,000 $ 206,000 Revolving credit facility 33,800,000 35,300,000 ----------- ----------- 33,948,000 35,506,000 Current portion of notes payable 29,000 26,000 =========== =========== Long-term portion of notes payable $33,919,000 $35,480,000 =========== =========== The company's 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 August 1, 2003. The agreement may be extended in one-year increments at any point through August 1, 2003. The agreement bears interest at the company's option of a fixed rate determined by the Eurodollar rate, a negotiated rate or a floating rate, plus a margin based on the company's funded debt ratio. The floating rate is based on the sum of (a) a margin plus (b) the 26 greater of (i) the prime rate and (ii) the sum of .5% plus the federal funds rate in effect from time to time. The 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 credit agreement requires the maintenance of certain minimum net worth and cash flow levels, imposes certain limitations on payments of dividends and restricts the amount of additional debt. In September 1999, the company entered into two interest rate swap agreements with a bank as a hedge against the interest rate risk associated with borrowings. The swap agreements each have a notional amount of $5,000,000 and effectively lock in a portion of the company's variable rate revolving credit liability at fixed rates of 6.3% and 6.5% plus a margin based on the company's funded debt ratio. These swap agreements are in effect for a period of three years. The differential to be paid or received is accrued as interest rates change and is recognized as an adjustment to the interest expense in the statements of operations. The company does not use derivative financial instruments for speculative purposes. In conjunction with purchase of the company's operations facility in October, 1997, the company issued a $263,000 note. The terms of the note require monthly principal and interest payments of $4,000 through 2005 and the note is collateralized by the facility. 6. 1996 Incentive Stock Plan In May 1996, the company adopted the AirNet Systems, Inc. 1996 Incentive Stock Plan (the "Plan"). The Plan was last amended on August 19, 1999. 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 the grant of stock options to outside directors. The maximum number of common shares available for issuance under the Plan is 1,650,000 through 2006. The Plan is administered by the Compensation Committee of the Board of Directors, which determines the terms and conditions applicable to the Awards. The exercise price of each option equals the market price of a common share on the date of grant. An option's maximum term is ten years (five years for ISO's granted to 10% shareholders). Option vesting periods range from vesting upon grant to vesting over four years. The company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its associate stock options. Under APB 25, because the exercise price of the company's associate stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the company had accounted for its associate stock options under the fair value method of that Statement. The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the years ended December 31: 1999 1998 1997 ------- ------ ------ Risk free interest rate 6.5% 6.5% 6.5% Volatility factor of expected market price of the company's common shares 50.0% 54.5% 59.1% Weighted average expected life of options (years) 6.88 7.55 7.88 27 For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The company's pro forma information follows for the years ended December 31: 1999 1998 1997 ---------- ---------- ----------- Net income, adjusted for FAS 123 $2,647,000 $4,668,000 $11,587,000 ---------- ---------- ----------- Net income per share, adjusted for FAS 123: Basic $.23 $.38 $ .92 Assuming dilution .23 .38 .91 A summary of the company's stock option activity and related information follows (in thousands, except price per share data) for the years ended December 31: 1999 1998 1997 ------------------- ------------------- ------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------- ---------- ------- ---------- ------- ---------- Outstanding at beginning of period 789 $16.14 651 $14.28 523 $14.18 Granted 422 9.62 288 19.32 282 14.40 Exercised - - (106) 14.11 (145) 14.17 Canceled 12.04 (44) 14.12 14.12 (53) (9) ======= ======= ======= Outstanding at end of period 1,158 13.95 789 16.14 651 14.28 ======= ======= ======= Options exercisable at end of period 662 14.82 532 14.99 587 14.28 Weighted average fair value of options granted during the period - $7.33 - $12.59 - $9.96 The following summarizes information about stock options outstanding as of December 31, 1999: Options Outstanding Options Exercisable ---------------------------------------------------------------- ----------------------------- Weighted-Averag a ge Remaining Weighted-Aver Weighted-Avera Range of Exercise Number of Contractual Exercise geNumber of Exercise Prices Options Life (Years) Price Options Price -------------------- -------------- ------------- ------------- -------------- -------------- Less than $10.00 385,240 9.4 $9.61 72,430 $9.58 $10.01-$15.00 465,025 6.2 14.15 452,225 14.20 $15.01-$20.00 206,200 8.4 17.33 75,400 17.08 $20.01-$25.00 102,000 8.4 22.64 62,100 22.69 ============== ============== 1,158,465 7.9 $13.95 662,155 $14.82 ============== ============== 28 7. Lease Obligations The company leases facility space at various locations throughout the United States. The company incurred lease expense of $1,560,000, $1,092,000, and $1,149,000 for the years ended December 31, 1999, 1998 and 1997, respectively. As of December 31, 1999, future minimum lease payments by year and in the aggregate under non-cancelable operating leases with initial or remaining terms exceeding one year are as follows: 2000 - $89,000; 2001 - $56,000. 8. Related Party Transactions In October 1997, the company purchased its corporate and operational headquarters for $4,100,000 from its President and majority shareholder, which represented fair market value as determined by an independent appraisal. In addition to the building, the company assumed the shareholder's land lease with The Port Authority of Columbus which expires on December 31, 2009 and contains a 20-year renewal option. Total rent expense incurred under the facility lease prior to the company's purchase from this shareholder was $864,000 for the year ended December 31, 1997. The company believes the terms of this lease and purchase were no less favorable than those reasonably available from unaffiliated third parties. 9. 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 $529,000, $457,000, and $379,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 10. Income Taxes Income taxes are summarized as follows for the years ended December 31: 1999 1998 1997 --------------- -------------- -------------- Current: Federal $1,594,000 $1,299,000 $ 3,058,000 State and local 63,000 230,000 540,000 --------------- -------------- -------------- 1,657,000 1,529,000 3,598,000 Deferred: Federal 759,000 1,855,000 4,394,000 State and local 157,000 327,000 775,000 --------------- -------------- -------------- 916,000 2,182,000 5,169,000 =============== ============== ============== $2,573,000 $3,711,000 $8,767,000 =============== ============== ============== 29 Significant components of the company's deferred tax liabilities and assets are as follows at December 31: 1999 1998 ------------ ------------ Long-term deferred tax asset: Alternative minimum tax credits $ 3,406,000 $ 2,047,000 Long-term deferred tax liabilities: Property and equipment (11,840,000) (8,698,000) Intangible assets (1,947,000) (1,913,000) ============ ============ Net long-term deferred tax liabilities ($10,381,000) ($ 8,564,000) ============ ============ Current deferred tax assets: Health insurance reserves $ 168,000 $ 82,000 Workers compensation reserves 265,000 - Allowance for bad debt reserves 236,000 116,000 Operating loss carryforwards - 1,662,000 Other 265,000 109,000 ------------ ------------ Total current assets 934,000 1,969,000 Current deferred tax liabilities: Prepaid expenses (172,000) (362,000) Start-up costs - (1,689,000) Other (24,000) (231,000) ------------ ------------ Total current liabilities (196,000) (2,282,000) ------------ ------------ Net current deferred tax assets (liabilities) $ 738,000 ($ 313,000) ============ ============ The provision for income taxes consist 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 before income taxes are as follows for the years ended December 31: 1999 1998 1997 ----------- ----------- ----------- Tax expense at federal statutory rate on pretax income $ 3,597,000 $ 3,178,000 $ 7,470,000 Add (deduct): State taxes, net of Federal benefit 566,000 410,000 1,136,000 Tax benefit on cumulative effect of accounting change (1,735,000) -- -- Non-deductible permanent differences 145,000 122,000 125,000 Other -- 1,000 36,000 ----------- ----------- ----------- Total taxes $ 2,573,000 $ 3,711,000 $ 8,767,000 =========== =========== =========== The company has net operating losses for tax purposes of $3,817,000 and $338,000 which expire in 2011 and 2013, respectively. 30 11. Net Income Per Share The following table sets forth the computation of basic and diluted net income per share for the years ended December 31: 1999 1998 1997 -------------- ----------- ----------- Numerator: Income before the cumulative effect of accounting change $6,272,000 $5,636,000 $13,203,000 Cumulative effect of accounting change, net of tax (2,488,000) -- -- -------------- ----------- ----------- Net Income $3,784,000 $5,636,000 $13,203,000 Denominator: Basic - weighted average shares outstanding 11,397,000 12,228,000 12,577,000 Diluted Stock options - associates, officers -- 152,000 129,000 and directors -------------- ----------- ----------- Adjusted weighted average shares outstanding 11,397,000 12,380,000 12,706,000 Net income per share - basic: Income before the cumulative effect of accounting change $.55 $.46 $1.05 Cumulative effect of accounting change, net of tax (.22) -- -- -------------- ----------- ----------- Net income .33 .46 1.05 Net income per share - assuming dilution: Income before the cumulative effect of accounting change .55 .46 1.04 Cumulative effect of accounting change, net of tax (.22) -- -- -------------- ----------- ----------- Net income $.33 $.46 $1.04 For the years ended December 31, 1999 and 1998, 1,212,000 and 102,000 stock options, respectively, were excluded from the diluted weighted average shares outstanding calculation, as their exercise prices exceeded the average fair market value of the underlying common shares for the year. 12. Acquisition Termination Charge On June 17, 1998, the company announced that it had terminated an agreement to acquire Q International Courier, Inc. ("Quick"). The company had incurred $2,370,000 of costs in conjunction with the planned acquisition, all of which were expensed upon the termination of the agreement. In 1999, the company agreed to settle a lawsuit filed by Quick in connection with the termination of the planned acquisition. Settlement and litigation costs related to the suit totaled approximately $3,200,000 and were expensed as of December 31, 1998. 13. Litigation and 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 31 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. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for in this Item 10 is incorporated herein by reference to AirNet's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 12, 2000, under the caption "ELECTION OF DIRECTORS". In addition, information concerning AirNet's executive officers is included in the portion of Part I of this Annual Report on Form 10-K entitled "Executive officers of the registrant". ITEM 11 - EXECUTIVE COMPENSATION The information called for in this Item 11 is incorporate herein by reference to AirNet's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 12, 2000 under the caption "ELECTION OF DIRECTORS - Compensation of Directors" and "EXECUTIVE COMPENSATION". Neither the report on executive compensation nor the performance graph included in AirNet's definitive Proxy Statement shall be deemed to be incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for in this Item 12 is incorporated herein by reference to AirNet's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 12, 2000, under the caption "BENEFICIAL OWNERSHIP OF COMMON SHARES". ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for in this Item 13 is incorporated herein by reference to AirNet's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 12, 2000, under the caption "TRANSACTIONS WITH MANAGMENT". PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report 1. The following consolidated financial statements are included in Item 8: Report of independent auditors Consolidated balance sheets as of December 31, 1999 and 1998. Consolidated statements of income for the years ended December 31, 1999, 1998 and 1997 Consolidated statements of changes in shareholders' equity for the years ended December 31, 1999, 1998 and 1997 Consolidated statements of cash flows for the years ended December 31, 1999, 1998 and 1997 Notes to consolidated financial statements 32 2. Schedule II - Valuation and Qualifying Accounts is being filed herewith. ------------------------------ ----------- --------------------- -------------- ----------- COL A COL B COL C COL D COL E --------------------- Additions ------------------------------ ----------- --------------------- -------------- ----------- Charged Charged Balance at to Costs to Balance at Start of and Other End of Description Period Expenses Accounts Deductions Period ------------------------------ ----------- ----------- --------- -------------- ----------- Year end December 31, 1999: Deducted from asset accounts; Allowance for doubtful accounts $289,784 $504,379 $0 $196,087(1) $598,076 ------------------------------ ----------- ----------- --------- -------------- ----------- Year end December 31, 1998: Deducted from asset accounts; Allowance for doubtful accounts 122,869 150,215 25,000 8,300 (1) 289,784 ------------------------------ ----------- ----------- --------- -------------- ----------- Year end December 31, 1997: Deducted from asset accounts; Allowance for doubtful accounts 23,149 83,656 16,064 0 (1) 122,869 ------------------------------ ----------- ----------- --------- -------------- ----------- (1) Uncollectible accounts written off, net of recoveries 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. 3. Exhibits The following exhibits are included or incorporated by reference in this Annual Report on Form 10-K: Exhibit No. Description Location ----------- ----------- -------- 3.1 Amended Articles of AirNet Systems, Incorporated herein by reference Inc. to Exhibit 2.1 to AirNet Systems, Inc.'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 the Incorporated herein by reference Amended Articles of AirNet Systems, to Exhibit 4(b) to AirNet Systems, Inc. as filed with the Ohio Secretary Inc.'s Registration Statement on of State on May 28, 1996. Form S-8 (Registration No. 333-08189) filed on July 16, 1996 (the "1996 Form S-8") 3.3 Amended Articles of AirNet Systems, Incorporated herein by reference Inc. (as amended through May 28, to Exhibit 4.3 to AirNet Systems, 1996) (for SEC reporting compliance Inc.'s 1996 Form S-8 purposes only - not filed with the Ohio Secretary of State) 33 Exhibit No. Description Location ----------- ----------- -------- 3.4 Code of Regulations of AirNet Incorporated herein by reference Systems, Inc. to Exhibit 2.2 to AirNet Systems, Inc.'s Form 8-A 4.1 Loan Agreement among AirNet Systems, Incorporated herein by reference Inc., the Lenders party thereto and to Exhibit 4 to AirNet Systems, NBD Bank, as agent, dated August 1, Inc.'s December 31, 1998 Form 1998. 10-K. (File No. 1-13025) 4.2 First Amendment to Credit Agreement, Filed herewith the Lenders party thereto and NBD Bank as agent, dated as of September 30, 1998. 4.3 Second Amendment to Credit Agreement, Filed herewith the Lenders party thereto and Bank One, Michigan, as agent, dated as of December 31, 1999. 4.4 Subordination Agreement among Bank Filed herewith One, Michigan, as agent, and the Senior Lenders, AirNet Management, Inc., and AirNet Systems, Inc., dated as of December 31, 1999 4.5 Subsidiary Guaranty by AirNet Filed herewith Management, Inc. dated as of December 31, 1999 10.1* AirNet Systems, Inc. Amended and Filed herewith Restated 1996 Incentive Stock Plan (reflects amendments through August 18, 1999) 10.3* Agreement, dated as of January 1, Incorporated herein by reference 1999, between AirNet Systems, Inc. to Exhibit 10.3 to AirNet Systems, and Eric P. Roy Inc.'s December 31, 1998 Form 10-K. (File No. 1-13025) 10.4 Indemnification Agreement dated as of Incorporated herein by reference May 15, 1996, among AirNet and to Exhibit 10.14 to AirNet's Messrs. Miller, Renusch, Roy, King, Amendment No. 2 to Form S-1 Rutter, Sumser and Wright Registration Statement (Registration No. 333-3092) filed on May 24, 1996 ("Amendment No. 2") 10.5 Indemnification Agreement dated as of Incorporated herein by reference May 15, 1996 between Mr. Mercer and to Exhibit 10.11 to AirNet's AirNet Systems, Inc. Amendment No. 2 10.6* Confidential Agreement between AirNet Filed herewith Systems, Inc. and Joel E. Biggerstaff 10.7 AirNet Systems, Inc. Director Filed herewith Deferred Compensation Plan dated May 27, 1998 34 Exhibit No. Description Location ----------- ----------- -------- 21 Subsidiaries of AirNet Systems, Inc. Filed herewith 23 Consent of Ernst & Young LLP Filed herewith 24 Powers of Attorney Filed herewith 27 Financial Data Schedule Filed herewith * Denotes a management contract or compensatory plan or arrangement required to be filed pursuant to Item 14 of Form 10-K. (b) No reports on Form 8-K were filed during the quarter ended December 31, 1999. (c) Exhibits are listed in Item 14(a)(3) above. (d) Financial statement schedules are included in Item 14(a)(1) above. 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: March 21, 2000 By: /s/ Gerald G. Mercer --------------------------------------- Gerald G. Mercer, Chairman of the Board 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, March 21, 2000 --------------------------------- Chief Executive Officer Gerald G. Mercer and Director (Principal Executive Officer) *Joel E. Biggerstaff President and Chief March 21, 2000 --------------------------------- Operating Officer Joel E. Biggerstaff *William R. Sumser Chief Financial Officer, March 21, 2000 --------------------------------- Treasurer, Vice President, William R. Sumser Finance and Secretary *Roger D. Blackwell Director March 21, 2000 --------------------------------- Roger D. Blackwell *Tony C. Canonie, Jr. Director March 21, 2000 --------------------------------- Tony C. Canonie, Jr. *Russell M. Gertmenian Director March 21, 2000 --------------------------------- Russell M. Gertmenian *J. F. Keeler, Jr. Director March 21, 2000 --------------------------------- J. F. Keeler, Jr. *David P. Lauer Director March 21, 2000 --------------------------------- David P. Lauer *James E. Riddle Director March 21, 2000 --------------------------------- James E. Riddle *By /s/ Gerald G. Mercer --------------------------------- Gerald G. Mercer Attorney-in-Fact INDEX TO EXHIBITS Exhibit No. Description Location ----------- ----------- -------- 3.1 Amended Articles of AirNet Systems, Incorporated herein by reference Inc. to Exhibit 2.1 to AirNet Systems, Inc.'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 the Incorporated herein by reference Amended Article of AirNet System, to Exhibit 4(b) to AirNet Systems, Inc. as filed with the Ohio Secretary Inc.'s Registration Statement on of State on May 28, 1996 Form S-8 (Registration No. 333-08189) filed on July 16, 1996 (the "1996 Form S-8") 3.3 Amended Article of AirNet Systems, Incorporated herein by reference Inc. (as amended through May 28, to Exhibit 4.3 to AirNet Systems, 1996) (for SEC reporting compliance Inc.'s 1996 form S-8 purposes only - not filed with the Ohio Secretary of State) 3.4 Code of Regulations of AirNet Incorporated herein by reference Systems, Inc. to Exhibit 2.2 to AirNet Systems, Inc.'s Form 8-A 4.1 Loan Agreement among AirNet Systems, Incorporated herein by reference Inc., the Lenders party thereto and to Exhibit 4 to AirNet Systems, NBD Bank, as agent, dated August 1, Inc.'s December 31, 1998 Form 1998. 10-K. (File No. 1-13025) 4.2 First Amendment to Credit Agreement, Filed herewith the Lenders party thereto and NBD Bank as agent, dated as of September 30, 1998. 4.3 Second Amendment to Credit Agreement, Filed herewith the Lenders party thereto and Bank One, Michigan, as agent, dated as of December 31, 1999. 4.4 Subordination Agreement among Bank Filed herewith One, Michigan, as agent, and the Senior Lenders, AirNet Management, Inc., and AirNet Systems, Inc., dated as of December 31, 1999 4.5 Subsidiary Guaranty by AirNet Filed herewith Management, Inc. dated as of December 31, 1999 10.1* AirNet Systems, Inc. Amended and Filed herewith Restated 1996 Incentive Stock Plan (reflects amendments through August 18, 1999) 10.3* Agreement, dated as of January 1, Incorporated herein by reference 1999, between AirNet Systems, Inc. to Exhibit 10.3 to AirNet Systems, and Eric P. Roy Inc.'s December 31, 1998 Form 10-K. (File No. 1-13025) 10.4 Indemnification Agreement dated as of Incorporated herein by reference May 15, 1996, among AirNet and to Exhibit 10.14 to AirNet's Messrs. Miller, Renusch, Roy, King, Amendment No. 2 to Form S-1 Rutter, Sumser and Wright Registration Statement (Registration No. 333-3092) filed on May 24, 1996 ("Amendment No. 2") 10.5 Indemnification Agreement dated as of Incorporated herein by reference May 15, 1996 between Mr. Mercer and to Exhibit 10.11 to AirNet's AirNet Systems, Inc. Amendment No. 2 10.6* Confidential Agreement between AirNet Filed herewith Systems, Inc. and Joel E. Biggerstaff 10.7 AirNet Systems, Inc. Director Filed herewith Deferred Compensation Plan dated May 27, 1998 1 Exhibit No. Description Location ----------- ----------- -------- 21 Subsidiaries of AirNet Systems, Inc. Filed herewith 23 Consent of Ernst & Young LLP Filed herewith 24 Powers of Attorney Filed herewith 27 Financial Data Schedule Filed herewith * Denotes a management contract or compensatory plan or arrangement required to be filed pursuant to Item 14 of Form 10-K. 2 EXHIBIT 4.2 Execution Copy FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of September 30, 1998 (this "Amendment"), is among AIRNET SYSTEMS, INC., an Ohio corporation (the "Company"), the lenders set forth on the signature pages hereof (collectively, the "Lenders") and NBD BANK, a Michigan banking corporation, as agent for the Lenders (in such capacity, the "Agent"). RECITALS The Company, the Agent and the Lenders are parties to a Credit Agreement, dated as of August 1, 1998 (the "Credit Agreement"). The Company desires to amend the Credit Agreement, and the Agent and the Lenders are willing to do so strictly in accordance with the terms hereof. TERMS In consideration of the premises and of the mutual agreements herein contained, the parties agree as follows: ARTICLE 1. AMENDMENTS Upon fulfillment of the conditions set forth in Article 3 hereof, the Credit Agreement shall be amended as follows: The following new definition is hereby added to Section 1.1 in appropriate alphabetical order: "Significant Subsidiary" shall mean any one or more Subsidiaries which, if considered in the aggregate as a single Subsidiary would be a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X under the Exchange Act, provided that no Subsidiary which is not by itself a Significant Subsidiary shall be included in any Significant Subsidiary if all Subsidiaries which are not by themselves Significant Subsidiaries or Guarantors would not constitute a Significant Subsidiary. Reference in the definition of "Guarantors" contained in Section 1.1 and in the third line of Section 5.1(f) to "Subsidiary" shall be deleted and "Significant Subsidiary" shall be substituted in each place thereof. Section 5.2(a) is amended by deleting reference therein to "$70,000,000" and substituting "$65,000,000" in place thereof. ARTICLE 2. GUARANTIES The Company has requested that the Lenders defer the requirement under the Credit Agreement of all of the Significant Subsidiaries of the Company executing and delivering a Guaranty to the Agent and the Lenders together with resolutions, legal opinions and corporate documents in connection with such Guaranty. In accordance with such request, the Lenders and the Company agree that any Significant Subsidiaries of the Company, if any, existing as of the date of this Amendment, will not be required to deliver a Guaranty and the resolutions, legal opinions and corporate documents required by the Agent in connection therewith until December 31, 1998. ARTICLE 3. REPRESENTATIONS The Company represents and warrants to the Agent and the Lenders that: 1 3.1 The execution, delivery and performance of this Amendment are within its powers, has been duly authorized and is not in contravention with any law, of the terms of its Articles of Incorporation or By-laws, or any undertaking to which it is a party or by which it is bound. 3.2 This Amendment is the legal, valid and binding obligations of the Company enforceable against it in accordance with the terms hereof. 3.3 After giving effect to the amendments herein contained, the representations and warranties contained in Article IV of the Credit Agreement are true on and as of the date hereof with the same force and effect as if made on and as of the date hereof. 3.4 No Event of Default or Default exists or has occurred and is continuing on the date hereof. ARTICLE 4. MISCELLANEOUS. 4.1 This Amendment shall not become effective until this Amendment shall be signed by the Company, the Agent and the Required Lenders. 4.2 References in the Credit Agreement or in any note or other Loan Document to the Credit Agreement shall be deemed to be references to the Credit Agreement as amended hereby and as further amended from time to time. 4.3 Except as expressly amended hereby, the Company agrees that the Credit Agreement, the Notes and all other documents and agreements executed by the Company in connection with the Credit Agreement in favor of the Agent or any Lender are ratified and confirmed and shall remain in full force and effect and that it has no set off, counterclaim or defense with respect to any of the foregoing. Terms used but not defined herein shall have the respective meanings ascribed thereto in the Credit Agreement. 4.4 This Amendment may be signed upon any number of counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties signing this Amendment have caused this Amendment to be executed and delivered as of the day and year first above written. AIRNET SYSTEMS, INC. By: _________________________________ Its: ____________________________ NBD BANK, as Agent and as a Lender By: _________________________________ Its: ____________________________ BANK ONE, N.A. By: _________________________________ Its: ____________________________ KEYBANK NATIONAL ASSOCIATION By: _________________________________ Its: ________________________________ 2 EXHIBIT 4.3 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT, dated as of December 31, 1999 (this "Amendment"), is among AIRNET SYSTEMS, INC., an Ohio corporation (the "Company"), the lenders set forth on the signature pages hereof (collectively, the "Lenders") and BANK ONE, MICHIGAN, a Michigan banking corporation formerly known as NBD Bank, as agent for the Lenders (in such capacity, the "Agent"). RECITAL The Company, the Agent and the Lenders are parties to a Credit Agreement, dated as of August 1, 1998, as amended by the First Amendment to Credit Agreement dated as of September 30, 1998 (as same may be amended or modified from time to time, the "Credit Agreement"). The Company desires to amend the Credit Agreement, and the Agent and the Lenders are willing to do so strictly in accordance with the terms hereof. TERMS In consideration of the premises and of the mutual agreements herein contained, the parties agree as follows: ARTICLE 1. AMENDMENTS Upon fulfillment of the conditions set forth in Article 2 hereof, the Credit Agreement shall be amended as follows: Section 5.2(f) is amended and restated in its entirety as follows: (f) Disposition of Assets; Etc. Sell, lease, license, transfer, assign or otherwise dispose of any of its business, assets, rights, revenues or property, real, Personal or mixed, tangible or intangible, whether in one or a series of transactions, other than inventory sold in the ordinary course of business upon customary credit terms and sales of scrap or obsolete material or equipment, provided, however that this Section 5.2(f) shall not prohibit (i) any such sale, lease, license, transfer, assignment or other disposition if the aggregate book value (disregarding any write-downs of such book value other than ordinary depreciation and amortization) of all of the business, assets, rights, revenues and property disposed of after the date of this Agreement shall be less than $3,500,000 in the aggregate for any calendar year or (ii) the transfer of the Company's intellectual property to AirNet Management, Inc., an Ohio corporation, provided that AirNet Management, Inc. shall be a Guarantor hereunder and if, immediately after such transactions, no Default or Event of Default shall exist or shall have occurred and be continuing. Clause (vi) of Section 5.2(i) is renumbered as Clause (vii) and a new Clause (vi) is added to Section 5.2(i) as follows: (vi) Indebtedness of the Company in aggregate amount not to exceed $100,000,000 to AirNet Management, Inc., provided that such Indebtedness is subordinated to all Advances and all other obligations pursuant to any Loan Documents and no payments, whether of principal, interest or otherwise are made on such Indebtedness until after all Advances and all other obligations pursuant to any Loan Documents are paid in full and all Commitments are terminated. 1.3 Schedule 4.4 attached to the Credit Agreement is deleted in its entirety and Schedule 4.4 attached to this Amendment shall be deemed substituted in place thereof. 1 ARTICLE 2. CONDITIONS PRECEDENT This Amendment shall not become effective until each of the following has been satisfied: 2.1 The Subsidiary Guaranty dated of even date herewith shall be signed by AirNet Management, Inc. (the "Subsidiary Guarantor"). 2.2 The Subordination Agreement dated of even date herewith shall be signed by the Subsidiary Guarantor, the Company and the Agent. 2.3 Copies of resolutions adopted by the Board of Directors of the Subsidiary Guarantor, certified by an officer of the Subsidiary Guarantor as being true and correct and in full force and effect without amendment as of the date hereof, authorizing the Subsidiary Guarantor to enter into the Subsidiary Guaranty and the Subordination Agreement and any other documents or agreements executed pursuant thereto, if any, shall have been delivered to the Agent. 2.4 The Agent determines that the Subordinated Revolving Credit Agreement between the Company and the Subsidiary Guarantor and the Subordinated Revolving Loan Promissory Note are satisfactory and the Agent approves of each of the foregoing. 2.5 This Amendment shall be signed by the Company and the Required Lenders. 2.6 Such other documents and agreements requested by the Agent. ARTICLE 3. REPRESENTATIONS The Company represents and warrants to the Agent and the Lenders that: 3.1 The execution, delivery and performance of this Amendment are within its powers, has been duly authorized and is not in contravention with any law, of the terms of its Articles of Incorporation or By-laws, or any undertaking to which it is a party or by which it is bound. 3.2 This Amendment is the legal, valid and binding obligation of the Company enforceable against it in accordance with the terms hereof. 3.3 After giving effect to the amendments herein contained, the representations and warranties contained in Article IV of the Credit Agreement are true on and as of the date hereof with the same force and effect as if made on and as of the date hereof. 3.4 No Event of Default or Default exists or has occurred and is continuing on the date hereof. 3.5 Other than AirNet Management, Inc., there are no other Significant Subsidiaries in existence as of the date of this Amendment. ARTICLE 4. MISCELLANEOUS. 4.1 This Amendment shall not become effective until the Agent determines that the conditions precedent contained in Article 2 of this Amendment are satisfied and this Amendment shall be signed by the Company, the Agent and the Required Lenders. 4.2 References in the Credit Agreement or in any Note or other Loan Document to the Credit Agreement shall be deemed to be references to the Credit Agreement as amended hereby and as further amended from time to time. 4.3 Except as expressly amended hereby, the Company agrees that the Credit Agreement, the Notes and all other documents and agreements executed by the Company in connection with the Credit Agreement in favor of the Agent or any Lender are ratified and confirmed and shall remain in full force and effect and that it has no set off, counterclaim or defense with respect to any of the foregoing. Terms used but not defined herein shall have the respective meanings ascribed thereto in the Credit Agreement. 2 4.4 This Amendment may be signed upon any number of counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties signing this Amendment have caused this Amendment to be executed and delivered as of the day and year first above written. AIRNET SYSTEMS, INC. By: ____________________________________ Its: _______________________________ BANK ONE, MICHIGAN, as Agent and as a Lender By: ____________________________________ Its: _______________________________ BANK ONE, NA By: ____________________________________ Its: _______________________________ KEYBANK NATIONAL ASSOCIATION By: ____________________________________ Its: _______________________________ DETROIT 7-1836 488754 3 SCHEDULE 4.4 SUBSIDIARIES Float Control, Inc. AirNet Management, Inc. 4 EXHIBIT 4.4 SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT dated as of December 31, 1999 (this "Agreement") is among BANK ONE, MICHIGAN, a Michigan banking corporation, formerly known as NBD Bank, as agent (in such capacity, the "Agent") for the Senior Lenders (as defined below), AIRNET MANAGEMENT, INC., an Ohio corporation (the "Subordinated Lender"), and AIRNET SYSTEMS, INC., an Ohio corporation (the "Company"). BACKGROUND As an inducement for the Senior Lenders to continue to provide a credit facility in favor of the Company, the Subordinated Lender has agreed to enter into this subordination agreement to provide for the subordination of the "Subordinated Indebtedness" to the "Senior Indebtedness", all on the terms and conditions herein set forth. AGREEMENTS NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions. 1.1 General Terms. For purposes of this Agreement, the following terms shall have the following respective meanings: "Agreements" means, collectively, the Senior Lending Agreements and the Subordinated Lending Agreements. "Credit Agreement" means the Credit Agreement, dated as of August 1, 1998, among the Company, the Senior Lenders and the Agent, as amended by the First Amendment to Credit Agreement dated as of September 30, 1998 and as further amended by the Second Amendment to Credit Agreement dated of even date herewith, as further amended, supplemented, extended, modified, renewed, restated, restructured, refinanced or replaced from time to time, and including without limitation any agreement entered into in substitution therefor or increasing the amount of available borrowings thereunder. "Creditors" means, collectively, Senior Lenders and Subordinated Lenders and their respective successors and assigns. "Distribution" means any payment, whether in cash, in kind, in securities or in any other property, or security therefor. "Guarantor" means any Person at any time guaranteeing or otherwise contingently liable for or otherwise supporting (including without limitation any Person granting a Lien on any of its assets) the Senior Indebtedness or the Subordinated Indebtedness. "Holders of Subordinated Indebtedness" or "Subordinated Lenders" means, collectively, the Subordinated Lender and any other Persons at any time or in any manner acquiring any right to or interest in any of the Subordinated Indebtedness. "Insolvency Event" shall have the meaning set forth in Section 2.2(c) hereof. "Lien" means any pledge, assignment, hypothecation, mortgage, deed of trust, security interest, deposit arrangement, option, conditional sale or title retaining contract, sale and lease back transaction, financing statement filing, intellectual property transfer or assignment filing, lessor's or lessee's interest under any lease, subordination of any claim or right, or any other type of lien, charge, assignment, encumbrance, preferential arrangement or other claim or right. "Obligations" means all present and future obligations for principal, premium, interest, make whole payments, penalties, fees, indemnifications, reimbursements, damages and other liabilities and obligations under any of the Agreements and other documentation governing or relating to the Senior Indebtedness or the Subordinated Indebtedness or otherwise owing pursuant to the Senior Indebtedness or the Subordinated Indebtedness at any time. 1 "Obligors" means, collectively, the Company and the Guarantors. "Payment Default" is defined in Section 2.2(d). "Person" means an individual, a partnership, a corporation (including a business trust), a joint stock company, a trust, an unincorporated association, a joint venture, a limited liability company, a limited liability partnership or other entity, or a government or any agency, instrumentality or political subdivision thereof. "Senior Indebtedness" means all present and future indebtedness, obligations and liabilities of any kind owing by the Company, any Guarantor or any other Person to Senior Lenders or any of them from time to time under or pursuant to any of the Senior Lending Agreements, including, without limitation, all principal, interest accruing thereon, reimbursement and other Obligations owing pursuant to any letters of credit or similar documents, indemnities, charges, expenses, fees and other Obligations chargeable to the Company, any Guarantor or any such other Person by Senior Lenders or any of them or otherwise due and payable at any time to the Senior Lenders or any of them, (including without limitation all interest and fees and other amounts accruing after commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of the Company or any other Obligor, whether or not an allowed claim). Senior Indebtedness shall continue to constitute Senior Indebtedness, notwithstanding the fact that such Senior Indebtedness or any claim for such Senior Indebtedness is subordinated, avoided or disallowed under the federal Bankruptcy Code or other applicable law. Without limiting the foregoing, Senior Indebtedness shall also include any indebtedness, obligations and liabilities of the Company, any Guarantor or any such other Person incurred in connection with a refinancing of the Senior Indebtedness. "Senior Lenders" means the Agent and all lenders now or hereafter parties to the Credit Agreement and any other Persons at any time or in any manner acquiring any right to or interest in any of the Senior Indebtedness. "Senior Lending Agreements" means, collectively, the Credit Agreement (as defined in this Agreement), and all promissory notes, guarantees, pledge agreements, security agreements, mortgages, financing statements and other agreements, instruments and documents from time to time entered into by the Company, any Guarantor or any other Person to evidence, secure, guarantee or otherwise relating in any way to, or executed in connection with, the Senior Indebtedness, and all agreements, devices or arrangements providing for payments which are relating to fluctuations of interest rates, exchange rates or forward rates (including without limitation any interest rate, swap agreements, dollar denominated or cross currency interest rate exchange agreements, forward currency exchange agreements, interest rate cap or collar protection agreements, forward rate currency or interest rate options, puts and warrants) entered into by the Company with any Senior Lender or Affiliate of any Senior Lender at any time, as all of the foregoing may be amended, modified, supplemented, extended, renewed, restated or replaced from time to time. "Subordinated Indebtedness" means all present and future indebtedness, obligations and liabilities of any kind owing by the Company, any Guarantor or any other Person to Subordinated Lenders or any of them from time to time under or pursuant to any of the Subordinated Lending Agreements, including, without limitation, all principal, interest accruing thereon, reimbursement and other Obligations owing pursuant to any letters of credit or similar documents, indemnities, charges, expenses, fees and other Obligations chargeable to the Company, any Guarantor or any such other Person by Subordinated Lenders or any of them or otherwise due and payable at any time to the Subordinated Lenders or any of them, (including without limitation all interest and fees and other amounts accruing after commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of the Company or any other Obligor, whether or not an allowed claim). Without limiting the foregoing, Subordinated Indebtedness shall also include any indebtedness, obligations and liabilities of the Company, any Guarantor or any such other Person incurred in connection with a refinancing of the Subordinated Indebtedness. "Subordinated Lending Agreements" means, collectively, the Subordinated Note and all guarantees, and other agreements, instruments and documents from time to time entered into by the Company, any Guarantor or any other Person to evidence, secure, guarantee or otherwise relating in any way to, or executed in connection with, the Subordinated Note, and all agreements, devices or arrangements providing for payments which are relating to fluctuations of interest rates, exchange rates or forward rates (including without limitation any interest rate, swap agreements, dollar denominated or cross currency interest rate exchange agreements, forward currency exchange agreements, interest rate cap or collar protection agreements, forward rate currency or interest rate options, puts and warrants) entered into by the Company with any Subordinated Lender at any time, as all of the foregoing may be amended, modified, supplemented, extended, renewed, restated or replaced from time to time. "Subordinated Note" means the Subordinated Revolving Loan Promissory Note due in October, 2009 in the principal amount of $100,000,000 dated as of October 1, 1999 of the Company payable to the Subordinated Lender, as amended, modified, supplemented, extended, renewed, restated, restructured, refinanced or replaced from time to time, and including any agreement entered into in substitution thereof. 2 1.2 Other Terms. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Credit Agreement. 1.3 Certain Matters of Construction. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. Wherever appropriate in the context, terms used herein in the singular also include the plural and vice versa. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. All references to any instruments or agreements, including, without limitation, references to any of the Senior Lending Agreements or Subordinated Lending Agreements shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. 2. Covenants. The Company and each Holder of Subordinated Indebtedness hereby covenant that until the Senior Indebtedness shall have been irrevocably paid in full and satisfied in cash and the Credit Agreement and any letters of credit issued pursuant thereto shall have been irrevocably terminated, all in accordance with the terms of the Credit Agreement and the other Senior Lending Agreements, each agrees and will comply with such of the following provisions as are applicable to it: 2.1 Transfers; Etc. Each Holder of Subordinated Indebtedness covenants it will not assign or otherwise transfer any of the Subordinated Indebtedness or any of the Subordinated Lending Agreements without the prior written consent of the Agent. Each Holder of Subordinated Indebtedness covenants that any transferee from it of any Subordinated Indebtedness or any Liens (if any) securing any Subordinated Indebtedness shall, prior to acquiring such interest, execute and deliver a counterpart of this Subordination Agreement to each other party hereto. The Company covenants that any holder of any Subordinated Indebtedness at any time and any Guarantor shall promptly execute and deliver a counterpart of this Subordination Agreement to each other party hereto. 2.2 Subordinated Indebtedness Subordination Provisions. To induce Senior Lenders to enter into the Credit Agreement and to make and continue to make from time to time loans and advances thereunder, notwithstanding any other provision of the Subordinated Indebtedness or the Subordinated Lending Agreements to the contrary, any Distribution with respect to the Subordinated Indebtedness is and shall be expressly junior and subordinated in right of payment to all amounts due and owing upon all Senior Indebtedness from time to time. Specifically, but not by way of limitation: (a) Payments. Neither the Company nor any other Obligor shall make any Distribution on the Subordinated Indebtedness until such time as the Senior Indebtedness shall have been irrevocably paid in full in cash and the Credit Agreement and any letters of credit issued pursuant thereto shall have been irrevocably terminated. (b) Limitation on Acceleration. No Holder of Subordinated Indebtedness shall be entitled to accelerate the maturity of the Subordinated Indebtedness, exercise any remedies with respect to the Subordinated Indebtedness, commence or join with any other creditors in commencing any bankruptcy, reorganization, receivership or insolvency proceeding against the Company or any Obligor or commence any other action or proceeding to recover any amounts due or to become due with respect to Subordinated Indebtedness until such time as the Senior Indebtedness shall have been irrevocably paid in full in cash and the Credit Agreement and any letters of credit issued pursuant thereto shall have been irrevocably terminated. (c) Prior Payment of Senior Indebtedness in Bankruptcy, Etc. In the event of any insolvency or bankruptcy proceedings relative to the Company or any other Obligor or any of their respective property, or any receivership, liquidation, reorganization or other similar proceedings in connection therewith, or, in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Company or any other Obligor or distribution or marshaling of its assets or any composition with creditors of the Company or any other Obligor, whether or not involving insolvency or bankruptcy, or if the Company or any other Obligor shall cease its operations, call a meeting of its creditors or no longer do business as a going concern (each individually or collectively, an "Insolvency Event") then all Senior Indebtedness shall be paid in full in cash and the Credit Agreement irrevocably terminated before any Distribution shall be made on account of any Subordinated Indebtedness, provided, however, that Holders of Subordinated Indebtedness may receive (and shall be entitled to retain) securities which are subordinate to (at least to the extent that the Subordinated Indebtedness is subordinate to the Senior Indebtedness pursuant to the terms hereof) the payment of all Senior Indebtedness. Any such Distribution which would, but for the provisions hereof, be payable or deliverable in respect of the Subordinated Indebtedness, shall be paid or delivered directly to the Senior Lenders or their representatives, in the proportions in which they hold the same, until all amounts owing upon the Senior Indebtedness shall have been irrevocably paid in full in cash and the Credit Agreement and any letters of credit issued pursuant thereto have been irrevocably terminated. (d) Power of Attorney. To enable the Senior Lenders to assert and enforce its rights hereunder in any proceeding referred to in Section 2.2(c) or upon the happening of any Insolvency Event, the Agent or any other Person whom the Senior Lenders may designate is hereby irrevocably 3 appointed attorney in fact for such Holder of Subordinated Indebtedness with full power to act in the place and stead of such Holder of Subordinated Indebtedness including the right to make, present, file and vote such proofs of claim against the Company or any other Obligor on account of all or any part of the Subordinated Indebtedness as Agent may deem advisable and to receive and collect any and all dividends or other payments made thereon and to apply the same on account of the Senior Indebtedness but excluding the right to exercise voting or approvals rights. The Subordinated Lenders will execute and deliver to the Senior Lenders such instruments as may be required by the Senior Lenders to enforce any and all Subordinated Indebtedness, to effectuate the aforesaid power of attorney and to effect collection of any and all dividends or other payments which may be made at any time on account thereof. (e) Payments Held In Trust. Should any Distribution or the proceeds thereof, in respect of the Subordinated Indebtedness, be collected or received by any Holder of Subordinated Indebtedness or any Affiliate of any such holder at a time when the Holders of Subordinated Indebtedness are not permitted, pursuant to the terms hereof, to receive any such Distribution or proceeds thereof, then each Holder of Subordinated Indebtedness will forthwith deliver, or cause to be delivered, the same to the Senior Lenders in precisely the form held by such Holder of Subordinated Indebtedness (plus any necessary endorsements) and, until so delivered, the same shall be held in trust by each Holder of Subordinated Indebtedness, or any such Affiliate, as the property of the Senior Lenders and shall not be commingled with other property of such Holder of Subordinated Indebtedness or any such Affiliate. (f) Subrogation. Subject to the prior payment in full in cash of the Senior Indebtedness and the irrevocable termination of the Credit Agreement and all Letters of Credit issued pursuant thereto, to the extent that Senior Lenders have received any Distribution on the Senior Indebtedness which, but for this Agreement, would have been applied to the Subordinated Indebtedness, the Subordinated Lenders shall be subrogated to the then or thereafter rights of the Senior Lenders including, without limitation, the right to receive any Distribution made on the Senior Indebtedness until the principal of, interest on and other charges due under the Subordinated Indebtedness shall be paid in full; and, for the purposes of such subrogation, no Distribution to the Senior Lenders to which the Subordinated Lenders would be entitled except for the provisions of this Agreement, and no delivery to the Senior Lenders by the Subordinated Lenders pursuant to Section 2.2(g) hereof, shall, as between the Company, its creditors (other than the Senior Lenders) and the Subordinated Lender, be deemed to be a Distribution by the Company to or on account of Senior Indebtedness, it being understood that the provisions hereof are and are intended solely for the purpose of defining the relative rights of the Subordinated Lenders on the one hand, and the Senior Lenders on the other hand. 2.3 Liens. The Company, the other Obligors and the Subordinated Lenders acknowledge, agree and represent and warrant to the Senior Lenders that there are not and will not be any Liens on or with respect to any assets of the Company, any Guarantor or any other Obligor at any time to secure all or any part of the Subordinated Indebtedness and any such Lien shall be null and void. 3. Miscellaneous. 3.1 Scope of Subordination; Reliance. The provisions of this Agreement are solely to define the relative rights of the Holders of Subordinated Indebtedness and the Senior Lenders. Nothing in this Agreement shall impair, as between the Company and the Holders of Subordinated Indebtedness, the unconditional and absolute obligation of the Company to punctually pay the principal, interest and any other amounts and obligations owing under the Subordinated Lending Agreements in accordance with the terms thereof, subject to the rights of the Senior Lenders under this Agreement. The Subordinated Lenders acknowledge and agree that this Agreement is, and is intended to be, an inducement and a consideration to the Senior Lenders for entering into the Senior Lending Agreements and lending and continuing to hold any Senior Indebtedness, whether such Senior Indebtedness was created or acquired before or after the issuance of the Subordinated Indebtedness, to acquire and continue to hold such Senior Indebtedness, and the Senior Lending Agreements were initially entered into in reliance on the Subordinated Lender's agreement to execute this Agreement. The Senior Lenders shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold the Senior Indebtedness. 3.2 Provisions of Subordinated Lending Agreements. From and after the date hereof, the Company, each other Obligor and the Subordinated Lenders shall cause each Subordinated Lending Agreement to contain a provision to the following effect: "This [describe agreement/instrument] is subject to the Subordination Agreement, dated as of December 31, 1999, among the Company, the Holders of Subordinated Indebtedness (as defined therein) and Bank One, Michigan, as agent for the Senior Lenders, under which this [describe agreement/instrument] and the [Obligor's] obligations hereunder and other rights of the Holder are subordinated in the manner set forth therein to the prior payment of obligations to the holders of Senior Indebtedness as defined therein and all collateral security therefor." Proof of compliance with the foregoing shall be promptly given to Senior Lenders. 4 3.3 Survival of Rights. The right of Senior Lenders to enforce the provisions of this Agreement shall not be prejudiced or impaired by any act or omitted act of any Senior Lender, the Company, any Guarantor or any other Person, including forbearance, waiver, consent, compromise, amendment, extension, renewal, or taking or release of security in respect of any Senior Indebtedness or noncompliance by the Company, any Guarantor or any other Person with such provisions, regardless of the actual or imputed knowledge of Senior Lenders. In the event that the Senior Indebtedness is refinanced in full, each Holder of Subordinated Indebtedness agrees at the request of such refinancing party to enter into a subordination agreement on terms substantially the same as this Subordination Agreement. 3.4 Amendments to Senior Lending Agreements. Nothing contained in this Agreement, or in any other agreement or instrument binding upon any of the parties hereto, shall in any manner limit or restrict the ability of the Senior Lenders from increasing or changing the terms of the Obligations under the Senior Lending Agreements, or to otherwise waive, amend or modify the terms and conditions of the Senior Lending Agreements, in such manner as the Senior Lenders and the Company shall mutually determine. Each Holder of Subordinated Indebtedness hereby consents to any and all such waivers, amendments, modifications and compromises, and any other renewals, extensions, indulgences, releases of collateral or other accommodations granted by the Senior Lenders to the Company or any other Obligor from time to time, and agrees that none of such actions shall in any manner affect or impair the subordination established by this Subordination Agreement in respect of the Subordinated Indebtedness. Without limiting the foregoing, and without notice to or the consent of the Subordinated Lender, the Senior Lenders may, at any time and from time to time and without impairing or releasing the subordination herein made, do any one or more of the following: (a) change the manner, place or terms of payment, or change or extend the time of payment of the Senior Indebtedness, or amend or supplement in any manner the documentation evidencing, securing or relating to the Senior Indebtedness, or increase without limit the amount of the Senior Indebtedness; (b) release any person liable in any manner for the payment or collection of the Senior Indebtedness; (c) exercise or refrain from exercising any rights with respect to the Senior Indebtedness against the Company or any of its Subsidiaries, any Guarantor or any other person; (d) apply any monies or other property paid by any person or otherwise available to the Senior Indebtedness; (e) accept or release, or fail to perfect an interest in, any collateral or security for the Senior Indebtedness; or (f) take or omit to take any other action with respect to the Senior Indebtedness which may impair or adversely affect the subordination herein made. 3.5 Notices. Any notice or other communication required or permitted pursuant to this Agreement shall be deemed given (a) when personally delivered to any officer of the party to whom it is addressed, (b) on the earlier of actual receipt thereof or three (3) days following posting thereof by certified or registered mail, postage prepaid, (c) upon actual receipt thereof when sent by a recognized overnight delivery service or (d) upon actual receipt thereof when sent by telecopier to the number set forth below with electronic confirmation of receipt, in each case addressed to each party at its address set forth below or at such other address as has been furnished in writing by a party to the other by like notice: If to Senior Lenders: c/o Bank One 100 East Broad Street 7th Floor Columbus, OH 43215 Attn: Thomas E. Redmond Phone: 614-248-5540 Fax: 614-248-5518 If to the Subordinated Lenders: AirNet Management, Inc. 4700 E. Fifth Avenue Columbus, Ohio 43219 Attention: Julie Hughes, Controller Telephone: 614-236-3840 Telecopier: 614-2381969 If to Company: AirNet Systems, Inc. 3939 International Gateway Columbus, Ohio 43219 Attention: William R. Sumser Telephone: 614-236-3850 Telecopier: 614-237-7876 5 3.6 Representations. The Subordinated Lender and the Company each hereby represent and warrant that: (a) attached hereto as Exhibit A is a true, correct and complete copy of the Subordinated Note, the sole original of the Subordinated Note has been conspicuously imprinted with the legend required by Section 3.2 hereof, and there are no other documents, agreements or instruments evidencing, securing or relating in any way to the Subordinated Indebtedness; (b) all Subordinated Lending Agreements are attached hereto as Exhibit B, and there are no other documents, agreements or instruments evidencing, securing or relating in any way to the Subordinated Indebtedness other than those attached hereto as Exhibits A and B; (c) the Subordinated Lender has not relied and will not rely on any representation or information of any nature made by or received from the Senior Lenders in deciding to execute this Agreement; (d) the Subordinated Lender has not heretofore assigned or transferred any of the Subordinated Indebtedness, any interest therein or any other rights pertaining thereto; (e) the Subordinated Lender has not heretofore given any subordination in respect of the Subordinated Indebtedness; (f) the execution, delivery and performance of this Agreement are within its corporate powers, have been duly authorized and are not in contravention of law or, if applicable, of the terms of its articles of incorporation or bylaws, or of any law, order, judgment, decree, contract or undertaking to which it is a party or by which it or any of its properties is bound or affected; and (g) this Agreement constitutes the legal, valid and binding obligation of each of them, enforceable against each in accordance with its terms. 3.7 Additional Covenants. Until all of the Senior Indebtedness has been irrevocably paid in full in cash and the Credit Agreement and any letters of credit issued pursuant thereto have expired or been terminated, unless otherwise consented to by the Agent in writing: (a) the Company and the Subordinated Lenders shall not assign, transfer, hypothecate or modify, terminate, amend or supplement, or consent to any cancellation, modification, termination, amendment or supplement of, any Subordinated Lending Agreement or any of the other terms of the Subordinated Indebtedness; (b) the Subordinated Lenders shall not hereafter give any subordination in respect to the Subordinated Indebtedness; (c) the Company and the Subordinated Lenders will not hereafter issue any instrument, agreement or other writing evidencing or securing any part of the Subordinated Indebtedness or allow any liens or securing interests on or with respect to any of its assets to secure any part of the Subordinated Indebtedness, and the Subordinated Lenders will not receive any such instrument, security or other writing of any such liens or securing interests, and any such instrument, security or other writing and any such liens or security interests shall be null and void; and (d) the Company and the Subordinated Lenders shall give the Senior Lender prompt notice of any default under the Subordinated Indebtedness. 3.8 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan, without giving effect to the choice of law principles of such State. 3.9 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one in the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. 3.10 Amendments; Successors and Assigns. No provision of this Agreement may be modified or waived except by an instrument or instruments in writing signed by the Senior Lenders (or the requisite number of Senior Lenders as may be required pursuant to the Senior Lending Agreements), the Subordinated Lenders (or the requisite number of Subordinated Lenders as may be required under the Subordinated Lending Agreements) and the Company. This Agreement shall bind the parties hereto and their respective successors and assigns, and shall inure to the benefit of their respective successors and assigns. 3.11 This Agreement Controls. The subordination and related provisions contained in this Agreement are in addition to and supplement all debt subordination and other provisions contained in the Subordinated Lending Agreements and any other instruments or agreements evidencing or relating to the Subordinated Indebtedness in favor of or for the benefit of the Senior Lenders; provided that, in the event of any conflict between this Agreement and the Subordinated Lending Agreements or such other instruments and agreements, the terms of this Agreement shall control. [The rest of this page intentionally left blank.] 6 WITNESS the due execution of this Agreement as of the day and year first above written. BANK ONE, MICHIGAN, as Agent for the Senior Lenders By: ____________________________________ Title:_______________________________ AIRNET SYSTEMS, INC. By: ____________________________________ Title:_______________________________ AIRNET MANAGEMENT, INC. By: ____________________________________ Title:_______________________________ 7 EXHIBIT A Copy of Subordinated Note 8 EXHIBIT B Copy of all Subordinated Lending Agreements 9 EXHIBIT 4.5 SUBSIDIARY GUARANTY THIS SUBSIDIARY GUARANTY (this "Guaranty") is made as of the 31st day of December, 1999, by AirNet Management, Inc., an Ohio corporation (the "Subsidiary Guarantor") in favor of the Agent, for the benefit of the Lenders, under the Credit Agreement referred to below; WITNESSETH: WHEREAS, AirNet Systems, Inc., an Ohio corporation (the "Principal"), certain Lenders from time to time party thereto and Bank One, Michigan, formerly known as NBD Bank, as agent for the Lenders (in such capacity, together with any successor agent, the "Agent") have entered into a certain Credit Agreement dated as of August 1, 1998, as amended by that certain First Amendment to Credit Agreement dated as of September 30, 1998, and as further amended by that certain Second Amendment to Credit Agreement dated of even date herewith (as same may be amended or modified from time to time, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for extensions of credit to be made by the Lenders to the Principal; WHEREAS, it is pursuant to Section 5.1(f) of the Credit Agreement that the Subsidiary Guarantor executes and delivers this Guaranty whereby the Subsidiary Guarantor shall guarantee the payment when due, subject to Section 9 hereof, of all Guaranteed Obligations, as defined below; and WHEREAS, in consideration of the financial and other support that the Principal has provided, and such financial and other support as the Principal may in the future provide to the Subsidiary Guarantor, and in order to induce the Lenders and the Agent to enter into the Credit Agreement, and the Lenders and their Affiliates to enter into one or more Rate Management Transactions with the Principal, and because the Subsidiary Guarantor has determined that executing this Guaranty is in its interest and to its financial benefit, the Subsidiary Guarantor is willing to guarantee the obligations of the Principal under the Credit Agreement, any Note, any Rate Management Transaction, and the other Loan Documents; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION l.1. Selected Terms Used Herein. "Guaranteed Obligations" is defined in Section 3 below. "Rate Management Transaction" means any transaction (including an agreement with respect thereto) now existing or hereafter entered into between the Principal and any Lender or Affiliate thereof which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures. "Rate Management Obligations" means any and all obligations of the Principal, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (i) any and all Rate Management Transactions, and (ii) any and all cancellations, buy backs, reversals, terminations or assignments of any Rate Management Transactions. SECTION 1.2. Terms in Credit Agreement. Other capitalized terms used herein but not defined herein shall have the meaning set forth in the Credit Agreement. SECTION 2.1. Representations and Warranties. The Subsidiary Guarantor represents and warrants (which representations and warranties shall be deemed to have been renewed upon each date an Advance is made under the Credit Agreement) that: 10 (a) It is a corporation, partnership or limited liability company duly and properly incorporated or organized, as the case may be, validly existing and (to the extent such concept applies to such entity) in good standing under the laws of its jurisdiction of incorporation or organization and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted. (b) It has the power and authority and legal right to execute and deliver this Guaranty and to perform its obligations hereunder. The execution and delivery by it of this Guaranty and the performance of its obligations hereunder have been duly authorized by proper corporate proceedings, and this Guaranty constitutes a legal, valid and binding obligation of such Subsidiary Guarantor enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally. (c) Neither the execution and delivery by it of this Guaranty, nor the consummation of the transactions herein contemplated, nor compliance with the provisions hereof will violate (i) any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on it or any of its subsidiaries or (ii) its articles or certificate of incorporation, partnership agreement, certificate of partnership, articles or certificate of organization, by-laws, or operating or other management agreement, as the case may be, or (iii) the provisions of any indenture, instrument or agreement to which it or any of its subsidiaries is a party or is subject, or by which it, or its property, is bound, or conflict with or constitute a default thereunder, or result in, or require, the creation or imposition of any Lien in, of or on the property of such Subsidiary Guarantor or a subsidiary thereof pursuant to the terms of any such indenture, instrument or agreement. No order, consent, adjudication, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of any governmental or public body or authority, or any subdivision thereof, which has not been obtained by it or any of its subsidiaries, is required to be obtained by it or any of its subsidiaries in connection with the execution and delivery of this Guaranty or the performance by it of its obligations hereunder or the legality, validity, binding effect or enforceability of this Guaranty. SECTION 2.2. Covenants. The Subsidiary Guarantor covenants that, so long as any Lender has any Commitment outstanding under the Credit Agreement, any Rate Management Transaction remains in effect or any of the Guaranteed Obligations shall remain unpaid, that it will, and, if necessary, will enable the Principal to, fully comply with those covenants and agreements set forth in the Credit Agreement. SECTION 3. The Guaranty. Subject to Section 9 hereof, the Subsidiary Guarantor hereby absolutely and unconditionally guarantees, as primary obligor and not as surety, the full and punctual payment (whether at stated maturity, upon acceleration or early termination or otherwise, and at all times thereafter) and performance of the Obligations and the Rate Management Obligations, including without limitation any such Obligations or Rate Management Obligations incurred or accrued during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, whether or not allowed or allowable in such proceeding (collectively, subject to the provisions of Section 9 hereof, being referred to as the "Guaranteed Obligations"). Upon failure by the Principal to pay punctually any such amount, the Subsidiary Guarantor agrees that it shall forthwith on demand pay to the Agent for the benefit of the Lenders and, if applicable, their Affiliates, the amount not so paid at the place and in the manner specified in the Credit Agreement, any Note, any Rate Management Transaction or the relevant Loan Document, as the case may be. This Guaranty is a guaranty of payment and not of collection. The Subsidiary Guarantor waives any right to require the Lender to sue the Principal, any other guarantor, or any other person obligated for all or any part of the Guaranteed Obligations, or otherwise to enforce its payment against any collateral securing all or any part of the Guaranteed Obligations. SECTION 4. Guaranty Unconditional. Subject to Section 9 hereof, the obligations of the Subsidiary Guarantor hereunder shall be unconditional and absolute and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (i) any extension, renewal, settlement, compromise, waiver or release in respect of any of the Guaranteed Obligations, by operation of law or otherwise, or any obligation of any other guarantor of any of the Guaranteed Obligations, or any default, failure or delay, willful or otherwise, in the payment or performance of the Guaranteed Obligations; (ii) any modification or amendment of or supplement to the Credit Agreement, any Note, any Rate Management Transaction or any other Loan Document; (iii) any release, nonperfection or invalidity of any direct or indirect security for any obligation of the Principal under the Credit Agreement, any Note, any Rate Management Transaction, any other Loan Document, or any obligations of any other guarantor of any of the Guaranteed Obligations, or any action or failure to act by the Agent, any Lender or any Affiliate of any Lender with respect to any collateral securing all or any part of the Guaranteed Obligations; 11 (iv) any change in the corporate existence, structure or ownership of the Principal or any other guarantor of any of the Guaranteed Obligations, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Principal, or any other guarantor of the Guaranteed Obligations, or its assets or any resulting release or discharge of any obligation of the Principal, or any other guarantor of any of the Guaranteed Obligations; (v) the existence of any claim, setoff or other rights which the Subsidiary Guarantor may have at any time against the Principal, any other guarantor of any of the Guaranteed Obligations, the Agent, any Lender or any other Person, whether in connection herewith or any unrelated transactions; (vi) any invalidity or unenforceability relating to or against the Principal, or any other guarantor of any of the Guaranteed Obligations, for any reason related to the Credit Agreement, any Rate Management Transaction, any other Loan Document, or any provision of applicable law or regulation purporting to prohibit the payment by the Principal, or any other guarantor of the Guaranteed Obligations, of the principal of or interest on any Note or any other amount payable by the Principal under the Credit Agreement, any Note, any Rate Management Transaction or any other Loan Document; or (vii) any other act or omission to act or delay of any kind by the Principal, any other guarantor of the Guaranteed Obligations, the Agent, any Lender or any other Person or any other circumstance whatsoever which might, but for the provisions of this paragraph, constitute a legal or equitable discharge of the Subsidiary Guarantor's obligations hereunder. SECTION 5. Discharge Only Upon Payment In Full: Reinstatement In Certain Circumstances. The Subsidiary Guarantor's obligations hereunder shall remain in full force and effect until all Guaranteed Obligations shall have been indefeasibly paid in full, the Commitments under the Credit Agreement shall have terminated or expired and all Rate Management Transactions have terminated or expired. If at any time any payment of the principal of or interest on any Note or any other amount payable by the Principal or any other party under the Credit Agreement, any Rate Management Transaction or any other Loan Document is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Principal or otherwise, each of the Subsidiary Guarantor's obligations hereunder with respect to such payment shall be reinstated as though such payment had been due but not made at such time. SECTION 6. Waivers. The Subsidiary Guarantor irrevocably waives acceptance hereof, presentment, demand, protest and, to the fullest extent permitted by law, any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against the Principal, any other guarantor of any of the Guaranteed Obligations, or any other Person. SECTION 7. Subrogation. The Subsidiary Guarantor hereby agrees not to assert any right, claim or cause of action, including, without limitation, a claim for subrogation, reimbursement, indemnification or otherwise, against the Principal arising out of or by reason of this Guaranty or the obligations hereunder, including, without limitation, the payment or securing or purchasing of any of the Guaranteed Obligations by the Subsidiary Guarantor unless and until the Guaranteed Obligations are indefeasibly paid in full, any commitment to lend under the Credit Agreement and any other Loan Documents is terminated and all Rate Management Transactions have terminated or expired. SECTION 8. Stay of Acceleration. If acceleration of the time for payment of any of the Guaranteed Obligations is stayed upon the insolvency, bankruptcy or reorganization of the Principal, all such amounts otherwise subject to acceleration under the terms of the Credit Agreement, any Note, any Rate Management Transaction or any other Loan Document shall nonetheless be payable by the Subsidiary Guarantor hereunder forthwith on demand by the Agent made at the request of the Required Lenders. SECTION 9. Limitation on Obligations. (a) The provisions of this Guaranty are severable, and in any action or proceeding involving any state corporate law, or any state, federal or foreign bankruptcy, insolvency, reorganization or other law affecting the rights of creditors generally, if the obligations of the Subsidiary Guarantor under this Guaranty would otherwise be held or determined to be avoidable, invalid or unenforceable on account of the amount of such Subsidiary Guarantor's liability under this Guaranty, then, notwithstanding any other provision of this Guaranty to the contrary, the amount of such liability shall, without any further action by the Subsidiary Guarantor, the Agent or any Lender, be automatically limited and reduced to the highest amount that is valid and enforceable as determined in such action or proceeding (such highest amount determined hereunder being the Subsidiary Guarantor's "Maximum Liability"). This Section 9(a) with respect to the Maximum Liability of the Subsidiary Guarantor is intended solely to preserve the rights of the Agent hereunder to the maximum extent not subject to avoidance under applicable law, and neither the Subsidiary Guarantor nor any other person or entity shall have any right or claim under this Section 9(a) with respect to the Maximum Liability, except to the extent necessary so that the obligations of the Subsidiary Guarantor hereunder shall not be rendered voidable under applicable law. (b) The Subsidiary Guarantor agrees that the Guaranteed Obligations may at any time and from time to time exceed the Maximum Liability of such Subsidiary Guarantor, and may exceed the aggregate Maximum Liability of all other Subsidiary Guarantors, without impairing this Guaranty or affecting the rights and remedies of the Agent hereunder. Nothing in this Section 9(b) shall be construed to increase the Subsidiary Guarantor's obligations hereunder beyond its Maximum Liability. 12 (c) In the event any Subsidiary Guarantor (a "Paying Subsidiary Guarantor") shall make any payment or payments under this Guaranty or shall suffer any loss as a result of any realization upon any collateral granted by it to secure its obligations under this Guaranty, each other Subsidiary Guarantor (each a "Non-Paying Subsidiary Guarantor") shall contribute to such Paying Subsidiary Guarantor an amount equal to such Non-Paying Subsidiary Guarantor's "Pro Rata Share" of such payment or payments made, or losses suffered, by such Paying Subsidiary Guarantor. For the purposes hereof, each Non-Paying Subsidiary Guarantor's "Pro Rata Share" with respect to any such payment or loss by a Paying Subsidiary Guarantor shall be determined as of the date on which such payment or loss was made by reference to the ratio of (i) such Non-Paying Subsidiary Guarantor's Maximum Liability as of such date (without giving effect to any right to receive, or obligation to make, any contribution hereunder) or, if such Non-Paying Subsidiary Guarantor's Maximum Liability has not been determined, the aggregate amount of all monies received by such Non-Paying Subsidiary Guarantor from the Principal after the date hereof (whether by loan, capital infusion or by other means) to (ii) the aggregate Maximum Liability of all Subsidiary Guarantors hereunder (including such Paying Subsidiary Guarantor) as of such date (without giving effect to any right to receive, or obligation to make, any contribution hereunder), or to the extent that a Maximum Liability has not been determined for any Subsidiary Guarantors, the aggregate amount of all monies received by such Subsidiary Guarantors from the Principal after the date hereof (whether by loan, capital infusion or by other means). Nothing in this Section 9(c) shall affect any Subsidiary Guarantor's several liability for the entire amount of the Guaranteed Obligations (up to such Subsidiary Guarantor's Maximum Liability). Each of the Subsidiary Guarantors covenants and agrees that its right to receive any contribution under this Guaranty from a Non-Paying Subsidiary Guarantor shall be subordinate and junior in right of payment to all the Guaranteed Obligations. The provisions of this Section 9(c) are for the benefit of both the Agent and the Subsidiary Guarantors and may be enforced by any one, or more, or all of them in accordance with the terms hereof. SECTION 10. Application of Payments. All payments received by the Agent hereunder shall be applied by the Agent to payment of the Guaranteed Obligations in the following order unless a court of competent jurisdiction shall otherwise direct: (a) FIRST, to payment of all costs and expenses of the Agent incurred in connection with the collection and enforcement of the Guaranteed Obligations or of any security interest granted to the Agent in connection with any collateral securing the Guaranteed Obligations; (b) SECOND, to payment of that portion of the Guaranteed Obligations constituting accrued and unpaid interest and fees, pro rata among the Lenders and their Affiliates in accordance with the amount of such accrued and unpaid interest and fees owing to each of them; (c) THIRD, to payment of the principal of the Guaranteed Obligations and the net early termination payments and any other Rate Management Obligations then due and unpaid from the Borrower to any of the Lenders or their Affiliates, pro rata among the Lenders and their Affiliates in accordance with the amount of such principal and such net early termination payments and other Rate Management Obligations then due and unpaid owing to each of them; and (d) FOURTH, to payment of any Guaranteed Obligations (other than those listed above) pro rata among those parties to whom such Guaranteed Obligations are due in accordance with the amounts owing to each of them. SECTION 11. Notices. All notices, requests and other communications to any party hereunder shall be given or made by telecopier or other writing and telecopied, or mailed or delivered to the intended recipient at its address or telecopier number set forth on the signature pages hereof or such other address or telecopy number as such party may hereafter specify for such purpose by notice to the Agent in accordance with the provisions of Article XIII of the Credit Agreement. Except as otherwise provided in this Guaranty, all such communications shall be deemed to have been duly given when transmitted by telecopier, or personally delivered or, in the case of a mailed notice sent by certified mail return-receipt requested, on the date set forth on the receipt (provided, that any refusal to accept any such notice shall be deemed to be notice thereof as of the time of any such refusal), in each case given or addressed as aforesaid. SECTION 12. No Waivers. No failure or delay by the Agent or any Lenders in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided in this Guaranty, the Credit Agreement, any Note, any Rate Management Transaction and the other Loan Documents shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 13. No Duty to Advise. The Subsidiary Guarantor assumes all responsibility for being and keeping itself informed of the Principal's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations and the nature, scope and extent of the risks that the Subsidiary Guarantor assumes and incurs under this 13 Guaranty, and agrees that neither the Agent nor any Lender has any duty to advise the Subsidiary Guarantor of information known to it regarding those circumstances or risks. SECTION 14. Successors and Assigns. This Guaranty is for the benefit of the Agent and the Lenders and their respective successors and permitted assigns and in the event of an assignment of any amounts payable under the Credit Agreement, any Note, any Rate Management Transaction, or the other Loan Documents, the rights hereunder, to the extent applicable to the indebtedness so assigned, shall be transferred with such indebtedness. This Guaranty shall be binding upon the Subsidiary Guarantor and its respective successors and permitted assigns. SECTION 15. Changes in Writing. Neither this Guaranty nor any provision hereof may be changed, waived, discharged or terminated orally, but only in writing signed by the Subsidiary Guarantor and the Agent with the consent of the Required Lenders. SECTION 16. Costs of Enforcement. The Subsidiary Guarantor agrees to pay all costs and expenses including, without limitation, all court costs and attorneys' fees and expenses paid or incurred by the Agent or any Lender or any Affiliate of any Lender in endeavoring to collect all or any part of the Guaranteed Obligations from, or in prosecuting any action against, the Principal, the Subsidiary Guarantor or any other guarantor of all or any part of the Guaranteed Obligations. SECTION 17. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF MICHIGAN. THE SUBSIDIARY GUARANTOR HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN AND OF ANY MICHIGAN STATE COURT SITTING IN DETROIT, MICHIGAN AND FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS GUARANTY (INCLUDING, WITHOUT LIMITATION, ANY OF THE OTHER LOAN DOCUMENTS) OR THE TRANSACTIONS CONTEMPLATED HEREBY. THE SUBSIDIARY GUARANTOR IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. THE SUBSIDIARY GUARANTOR, AND THE AGENT AND THE LENDERS ACCEPTING THIS GUARANTY, HEREBY IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 18. Taxes. etc. All payments required to be made by the Subsidiary Guarantor hereunder shall be made without setoff or counterclaim and free and clear of and without deduction or withholding for or on account of, any present or future taxes, levies, imposts, duties or other charges of whatsoever nature imposed by any government or any political or taxing authority thereof (but excluding excluded taxes), provided, however, that if the Subsidiary Guarantor is required by law to make such deduction or withholding, such Subsidiary Guarantor shall forthwith (i) pay to the Agent or any Lender, as applicable, such additional amount as results in the net amount received by the Agent or any Lender, as applicable, equaling the full amount which would have been received by the Agent or any Lender, as applicable, had no such deduction or withholding been made, (ii) pay the full amount deducted to the relevant authority in accordance with applicable law, and (iii) furnish to the Agent or any Lender, as applicable, certified copies of official receipts evidencing payment of such withholding taxes within 30 days after such payment is made. IN WITNESS WHEREOF, the Subsidiary Guarantor has caused this Guaranty to be duly executed, under seal, by its authorized officer as of the day and year first above written. AIRNET MANAGEMENT, INC. By: __________________________ Title: _______________________ Address for Subsidiary Guarantor: AirNet Management, Inc. 4700 E. Fifth Avenue Columbus, Ohio 43219 Telecopy No.: (614) 238-1969 14 EXHIBIT 10.1 AIRNET SYSTEMS, INC. AMENDED AND RESTATED 1996 INCENTIVE STOCK PLAN (Reflects amendments through August 18, 1999) SECTION 1. Purposes. The purposes of the Amended and Restated AirNet Systems, Inc. 1996 Incentive Stock Plan are to promote the interests of AirNet Systems, Inc. and its shareholders by (a) attracting and retaining exceptional executive personnel and other key employees of, and advisors and consultants to, and directors of the Company and its Subsidiaries; (b) motivating such employees, advisors and consultants and Eligible Directors by means of performance-related incentives to achieve longer-range performance goals; and (c) providing all long-term employees of the Company and its Subsidiaries with the opportunity to participate in the long-term growth and financial success of the Company. SECTION 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below: "Award" shall mean any Option, Restricted Stock Award or Performance Award but shall not include any Director Option, any Right to Purchase or any Share issued pursuant to Section 10 of this Plan. "Award Agreement" shall mean any written agreement, contract or other instrument or document evidencing any Award which may, but need not, be executed or acknowledged by a Participant. "Board" shall mean the Board of Directors of the Company. "Cash Account" shall mean an account established for each Participant to which amounts withheld through payroll deductions shall be credited to purchase Shares under the provisions of Section 10. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Committee" shall mean a committee of the Board designated by the Board to administer the Plan which shall satisfy the requirements contained in Section 1.162-27(c)(4) of the Final Regulations. The Committee shall be composed of not less than the minimum number of persons from time to time required by Rule l6b-3, each of whom shall be (a) a person from time to time permitted by the rules promulgated under Section 16 of the Exchange Act in order for grants of Awards to be exempt transactions under said Section 16; and (b) receiving remuneration in no other capacity than as a director, except as permitted under Section 1.162-27(e)(3) of the Final Regulations. "Company" shall mean AirNet Systems, Inc., together with any successor thereto. "Covered Employee" shall mean any individual who, on the last day of the Company's taxable year, is (a) the chief executive officer of the Company or is acting in such capacity; or (b) among the four highest compensated officers (other than the chief executive officer). For this purpose, whether an individual is the chief executive officer or one of the four highest compensated officers of the Company shall be determined pursuant to the executive compensation disclosure rules under the Exchange Act. "Director Option" shall mean a Non-Qualified Stock Option granted to an Eligible Director pursuant to Section 6(e) of the Plan. [Amended effective August 18, 1999.] "Effective Date" shall mean the date on which the Plan is approved by the shareholders of the Company. "Eligible Director" shall mean, on any date, a person who is serving as a member of the Board but shall not include a person who is an Employee of the Company or a Subsidiary or a person who was a member of the Board on May 1, 1996. "Employee" shall mean (a) an employee of the Company or of any Subsidiary; and (b) except with respect to an Incentive Stock Option, a Right to Purchase and the issuance of Shares under Section 10, an advisor or consultant to the Company or to any Subsidiary. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" shall mean the fair market value of the property or other item being valued, as determined by the Committee in its sole discretion, provided that the fair market value of Shares shall be determined by reference to the most recent closing price quotation or, if none, the average of the bid and asked prices, as reported as of the most recent available date with respect to the sale of Shares on any quotation system approved by the National Association of Securities Dealers then reporting sales of Shares or on any national securities exchange on which the Shares are then listed. "Final Regulations" shall mean the final regulations promulgated by the Internal Revenue Service under Section 162(m) of the Code. "Incentive Stock Option" shall mean a right to purchase Shares from the Company that is granted under Section 6 of the Plan and that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. "Non-Qualified Stock Option" shall mean a right to purchase Shares from the Company that is granted under Section 6 of the Plan and that is not intended to be an Incentive Stock Option. "Offering" shall mean an opportunity provided by the Committee to purchase Shares under the provisions of Section 10. Offerings may be consecutive or concurrent, as determined by the Committee. The Committee shall designate the maximum number of Shares that may be purchased under each Offering. Shares not sold under one Offering may be offered again in any subsequent Offering. "Offering Effective Date" shall mean the first business day of the month designated by the Committee as the start of the Offering Period applicable to an Offering. "Offering Period" shall mean the duration of an Offering, as designated by the Committee. The Offering Period for any Offering shall not exceed 12 months. "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option but shall not include a Director Option. "Participant" shall mean any Employee selected by the Committee to receive an Award under the Plan. In addition, for purposes of Section 10, the term "Participant" shall include any Employee who has satisfied the requirements of such section to acquire Shares under the Plan. "Performance Award" shall mean any right granted under Section 8 of the Plan. "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other entity. "Plan" shall mean the AirNet Systems, Inc. Amended and Restated 1996 Incentive Stock Plan. "Restricted Stock" shall mean any Share granted under Section 7 of the Plan. "Right to Purchase" shall mean an option to purchase Shares granted to a Participant who elects to participate in an Offering under the provisions of Section 10. A Right to Purchase granted for an Offering shall terminate following the close of business on the Right to Purchase Date for that Offering to the extent that such Right to Purchase is not exercised on such Right to Purchase Date. "Right to Purchase Date" shall mean the last business day of an Offering Period to purchase Shares under the provisions of Section 10. "Rule l6b-3" shall mean Rule l6b-3 as promulgated and interpreted by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time. "SEC" shall mean the Securities and Exchange Commission or any successor thereto and shall include the staff thereof. 16 "Shares" shall mean the Common Shares, $0.01 par value, of the Company or such other securities of the Company as may be designated by the Committee from time to time. "Share Account" shall mean an account established for each Participant who exercises a Right to Purchase under Section 10. A Participant's Share Account will be credited with the number of Shares purchased on each Right to Purchase Date and debited for the number of Shares withdrawn by the Participant after such date. "Subsidiary" shall mean any corporation which, on the date of determination, qualified as a subsidiary corporation of the Corporation under Section 424(f) of the Code. "Substitute Awards" shall mean Awards granted in assumption of, or in substitution for, outstanding awards previously granted by a company acquired by the Company or with which the Company combines. "Ten Percent Shareholder" shall mean any shareholder who, at the time an Incentive Stock Option is granted to such shareholder, owns (within the meaning of Section 424(d) of the Code) more than ten percent of the voting power of all classes of stock of the Company or a Subsidiary. "Year of Service" shall mean each 12 consecutive month period, beginning on an Employee's date of hire with the Company or a Subsidiary (and anniversaries of such date), during which an Employee is employed by the Company or a Subsidiary. For this purpose, all service with the Company or a Subsidiary prior to May 1, 1996 shall be included. Further, periods of service with the Company or a Subsidiary which are interrupted by a termination of employment (not including any authorized leave of absence) of more than two months shall not be aggregated. SECTION 3. Administration. (a) The Plan shall be administered by the Committee. Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to an eligible Employee; (iii) determine the number of Shares to be covered by, or with respect to which payments, rights or other matters are to be calculated in connection with Awards; (iv) determine the terms and conditions of any Award or Director Option; (v) determine whether, to what extent and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, other Awards or other property or canceled, forfeited or suspended; (vi) determine whether, to what extent and under what circumstances cash, Shares, other securities, other Awards, other property and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii) interpret and administer the Plan and any instrument or agreement relating to, or Award or Director Option made under, the Plan; (viii) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. (b) Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan or any Award or Director Option shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and binding upon all Persons, including the Company, any subsidiary, any Participant, any holder or beneficiary of any Award or Director Option, any shareholder and any Employee. SECTION 4. Shares Available for the Plan. (a) Shares Available. Subject to adjustment as provided in Section 4(b), the number of Shares available for issuance under the Plan shall be 1,650,000. If any Shares covered by an Award or Director Option granted under the Plan, or to which such an Award or Director Option relates, or any Shares issued under Section 10, are forfeited, or if an Award or Director Option otherwise terminates or is canceled without the delivery of Shares, then the Shares which may be issued under this Plan, to the extent of any such settlement, forfeiture, termination or cancellation, shall again be, or shall become, Shares available for issuance, to the extent permissible under Rule l6b-3. In the event that any Option, Director Option or other Award granted hereunder is exercised through the delivery of Shares, the number of Shares available under the Plan shall be increased by the number of Shares surrendered, to the extent permissible under Rule l6b-3. (b) Adjustments. In the event that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar 17 corporate transaction or event affects the Shares such that an adjustment is necessary in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall proportionately adjust any or all (as necessary) of (i) the number of Shares or other securities of the Company (or number and kind of other securities or property) which may be issued under the Plan; (ii) the number of Shares or other securities of the Company (or number and kind of other securities or property) subject to outstanding Awards; (iii) the number of Shares or other securities of the Company (or number and kind of other securities or property) and the purchase price per Share subject to purchase under Section 10 hereof; and (iv) the grant or exercise price with respect to any Award; provided, in each case, that with respect to Awards of Incentive stock Options, no such adjustment shall be authorized to the extent that such authority would cause the Plan to violate Section 422(b)(1) of the Code, as from time to time amended. If, pursuant to the preceding sentence, an adjustment is made to outstanding Options held by Participants, a corresponding adjustment shall be made to outstanding Director Options and if, pursuant to the preceding sentence, an adjustment is made to the number of Shares authorized for issuance under the Plan, a corresponding adjustment shall be made to the number of Shares subject to each Director Option thereafter granted pursuant to paragraph (iii) of Section 6(e). [Last sentence of Section 4(b) amended effective August 18, 1999.] (c) Sources of Shares. Any Shares issued pursuant to the terms of this Plan may consist, in whole or in part, of authorized and unissued Shares or of treasury Shares. SECTION 5. Eligibility for Awards and Director Options. Any Employee, including any officer or employee-director of the Company or any Subsidiary, who is not a member of the Committee, shall be eligible to be designated a Participant for purposes of receiving an Award under the Plan. Each Eligible Director shall be eligible to receive Director Options in accordance with Section 6(e) hereof. [Last sentence of Section 5 amended effective August 18, 1999.] SECTION 6. Options and Director Options. (a) Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom Options shall be granted, the number of Shares to be covered by each Option, the option price therefor and the conditions and limitations applicable to the exercise of the Option. The Committee shall have the authority to grant Incentive Stock Options or to grant Non-Qualified Stock Options or to grant both types of options. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to, and comply with, such rules as may be prescribed by Section 422 of the Code, as from time to time amended, and any regulations implementing such statute, including, without limitation, the requirements of Code Section 422(d) which limit the aggregate Fair Market Value of Shares for which Incentive Stock Options are exercisable for the first time to $100,000 per calendar year. Each provision of the Plan and of each written option agreement relating to an Option designated as an Incentive Stock Option shall be construed so that such Option qualifies as an Incentive Stock Option, and any provision that cannot be so construed shall be disregarded. (b) Exercise Price. The Committee shall establish the exercise price at the time each Option is granted, which price, except in the case of Options that are Substitute Awards, shall not be less than 100% of the per Share Fair Market Value on the date of grant. Notwithstanding any provision contained herein, in the case of an Incentive Stock Option, the exercise price at the time such Incentive Stock Option is granted to any Employee who, at the time of such grant, is a Ten Percent Shareholder, shall not be less than 110% of the per Share Fair Market Value on the date of grant. (c) Exercise. Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Award Agreement or thereafter; provided, in the case of an Incentive Stock Option, a Participant may not exercise such Incentive Stock Option after (i) the date which is ten years (five years in the case of a Participant who is a Ten Percent Shareholder) after the date on which such Incentive Stock Option is granted; or (ii) the date which is three months (twelve months in the case of a Participant who becomes disabled, as defined in Section 22(e)(3) of the Code, or who dies) after the date on which he ceases to be an Employee of the Company or a Subsidiary. The Committee may impose such conditions with respect to the exercise of Options, including without limitation, any relating to the application of federal or state securities laws, as it may deem necessary or advisable. The Committee shall have the right to accelerate the exercisability of any Option or outstanding Option in its discretion. (d) Payment. No Shares shall be delivered pursuant to any exercise of an Option until payment in full of the option price therefor is received by the Company. Such payment may be made in cash, or its equivalent or, if and to the extent permitted by the Committee, by exchanging Shares owned by the optionee (which are not the subject of any pledge or other security interest) or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair Market Value of any such Shares so tendered to the Company as of the date of such tender is at least equal to such option price. (e) Director Options. 18 (i) On March 7, 1997, each individual then serving as an Eligible Director was granted an immediately exercisable Director Option to purchase 2,000 Shares at an exercise price per Share equal to the Fair Market Value on the date of grant. (ii) On August 19, 1998, each individual then serving as an Eligible Director was granted a Director Option to purchase 20,000 Shares at an exercise price per share equal to the Fair Market Value on the date of grant. Each Director Option granted on August 19, 1998 shall vest and become exercisable as follows: (A) with respect to 20% of the Shares covered thereby on the grant date; and (B) with respect to an additional 20% of the Shares covered thereby on each of the first, second, third and fourth anniversaries of the grant date. (iii) Any individual who is a newly-elected or appointed Eligible Director after August 19, 1998 shall be granted a Director Option to purchase 20,000 Shares effective on the date of his appointment or election to the Board. Each Director Option granted in accordance with this paragraph (iii) of Section 6(e) shall be granted at an exercise price per Share equal to the Fair Market Value on the date of grant. In addition, each such Director Option shall vest and become exercisable as follows: (A) with respect to 20% of the Shares covered thereby on the grant date; and (B) with respect to an additional 20% of the Shares covered thereby on each of the first, second, third and fourth anniversaries of the grant date. (iv) The Board shall have the sole and complete authority to grant Director Options to the Eligible Directors in addition to those nondiscretionary Director Options granted in accordance with paragraphs (i) through (iii) of this Section 6(e). The Board shall have the authority to determine the date of grant of each such Director Option, the number of Shares covered by each such Director Option, and the date or dates when each such Director Option becomes exercisable. Any Director Option granted by the Board shall be granted at an exercise price per Share equal to the Fair Market Value on the date of grant. (v) Each Director Option granted to an Eligible Director on or after August 18, 1999 shall become immediately exercisable in full (A) by the Eligible Director if he retires from service as a director of the Company, (B) by the Eligible Director if he becomes disabled within the meaning of Section 22(e)(3) of the Code or (C) upon the death of an Eligible Director, by the Eligible Director's estate or by the person who acquires the right to exercise the Director Options of the Eligible Director upon his death by bequest or inheritance. (vi) Once vested and exercisable, each Director Option shall remain exercisable until the earlier to occur of the following two dates: (A) the tenth anniversary of the date of grant of such Director Option; or (B) three months (twelve months in the case of an Eligible Director who becomes disabled, as defined in Section 22(e)(3) of the Code, or who dies) after the date the Eligible Director ceases to be a member of the Board, except that if the Eligible Director ceases to be a member of the Board after having been convicted of, or pled guilty or nolo contendere to, a felony, each of his Director Options shall be canceled on the date he ceases to be a member of the Board. (vii) In the event the Company merges with another Person and the Company is not the survivor in the merger, or in the event all or substantially all of the Company's assets or stock is acquired by another Person, each Director Option shall immediately vest and become exercisable in full. (viii) An Eligible Director may pay the exercise price of a Director Option in the manner described in Section 6(d). [Section 6(e) amended effective August 18, 1999.] SECTION 7. Restricted Stock. (a) Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom Shares of Restricted Stock shall be granted, the number of Shares of Restricted Stock to be granted to each Participant, the duration of the period during which, and the conditions under which, the Restricted Stock will vest and no longer be subject to forfeiture to the Company and the other terms and conditions of such Awards. The Committee shall have the right to accelerate the vesting of any Restricted Stock or outstanding Restricted Stock in its discretion. (b) Transfer Restrictions. Until the lapse of applicable restrictions, Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered except as provided in the Plan or the applicable Award Agreements. Certificates issued in respect of Shares of Restricted Stock shall be registered in the name of the Participant and deposited by such Participant, together with a stock power endorsed in blank, with the Company. 19 Upon the lapse of the restrictions applicable to such Shares of Restricted Stock, the Company shall deliver such certificates to the Participant or the Participant's legal representative. (c) Payment of Dividends. Dividends paid on any Shares of Restricted Stock may be paid directly to the Participant, or may be reinvested in additional Shares of Restricted Stock, as determined by the Committee in its sole discretion. SECTION 8. Performance Awards. (a) Grant. The Committee shall have sole and complete authority to determine the Employees who shall receive a Performance Award denominated in cash or Shares; (i) valued, as determined by the Committee, in accordance with the achievement of such performance goals during such performance periods as the Committee shall establish; and (ii) payable at such time and in such form as the Committee shall determine. (b) Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award and the amount and kind of any payment or transfer to be made pursuant to any Performance Award. (c) Payment of Performance Awards. Performance Awards may be paid in a lump sum or in installments following the close of the performance period or, in accordance with procedures established by the Committee, on a deferred basis. SECTION 9. Code Section 162(m) Limitations. (a) General Limitations. Any Awards issued under this Plan to Covered Employees must satisfy the requirements of this Section 9. (b) Requirements For All Awards. Any Award issued to a Covered Employee shall constitute qualified performance-based compensation. For this purpose, an Award shall constitute qualified performance-based compensation to the extent that: (i) it is granted by the Committee on account of the attainment of one or more preestablished, objective performance goals established by the Committee, in accordance with the provisions of Section 1.162-27(e)(2) of the Final Regulations; (ii) the material terms of the performance goal under which the Award is issued are disclosed to and subsequently approved by the shareholders of the Company, in accordance with the provisions of Section 1.162-27(e)(4) of the Final Regulations; and (iii) the Committee certifies, in writing, prior to the payment of any compensation under the Award, that the performance goals and any other material terms were in fact satisfied. (c) Special Rules For Options. The grant of an Option to a Covered Employee under the Plan shall satisfy the requirements of Section 9(b)(i) above to the extent that the following requirements are satisfied: (i) subject to the provisions of Section 4(b), no Covered Employee shall receive Options for more than 200,000 Shares over any one-year period. For this purpose, to the extent that any Option is canceled (as described in Section 1.162-27(e)(2)(vi)(B) of the Final Regulations), such canceled Option shall continue to be counted against the maximum number of Shares for which Options may be granted to a Covered Employee under the Plan; and (ii) under the terms of the Option, the amount of compensation that the Covered Employee may receive is based solely on an increase in the value of the Shares after the grant of the Option, unless the grant of such Option is contingent upon the attainment of a performance goal that otherwise satisfies the requirements of Section 9(b)(i) above. SECTION 10. Stock Purchase Plan. 20 (a) Eligibility. Each Employee who has at least one Year of Service on an Offering Effective Date shall be eligible to participate in the Offering which is applicable to such Offering Effective Date. Nothing contained herein and no rules and regulations prescribed by the Committee shall permit or deny participation in any Offering contrary to the requirements of the Code (including, without limitation, Sections 423(b)(3), 423(b)(4) and 423(b)(8) thereof). Nothing contained herein and no rules and regulations prescribed by the Committee shall permit any Participant to be granted a Right to Purchase: (i) if, immediately after such Right to Purchase is granted, such Participant would own, and/or hold outstanding options or rights to purchase, shares of the Company or of any Subsidiary, possessing five percent (5%) or more of the total combined voting power or value of all classes of shares of the Company or such Subsidiary; or (ii) which permits a Participant's rights to purchase Shares under all employee stock purchase plans of the Company and of its Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000.00) of Fair Market Value of Shares (determined as of the date such Right to Purchase is granted) for each calendar year in which such Right to Purchase is outstanding at any time. For purposes of clause (a)(i) above, the provisions of Section 424(d) of the Code shall apply in determining the stock ownership of each Participant. For purposes of clause (a)(ii) above, the provisions of Section 423(b)(8) of the Code shall apply in determining whether a Participant's Rights to Purchase and other rights are permitted to accrue at a rate in excess of the permitted rate. (b) Purchase Price. The purchase price for a Share under each Offering shall be determined by the Committee prior to the Offering Effective Date and shall be stated as a percentage of the Fair Market Value of a Share on either the Right to Purchase Date or the Offering Effective Date, whichever is the lesser, but the purchase price shall not be less than the lesser of eighty-five percent (85%) of the per share Fair Market Value of the Shares as of the Offering Effective Date or eighty-five percent (85%) of the per share Fair Market Value of the Shares as of the Right to Purchase Date for the Offering. (c) Participation in Offerings. Except as may be otherwise provided for herein, each Employee who is eligible for and elects to participate in an Offering shall be granted Rights to Purchase for as many Shares as he may elect to purchase during that Offering, to be paid by payroll deductions during such period. The Committee shall establish administrative rules and regulations regarding the payroll deduction process for this Section 10, including, without limitation, minimum and maximum permissible deductions; the timing for initial elections, changes in elections and suspensions of elections during an Offering Period; and the complete withdrawal by a Participant from an Offering. Amounts withheld through payroll deductions under this paragraph shall be credited to each Participant's Cash Account. Such amounts will be delivered to a custodian for the Plan and held pending the purchase of Shares as described in paragraph (e) of this Section 10. All amounts held in a Participant's Cash Account shall bear interest at a rate as may be agreed upon by the Committee and the custodian of the Plan. If a Participant withdraws entirely from an Offering (pursuant to rules established by the Committee), his Cash Account balance will not be used to purchase Shares on the Right to Purchase Date. Instead, the portion of the Cash Account equal to the Participant's payroll deductions under the Plan during the Offering Period will be refunded to the Participant without interest (notwithstanding any provision contained herein). Such a Participant will not be eligible to re-enroll in that Offering, but may resume participation on the Offering Effective Date for the next Offering. In addition, the Committee may impose such other restrictions on the right to withdraw from Offerings as it may deem appropriate. (d) Grant of Rights to Purchase. Rights to Purchase with respect to Shares shall be granted to Participants who elect to participate in an Offering. Such Rights to Purchase may be exercised on the Right to Purchase Date applicable to the Offering. The number of Shares subject to Rights to Purchase on each Right to Purchase Date shall not exceed the number of Shares authorized for issuance during the applicable Offering. (e) Exercise of Rights to Purchase. Each Right to Purchase shall be exercised on the applicable Right to Purchase Date. Each Participant automatically and without any act on his part will be deemed to have exercised a Right to Purchase on each Right to Purchase Date to purchase the number of whole and fractional Shares which the amount in his Cash Account at that time is sufficient to purchase at the applicable purchase price. Any remaining amount credited to a Participant's Cash Account after such application shall remain in such Participant's Cash Account for use in the next Offering unless withdrawn by the Participant. The Company shall deliver to the custodian of the Plan as soon as practicable after each Right to Purchase Date a certificate for the total number of Shares purchased by all Participants on such Right to Purchase Date. The custodian shall allocate the proper number of Shares to the Share Account of each Participant. If the aggregate Cash Account balances of all Participants on any Right to Purchase Date exceeds the amount required to purchase all of the Shares subject to Rights to Purchase on that Right to Purchase Date, then the Shares subject to Rights to Purchase shall be allocated pro rata among the Participants in the proportion that the number of Shares subject to Rights to Purchase bears to the number of Shares that could have been purchased with such aggregate amount available, if an unlimited number of Shares were available for 21 purchase. Any balances remaining in Participants' Cash Accounts due to over subscription will remain in the Participants' Cash Accounts for use in the next Offering unless withdrawn by the Participant. (f) Withdrawals From Share Accounts and Dividend Reinvestment. A Participant may withdraw the Shares credited to his Share Account on a first-in-first-out basis. The Committee shall establish rules and regulations governing such withdrawals. All cash dividends paid, if any, with respect to the Shares credited to a Participant's Share Account shall be added to the Participant's Cash Account and thereby shall be applied to exercise Rights to Purchase for Shares on the Right to Purchase Date next succeeding the date such cash dividends are paid by the Company. An election to leave Shares with the custodian shall constitute an election to apply the cash dividends with respect to such Shares to the exercise of Rights to Purchase hereunder. Shares so purchased shall be applied to the Shares credited to each Participant's Share Account. (g) Termination of Employment. If the employment of a Participant terminates for any reason, including death, disability, retirement or other cause, his participation in this Section 10 of the Plan shall automatically and without any act on his part terminate as of the date of termination of his employment. As soon as practicable following the Participant's termination of employment, the Company shall refund to such Participant (or beneficiary, in the case of the Participant's death) any amount in his Cash Account which constitutes payroll deductions, without interest, and the custodian shall deliver to such Participant a share certificate issued in his name for the number of whole Shares credited to his Share Account through prior Offerings. (h) Effect of Merger or Liquidation Involving the Company. In the event the Company merges with another entity and the Company is not the surviving entity, or in the event all or substantially all of the Company's assets or stock is acquired by another entity, the Committee may, in connection with any such transaction, cancel each outstanding Right to Purchase and refund sums previously collected from Participants under the canceled Rights to Purchase, or, in its discretion, cause each Participant with outstanding Rights to Purchase to have his or her Rights to Purchase exercised immediately prior to such transaction and thereby the balance of his or her Cash Account applied to the purchase of Shares at the purchase price in effect for that Offering, which would be treated as ending with the effective date of such transaction. The balances of the Cash Accounts not so applied shall be refunded to the Participants. In the event of a merger in which the Company is the surviving entity, each Participant shall be entitled to receive, for each Share as to which such Participant's Rights to Purchase are exercised, the securities or property that a holder of one Share was entitled to receive in connection with the merger. To the extent that this paragraph is inconsistent with any other provision in this Plan, this paragraph shall control. SECTION 11. Amendment and Termination. (a) Amendments to the Plan. The Board may amend, alter, suspend, discontinue or terminate the Plan or any portion thereof at any time; provided that no such amendment, alteration, suspension, discontinuation or termination shall be made without shareholder approval if such approval is necessary to comply with any tax or regulatory requirement, including for these purposes any approval requirement which is a prerequisite for exemptive relief from Section 16(b) of the Exchange Act for which or with which the Board deems it necessary or desirable to qualify or comply. Notwithstanding anything to the contrary herein, the Committee may amend the Plan, subject to any shareholder approval required under Rule l6b-3, in such manner as may be necessary so as to have the Plan conform with local rules and regulations in any jurisdiction outside the United States. (b) Amendments to Awards. Subject to the provisions of Section 9, the Committee may waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate any Award theretofore granted, prospectively or retroactively; provided that any such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination that would impair the rights of any Participant or any holder or beneficiary of any Award theretofore granted shall not to that extent be effective without the consent of the affected Participant, holder or beneficiary. (c) Cancellation of Award. Any provision of this Plan (except Section 9) or any Award Agreement to the contrary notwithstanding, the Committee may cause any Award granted hereunder to be canceled in consideration of the granting to the holder of an alternative Award having a Fair Market Value equal to the Fair Market Value of such canceled Award. SECTION 12. General Provisions. (a) Nontransferability. (i) Each Award, each Director Option and each Right to Purchase, and each right under any Award, any Director Option or any Right to Purchase, shall be exercisable during the Participant's or the Eligible Director's lifetime only by the Participant or the Eligible Director or, if permissible under 22 applicable law, by the Participant's or the Eligible Director's guardian or legal representative or a transferee receiving such Award, Director Option or Right to Purchase pursuant to a qualified domestic relations order ("QDRO"), as determined by the Committee. (ii) No Award, Director Option or Right to Purchase that constitutes a "derivative security," for purposes of Section 16 of the Exchange Act, may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant or Eligible Director otherwise than by will or by the laws of descent and distribution or pursuant to a QDRO, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Subsidiary; provided that the designation of a beneficiary shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance. (b) No Rights to Awards. No Employee, Participant or other Person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Employees, Participants or holders or beneficiaries of Awards. The terms and conditions of Awards need not be the same with respect to each recipient. (c) Share Certificates. All certificates for Shares or other securities of the Company or any Subsidiary delivered under the Plan shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations and other requirements of the SEC, any stock exchange or national securities association upon which such Shares or other securities are then listed and any applicable federal or state laws; and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (d) Withholding. A Participant or Eligible Director may be required to pay to the Company or any Subsidiary and the Company or any Subsidiary shall have the right and is hereby authorized to withhold from any Award, Director Option or Share otherwise issued under the Plan, from any payment due or transfer made under any Award or any Director Option or otherwise under the Plan, or from any compensation or other amount owing to a Participant or Eligible Director, the amount of any applicable withholding taxes in respect of an Award, a Director Option or a Share otherwise issued under the Plan, its exercise or any payment or transfer under an Award, under a Director Option or otherwise under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. With respect to Participants who are not subject to Section 16 of the Exchange Act, the withholding may be in the form of cash, Shares, other securities, other Awards or other property as the Committee may allow. With respect to Participants and Eligible Directors who are subject to Section 16 of the Exchange Act, the withholding shall be in cash or in any other property permitted by Rule 16b-3 as the Committee may allow. The Committee may provide for additional cash payments to Participants or Eligible Directors to defray or offset any tax arising from the grant, vesting, exercise or payments of any Award or Share otherwise issued under this Plan. (e) Award Agreements. Each Award hereunder shall be evidenced by an Award Agreement which shall be delivered to the Participant and shall specify the terms and conditions of the Award and any rules applicable thereto, including but not limited to the effect on such Award of the death, retirement or other termination of employment of a Participant and the effect, if any, of a change in control of the Company. (f) No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Subsidiary from adopting or continuing in effect other compensation arrangements, which may, but need not, provide for the grant of options, restricted stock, shares and other types of awards provided for hereunder (subject to shareholder approval if such approval is required), and such arrangements may be either generally applicable or applicable only in specific cases. (g) No Right to Employment. Eligibility for participation in this Plan or the grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Subsidiary. Further, the Company or a Subsidiary may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. (h) No Rights as Shareholder. Subject to the provisions of the Plan and/or the applicable Award, no Participant or holder or beneficiary of any Award, Director Option or Right to Purchase shall have any rights as a shareholder with respect to any Shares to be distributed under the Plan until he or she has become the holder of such Shares. Notwithstanding the foregoing, in connection with each grant of Restricted Stock hereunder, the applicable Award shall specify if and to what extent the Participant shall not be entitled to the rights of a shareholder in respect of such Restricted Stock. (i) Governing Law. The validity, construction and effect of the Plan and any rules and regulations relating to the Plan and any Award Agreement shall be determined in accordance with the laws of the State of Ohio. 23 (j) Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect. (k) Other Laws. The Committee may refuse to issue or transfer any Shares or other consideration under the Plan if, acting in its sole discretion, it determines that the issuance or transfer of such Shares or such other consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the issuance of such Shares shall be promptly refunded to the relevant Participant, holder or beneficiary. Without limiting the generality of the foregoing, no Award granted hereunder shall be construed as an offer to sell securities of the Company, and no such offer shall be outstanding, unless and until the Committee in its sole discretion has determined that any such offer, if made, would be in compliance with all applicable requirements of the U.S. federal securities laws. (l) No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Subsidiary and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Subsidiary pursuant to the Plan, such rights shall be no greater than the right of any unsecured general creditor of the Company or any Subsidiary. (m) Rule l6b-3 Compliance. With respect to persons subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable terms and conditions of Rule 16b-3 and any successor provisions. To the extent that any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. (n) Headings. Headings are given to the sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. (o) No Impact on Benefits. Plan Awards or Shares otherwise issued under this Plan shall not be treated as compensation for purposes of calculating an Employee's rights under any employee benefit plan. (p) Indemnification. Each person who is or shall have been a member of the Committee or of the Board shall be indemnified and held harmless by the Company against and from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit or proceeding to which he may be made a party or in which he may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him in settlement thereof, with the Company's approval, or paid by him in satisfaction of any judgment in any such action, suit or proceeding against him, provided he shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive and shall be independent of any other rights of indemnification to which such persons may be entitled under the Company's Articles of Incorporation or Regulations, by contract, as a matter of law, or otherwise. SECTION 13. Term of the Plan. (a) Effective Date. The AirNet Systems, Inc. 1996 Stock Incentive Plan was effective as of May 1, 1996. The amendment and restatement of such Plan shall be effective as of the date of its approval by the shareholders of the Company. (b) Expiration Date. No Award or Right to Purchase shall be granted under the Plan after May 1, 2006. Unless otherwise expressly provided for in the Plan or in an applicable Award Agreement, any Award granted hereunder may, and the authority of the Board or the Committee to amend, alter, adjust, suspend, discontinue or terminate any such Award or to waive any conditions or rights under any such Award shall, continue after May 1, 2006. 24 EXHIBIT 10.6 Confidential Agreement By and Between AirNet Systems, Inc. And Joel E. Biggerstaff This agreement is entered into by and between AirNet Systems, Inc. ("AirNet"), an Ohio corporation, and Joel E. Biggerstaff ("Biggerstaff"). WHEREAS, AirNet desires to employ Biggerstaff in the positions of President and Chief Operating Officer of AirNet; WHEREAS, Biggerstaff desires to accept the positions of President and Chief Operating Officer of AirNet, effect August 16, 1999 ("Effective Employment Date"); WHEREAS, AirNet and Biggerstaff desire to enter into an agreement to establish the rights and obligations of Biggerstaff and AirNet in such employment relationship; NOW, THEREFORE, in consideration of the mutual promises and other good and valuable consideration contained herein, the parties agree as follows: 1. Biggerstaff will satisfactorily discharge such duties as may be reasonably assigned to him in the capacity of President and Chief Operating Officer by AirNet's Chief Executive Officer. 2. Biggerstaff will be paid a Base Salary of $220,000 per year, payable bi-weekly. Biggerstaff's Base Salary subsequent to the first year following the Effective Employment Date may be adjusted annually by the Compensation Committee of the Board of Directors of AirNet Systems, Inc. ("AirNet Compensation Committee"). 3. Biggerstaff will participate in the management incentive compensation system, which for on-plan performance (defined as 100% of agreed upon goals and objectives achieved) would pay Biggerstaff 70% of his Base Salary in the first year of employment, with a $30,000 guaranteed bonus for 1999 employment. 4. Incentive compensation targets subsequent to the first year may be adjusted annually by the AirNet Compensation Committee. 5. In the event of a change in control of AirNet resulting from either a substantial change in ownership or in senior management (as defined in a resolution by the AirNet Board of Directors), which results in Biggerstaff's involuntary termination of employment by AirNet or results in a material reduction in Biggerstaff's responsibilities without cause for a period of up to two years subsequent to Biggerstaff's Effective Employment Date, Biggerstaff will receive payment equal to one year of his then current Base Salary. 6. If Biggerstaff is involuntarily terminated by AirNet or its successor(s) for any reason other than fraud, bad faith, etc. for the period up to three years subsequent to the Effective Employment Date, AirNet will pay Biggerstaff an amount equal to one year of his then current Base Salary. Thereafter, if Biggerstaff is involuntarily terminated by AirNet or its successor(s) for any reason other than fraud, bad faith, etc., AirNet will pay Biggerstaff an amount equal to eighteen months of his then current Base Salary. 7. AirNet will award 80,000 AirNet stock options under the 1996 AirNet Incentive Stock Plan (1996 Plan), as amended, to Biggerstaff at the Effective Date of Employment. The options will be priced based on fair market value (as defined in the 1996 Plan) on the Effective Date of Employment and will vest 25% immediately and 25% annually over the following three years. If AirNet experiences a change in control (as defined in a resolution by the AirNet Board of Directors), unvested options will vest at the time of the change of control. 8. Biggerstaff will receive three weeks of paid vacation and other benefits customarily made available to AirNet officers and team members. 9. AirNet will pay all reasonable costs associated with relocating Biggerstaff's family to Central Ohio. 10. Biggerstaff will be entitled to personal use of the AirNet aircraft at cost, when available. IN WITNESS WHEREOF, the undersigned voluntarily and knowingly signed this Agreement this 16th day of July, 1999. WITNESSED: /s/ Ann Mancuso /s/ Joel E. Biggerstaff ------------------------ ---------------------------- Ann Mancuso Joel E. Biggerstaff IN WITNESS WHEREOF, the undersigned is a duly authorized officer of AirNet Systems, Inc. and voluntarily and knowingly signed this Agreement this 16th day of July, 1999. WITNESSED: AIRNET SYSTEMS, INC. /s/ Ann Mancuso /s/ Gerald G. Mercer ------------------------ ---------------------------- Ann Mancuso Gerald G. Mercer Its CEO EXHIBIT 10.7 AIRNET SYSTEMS, INC. DIRECTOR DEFERRED COMPENSATION PLAN Section 1. PURPOSE - The Company desires and intends to recognize the value to the Company and its Affiliates of the past and present services of the Directors of the Company and its Affiliates, to encourage their continued service to the Company and its Affiliates and to be able to attract and retain superior Directors by adopting and implementing this Plan to provide such Directors an opportunity to defer compensation otherwise payable to them from the Company and/or Affiliate. Section 2. CERTAIN DEFINITIONS - The following terms will have the meanings provided below. "Additions" means the credits applied to Deferred Compensation Accounts as provided in Section 4 hereof. "Adjustment Date" means the last business day of each calendar quarter. "Affiliate" means any organization or entity which, together with the Company, is a member of a controlled group of corporations or of a commonly controlled group of trades or businesses [as defined in Sections 414(b) and (c) of the Code], or of an affiliated service group [as defined in Code Section 414(m)] or other organization described in Code Section 414(o). "Annual Retainer" means, with respect to any calendar year or other period, the fixed retainer which, absent an election to defer hereunder, would be payable to a Participant during those pay periods beginning in the given calendar year or other period. "Beneficiary" means the person or persons designated in writing as such and filed with the Plan Administrator at any time by a Participant. Any such designation may be withdrawn or changed in writing (without the consent of the Beneficiary), but only the last designation on file with the Plan Administrator shall be effective. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as may be amended from time to time. "Common Shares" means the common shares of the Company. "Company" means AirNet Systems, Inc. and any successor entity. "Deferred Compensation Account" means the separate Deferred Compensation Account established for each Participant pursuant to Section 4 of the Plan. "Director" means any director of the Company and any director of an Affiliate of the Company. "Effective Date" means May 27, 1998. "Eligible Compensation" means, to the extent applicable to any given Participant, the Annual Retainer and all Meeting Fees. The extent to which a given Participant may defer a given component of Eligible Compensation shall be based upon such Participant's eligibility to receive the given component of Eligible Compensation (as determined under applicable agreements and pay practices of the Company or applicable Affiliate) and the provisions and limitations applicable to the given component as provided under this Plan. "Fair Market Value" of the Common Shares means the most recent closing price of the Common Shares on any securities exchange on which the Common Shares are then listed. "Meeting Fees" means, with respect to any calendar year or other period, the fees for attendance at meetings of the Board of Directors of the Company or applicable Affiliate or any committees thereof (exclusive of expenses) which, absent an election to defer hereunder, would be payable to a Participant during those pay periods beginning in the given calendar year or other period. "Participant" has the meaning specified in Section 3 of the Plan. 1 "Plan" means the AirNet Systems, Inc. Director Deferred Compensation Plan, as reflected in this document, as the same may be amended from time to time after the Effective Date. "Plan Administrator" means the Company. "Plan Year" means the calendar year. Section 3. PARTICIPANTS Each Director as of the Effective Date shall be eligible for participation in the Plan as of such date. Each Director who first becomes a Director after the Effective Date shall be eligible for participation in the Plan as of the date on which he becomes a Director. A Director who is eligible for participation in the Plan and who elects to make deferral contributions pursuant to Section 4 shall be designated a "Participant" in the Plan. A Participant shall continue to participate in the Plan until his status as a Participant is terminated by either a complete distribution of his Deferred Compensation Account pursuant to the terms of the Plan or by written directive of the Company. 2 Section 4. DEFERRED COMPENSATION ACCOUNTS A. Establishment of Deferred Compensation Accounts. The Plan Administrator will establish a Deferred Compensation Account for each Participant. A Participant's Deferred Compensation Account shall have two subaccounts--a Cash Account to record amounts allocated under Section 4.D.(ii) and a Stock Account to record amounts allocated under Section 4.D.(iii). Such Deferred Compensation Account shall be a bookkeeping account only, maintained as part of the books and records of the Company or applicable Affiliate. B. Election of Participant. With respect to each Plan Year, a Participant may elect to have a percentage or a flat dollar amount of his Eligible Compensation which is to be paid to him by the Company or applicable Affiliate for the Plan Year in question allocated to his Deferred Compensation Account and paid on a deferred basis pursuant to the terms of the Plan. To exercise such an election for any Plan Year, within thirty (30) days prior to the commencement of the Plan Year, the Participant must advise the Plan Administrator of his election, in writing, on a form prescribed by the Plan Administrator (each, a "Deferral Notice"). Notwithstanding the preceding sentence, in the first year of the Plan, or in the case of a Director who first becomes eligible to participate in the Plan after the Effective Date, a Participant may complete a Deferral Notice at any time within thirty (30) days following the date on which he is first eligible to participate in the Plan. Such Deferral Notice shall apply only to Eligible Compensation payable to, or earned by, the Participant after the date on which the Deferral Notice is received by the Plan Administrator. To the extent that a Participant completes a Deferral Notice in accordance with the provisions of this paragraph, such Deferral Notice shall remain in effect for future Plan Years until changed or revoked by the Participant. C. Company Contributions. Each time a Deferral Notice is submitted to the Plan Administrator in accordance with Section 4.B. above, during the next Plan Year (or, if applicable, the remaining Plan Year), the Company or applicable Affiliate will allocate to the Participant's Deferred Compensation Account the percentage or dollar amount of Eligible Compensation specified in the Deferral Notice. Notwithstanding the preceding sentence, to the extent that a Participant elects, under Section 4.D.(i), to have a portion of his Eligible Compensation deferred under Section 4.B. allocated to his Stock Account, the Company or applicable Affiliate shall increase such amount by 25% and allocate such additional amount to the Participant's Stock Account. Any amounts allocated by the Company or Affiliate under this Section 4.C. are called "Company Contributions." D. Adjustment of Account Balances. (i) Participant Election. At the time that a Participant submits a Deferral Notice, he shall elect the percentage of his deferred amounts to be allocated to his Cash Account (to be adjusted pursuant to Paragraph (ii) of this Section 4.D.) and his Stock Account (to be adjusted pursuant to Paragraph (iii) of this Section 4.D.). Any election made pursuant to this Paragraph (i) shall be irrevocable with respect to the affected amounts. (ii) As of each Adjustment Date, the Plan Administrator shall credit the balance in the Participant's Cash Account with Additions which shall mirror a specific interest rate. For this purpose, the interest rate to be used shall be equal to the rate of return on [designate investment (e.g. 3-year Treasury Bill)] as of the applicable Adjustment Date. The crediting of Additions shall be determined by multiplying the Participant's Cash Account balance as of the previous Adjustment Date by the applicable rate of interest determined under the preceding sentence. The crediting of Additions shall occur so long as there is a balance in the Participant's Cash Account regardless of whether the Participant has terminated service as a Director or has died. The Plan Administrator may prescribe any reasonable method or procedure for the accounting of Additions. (iii) As of each Adjustment Date, the amount credited to the Stock Account of each Participant shall be divided by the then Fair Market Value of the Common Shares. Upon completion of this calculation, each Stock Account shall be credited with the resulting number of whole Common Shares; and any remaining amounts shall continue to be credited to the Stock Account until converted to whole Common Shares at a future Adjustment Date. The Stock Account of each Participant shall be credited with cash dividends on the Common Shares on and after the date credited to the Stock Account. At the following Adjustment Date, the amount of cash dividends credited to each Stock Account (and any other amounts then credited to such account) shall be divided by the then Fair Market Value of the Common Shares; and the Stock Account of each Participant shall be credited with the resulting number of whole Common Shares and any remaining amounts shall continue to be credited to the Stock Account until converted to whole Common Shares at a future Adjustment Date. The Plan Administrator may prescribe any reasonable method or procedure for the accounting of Additions. E. Stock Adjustments. The number of Common Shares in the Stock Account of each Participant shall be adjusted from time to time to reflect stock splits, stock dividends or other changes in the Common Shares resulting from a change in the Company's capital structure. F. Participant's Rights in Accounts. A Participant's only right with respect to his Deferred Compensation Account (and amounts allocated thereto) will be to receive payments in accordance with the provisions of Section 5 of the Plan. 3 Section 5. PAYMENT OF DEFERRED BENEFITS A. Time of Payment. Distribution of a Participant's Deferred Compensation Account shall commence within thirty (30) days of the earlier of (i) the date specified by the Participant in the Deferral Notice delivered to the Plan Administrator at the time the deferral election is made; or (ii) the date of the Participant's termination of service as a Director due to resignation, retirement, death or otherwise. B. Method of Distribution. A Participant's Deferred Compensation Account shall be distributed to the Participant either in a single lump sum payment or in equal annual installments over a period of not more than ten (10) years. To the extent that a Deferred Compensation Account is distributed in installment payments, the undisbursed portions of such account shall continue to be credited with Additions in accordance with the applicable provisions of Section 4.D. In addition, if, as of any Adjustment Date, the amount allocated to a Participant's Deferred Compensation Account is less than $1,000, the Plan Administrator may elect to pay such amount to the Participant and reduce the balance of his Deferred Compensation Account to zero. The method of distribution shall be elected by the Participant in the Deferral Notice delivered to the Plan Administrator at the time the deferral election is made. Cash Accounts shall be distributed in cash. Stock Accounts shall be distributed either in Common Shares or in cash at the election of the Plan Administrator. In the event that a distribution of a Participant's Stock Account is made in cash, the Plan Administrator shall determine the amount of such distribution by using the Fair Market Value of the Common Shares as of either the date of distribution specified by the Participant in his Deferral Notice or the date on which the Participant's service as a Director terminated, whichever may be applicable. C. Hardship Distributions. Prior to the time a Participant's Deferred Compensation Account becomes payable, the Plan Administrator, in its sole discretion, may elect to distribute all or a portion of such account in the event such Participant requests a distribution due to severe financial hardship. For purposes of this Plan, severe financial hardship shall be deemed to exist in the event the Plan Administrator determines that a Participant needs a distribution to meet immediate and heavy financial needs resulting from a sudden or unexpected illness or accident of the Participant or a member of the Participant's family, loss of the Participant's property due to casualty or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. A distribution based on financial hardship shall not exceed the amount required to meet the immediate financial need created by the hardship and shall be made in cash. With respect to a Participant's Stock Account, any hardship distribution shall be made in cash, based upon the Fair Market Value of the Common Shares as of the date of distribution. D. Designation of Beneficiary. Upon the death of a Participant, his Deferred Compensation Account shall be paid to the Beneficiary designated by the Participant. If there is no designated Beneficiary or no designated Beneficiary surviving at a Participant's death, payment of the Participant's Deferred Compensation Account shall be made to the Participant's estate. E. Taxes. In the event any taxes are required by law to be withheld or paid from any payments made pursuant to the Plan, the Plan Administrator shall deduct such amounts from such payments and shall transmit the withheld amounts to the appropriate taxing authority. Section 6. ASSIGNMENT OR ALIENATION - The right of a Participant, Beneficiary or any other person to the payment of a benefit under this Plan may not be assigned, transferred, pledged or encumbered except by Will or by the laws of descent and distribution. 4 Section 7. PLAN ADMINISTRATION - The Plan Administrator will have the right to interpret and construe the Plan and to determine all questions of eligibility and of status, rights and benefits of Participants and all other persons claiming benefits under the Plan. In all such interpretations and constructions, the Plan Administrator's determination will be based upon uniform rules and practices applied in a nondiscriminatory manner and will be binding upon all persons affected thereby. Subject to the provisions of Section 8 below, any decision by the Plan Administrator with respect to any such matters will be final and binding on all parties. The Plan Administrator will have absolute discretion in carrying out its responsibilities under this Section 7. Section 8. CLAIMS PROCEDURE A. Filing Claims. Any Participant or Beneficiary entitled to benefits under the Plan will file a claim request with the Plan Administrator. B. Notification to Claimant. If a claim request is wholly or partially denied, the Plan Administrator will furnish to the claimant a notice of the decision within ninety (90) days in writing and in a manner calculated to be understood by the claimant, which notice will contain the following information: (i) the specific reason or reasons for the denial; (ii) specific reference to pertinent Plan provisions upon which the denial is based; (iii) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (iv) an explanation of the Plan's claims review procedure describing the steps to be taken by a claimant who wishes to submit his claims for review. C. Review Procedure. A claimant or his authorized representative may, with respect to any denied claim: (i) request a review upon a written application filed within sixty (60) days after receipt by the claimant of written notice of the denial of his claim; (ii) review pertinent documents; and (iii) submit issues and comments in writing. 5 Any request or submission will be in writing and will be directed to the Plan Administrator (or its designee). The Plan Administrator (or its designee) will have the sole responsibility for the review of any denied claim and will take all steps appropriate in the light of its findings. D. Decision on Review. The Plan Administrator (or its designee) will render a decision upon review. If special circumstances (such as the need to hold a hearing on any matter pertaining to the denied claim) warrant additional time, the decision will be rendered as soon as possible, but not later than one hundred twenty (120) days after receipt of the request for review. Written notice of any such extension will be furnished to the claimant prior to the commencement of the extension. The decision on review will be in writing and will include specific reasons for the decision, written in a manner calculated to be understood by the claimant, as well as specific references to the pertinent provisions of the Plan on which the decision is based. If the decision on review is not furnished to the claimant within the time limits prescribed above, the claim will be deemed denied on review. Section 9. UNSECURED AND UNFUNDED OBLIGATION - Notwithstanding any provision herein to the contrary, the benefits offered under the Plan shall constitute an unfunded, unsecured promise by the Company and its Affiliates to pay benefits determined hereunder which are accrued by Participants while such Participants are Directors. No provision shall at any time be made with respect to segregating any assets of the Company or any Affiliate for payment of any benefits hereunder. No Participant, Beneficiary or any other person shall have any interest in any particular assets of the Company or any Affiliate by reason of the right to receive a benefit under the Plan and any such Participant, Beneficiary or other person shall have only the rights of a general unsecured creditor of the Company and its Affiliates with respect to any rights under the Plan. Nothing contained in the Plan shall constitute a guaranty by the Company, any Affiliate or any other entity or person that the assets of the Company or its Affiliates will be sufficient to pay any benefit hereunder. All expenses and fees incurred in the administration of the Plan shall be paid by the Company or an Affiliate. Section 10. AMENDMENT AND TERMINATION OF THE PLAN - The Company reserves the right, by a resolution of the Board, to amend the Plan at any time, and from time to time, in any manner which it deems desirable, provided that no amendment will adversely affect the accrued benefits of any Participant under the Plan. The Company also reserves the right, by a resolution of the Board, to terminate this Plan at any time without providing any advance notice to any Participant; and in the event of any Plan termination, the Company reserves the right to then distribute all amounts allocated to Participants' Deferred Compensation Accounts. Section 11. BINDING UPON SUCCESSORS - The Plan shall be binding upon and inure to the benefit of the Company, its Affiliates, any of their successors and assigns and the Participants and their heirs, executors, administrators and legal representatives. In the event of the merger or consolidation of the Company or any of its Affiliates with or into any other corporation, or in the event substantially all of the assets of the Company or any of its Affiliates shall be transferred to another corporation, the successor corporation resulting from the merger or consolidation, or the transferee of such assets, as the case may be, shall, as a condition to the consummation of the merger, consolidation or transfer, assume the obligations of the Company or Affiliate hereunder and shall be substituted for the Company or Affiliate hereunder. Section 12. NO GUARANTEE OF PLAN PERMANENCY - This Plan does not contain any guarantee of provisions for continued service as a Director to any Participant nor is it guaranteed by the Company or any of its Affiliates to be a permanent plan. Section 13. GENDER - Any reference in the Plan made in the masculine pronoun shall apply to both men and women. Section 14. INCAPACITY OF RECIPIENT - In the event that a Participant or Beneficiary is declared incompetent and a guardian, conservator or other person legally charged with the care of his person or of his estate is appointed, any benefits under the Plan to which such Participant or Beneficiary is entitled shall be paid to such guardian, conservator or other person legally charged with the care of his person or his estate. Except as provided hereinabove, when the Plan Administrator, in its sole discretion, determines that a Participant or Beneficiary is unable to manage his financial affairs, the Plan Administrator may, but shall not be required to, direct the Company to make distribution(s) to any one or more of the spouse, lineal ascendants or descendants or other closest living relatives of such Participant or Beneficiary who demonstrates to the satisfaction of the Plan Administrator the propriety of making such distribution(s). Any payment made under this Section 14 shall be in complete discharge of any liability under the Plan for such payment. The Plan Administrator shall not be required to see to the application of any such distribution made to any person. 6 Section 15. GOVERNING LAW - This Plan shall be construed in accordance with and governed by the laws of the State of Ohio. IN WITNESS WHEREOF, the Company has caused this Plan to be executed by a duly authorized officer as of the Effective Date. AIRNET SYSTEMS, INC. By:__________________________________ Its:_________________________________ 7 AIRNET SYSTEMS, INC. DIRECTOR DEFERRED COMPENSATION PLAN DEFERRAL NOTICE 1. ELECTION TO DEFER. In accordance with the provisions of the AirNet Systems, Inc. Director Deferred Compensation Plan (the "Plan"), I hereby elect to defer __________ percent or $___________ of the Eligible Compensation (as defined in the Plan) payable to me for services as a Director of AirNet Systems, Inc., or any of its Affiliates. This election supersedes any prior deferral election made by me and shall remain in effect until terminated or otherwise amended. 2. DISTRIBUTION ELECTION. I hereby elect to commence distribution of my Deferred Compensation Account in the Plan within 30 days of my termination as a Director or, if earlier, within 30 days of _______________. 3. INVESTMENT ELECTION. I hereby elect to have amounts deferred pursuant to this election allocated to the applicable subaccounts in the following percentages (total must equal 100%): ______ Cash Account ______ Stock Account 4. METHOD OF PAYMENT. I hereby elect to receive the distribution of my Deferred Compensation Account in the Plan in the following form of payment: ______ A single lump sum payment; or ______ Substantially equal annual installments over a period of _______ (not to exceed 10) years. 5. DESIGNATION OF BENEFICIARY. I hereby designate _____________________ as my primary Beneficiary and ______________________ as my contingent Beneficiary(ies) to receive any amounts payable under the Plan in the event of my death. 6. ACKNOWLEDGMENT. I hereby acknowledge that my election to defer Eligible Compensation under the Plan is irrevocable with respect to amounts which are deferred under the Plan and shall remain in effect until terminated or modified. ----------------------------- --------------------------------- Date Signature --------------------------------- Name (please print) 8 EXHIBIT 21 SUBSIDIARIES OF AIRNET SYSTEMS, INC. Name of Subsidiary State of Incorporation ------------------ ---------------------- Float Control, Inc. Michigan AirNet Management, Inc. Ohio 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the inclusion in this Annual Report (Form 10-K) of AirNet Systems, Inc. of our report dated February 18, 2000 with respect to the consolidated financial statements of AirNet Systems, Inc. included herein. Our audits also included the financial statement schedule of AirNet Systems, Inc. listed in Item 14(a)(2) and 14(d). This schedule is the responsibility of the company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-08189 and No. 333-62659) pertaining to the AirNet Systems, Inc. Amended and Restated 1996 Incentive Stock Plan and the Registration Statement (Form S-8 No. 333-43605) pertaining to the AirNet Systems, Inc. Retirement Savings Plan of our report dated February 18, 2000, with respect to the consolidated financial statements of AirNet Systems, Inc. included herein, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of AirNet Systems, Inc. /s/ Ernst & Young LLP Columbus, Ohio March 27, 2000 1 EXHIBIT 24 POWERS OF ATTORNEY 1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and/or director of AirNet Systems, Inc., an Ohio Corporation (the "company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report on Form 10-K for the fiscal year ended December 31, 1999, hereby constitutes and appoints William R. Sumser as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, with any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the New York Stock Exchange, and grants unto each of said attorney-in-fact and agent, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and thereby ratifies and confirms all things that each of the said attorney-in-fact and agent, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of this 21st day of March, 2000. /s/ Gerald G. Mercer -------------------------------------- Gerald G. Mercer 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and/or director of AirNet Systems, Inc., an Ohio Corporation (the "company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report on Form 10-K for the fiscal year ended December 31, 1999, hereby constitutes and appoints Gerald G. Mercer and William R. Sumser as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, with any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the New York Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and thereby ratifies and confirms all things that each of the said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of this 21st day of March, 2000. /s/ Joel E. Biggerstaff ---------------------------------- Joel E. Biggerstaff 3 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and/or director of AirNet Systems, Inc., an Ohio Corporation (the "company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report on Form 10-K for the fiscal year ended December 31, 1999, hereby constitutes and appoints Gerald G. Mercer as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, with any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the New York Stock Exchange, and grants unto each of said attorney-in-fact and agent, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and thereby ratifies and confirms all things that each of the said attorney-in-fact and agent, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of this 21st day of March, 2000. /s/ William R. Sumser -------------------------------------- William R. Sumser 4 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and/or director of AirNet Systems, Inc., an Ohio Corporation (the "company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report on Form 10-K for the fiscal year ended December 31, 1999, hereby constitutes and appoints Gerald G. Mercer and William R. Sumser as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, with any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the New York Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and thereby ratifies and confirms all things that each of the said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of this 21st day of March, 2000. /s/ Roger D. Blackwell -------------------------------------- Roger D. Blackwell 5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and/or director of AirNet Systems, Inc., an Ohio Corporation (the "company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report on Form 10-K for the fiscal year ended December 31, 1999, hereby constitutes and appoints Gerald G. Mercer and William R. Sumser as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, with any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the New York Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and thereby ratifies and confirms all things that each of the said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of this 21st day of March, 2000. /s/ Tony C. Canonie, Jr. -------------------------------------- Tony C. Canonie, Jr. 6 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and/or director of AirNet Systems, Inc., an Ohio Corporation (the "company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report on Form 10-K for the fiscal year ended December 31, 1999, hereby constitutes and appoints Gerald G. Mercer and William R. Sumser as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, with any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the New York Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and thereby ratifies and confirms all things that each of the said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of this 21st day of March, 2000. /s/ Russell M. Gertmenian -------------------------------------- Russell M. Gertmenian 7 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and/or director of AirNet Systems, Inc., an Ohio Corporation (the "company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report on Form 10-K for the fiscal year ended December 31, 1999, hereby constitutes and appoints Gerald G. Mercer and William R. Sumser as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, with any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the New York Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and thereby ratifies and confirms all things that each of the said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of this 21st day of March, 2000. /s/ J. F. Keeler, Jr. -------------------------------------- J. F. Keeler, Jr. 8 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and/or director of AirNet Systems, Inc., an Ohio Corporation (the "company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report on Form 10-K for the fiscal year ended December 31, 1999, hereby constitutes and appoints Gerald G. Mercer and William R. Sumser as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, with any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the New York Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and thereby ratifies and confirms all things that each of the said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of this 21st day of March, 2000. /s/ David P. Lauer -------------------------------------- David P. Lauer 9 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and/or director of AirNet Systems, Inc., an Ohio Corporation (the "company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report on Form 10-K for the fiscal year ended December 31, 1999, hereby constitutes and appoints Gerald G. Mercer and William R. Sumser as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, with any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the New York Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and thereby ratifies and confirms all things that each of the said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of this 21st day of March, 2000. /s/ James E. Riddle -------------------------------------- James E. Riddle 10 ARTICLE 5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AIRNET SYSTEMS INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. MULTIPLIER: 1,000 PERIOD TYPE YEAR FISCAL YEAR END DEC 31 1999 PERIOD START JAN 01 1999 PERIOD END DEC 31 1999 CASH 1,667 SECURITIES 0 RECEIVABLES 18,053 ALLOWANCES 598 INVENTORY 10,426 CURRENT ASSETS 32,215 PP&E 151,235 DEPRECIATION 66,502 TOTAL ASSETS 127,477 CURRENT LIABILITIES 9,426 BONDS 0 PREFERRED MANDATORY 0 PREFERRED 0 COMMON 128 OTHER SE 73,623 TOTAL LIABILITY AND EQUITY 127,477 SALES 1,033 TOTAL REVENUES 128,698 CGS 1,089 TOTAL COSTS 97,315 OTHER EXPENSES 17,237 LOSS PROVISION 0 INTEREST EXPENSE 2,477 INCOME PRETAX 10,580 INCOME TAX 4,308 INCOME CONTINUING 6,272 DISCONTINUED 0 EXTRAORDINARY 0 CHANGES 2,488 NET INCOME 3,784 EPS BASIC .33