Ohio 31-1458309
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes_X_ No___
Common Shares, $.01 Par Value,
Outstanding as of May 14, 2001 - 10,928,902
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000...............................................................3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2001 and 2000...................................................4
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 and 2000.........................................................5
Notes to Condensed Consolidated Financial Statement.............................6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................9
Item 3 Quantitative and Qualitative Disclosures About Market Risk.....................11
PART II: OTHER INFORMATION
Items 1 through 6........................................................................12
Signatures .............................................................................13
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In thousands, except share data MARCH 31, DECEMBER 31,
2001 2000
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,094 $ 1,118
Accounts receivable:
Trade, less allowances 18,861 16,279
Shareholders, affiliates, and associates 76 99
Inventory and spare parts 7,391 6,618
Taxes refundable -- 283
Deferred taxes 314 314
Deposits and prepaids 1,247 1,473
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Total current assets 29,983 26,184
Net property and equipment 87,810 86,600
Other assets:
Goodwill, net of accumulated amortization 7,620 7,705
Other intangibles, net of accumulated amortization 186 233
Investment in partnerships and other 1,814 1,811
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Total assets $ 127,413 $ 122,533
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,631 $ 4,456
Salaries and related liabilities 3,356 3,271
Accrued expenses 2,748 1,873
Taxes payable 600 --
Current portion of notes payable 33 33
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Total current liabilities 10,368 9,633
Other liabilities 260 --
Notes payable, less current portion 25,478 22,686
Deferred tax liability 11,264 11,369
Shareholders' equity:
Preferred shares, $.01 par value; 10,000,000 shares
authorized; and no shares issued and outstanding -- --
Common shares, $.01 par value; 40,000,000 shares authorized;
and 12,753,000 shares issued at March 31, 2001
and December 31, 2000 128 128
Additional paid-in-capital 77,613 77,702
Retained earnings 23,782 22,462
Accumulated other comprehensive income (154) --
Treasury shares, 1,832,000 and 1,840,000 shares held at cost
at March 31, 2001 and December 31, 2000, respectively (21,326) (21,447)
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Total shareholders' equity 80,043 78,845
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 127,413 $ 122,533
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See notes to condensed consolidated financial statements
In thousands, except per share data
THREE MONTHS ENDED
MARCH 31,
2001 2000
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NET REVENUES
Air transportation, net of excise tax
Bank services $25,783 $25,080
Express services 8,176 8,427
Aviation services and other 363 167
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TOTAL NET REVENUES 34,322 33,674
COSTS AND EXPENSES
Air transportation
Wages and benefits 4,877 4,598
Aircraft fuel 3,011 2,919
Aircraft maintenance 2,730 2,506
Ground couriers and outside services 6,741 6,947
Depreciation 3,495 3,408
Other operating 5,784 6,127
Aviation services and other 290 284
Selling, general and administrative 4,688 3,970
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TOTAL COSTS AND EXPENSES 31,616 30,759
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Income from operations 2,706 2,915
Interest expense 474 626
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Income before income taxes 2,232 2,289
Provision for income taxes 912 915
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NET INCOME $ 1,320 $ 1,374
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Net income per common share - basic and assuming dilution $ 0.12 $ 0.12
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See notes to condensed consolidated financial statements
THREE MONTHS ENDED
In thousands MARCH 31,
2001 2000
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OPERATING ACTIVITIES:
Net income $ 1,320 $ 1,374
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,527 3,445
Amortization of intangibles 132 131
Deferred taxes -- 43
Provision for losses on accounts receivable 84 47
Loss on disposition of assets 14 --
Cash provided by (used in) operating assets and liabilities:
Accounts receivable (2,642) (1,905)
Inventory and spare parts (773) (253)
Prepaid expenses 226 156
Accounts payable (825) (548)
Accrued expenses 875 391
Taxes payable 883 1,002
Salaries and related liabilities 85 138
Other, net (2) 79
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NET CASH PROVIDED BY OPERATING ACTIVITIES 2,904 4,100
INVESTING ACTIVITIES:
Purchases of property and equipment (4,837) (3,502)
Proceeds from sales of property and equipment 85 4
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NET CASH USED IN INVESTING ACTIVITIES (4,752) (3,498)
FINANCING ACTIVITIES:
Proceeds from 1996 Incentive Stock Plan programs 32 66
Net borrowings under the revolving credit facility 2,800 500
Repayment of long-term debt (8) (2)
Purchase of treasury shares -- (142)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 2,824 422
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Net increase in cash 976 1,024
Cash and cash equivalents at beginning of period 1,118 1,667
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,094 $ 2,691
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See notes to condensed consolidated financial statements
1. BASIS OF PRESENTATION
AirNet Systems, Inc. and its subsidiaries ("AirNet" or the "Company") operate a fully integrated national air transportation network which provides delivery service of time-critical shipments for customers in the U.S. banking industry and other industries requiring the express delivery of packages. AirNet also offers retail aviation fuel sales and related ground services for customers at its Columbus, Ohio facility.
The accompanying unaudited condensed consolidated financial statements include the accounts of AirNet Systems, Inc. and its subsidiaries. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the year ended December 31, 2000 consolidated financial statements of AirNet Systems, Inc. included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 1-13025) which contains additional disclosures including a summary of AirNet's accounting policies.
The financial information included herein reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results of interim periods. Operating results for the three months ended March 31, 2001 are not necessarily indicative of the results to be expected for the year ending December 31, 2001.
The preparation of the condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in those financial statements and accompanying notes thereto. Actual results could differ from those estimates.
Certain 2000 balances have been reclassified to conform with the 2001 presentation.
2. SEGMENT REPORTING
During the quarter, AirNet changed the names of its two major operating segments. The Bank Delivery segment was changed to Bank services and the Express Delivery segment was changed to Express services. The Bank service segment transports canceled checks and related information for the U.S. banking industry. The Express service segment provides specialized, high priority delivery service for customers requiring late pick-ups and early deliveries combined with prompt, on-line delivery information.
Additionally, fixed base operations, formerly reported as "Other" in the Company's segment reporting is now included in the newly named segment, Aviation services. Aviation services will also include certain charter services and aircraft brokerage services.
AirNet has no inter-segment sales. AirNet's assets are not allocated between segments due to significant overlap in usage of the aircraft fleet, vehicles and facilities. Management evaluates the performance of each segment based on operating income.
Summarized financial information concerning AirNet's reportable segments is shown in the following table for the three months ended March 31, 2001 and 2000. The Aviation services and other category includes AirNet's Aviation Services division and income and expense not allocated to the reportable segments.
Effective January 1, 2001, AirNet changed its method for allocating costs between segments. Management believes the new method more accurately reflects the actual cost structure that would be employed if each segment operated independently. Segment data for the three months ended March 31, 2000 has been restated to conform to the new cost allocation method.
THREE MONTHS ENDED
MARCH 31,
2001 2000
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NET REVENUE
Bank services $25,783 $25,080
Express services 8,176 8,427
Aviation services and other 363 167
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Total 34,322 33,674
INCOME FROM OPERATIONS
Bank services $ 4,052 $3,283
Express services (1,110) (210)
Aviation services and other (236) (158)
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Total 2,706 2,915
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3. DERIVATIVE AND HEDGING ACTIVITIES
In September 1999, AirNet entered into two interest rate swap agreements with a bank as a hedge against the interest rate risk associated with borrowing at a variable rate. The objective of the hedge is to eliminate the variability of cash flows in the interest rate payments for $10.0 million of the variable rate debt. The swap agreements each have a notional amount of $5.0 million and effectively locked in a portion of AirNet's variable rate revolving credit liability at fixed rates of 6.3% and 6.5% plus a margin based on AirNet's funded debt ratio. These swap agreements are in effect for a period of three years ending in September 2002 and are accounted for as cash flow hedges, as defined. AirNet does not use derivative financial instruments for speculative purposes.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, and its amendments, Statements 137 and 138, in June 1999 and June 2000, respectively. The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company's adoption of Statement No. 133 on January 1, 2001 resulted in a cumulative effect of an accounting change charge of $62,155, net of tax, to accumulated other comprehensive income. At March 31, 2001, the aggregate fair value of the interest rate swaps was approximately ($260,000) and is recorded in other liabilities on the condensed, consolidated balance sheet.
4. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per common share (in thousands, except per share data):
Three Months Ended
March 31,
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2001 2000
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Numerator:
Net income $ 1,320 $ 1,374
Denominator:
Basic - weighted average shares outstanding 10,922 11,410
Diluted
Stock options - associates, officers, and directors 11 2
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Adjusted weighted average shares outstanding 10,933 11,412
Income per common share - basic and assuming dilution:
Net income $ .12 $ .12
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For the three months ended March 31, 2001, 1,140,000 common shares subject to outstanding stock options were excluded from the diluted weighted average shares outstanding calculation, as the exercise price of the stock options exceeded the average fair market value of the underlying common shares for the period.
5. INVESTMENT IN SUBSIDIARY
AirNet Systems, Inc. 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. CHEXS maintains a contract with a customer who accounts for approximately 80% of CHEXS' revenues. However, CHEXS has received notice that such customer does not intend to renew the contract beyond August 2001. Although CHEXS is actively seeking to both renew the contract and generate additional revenues through new customers and through its services, there can be no assurances that CHEXS will maintain its current revenue and income streams beyond the August 2001 contract expiration. At March 31, 2001, Float Control's recorded investment in CHEXS totaled $1,612,000.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT
Except for the historical information contained in this Form 10-Q, the matters discussed, 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. Such statements involve risks and uncertainties including, but not limited to, the following which could cause actual results to differ materially from any forward-looking statement: potential regulatory changes by the Federal Aviation Administration ("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; 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. Please refer to Item 7 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2000 for additional detail relating to risk factors that could affect AirNet's results and cause those results to differ materially from those expressed in forward-looking statements.
RESULTS OF OPERATIONS
During the quarter, AirNet changed the names of its two major operating segments. The Bank Delivery segment was changed to Bank services and the Express Delivery segment was changed to Express services. Additionally, fixed base operations, formerly reported as "Other" in the Company's segment reporting is now included in the newly named segment, Aviation services. Aviation services will also include certain charter services and aircraft brokerage services.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Total net revenues were $34.3 million for the three months ended March 31, 2001, an increase of $0.6 million, or 1.8%, over the same period of 2000.
Net revenues from Bank services increased $0.7 million, or 2.8%. The increase in Bank service net revenues is primarily the result of price increases totaling $0.6 million and new business totaling $0.5 million. These increases were offset by one less flying day compared to the same quarter in the prior year.
Express service net revenues decreased $0.2 million, or 3.0%. Revenues were affected by the slowing U.S. economy, including significant volume reduction from a key parts fulfillment customer during first quarter 2001. Medical shipments continued to achieve solid growth during first quarter 2001 and shipments for Mercury Business Services increased 8.9% during first quarter 2001 due to expansion into the Chicago market, which offset weakness in other markets that occurred during the first quarter 2001.
Aviation services revenue increased $0.2 million over the first quarter of 2000 primarily due to a brokerage commission received through the sale of an aircraft.
Total costs and expenses were $31.6 million for the three months ended March 31, 2001, an increase of $0.8 million, or 2.8%, over the same period in 2000, resulting in income from operations of $2.7 million for the three months ended March 31, 2001, compared to $2.9 million for the same period of 2000.
Air transportation expenses were up $0.1 million, or 0.5%, for the three month period ended March 31, 2001. Wages and benefits were up $0.3 million, primarily related to an enhanced incentive compensation program. Maintenance expense increased $0.2 million primarily due to an increase in aircraft operating hours, which in turn was primarily due to new bank routes. These increases were offset by reduced ground courier costs, worker's compensation expense, and commercial freight costs related to shipments transported via commercial airlines.
Selling, general and administrative expense increased $0.7 million, or 18.1%, over the same quarter in the prior year. Of this amount, $0.3 million can be attributed to an insurance refund received in the first quarter of 2000. In addition, AirNet has increased its regional support and sales staff to support new Express services sales initiatives.
The operating margin for Bank services increased from 13.1% for the quarter ended March 31, 2000, to 15.7% for the quarter ended March 31, 2001. The $0.8 million increase is primarily attributable to both rate increases, which were effective January 1, 2001, and reduced ground costs. The reduction in ground costs is the result of an ongoing effort to streamline ground operations, aligning them more closely with volumes under a more variable cost structure.
Operating margins for Express services decreased from a negative 2.5% for the quarter ended March 31, 2000, to a negative 13.6% for the same 2001 quarter. The $0.9 million decrease is primarily attributable to the $0.2 million decrease in revenues and increased costs associated with the addition of region and sales personnel added to target sales efforts in the express market.
Interest expense decreased $0.2 million to $0.5 million for the quarter ended March 31, 2001 primarily due to a reduced borrowing base on the credit facility and the fact that interest rates on the variable portion of the credit facility were less during the first 2001 quarter. As of March 31, 2001, AirNet's borrowings totaled $25.5 million which is a $10.9 million reduction from the balance at March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATING ACTIVITIES. Net cash provided by operating activities was $2.9 million for the three months ended March 31, 2001, compared to net cash provided by operating activities of $4.1 million for the same period in 2000.
CURRENT CREDIT ARRANGEMENTS. AirNet maintains a credit agreement with a bank that provides a $50.0 million unsecured revolving credit facility which is scheduled to expire on August 1, 2003. The credit agreement limits the availability of funds to designated 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 which may be incurred. AirNet's outstanding balance at March 31, 2001 was $25.5 million, which is a $2.8 million increase over the balance at December 31, 2000. The decrease is primarily due to the acquisition of an aircraft during the quarter.
INVESTING ACTIVITIES. Capital expenditures totaled $4.8 million for the three months ended March 31, 2001 compared to $3.5 million for the same period in 2000. Of the 2001 expenditures, $2.0 million was for the purchase of an aircraft. Substantially all of the remaining 2001 expenditures were incurred for aircraft inspections, major engine overhauls and related flight equipment. AirNet anticipates it will have between $16.0 million and $17.0 million in total capital expenditures in 2001. AirNet anticipates it will continue to acquire aircraft and flight equipment as necessary to maintain growth and continue offering quality service to its customers.
AirNet announced a stock repurchase program in February 2000 allowing AirNet to purchase up to $3.0 million of its common shares. There was no repurchase activity in the first quarter ending March 31, 2001. As such, approximately $0.6 million of the Company's common shares remain available for repurchase in the future. Management and the Board of Directors believe that AirNet's common shares represent an excellent value and an appropriate investment. Future purchases of 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 somewhat dependent on the number of banking holidays falling during the week. Because financial institutions are currently AirNet'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 fiscal quarter ending December 31 is often the most impacted by bank holidays (including Thanksgiving and Christmas) recognized by its primary customers. When these holidays fall on Monday through Thursday, AirNet's revenue and net income are adversely affected. AirNet's annual results fluctuate as well.
Operating results are also affected by the weather. AirNet generally experiences higher maintenance costs during its fiscal quarter ending March 31. Winter weather often requires additional costs for de-icing, hangar rental and other aircraft services.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INFLATION AND INTEREST RATES
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. AirNet's revolving credit facility bears interest, at AirNet's option, at a fixed rate determined by the Eurodollar rate, a negotiated rate or a floating rate. Based on borrowings of $25.5 million at March 31, 2001, a one hundred basis point change in interest rates would impact net interest expense by approximately $255,000 per year.
In September 1999, AirNet entered into two interest rate swap agreements with a bank as a hedge against the interest rate risk associated with borrowing at a variable rate. The objective of the hedge is to eliminate the variability of cash flows in the interest rate payments for $10.0 million of the variable rate debt. The swap agreements each have a notional amount of $5.0 million and effectively locked in a portion of AirNet's variable rate revolving credit liability at fixed rates of 6.3% and 6.5% plus a margin based on AirNet's funded debt ratio. These swap agreements are in effect for a period of three years ending in September 2002 and are accounted for as cash flow hedges as defined. AirNet does not use derivative financial instruments for speculative purposes. At March 31, 2001, the aggregate fair value of these interest rate swaps was approximately ($260,000).
DERIVATIVE AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, and its amendments, Statements 137 and 138, in June 1999 and June 2000, respectively. The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company's adoption of Statement No. 133 on January 1, 2001 resulted in a cumulative effect of an accounting change charge of $62,155, net of tax, to other comprehensive income. At March 31, 2001, the aggregate fair value of the interest rate swaps was approximately ($260,000) and is recorded in other liabilities on the condensed, consolidated balance sheet.
Item 1. Legal Proceedings.
On April 6, 2000, AirNet filed an action in the United States District Court of the District of Maryland seeking to recover on a $0.5 million debt owed to it by Continental Courier Systems, Inc. for overnight courier services performed. On April 27, 2000, Continental answered AirNet's complaint, denying any indebtedness to AirNet and asserting several counterclaims, including violations of federal antitrust laws and state law claims of fraud and tortious competition. On May 3, 2001, the parties reached an agreement to settle the matter on terms favorable to AirNet. The parties have agreed to petition the Court to dismiss the action with prejudice, and anticipate that the matter will be dismissed by the Court within a week to ten days following the petition.
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' results of operations or financial condition.
Item 2. Changes in Securities and Use of Proceeds. Not Applicable
Item 3. Defaults Upon Senior Securities. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
Item 5. Other Information. Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended March 31, 2001.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: May 14, 2001 By: /s/ William R. Sumser
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William R. Sumser,
Chief Financial Officer
(Duly Authorized Officer)
(Principal Financial Officer)
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