SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 0-28428 AIRNET SYSTEMS, INC. --------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 31-1458309 ----------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3939 International Gateway, Columbus, Ohio 43219 ------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (614) 237-9777 ------------------------------------------------------------------------ (Registrant's telephone number, including area code) NOT APPLICABLE ---------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check 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 August 6, 1999 - 11,402,400 AIRNET SYSTEMS, INC. FORM 10-Q FOR QUARTER ENDED JUNE 30, 1999 PART I: FINANCIAL INFORMATION Item 1 Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 . . . . 3 Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Item 3 Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . 12 PART II: OTHER INFORMATION Items 1 through 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2 AIRNET SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS In thousands, except share data JUNE 30, DECEMBER 31, 1999 1998 ------------ ------------ ASSETS (Unaudited) Current assets: Cash and cash equivalents $1,624 $1,142 Accounts receivable: Trade, less allowances 16,665 13,077 Shareholders, affiliates, and associates 214 163 Inventory and spare parts 10,532 9,386 Taxes refundable 1,048 2,001 Deferred taxes 106 - Deposits and prepaids 5,329 5,739 ------------ ------------ Total current assets 35,518 31,508 Net property and equipment 78,707 75,826 Other assets: Goodwill, net of accumulated amortization 8,067 8,237 Other intangibles, net of accumulated amortization 554 678 Investment in partnerships and other 2,409 2,490 Start-up costs - 4,223 ------------ ------------ Total assets $125,255 $122,962 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $5,053 $5,930 Salaries and related liabilities 2,296 1,284 Accrued expenses 1,730 3,889 Deferred taxes - 1,814 Current portion of notes payable 27 26 ------------ ------------ Total current liabilities 9,106 12,943 Notes payable, less current portion 38,866 35,480 Deferred tax liability 6,064 4,865 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 June 30, 1999 and December 31, 1998 128 128 Additional paid-in-capital 78,293 78,455 Retained earnings 12,832 11,423 Treasury shares, 1,360,000 and 1,375,000 shares held at cost at June 30, 1999 and December 31, 1998, respectively (20,034) (20,332) ------------ ------------ Total shareholders' equity 71,219 69,674 ------------ ------------ Total liabilities and shareholders' equity $125,255 $122,962 ------------ ------------ ------------ ------------ See notes to consolidated financial statements 3 AIRNET SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited In thousands, except per share data THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 1999 1998 -------- -------- -------- -------- NET REVENUES Air transportation, net of excise tax Check delivery $25,104 $23,416 $49,534 $45,786 Express delivery 6,291 4,396 12,183 8,310 Fixed base and other operations 371 296 571 584 ------- ------ ------ ------ Total net revenues 31,766 28,108 62,288 54,680 COSTS AND EXPENSES Air transportation 23,391 19,712 46,394 38,927 Fixed base operations 307 198 562 373 Selling, general and administrative 3,770 2,670 7,524 4,942 ------ ------ ------ ------ Total costs and expenses 27,468 22,580 54,480 44,242 ------ ------ ------ ------ Income from operations 4,298 5,528 7,808 10,438 Acquisition termination charge - 2,350 - 2,350 Interest expense 597 258 1,219 455 ------ ------ ------ ------ Income before income taxes 3,701 2,920 6,589 7,633 Provision for income taxes 1,517 1,167 2,691 3,027 ------ ------ ------ ------ Income before cumulative effect of a change in accounting principle 2,184 1,753 3,898 4,606 Cumulative effect of writing off start-up costs, net of tax - - (2,488) - ------ ------ ------ ------ Net income $2,184 $1,753 $1,410 $4,606 ------ ------ ------ ------ ------ ------ ------ ------ Income per common share Income before cumulative effect of a change in accounting principle $0.19 $0.14 $0.34 $0.37 Cumulative effect of writing off start-up costs - - (0.22) - ------ ------ ------ ------ Net income $0.19 $0.14 $0.12 $0.37 ------ ------ ------ ------ ------ ------ ------ ------ Income per common share - assuming dilution Income before cumulative effect of a change in accounting principle $0.19 $0.14 $0.34 $0.36 Cumulative effect of writing off start-up costs - - (0.22) - ------ ------ ------ ------ Net income $0.19 $0.14 $0.12 $0.36 ------ ------ ------ ------ ------ ------ ------ ------ 4 AIRNET SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited In thousands SIX MONTHS ENDED JUNE 30, 1999 1998 --------- --------- Operating activities: Net income $1,410 $4,606 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Cumulative effect of writing off start-up costs 2,488 - Depreciation 5,443 4,839 Deferred taxes (721) (140) Amortization of intangibles 437 251 Provision for losses on accounts receivable 90 65 Loss on disposition of assets 22 48 Cash provided by (used in) operating assets and liabilities: Accounts receivable (3,729) (902) Inventory and spare parts (1,146) (242) Prepaid expenses 410 (26) Start-up costs - (2,164) Accounts payable (878) (235) Accrued expenses (2,159) (587) Taxes payable 2,689 (1,636) Salaries and related liabilities 1,012 (42) Other, net 82 438 -------- -------- Net cash provided by operating activities 5,450 4,273 Investing activities: Acquisition of Pacific Air Charter, Inc., net of cash acquired - (34) Purchases of property and equipment (8,347) (11,788) Payments for covenants not to compete (143) (139) Proceeds from sales of property and equipment - 288 -------- -------- Net cash used in investing activities (8,490) (11,673) Financing activities: Proceeds from 1996 Incentive Stock Plan programs 135 1,500 Net borrowings under the revolving credit facility 3,400 4,500 Repayment of long-term debt (13) (12) -------- -------- Net cash provided by financing activities 3,522 5,988 -------- -------- Net increase (decrease) in cash 482 (1,412) Cash and cash equivalents at beginning of period 1,142 2,125 -------- -------- Cash and cash equivalents at end of period $1,624 $713 -------- -------- -------- -------- See notes to consolidated financial statements 5 AIRNET SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION AirNet Systems, Inc. and its subsidiaries ("AirNet" or the "Company") operate a fully integrated national air transportation network which provides delivery service for 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, 1998 consolidated financial statements of AirNet Systems, Inc. incorporated by reference in the Annual Report on Form 10-K (File No. 0-28428) for additional disclosures including a summary of AirNet's accounting policies, which have not changed. 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 and six months ended June 30, 1999 are not necessarily indicative of the results to be expected for the year ending December 31, 1999. 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 the financial statements and accompanying notes thereto. Actual results could differ from those estimates. 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 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. The effect of the adoption of SOP 98-5 was to increase income before the cumulative effect of a change in accounting principle for the three months and six months June 30, 1999 by $138,000 ($0.01 per common share - assuming dilution) and $276,000 ($.01 per common share - assuming dilution), respectively, and to record a charge for the cumulative effect of a change in accounting principle, effective January 1, 1999, of $2,488,000, net of taxes of $1,735,000 ($0.22 per common share, assuming dilution), to write off costs that had been capitalized prior to 1999. 6 3. NET INCOME PER SHARE The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data): Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 1999 1998 1999 1998 ----------- ---------- ---------- ----------- Numerator: Income before the cumulative effect of a change in accounting principle $2,184 $ 1,753 $3,898 $4,606 Net income $2,184 $ 1,753 $1,410 $4,606 Denominator: Basic - weighted average shares outstanding 11,393 12,585 11,388 12,557 Diluted Stock options - associates, officers, directors 5 216 2 200 ---------- ---------- ---------- ---------- Adjusted weighted average shares outstanding 11,398 12,801 11,390 12,757 Income per common share: Income before the cumulative effect of a change in accounting principle $ .19 $ .14 $ .34 $ .37 Net income $ .19 $ .14 $ .12 $ .37 Income per common share - assuming dilution: Income before the cumulative effect of a change in accounting principle $ .19 $ .14 $ .34 $ .36 Net income $ .19 $ .14 $ .12 $ .36 For the three months and six months ended June 30, 1999, 745,000 and 789,00 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 related common shares for the periods. 7 AIRNET SYSTEMS, INC. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENT Matters discussed in this Form 10-Q, 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 such 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; technological advances and increases in the use of electronic funds transfers; the effective detection and remediation of Y2K issues by AirNet and its key third party vendors and suppliers, including the FAA and local airport air traffic control systems; as well as other economic and competitive factors affecting the markets and prices AirNet's express delivery 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. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998 Revenues were $31.8 million for the three months ended June 30, 1999, an increase of $3.7 million, or 13.0%, over the same period of 1998. Revenues from check delivery increased $1.7 million, or 7.2%. Of the increase in check delivery revenues, $0.5 million is attributable to price increases effective January 1, 1999, and $0.7 million is attributable to new volume in the weekend program. The remainder of the increase is the result of additional volume in the weekday program. Express delivery revenues increased $1.9 million, or 43.1%. The acquisition of Mercury Business Services, Inc., a Boston-based express delivery management service, in August 1998 accounted for $1.8 million of the increase. Revenues from AirNet's premium services increased $0.7 million. These increases were offset by decreases in standard and wholesale service revenues of $0.5 million, which was the result of AirNet's strategic decision to decrease its wholesale and standard service business in late 1997 and early 1998, while emphasizing the premium services. Total costs and expenses were $27.5 million for the three months ended June 30, 1999, an increase of $4.9 million, or 21.6%, over the same period in 1998, resulting in income from operations of $4.3 million for the three months ended June 30, 1999, compared to $5.5 million for the same period of 1998. Air transportation expenses were up $3.7 million, or 18.7%. Selling, general and administrative expenses increased $1.1 million, or 41.2%, for the three month period. 8 In April 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) No. 98-5, Reporting 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. During the three months ended June 30, 1998, AirNet capitalized approximately $1.0 million of expenses associated with the start-up of the premium products business. The increase in air transportation costs, including ground courier costs, operational wages and related benefits, was primarily a result of infrastructure costs incurred in anticipation of growth in the express delivery area and the acquisition of Mercury. In addition, AirNet capitalized approximately $0.6 million of such costs as start-up costs in the second quarter of 1998. Such ongoing costs were expensed in the 1999 period. The costs associated with shipping packages with integrators and on commercial airlines increased $1.1 million as a result of the addition of Mercury and an increase in the volumes of the weekend program. Aircraft fuel costs for the 1999 quarter were up $0.2 million, or 6.1%, over the same 1998 period due to an increase in jet flight hours and increased fuel costs. Aircraft maintenance expenses were down $0.3 million, or 15.6% due to lower maintenance rates. Selling, general and administrative expense increased partly due to the fact AirNet capitalized $0.4 million of sales and marketing costs associated with the start up of the premium services in the second quarter of 1998. The addition of Mercury accounted for approximately $0.3 million of the increase in sales, general and administrative costs. In addition, AirNet has increased its Express sales staff and its administrative staff to support new sales initiatives. Interest costs were $0.6 million for the quarter ended June 30, 1999, an increase of $0.3 million, over the 1998 quarter due to increased borrowings, of which $20.0 million was used to fund the repurchase of common shares in the last half of 1998. SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 Revenues were $62.3 million for the six months ended June 30, 1999, an increase of $7.6 million, or 13.9%, over the same period of 1998. Revenues from check delivery increased $3.7 million, or 8.2%. Of the increase in check delivery revenues, $0.9 million is attributable to price increases effective January 1, 1999, and approximately $1.6 million is attributable to new volume in the weekend program. The remainder of the increase is the result of additional volume in the weekday program. Express delivery revenues increased $3.9 million, or 46.6%. The acquisition of Mercury Business Services accounted for $3.5 million of the increase. Revenues from AirNet's premium services increased $1.7 million. These increases were offset by decreases in standard and wholesale service revenues of $1.0 million. Total costs and expenses were $54.5 million for the six months ended June 30, 1999, an increase of $10.2 million, or 23.1%, over the same period in 1998 resulting in income from operations of $7.8 million for the six months ended June 30, 1999 compared to $10.4 million for the same period of 1998. Air transportation expenses were up $7.5 million, or 19.2%. Selling, general and administrative expenses increased $2.6 million, or 52.2%, for the six month period. In addition, in the second quarter of 1998, AirNet incurred a $2.4 million charge in connection with the write-off of costs associated with the efforts to acquire Q International Courier, Inc. ("Quick"). The agreement with Quick was terminated in June, 1998. 9 Prior to the adoption of SOP 98-5, AirNet capitalized approximately $2.0 million of expenses related to start-up activities in the first half of 1998. 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. The effect of adoption of SOP 98-5 was to record a charge for the cumulative effect of an accounting change of $2.5 million, net of taxes of $1.7 million ($0.22 per common share), to expenses costs that had been capitalized prior to 1999. In addition to the effects of capitalizing $1.0 million of operations related start-up costs in the first half of 1998, the increase in air transportation costs, including ground courier costs, operational wages and related benefits, was primarily a result of infrastructure costs incurred in anticipation of growth in the express delivery area and the acquisition of Mercury. The costs associated with shipping packages with other integrators and on commercial airlines increased $2.2 million as a result of the addition of Mercury and an increase in the weekend business. Aircraft maintenance expense increased $0.3 million, or 7.9%, over 1998 levels due to increased jet flight hours. The increase in depreciation expense of $0.6 million, or 12.3%, is a reflection of the higher use of the jet fleet, thus increasing the depreciation expense on engines. Selling, general and administrative expense increased partly due to the fact AirNet capitalized $1.0 million of sales, administrative and marketing costs associated with the start up of the premium services in the first half of 1998. The addition of Mercury accounted for approximately $0.6 million of the increase and AirNet has increased its Express sales staff and its administrative staff to support new sales initiatives. Amortization of intangibles increased $0.2 million primarily as a result of the addition of Mercury's goodwill and related intangibles. Interest costs were $1.2 million for the six months ended June 30, 1999, an increase of $0.8 million, over the 1998 period due to increased borrowings, of which $20.0 million was used to fund the repurchase of common shares in the last half of 1998. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW FROM OPERATING ACTIVITIES. Net cash provided by operating activities was $5.4 million for the six months ended June 30, 1999, compared to cash provided by operating activities of $4.3 million for the same period in 1998. The increase is primarily the result of the costs incurred in 1998 associated with the termination of the Quick transaction. CURRENT CREDIT ARRANGEMENTS. AirNet maintains a credit agreement with a bank that provides a $50.0 million, five-year, unsecured revolving credit facility. 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. AirNet's outstanding balance at June 30, 1999 was $38.7 million, which is a $3.4 million increase over the balance at December 31, 1998. INVESTING ACTIVITIES. Capital expenditures totaled $8.3 million for six months ended June 30, 1999 compared to $11.8 million for the same period in 1998. Substantially all of the 1999 expenditures were incurred for aircraft inspections, major engine overhauls and related flight equipment. AirNet anticipates it will have approximately $15.0 million in total capital expenditures in 1999. 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 anticipates that operating cash and capital expenditure requirements will continue to be funded by cash flow from operations, cash on hand and bank borrowings. 10 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. YEAR 2000 ("Y2K") IMPACT ON INFORMATION SYSTEMS AND OPERATIONS AirNet intends this information to constitute notice under the Year 2000 Information and Readiness Disclosure Act as a "Year 2000 Readiness Disclosure". AirNet relies heavily on its own information systems, as well as significant third party vendors, governmental agencies and business partners (including, but not limited to, utilities, fuel suppliers, commercial airlines, the FAA and local airport authorities), whose Y2K non-compliance could have either a material or adverse effect on AirNet's business, financial conditions or results of operations, or involve a safety risk to team members and customers. AirNet has completed assessment, renovation, testing and deployment phases of its internal systems (Information Technology (IT) and non-IT systems) for Y2K compliance. No changes or improvements to the systems were required as a result of the processes, which cost AirNet less than $0.1 million, paid from the operating cash flows of the Company. AirNet continues to assess the Y2K status and progress of third party vendors and suppliers that it heavily relies on for operational and administrative purposes. AirNet's assessment plan includes: assessing vendor compliance status initially through questionnaires, tracking progress toward compliance, developing contingency plans, including identifying alternate suppliers, and follow-up to non-responses on questionnaires. AirNet has also performed a review of its aircraft to ensure operational compliance with Y2K date-sensitive components. Based on representations from manufacturers, AirNet believes its aircraft and related components are in compliance with such measures. In addition, the FAA has indicated most of the air traffic control systems at tier one and tier two airports in the United States, which are the primary airports that the Company flies in and out of, are currently Y2K compliant. AirNet will continue to monitor the FAA's progress in assessing and correcting Y2K issues at the remaining airports to determine the need and extent of a contingency plan for air operations. If the FAA is not able to detect and correct any remaining Y2K problems at airports utilized by AirNet in the appropriate time frame, then a material adverse affect on the Company's ability to schedule and execute aircraft arrivals and departures from affected airports may occur. AirNet is also assessing the Y2K readiness of the internal and third party systems of Mercury, which it acquired in 1998. Mercury relies on inhouse developed and vendor supplied shipping stations to maintain and track shipment data. A Y2K triggered failure in one or more of these shipping stations could slow the routing process and cause delivery delays. 11 AirNet has prepared an initial draft of a contingency plan. The contingency plan focuses on most likely scenarios, such as the rerouting of aircraft from scheduled airport landings due to individual airport air traffic control failures, the use of alternative commercial airline routes in the event commercial airlines reduce their flight schedules and determining alternate fuel suppliers at key refueling locations. The plan also addresses procedures to track key shipment information manually and alternative communication plans in the event of an unanticipated internal system failure(s). Although AirNet has addressed the potential issues most likely to affect the Company within its Y2K contingency plan, there can be no assurances that the plan will accommodate a widespread Y2K failure (including, but not limited to significant power outages nationwide; significant reduction or elimination of aircraft flights by the FAA or major commercial airlines and; significant ground traffic delays due to malfunctioned or overloaded systems). Such a widespread Y2K failure could have a material adverse impact on AirNet's business. AirNet intends to update the contingency plan throughout the remainder of 1999 as additional information regarding FAA and third party readiness is received. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. No response required. 12 AIRNET SYSTEMS, INC. PART II - OTHER INFORMATION Item 1. Legal Proceedings. Not Applicable Item 2. Changes in Securities and Use of Proceeds. Not Applicable Item 3. Defaults Upon Senior Securities. Not Applicable Item 4. Submission of Matters to a Vote of Security Holders. (a) The Annual Meeting of Shareholders of the Company (the "Annual Meeting") was held on May 14, 1999. At the close of business on the record date March 22, 1999, 11,383,409 Common Shares were outstanding and entitled to vote at the Annual Meeting. At the Annual Meeting, 9,906,202 or 87.0% of the outstanding Common Shares entitled to vote, were represented in person or by proxy. (b) Directors elected at the Annual Meeting: Gerald G. Mercer For: 9,832,579 Withheld: 73,623 Broker non-vote: -0- Roger D. Blackwell For: 9,870,319 Withheld: 35,883 Broker non-vote: -0- Tony C. Canonie, Jr. For: 9,866,874 Withheld: 39,328 Broker non-vote: -0- Russell M. Gertmenian For: 9,842,673 Withheld: 63,529 Broker non-vote: -0- J. F. Keeler, Jr. For: 9,867,974 Withheld: 38,228 Broker non-vote: -0- (c) See Item 4(b) for voting results for directors. (d) Not applicable. Item 5. Other Information. Not Applicable Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: Exhibit No. Description ----------- -------------------------------------- Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed during the three months ended June 30, 1999 13 AIRNET SYSTEMS, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 6, 1999 By: /S/ WILLIAM R. SUMSER -------------------------------- William R. Sumser, Acting Chief Financial Officer (Duly Authorized Officer) (Principal Financial Officer) 14 AIRNET SYSTEMS, INC. INDEX TO EXHIBITS Exhibit No. Description 27 Financial Data Schedule. Filed herewith. 15 TYPE: EX-27 SEQUENCE: 2 DESCRIPTION: EXHIBIT 27 ARTICLE: 5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AIRNET SYSTEMS, INC'S QUARTERLY REPORT ON FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. MULTIPLIER: 1,000 PERIOD TYPE: 6-MOS FISCAL YEAR END: DEC-31-1999 PERIOD START: JAN-01-1999 PERIOD END: JUN-30-1999 CASH: 1,624 SECURITIES: 0 RECEIVABLES: 17,222 ALLOWANCES: 343 INVENTORY: 13,216 CURRENT ASSETS: 35,518 PP&E: 139,530 DEPRECIATION: 60,823 TOTAL ASSETS: 125,255 CURRENT LIABILITIES: 9,106 BONDS: 0 PREFERRED MANDATORY: 0 PREFERRED: 0 COMMON: 128 OTHER SE: 71,091 TOTAL LIABILITY AND EQUITY: 125,255 SALES: 571 TOTAL REVENUES: 62,288 CGS: 562 TOTAL COSTS: 46,956 OTHER EXPENSES: 7,524 LOSS PROVISION: 0 INTEREST EXPENSE: 1,219 INCOME PRETAX: 6,589 INCOME TAX: 2,691 INCOME CONTINUING: 3,898 DISCONTINUED: 0 EXTRAORDINARY: 0 CHANGES: (2,488) NET INCOME: 1,410 EPS BASIC: .12 EPS DILUTED: .12