AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY , 1998 REGISTRATION NO. 333-XXXXX SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ AIRNET SYSTEMS, INC. (Exact name of Registrant as specified in its charter) OHIO 4500 31-1458309 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification incorporation or organization) No.) 3939 INTERNATIONAL GATEWAY, COLUMBUS, OHIO 43219, (614) 237-9777 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ERIC P. ROY 3939 INTERNATIONAL GATEWAY COLUMBUS, OHIO 43219 (614) 237-9777 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ COPIES TO: RONALD A. ROBINS, JR. KENNETH E. ADELSBERG Vorys, Sater, Seymour and Pease LLP Winthrop, Stimson, Putnam & Roberts 52 East Gay Street, P.O. Box 1008 One Battery Park Plaza Columbus, Ohio 43216-1008 New York, New York 10004-1490 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT AS THE REGISTRANT SHALL DETERMINE. ------------------------ If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ------------------------ CALCULATION OF REGISTRATION FEE PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE Common Shares, $.01 par value........................ 3,141,356 shares $1,088.70(1) $13,702,378.20(1) $4,042.20 (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(f)(2). ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AIRNET SYSTEMS, INC. 3939 INTERNATIONAL GATEWAY COLUMBUS, OHIO 43219 [JUNE ,] 1998 ------------------------ Dear Fellow Shareholders: The Annual Meeting of the Shareholders (the "Annual Meeting") of AirNet Systems, Inc., an Ohio corporation ("AirNet"), will be held at 10:00 a.m., local time, on Tuesday, July 14, 1998, at the Concourse Hotel, 4300 International Gateway, Columbus, Ohio. The enclosed Notice of Annual Meeting and Proxy Statement/Prospectus contain detailed information about the business to be conducted at the Annual Meeting. In light of the proposed Merger described below, this is an important Annual Meeting for AirNet, and we strongly encourage you to exercise your right to vote. As you may have read in the newspaper recently, AirNet has entered into an Agreement and Plan of Merger (the "Agreement") with Q International Courier, Inc. ("Quick") and with the stockholders of Quick (the "Quick Stockholders"). Under the Agreement, Quick will become wholly-owned by AirNet (the "Merger"); the Quick Stockholders will receive an aggregate of 3,141,356 Common Shares of AirNet, which will enable them to exercise, as a group, approximately [20]% of the voting power of AirNet; and the holders of options to purchase capital stock of Quick will receive options to purchase an aggregate of 249,591 Common Shares of AirNet. AirNet's management and its Board of Directors believe that the Merger will benefit our shareholders and strengthen AirNet (see "THE MERGER--Reasons for the Merger" in the Proxy Statement/ Prospectus). SBC Warburg Dillon Read Inc., AirNet's financial advisor, has rendered an opinion to the Board of Directors to the effect that, as of the date of its opinion, the consideration to be paid by AirNet with respect to the Merger is fair, from a financial point of view, to AirNet. The acquisition by the Quick Stockholders, as a group, of one-fifth or more but less than one-third of the voting power of AirNet (Proposal No. 1) must be approved by the AirNet shareholders in accordance with the provisions of Section 1701.831 of the Ohio General Corporation Law. The consummation of the Merger is conditioned on, among other things, the approval at the Annual Meeting of Proposal No. 1 described in the enclosed Proxy Statement/Prospectus. Your Board of Directors believes that the Merger is in the best interests of AirNet and its shareholders and that it will further AirNet's long-term objective of maximizing shareholder value. The Board has unanimously approved the Merger and recommends that you vote FOR Proposal No. 1 in order that the Merger may be consummated. In addition to approving Proposal No. 1, which is a condition precedent to the Merger, you will be asked to consider and vote upon the election of six directors (Proposal No. 2) and upon the approval of the amendment and restatement of AirNet's 1996 Incentive Stock Plan (Proposal No. 3). Your Board of Directors recommends that you vote FOR the six nominees named in the enclosed Proxy Statement/ Prospectus and FOR the approval of the amended and restated 1996 Incentive Stock Plan. The enclosed Notice of Annual Meeting and Proxy Statement/Prospectus contain detailed information about the Merger and the matters to be voted upon at the Annual Meeting. Please give this material your careful attention. On behalf of the Board of Directors and management, we cordially invite you to attend the Annual Meeting. Whether or not you plan to attend the Annual Meeting, the prompt return of your proxy in the enclosed return envelope will save AirNet additional expenses of solicitation and will help ensure that as many shares as possible are represented. Sincerely, Gerald G. Mercer CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER [LOGO] [LOGO] AIRNET SYSTEMS, INC. ---------------- NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD TUESDAY, JULY 14, 1998 ------------------------ NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the "Annual Meeting") of AirNet Systems, Inc., an Ohio corporation ("AirNet"), will be held on Tuesday, July 14, 1998, at the Concourse Hotel, 4300 International Gateway, Columbus, Ohio, at 10:00 a.m., local time, for the following purposes: 1. To consider and vote upon the acquisition of one-fifth or more but less than one-third of the voting power of AirNet by the stockholders of Q International Courier, Inc., a New York corporation ("Quick"), in connection with a merger involving Quick, Q Acquisition Company and AirNet. 2. To elect six directors, each for a term to expire at the 1999 Annual Meeting. 3. To amend and restate AirNet's 1996 Incentive Stock Plan in the form attached hereto as Appendix IV. 4. To transact such other business as may properly come before the Annual Meeting or any adjournment(s) thereof. The close of business on June 11, 1998, has been fixed by the Board of Directors of AirNet as the record date for determining the shareholders entitled to notice of, and to vote at, the Annual Meeting. You are cordially invited to attend the Annual Meeting. Whether or not you plan to attend the Annual Meeting, you may insure your representation by completing, signing, dating and promptly returning the enclosed proxy card. A return envelope, which requires no postage if mailed in the United States, has been provided for your use. If you attend the Annual Meeting and inform the Secretary of AirNet in writing that you wish to vote your shares in person, your proxy will not be used. By Order of the Board of Directors William R. Sumser, SECRETARY AirNet Systems, Inc. 3939 International Gateway Columbus, Ohio 43219 June , 1998 AIRNET SYSTEMS, INC. 3939 INTERNATIONAL GATEWAY COLUMBUS, OHIO 43219 PROXY STATEMENT PROSPECTUS FOR FOR ANNUAL MEETING OF SHAREHOLDERS 3,141,356 COMMON SHARES, $.01 PAR VALUE TUESDAY, JULY 14, 1998 This Proxy Statement/Prospectus is furnished to the shareholders of AirNet Systems, Inc., an Ohio corporation ("AirNet"), in connection with the solicitation on behalf of the Board of Directors of AirNet of proxies for use at the Annual Meeting of Shareholders (the "Annual Meeting") to be held on Tuesday, July 14, 1998, at the Concourse Hotel, 4300 International Gateway, Columbus, Ohio, at 10:00 a.m., local time, and at any adjournment(s) thereof, for the purposes set forth in the accompanying Notice of Annual Meeting of Shareholders. This Proxy Statement/Prospectus also constitutes the prospectus of AirNet relating to 3,141,356 Common Shares, $.01 par value ("AirNet Common Shares"), to be issued by AirNet in accordance with the terms of the Agreement and Plan of Merger, dated as of April 14, 1998 (the "Agreement"), described in this Proxy Statement/Prospectus and attached hereto as Appendix I, by and among AirNet, Q Acquisition Company, a wholly-owned subsidiary of AirNet ("Merger Subsidiary"), Q International Courier, Inc., a New York corporation ("Quick"), and the stockholders of Quick (the "Quick Stockholders"). This Proxy Statement/Prospectus and the accompanying proxies are first being mailed on or about June , 1998, to all shareholders of AirNet and to all Quick Stockholders. Only holders of record of AirNet Common Shares at the close of business on June 11, 1998 (the "Record Date"), will be entitled to vote at the Annual Meeting. FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE AIRNET COMMON SHARES OFFERED HEREBY, SEE "RISK FACTORS" ON PAGE . THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS , 1998. AVAILABLE INFORMATION AirNet is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by AirNet can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Citicorp Center, 500 West Madison, 14th Floor, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such material can also be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also maintains a World Wide Web site on the Internet at http:/ /www.sec.gov that contains reports and other information regarding registrants that file electronically with the Commission. In addition, material filed by AirNet can be inspected at the offices of the New York Stock Exchange ("NYSE"), 20 West Broad Street, New York, New York 10005. AirNet has filed with the Commission a registration statement on Form S-4 (herein, together with any amendments, supplements and exhibits, referred to as the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities to be issued pursuant to the Agreement. This Proxy Statement/Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement. Such additional information may be obtained from the Commission's principal office in Washington, D.C. Statements contained in this Proxy Statement/Prospectus as to the contents of any contract or other document referred to herein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Quick is not subject to the informational requirements of the Exchange Act. TABLE OF CONTENTS PAGE ----------- GLOSSARY OF DEFINED TERMS................................................................................. v SUMMARY................................................................................................... 1 Annual Meeting of Shareholders of AirNet................................................................ 1 Parties to the Merger................................................................................... 1 Terms of the Proposed Merger............................................................................ 2 Recommendation of the AirNet Board of Directors......................................................... 3 Reasons for the Merger.................................................................................. 3 Opinion of AirNet's Financial Advisor................................................................... 4 Vote Required........................................................................................... 4 Regulatory Matters...................................................................................... 5 Dissenters' Rights...................................................................................... 5 Certain Federal Income Tax Consequences................................................................. 5 Market Prices........................................................................................... 5 Historical and Unaudited Pro Forma Comparative Per Share Data........................................... 6 SELECTED FINANCIAL DATA................................................................................... 8 Selected Financial Data for AirNet...................................................................... 8 Selected Financial Data for Quick....................................................................... 9 Unaudited Pro Forma Combined Selected Financial Data.................................................... 10 RISK FACTORS.............................................................................................. 12 THE MERGER................................................................................................ 12 Background of the Merger................................................................................ 12 Reasons for the Merger.................................................................................. 13 Opinion of AirNet's Financial Advisor................................................................... 14 Resale Considerations With Respect to the AirNet Common Shares.......................................... 17 Federal Income Tax Consequences......................................................................... 18 Antitrust Considerations................................................................................ 18 Accounting Treatment.................................................................................... 18 THE AGREEMENT............................................................................................. 18 Terms of the Agreement.................................................................................. 18 Representations and Warranties.......................................................................... 18 Covenants............................................................................................... 19 Additional Agreements................................................................................... 20 Conditions.............................................................................................. 20 Waivers and Amendments.................................................................................. 22 Termination............................................................................................. 22 Termination Fee......................................................................................... 22 Indemnification; Escrow................................................................................. 22 Expenses................................................................................................ 23 THE AIRNET ANNUAL MEETING................................................................................. 23 General................................................................................................. 23 Matters to be Considered at the Annual Meeting.......................................................... 23 Voting at the Meeting; Record Date...................................................................... 23 PROPOSAL TO APPROVE ACQUISITION OF ONE-FIFTH OR MORE BUT LESS THAN ONE-THIRD OF THE VOTING POWER OF AIRNET.................................................................................................. 24 Effect of Approval of Acquisition....................................................................... 25 i PAGE ----------- Recommendation and Vote................................................................................. 25 ELECTION OF DIRECTORS..................................................................................... 25 Nominees Standing for Election to the Board of Directors................................................ 25 Additional Director..................................................................................... 26 Nomination Procedure.................................................................................... 27 Recommendation and Vote................................................................................. 27 Executive Officers of AirNet............................................................................ 28 Beneficial Ownership of AirNet Common Shares............................................................ 29 Committees and Meetings of the Board.................................................................... 30 Compensation of Directors............................................................................... 31 EXECUTIVE COMPENSATION.................................................................................... 31 Summary of Cash and Certain Other Compensation.......................................................... 31 Section 401(k) Savings Plan............................................................................. 33 Grants of Options....................................................................................... 33 Option Exercises and Holdings........................................................................... 34 Certain Relationships and Related Party Transactions.................................................... 34 Performance Graph....................................................................................... 35 Report of the Compensation Committee on Executive Compensation.......................................... 36 PROPOSAL TO AMEND AND RESTATE THE AIRNET SYSTEMS, INC. 1996 INCENTIVE STOCK PLAN.......................... 38 Description of Amendments............................................................................... 39 Operation of the Incentive Stock Plan................................................................... 39 AirNet Common Shares Available Under the Incentive Stock Plan........................................... 39 Administration of the Incentive Stock Plan.............................................................. 39 Eligibility............................................................................................. 39 Duration................................................................................................ 40 Terms of Awards......................................................................................... 41 Amendments and Termination.............................................................................. 42 Federal Income Tax Matters.............................................................................. 42 Recommendation and Vote................................................................................. 45 DESCRIPTION OF CAPITAL STOCK OF AIRNET.................................................................... 46 General................................................................................................. 46 AirNet Common Shares.................................................................................... 46 Preferred Shares........................................................................................ 46 Transfer Agent and Registrar............................................................................ 46 Anti-takeover Effects of Amended Articles, Code of Regulations and the Ohio General Corporation Law..... 46 COMPARISON OF CAPITAL STOCK OF AIRNET AND QUICK........................................................... 49 Mergers and Consolidations.............................................................................. 49 Other Corporate Transactions............................................................................ 49 Anti-takeover Effects of Amended Articles, Code of Regulations and the Ohio General Corporation Law..... 49 Special Meetings........................................................................................ 50 Class Voting............................................................................................ 50 Removal of Directors and Filling of Vacancies........................................................... 50 Amendment of the Amended Articles and Code of Regulations............................................... 50 Appraisal Rights........................................................................................ 51 Dividends............................................................................................... 51 ii PAGE ----------- Repurchases............................................................................................. 51 Director and Officer Liability and Indemnification...................................................... 51 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.............................................. 53 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AIRNET........... 61 General................................................................................................. 61 Results of Operations................................................................................... 63 Liquidity and Capital Resources......................................................................... 66 Seasonality and Variability in Quarterly Results........................................................ 67 Selected Quarterly Data................................................................................. 68 Inflation............................................................................................... 68 Recent Accounting Pronouncements........................................................................ 68 Year 2000 Impact on Information Systems................................................................. 69 Forward-Looking Statements.............................................................................. 69 BUSINESS OF AIRNET........................................................................................ 71 Overview of AirNet's Business........................................................................... 71 Business Strategy....................................................................................... 72 Ground Operations....................................................................................... 73 Flight Operations....................................................................................... 73 Aircraft Fleet.......................................................................................... 74 Delivery Services....................................................................................... 74 Customers............................................................................................... 75 Human Resources......................................................................................... 75 Associates.............................................................................................. 76 Competition............................................................................................. 76 Regulation.............................................................................................. 76 Environmental Matters................................................................................... 77 Properties.............................................................................................. 77 Legal Proceedings....................................................................................... 77 Summary of AirNet Recent Developments................................................................... 77 MARKET FOR AIRNET COMMON SHARES AND RELATED SHAREHOLDER MATTERS........................................... 77 SELECTED INFORMATION ABOUT QUICK.......................................................................... 78 General................................................................................................. 78 Products and Services................................................................................... 79 Competition............................................................................................. 81 Capital Stock of Quick.................................................................................. 82 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF QUICK............ 83 Results of Operations................................................................................... 83 Liquidity and Capital Resources......................................................................... 85 Year 2000 Impact on Information Systems................................................................. 85 DISSENTERS' RIGHTS........................................................................................ 85 LEGAL MATTERS............................................................................................. 85 EXPERTS................................................................................................... 85 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE................................................... 85 iii PAGE ----------- INDEPENDENT AUDITORS...................................................................................... 86 SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING............................................................. 86 OTHER BUSINESS............................................................................................ 87 ANNUAL REPORT............................................................................................. 87 Appendix I Agreement and Plan of Merger............................................ I-1 Appendix II Opinion of Financial Advisor............................................ II-1 Appendix III Acquiring Person Statement.............................................. III-1 Appendix IV AirNet Systems, Inc. Amended and Restated 1996 Incentive Stock Plan..... IV-1 iv GLOSSARY OF DEFINED TERMS PAGE ------------- 1997 fiscal year.................................................................................... 30 AAA distributions................................................................................... 62 Acquisition......................................................................................... 2 Agreement........................................................................................... Cover page AirNet.............................................................................................. Cover page AirNet Common Shares................................................................................ Cover page Airport Facility Purchase Agreement................................................................. 20 Amendments.......................................................................................... 38 Annual Meeting...................................................................................... Cover page Antitrust Division.................................................................................. 5 Awards.............................................................................................. 38 CHEXS Partnership................................................................................... 34 Code................................................................................................ 5 Commission.......................................................................................... Inside front cover Committee........................................................................................... 36 Comparison Companies................................................................................ 16 Control Share Acquisition Statute................................................................... 47 CSRs................................................................................................ 75 Data Air............................................................................................ 62 DLJ................................................................................................. 12 EBIT................................................................................................ 15 EBITDA.............................................................................................. 16 ECC................................................................................................. 9 Effective Time...................................................................................... 2 EPS................................................................................................. 16 Escrow Account...................................................................................... 23 Escrow Agent........................................................................................ 23 Escrow Shares....................................................................................... 2 Exchange Act........................................................................................ Inside front cover v PAGE ------------- F FAA................................................................................................. 69 FASB................................................................................................ 68 FedEx............................................................................................... 70 fiscal 1996......................................................................................... 63 fiscal 1997......................................................................................... 63 Float Control....................................................................................... 34 FTC................................................................................................. 5 GCL................................................................................................. 2 General Escrow Shares............................................................................... 2 Genesis............................................................................................. 83 Herndon Lease Amendment............................................................................. 19 HSR Act............................................................................................. 5 Incentive Stock Plan................................................................................ 38 Interested Shareholder.............................................................................. 48 Interested Shares................................................................................... 4 ISOs................................................................................................ 38 ITS................................................................................................. 70 Litigation Reform Act............................................................................... 69 Losses.............................................................................................. 22 LTM................................................................................................. 16 Merger.............................................................................................. 2 Merger Consideration................................................................................ 2 Merger Moratorium Statute........................................................................... 48 Merger Subsidiary................................................................................... Cover page Midway.............................................................................................. 61 Mitzman Agreement................................................................................... 28 Monetary Control Act................................................................................ 70 Named Executive Officers............................................................................ 31 NCHA................................................................................................ 34 NFO................................................................................................. 79 Non-Employee Directors.............................................................................. 31 NQSOs............................................................................................... 38 NYSE................................................................................................ Inside front cover vi PAGE ------------- O Offering............................................................................................ 7 Opinion............................................................................................. 4 P/E ratios.......................................................................................... 16 PAC................................................................................................. 62 Port Authority...................................................................................... 34 Proposed Merger..................................................................................... 16 Proposed Merger Price............................................................................... 16 Quick............................................................................................... Cover page Quick Common Share Options.......................................................................... 82 Quick Common Shares................................................................................. 2 Quick Stockholders.................................................................................. Cover page QuickMail........................................................................................... 80 Record Date......................................................................................... Cover page Registration Statement.............................................................................. Inside front cover Savings Plan........................................................................................ 33 Securities Act...................................................................................... Inside front cover SMI................................................................................................. 84 Specific Contingencies.............................................................................. 2 Specific Escrow Shares.............................................................................. 2 Sterling............................................................................................ 83 UPS................................................................................................. 70 Warburg Dillon Read................................................................................. 4 WIE................................................................................................. 62 vii SUMMARY THE FOLLOWING SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS AND THE APPENDICES. SHAREHOLDERS ARE URGED TO READ THIS PROXY STATEMENT/PROSPECTUS AND THE APPENDICES HERETO IN THEIR ENTIRETY. ANNUAL MEETING OF SHAREHOLDERS OF AIRNET DATE, TIME AND PLACE OF ANNUAL MEETING The Annual Meeting of Shareholders of AirNet will be held on Tuesday, July 14, 1998, at the Concourse Hotel, 4300 International Gateway, Columbus, Ohio, at 10:00 a.m., local time. RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE Only holders of record of AirNet Common Shares at the close of business on the Record Date, June 11, 1998, will be entitled to notice of and to vote at the Annual Meeting. On the Record Date, there were [12,577,913] AirNet Common Shares outstanding, each of which will be entitled to one vote on each matter properly submitted for vote to AirNet's shareholders at the Annual Meeting. See "THE AIRNET ANNUAL MEETING--Voting at the Meeting; Record Date." PURPOSE OF ANNUAL MEETING OF SHAREHOLDERS OF AIRNET The purpose of the Annual Meeting will be to consider and vote on proposals to: (1) approve the acquisition of one-fifth or more but less than one-third of the voting power of AirNet by the Quick Stockholders, as a group, (2) elect directors, (3) approve the amendment and restatement of AirNet's 1996 Incentive Stock Plan and (4) transact such other business as may properly come before the Annual Meeting. PARTIES TO THE MERGER AIRNET AirNet ExpressSM, AirNet's integrated national air transportation network, operates between 100 cities in more than 40 states and delivers over 18,000 time-critical shipments each working day. AirNet's check delivery services, which generates approximately 84% of AirNet's revenues, is the leading transporter of canceled checks and related information for the U.S. banking industry, meeting more that 2,200 daily deadlines. AirNet's small package service, which generates approximately 15% 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 accounts for approximately 1% of AirNet's revenues, also offers retail aviation fuel sales and related ground services for customers in Columbus, Ohio. AirNet operated a fleet of 115 aircraft (29 Learjets and 86 light twin engine aircraft) as of March 31, 1998, which fly approximately 105,000 miles per night, primarily Monday through Thursday. AirNet also provides ground pick-up and delivery services throughout the nation, seven days per week, utilizing a fleet of approximately 250 company-owned ground vehicles as well as a ground transportation network of over 300 independent contractors. AirNet uses its air and ground transportation network to support its banking industry customers, as well as its SameNight, LateNight and BusinessDay small package customers. AirNet also utilizes commercial airlines to provide SameDay delivery service for certain 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. AirNet has consistently achieved on-time performance levels exceeding 97%. In order to maintain this performance, AirNet utilizes a number of proprietary customer service and management information systems to track, sort, dispatch and control the flow of checks and small packages throughout AirNet's delivery system. Delivery times and certain shipment information are available on-line and through the Internet. AirNet believes that the market for reliable, time-critical deliveries is growing as a result of a number of global trends, including: (i) global business strategies aimed at serving customers' time-critical needs for the dissemination of printed and graphic information; (ii) medical laboratories requiring same-day deliveries; and (iii) corporations requiring just-in-time inventory parts in order to lower production costs. AirNet believes that its flexible and reliable air transportation network and its demonstrated expertise in providing time-critical deliveries to the banking industry for over 24 years position AirNet to provide such additional services at premium prices. AirNet was incorporated under the laws of the State of Ohio on February 15, 1996. The principal executive offices of AirNet are located at 3939 International Gateway, Columbus, Ohio 43219, telephone (614) 237-9777. QUICK Quick (together with its subsidiaries) is a domestic and international specialty courier transportation company. Quick combines an understanding of domestic and international transportation complexities, a network of worldwide independent agents and a proprietary information system, to provide customized courier transportation services. Quick believes that its lack of restrictive operational parameters, such as pre-determined pick up and delivery times and dates, is an important factor in differentiating Quick in the specialty transportation industry. Although Quick also provides traditional on-demand delivery services, Quick's focus has been the resolution of unique logistics, transportation and delivery issues and providing superior customer service. Quick was incorporated under the laws of the State of New York on January 19, 1981. The principal executive offices of Quick are located at 909 Third Avenue, New York, New York 10022-4731, telephone (212) 754-0430. TERMS OF THE PROPOSED MERGER Pursuant to the terms of the Agreement, Merger Subsidiary will be merged with and into Quick, whereupon Quick will be the surviving corporation and a wholly-owned subsidiary of AirNet (the "Merger"). The outstanding shares of common stock, $1.00 par value, of Quick (the "Quick Common Shares") will be converted into an aggregate of 3,141,356 AirNet Common Shares (the "Merger Consideration"), less (i) 314,136 AirNet Common Shares to indemnify AirNet with respect to general contingencies (the "General Escrow Shares") and (ii) 46,091 AirNet Common Shares to indemnify AirNet with respect to certain contingencies relating to potential litigation, taxes and fines ("Specific Contingencies") (the "Specific Escrow Shares" and, together with the General Escrow Shares, the "Escrow Shares"). As a result of the Merger, the Quick Stockholders, as a group, will receive 3,141,356 Common Shares of AirNet (less any Escrow Shares that may be forfeited by the Quick Stockholders pursuant to the terms of the Agreement) which will enable them to exercise approximately [20]% of the voting power of AirNet. In addition, outstanding options to purchase capital stock of Quick will be converted into options to purchase an aggregate of 249,591 AirNet Common Shares, which is the number of AirNet Common Shares the holders of such Quick options would have been entitled to receive pursuant to the if they had exercised the options in full prior to the Effective Time. A copy of the Agreement is attached hereto as Appendix I and is incorporated herein by reference. See "THE AGREEMENT--Terms of the Agreement" and "--Indemnification; Escrow." The consummation of the Merger is conditioned on, among other things, the approval by AirNet's shareholders at the Annual Meeting of the acquisition by the Quick Stockholders of one-fifth or more but less than one-third of the voting power of AirNet (the "Acquisition") in accordance with Section 1701.831 of the Ohio General Corporation Law (the "GCL"). The time the Merger becomes effective is referred to herein as the "Effective Time." 2 RECOMMENDATION OF THE AIRNET BOARD OF DIRECTORS The Board of Directors of AirNet has unanimously approved the Agreement and the issuance of the AirNet Common Shares in connection with the Merger, believes that the terms of the Merger are fair to, and in the best interests of, AirNet and its shareholders and recommends that the shareholders vote FOR the approval of the Acquisition. See "THE MERGER--Background of the Merger" and "--Reasons for the Merger." REASONS FOR THE MERGER AIRNET AirNet's management and the Board of Directors believe that the Merger will benefit AirNet's shareholders and strengthen AirNet by accelerating AirNet's strategic plan of developing its document and small package business. The acquisition of Quick will provide AirNet with 3,000 active customers including many Fortune 500 clients, an experienced sales force and a network of over 5,000 ground service agents. A substantial part of Quick's business involves international, next flight out, mail and distribution services, which are areas yet to be developed by AirNet. This acquisition allows AirNet to establish a solid foundation from which to grow this business. In addition, the sales force will be able to market the advantages of AirNet's unique multiple reflex air system to existing Quick customers and potential new customers of AirNet. Once the Merger is completed, AirNet believes additional value will be created through marketing, operating and scale synergies. AirNet and Quick, as a combined entity, will implement a coordinated marketing and sales approach to best serve the customer base. The ability to cross market the services of each company to the combined customer base should generate additional revenue opportunities. Also, Quick's air and ground transportation costs paid to third party providers may be reduced to the extent shipments can be redirected to fill AirNet's air and ground excess capacity. Further, value should be created since the likelihood of being able to reduce the cost per shipment by consolidating two or more next flight out shipments into one will increase as a result of the Merger. Additional economic benefit will be derived from the combined purchasing power of AirNet and Quick with respect to a wide range of areas in the business. AirNet believes the structure of the transaction is the preferable method in which to accomplish the acquisition of Quick in order to achieve the benefits described above. The current management of Quick includes the principal stockholders of Quick who will become shareholders of AirNet following the Merger. AirNet believes that the Merger will clearly align Quick management with the goals of maximizing the benefit for all AirNet shareholders. Of course, as in any business transaction, there can be no assurance that AirNet's expectations will be fulfilled. QUICK The Board of Directors of Quick believes that the terms of the Merger are fair to, and in the best interest of, Quick and the Quick Stockholders. Accordingly, the Board of Directors of Quick approved the Agreement and the Acquisition contemplated thereby, and recommended the approval and adoption of the Agreement by the Quick Stockholders. In reaching its conclusion to enter into the Agreement and to recommend that the Quick Stockholders vote for the approval and adoption of the Agreement, the Board of Directors of Quick considered a number of factors, including, but not limited to, (i) the competitive environment of the courier industry generally and of priority courier providers specifically, (ii) the terms of the Agreement, (iii) the terms of other recent business combination transactions involving courier companies, (iv) the financial condition, performance, management and future prospects of each of Quick and AirNet, (v) the potential for growth, 3 stability and enhanced services as a result of an association with AirNet, (vi) the comparative marketability of the AirNet Common Shares and (vii) the potential tax treatment of the Merger. The Board of Directors of Quick also considered certain potential disadvantages or negative factors relating to the Merger, including, but not limited to, (i) the loss of a significant degree of control by Quick's stockholders and management that would result from becoming a closely-held subsidiary of a public company, (ii) the risk that the Merger would not be consummated, (iii) the risk that the benefits sought by the consummation of the Merger would not be achieved, and (iv) the relative liquidity of the AirNet Common Shares. The Board of Directors of Quick believes the Merger will provide an attractive opportunity to strengthen Quick's competitive position in the courier industry, enhance its profile among customers and achieve operational, financial and strategic goals. The Board of Directors also believes that an association with AirNet will increase Quick's potential for growth and stability. In addition, the Board of Directors believes the terms and structure of the Merger, including, but not limited to, the pooling-of-interests accounting treatment, to be favorable to Quick and the Quick Stockholders. OPINION OF AIRNET'S FINANCIAL ADVISOR As part of its deliberations, the AirNet Board considered the oral and written analyses and advice of SBC Warburg Dillon Read Inc. ("Warburg Dillon Read"), its financial advisor, regarding the Merger. On Monday, April 13, 1998, Warburg Dillon Read advised AirNet that based on the terms of the Merger as presented to Warburg Dillon Read and subject to the receipt of the executed Agreement substantially in the form and containing the terms presented at such meeting, upon AirNet's request, Warburg Dillon Read was prepared to render an opinion (the "Opinion") as to the fairness to AirNet from a financial point of view of the consideration to be paid by AirNet pursuant to the Merger. The engagement letter between AirNet and Warburg Dillon Read does not require Warburg Dillon Read to render an opinion as to the fairness of the Merger to AirNet's shareholders. On Wednesday, April 22, 1998, AirNet requested that Warburg Dillon Read render its opinion in writing and on April 24, 1998 (effective April 13, 1998), Warburg Dillon Read delivered its written opinion to the AirNet Board of Directors to the effect that, and based upon and subject to the assumptions, limitations and qualifications set forth therein, as of the date thereof, the aggregate consideration to be paid by AirNet pursuant to the Agreement, without reference to the consideration to be paid to any specific shareholder, is fair to AirNet, from a financial point of view. The full text of the written Opinion, which sets forth the assumptions made, procedures followed, matters considered and scope of the review by Warburg Dillon Read in rendering its Opinion, is attached hereto as Appendix II and should be read in its entirety. See "THE MERGER--Opinion of AirNet's Financial Advisor" for information regarding, among other things, the selection of Warburg Dillon Read and its compensation in connection with the Merger. VOTE REQUIRED The consummation of the Merger is conditioned on, among other things, the approval of the Acquisition at the Annual Meeting. The shareholders of AirNet must approve the Acquisition because, immediately thereafter, the Quick Stockholders will exercise in excess of one-fifth of the voting power of AirNet. The GCL provides that any "control share acquisition" of AirNet must be submitted to AirNet's shareholders. The GCL defines a control share acquisition to include an acquisition of AirNet's shares which would give the acquiring person voting power falling within one of the following three categories: (a) one-fifth or more but less than one-third of the voting power, (b) one-third or more but less than a majority of the voting power and (c) a majority or more of the voting power. For the Acquisition to be approved, the affirmative vote of the holders of a majority of the voting power of AirNet represented at a meeting at which a quorum is present and the affirmative vote of the holders of a majority of the portion of such voting power excluding "Interested Shares" is required. "Interested Shares" are defined by the GCL 4 to include shares held by the Acquiring Person (i.e., the Quick Stockholders), shares held by an officer of AirNet elected or appointed by the Board of Directors, shares held by associates of AirNet who are also directors and certain shares purchased after a control share acquisition is announced. As indicated elsewhere in this Proxy Statement/Prospectus, executive officers and associate directors of AirNet as a group own approximately 41.6% of the outstanding AirNet Common Shares. Gerald G. Mercer, the Chairman and Chief Executive Officer of AirNet, has agreed pursuant to the Agreement to vote his AirNet Common Shares for the Acquisition. The Quick Stockholders do not currently own any AirNet Common Shares. See "PROPOSAL TO APPROVE ACQUISITION OF ONE-FIFTH OR MORE BUT LESS THAN ONE-THIRD OF THE VOTING POWER OF AIRNET--Recommendation and Vote." REGULATORY MATTERS The Merger is subject to the applicable provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder (the "HSR Act"). AirNet and Quick filed the information and material required under the HSR Act with the Antitrust Division of the Department of Justice (the "Antitrust Division") and the Federal Trade Commission (the "FTC") on April 10, 1998. On April 22, 1998, AirNet and Quick received notice of early termination of the waiting period provision of the HSR Act. No further approval by the Antitrust Division or the FTC is required in order to consummate the Merger. See "THE MERGER--Antitrust Considerations." DISSENTERS' RIGHTS Shareholders of AirNet have no dissenters' rights with respect to the Merger or any matter to be considered at the Annual Meeting. Pursuant to the Agreement, the Quick Stockholders have waived any dissenters' rights they might otherwise have with respect to the Merger. CERTAIN FEDERAL INCOME TAX CONSEQUENCES No gain or loss will be recognized by AirNet or AirNet's shareholders for federal income tax purposes as a result of the Merger. With respect to the Quick Stockholders, the consummation of the Merger is intended to constitute a tax-free reorganization pursuant to Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). Each Quick Stockholder is urged to consult his or her own tax advisor as to the specific tax consequences to him or her of the Merger. See "THE MERGER--Federal Income Tax Consequences." MARKET PRICES The AirNet Common Shares are traded on the NYSE under the symbol ANS. Quick is a privately held company whose capital stock is not actively traded. The following table sets forth the high and low sales prices on the NYSE of the AirNet Common Shares on February 9, 1998, the last day of trading prior to the joint public announcement by AirNet and Quick of the proposed Merger. HIGH LOW --------- --------- Sales prices on February 9, 1998 for AirNet Common Shares............... $ 24.063 $ 23.500 NO ASSURANCE CAN BE GIVEN AS TO WHAT THE MARKET PRICE OF THE AIRNET COMMON SHARES WILL BE IF AND WHEN THE MERGER IS CONSUMMATED OR WHEN THE AIRNET COMMON SHARES WILL ACTUALLY BE ISSUED. SHAREHOLDERS ARE ENCOURAGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THEIR AIRNET COMMON SHARES. 5 HISTORICAL AND UNAUDITED PRO FORMA COMPARATIVE PER SHARE DATA The following tables present the selected comparative per share data for the AirNet Common Shares on a historical and unaudited pro forma combined basis and for the Quick Common Shares on a historical and unaudited pro forma equivalent basis giving effect to the Merger using the pooling-of-interests method of accounting. The unaudited pro forma combined net book value per share data is based on an assumed exchange ratio of 249.5913 AirNet Common Shares for each Quick Common Share and assumes the Effective Time of the Merger had occurred on December 31, 1997 and March 31, 1998. The following tables should be read in conjunction with the historical consolidated financial statements of AirNet and of Quick and the unaudited pro forma condensed combined financial information giving effect to the Merger presented elsewhere herein. NET BOOK VALUE PER COMMON SHARE: DECEMBER 31, MARCH 31, 1997 1998 ------------ ----------- AirNet--historical (1).............................................. $ 6.43 $ 6.71 Quick--historical (2)............................................... 986.89 1,088.70 Quick--unaudited pro forma equivalent (3)........................... 3.95 4.36 AirNet and Quick--unaudited pro forma combined (4).................. 5.72 6.22 NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE: YEAR ENDED THREE MONTHS ENDED ------------------------------------------ --------------------------------------- DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, MARCH 31, 1997 1996 1995 1996 1998 1997 ------------ ------------- ------------- ------------- ----------- ----------- (8) (8) (8) BASIC AirNet--pro forma historical(5).......... $ 1.05 $ (0.34) $ 1.43 $ 0.20 $ 0.23 $ 0.25 Quick--historical(6)..................... 176.92 74.60 (31.50) 15.20 97.34 21.60 Quick--unaudited pro forma equivalent(3).......................... 0.71 0.30 (0.13) 0.06 0.39 0.09 AirNet and Quick--unaudited pro forma combined(7)............................ 0.96 (0.19) 0.92 0.17 0.23 0.21 ASSUMING DILUTION AirNet--pro forma historical(5).......... $ 1.04 $ (0.34) $ 1.43 $ 0.20 $ 0.22 $ 0.24 Quick--historical(6)..................... 167.16 74.60 (31.50) 15.20 90.76 21.60 Quick--unaudited pro forma equivalent(3).......................... 0.67 0.30 (0.13) 0.06 0.36 0.09 AirNet and Quick--unaudited pro forma combined(7)............................ 0.94 (0.19) 0.92 0.17 0.22 0.21 - ------------------------ (1) Based on 12,489,830 and 12,571,813 AirNet Common Shares outstanding as of December 31, 1997 and March 31, 1998, respectively. (2) Based on 12,277 Quick Common Shares outstanding as of December 31, 1997 and March 31, 1998. (3) The unaudited pro forma equivalent per share data for Quick represents the pro forma per share data for Quick Common Shares multiplied by the assumed exchange ratio of 249.5913 AirNet Common Shares for each Quick Common Share. 6 (4) Represents the unaudited pro forma combined net book value of AirNet and Quick, divided by the sum of the number of AirNet Common Shares outstanding at December 31, 1997 and March 31, 1998, plus the 3,141,356 AirNet Common Shares expected to be issued in the Merger. (5) September 30, 1996 and 1995 balances include unaudited pro forma adjustments related to AirNet's initial public offering (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 Offering occurred on October 1, 1994. All such changes were effective with the consummation of the Offering on May 31, 1996. The weighted average number of AirNet Common Shares outstanding for the years ended December 31, 1997 and September 30, 1996 and 1995 were 12,577,487, 8,055,490 and 5,856,561, respectively, and for the three months ended December 31, 1996 and March 31, 1998 and 1997 were 12,580,048, 12,529,327 and 12,621,470, respectively. Assuming dilution of outstanding stock options and warrants, the weighted average number of AirNet Common Shares outstanding for the years ended December 31, 1997 and September 30, 1996 and 1995 were 12,706,308, 8,491,232 and 5,856,561, respectively, and for the three months ended December 31, 1996 and March 31, 1998 and 1997 were 12,580,048, 12,781,600 and 12,637,110, respectively. (6) The weighted average number of Quick Common Shares outstanding for the years ended December 31, 1997 and September 30, 1996 and 1995 were 10,745, 10,000 and 10,000, respectively, and for the three months ended December 31, 1996 and March 31, 1998 and 1997 was 10,000, 12,277 and 10,000, respectively. Assuming dilution for outstanding stock options, the weighted average number of Quick Common Shares outstanding for the years ended December 31, 1997 and September 30, 1996 and 1995 were 11,372, 10,000 and 10,000, respectively, and for the three months ended December 31, 1996 and March 31, 1998 and 1997 were 10,000, 13,166 and 10,000, respectively. (7) Amounts reflect the net income per common share on a pro forma combined basis. Such amounts are determined by dividing the pro forma combined net income by the sum of the average number of AirNet Common Shares outstanding during the applicable period plus the 3,141,356 AirNet Common Shares to be issued in the Merger and the dilutive effect of the options to purchase 249,591 AirNet Common Shares to be issued in connection with the Merger. (8) During 1997, AirNet changed its fiscal year end from September 30 to December 31. As a result, the three months ended December 31, 1996 has been treated as a transition period. During 1997, Quick also changed its fiscal year end from June 30 to December 31. As a result, Quick's data for the years ended June 30, 1996 and 1995 have been combined with AirNet's data for the years ended September 30, 1996 and 1995, respectively. 7 SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA FOR AIRNET The selected financial data presented below as of and for the year ended December 31, 1997, each of the fiscal years in the four-year period ended September 30, 1996, and the three months ended December 31, 1996, have been derived from the Consolidated Financial Statements of AirNet, which have been audited by Ernst & Young LLP. The selected financial data set forth below for AirNet as of and for the three months ended March 31, 1998 and 1997, have been derived from unaudited financial statements of AirNet that have been prepared on the same basis as the audited Consolidated Financial Statements and include all adjustments, consisting of normal recurring accruals, that AirNet considers necessary for a fair presentation of the financial position and results of operations for the periods presented. AIRNET SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS YEAR ENDED YEARS ENDED SEPTEMBER 30, ENDED THREE MONTHS THREE MONTHS DECEMBER 31, ------------------------------------------ DECEMBER 31, ENDED MARCH ENDED MARCH 1997 1996 1995 1994 1993 1996 31, 1998 31, 1997 ------------- --------- --------- --------- --------- ------------- ------------- ------------- (RESTATED FOR ECC POOLING) (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA Net revenues Check delivery............ $ 80,707 $ 65,025 $ 58,264 $ 54,046 $ 49,358 $ 16,811 $ 22,370 $ 18,080 Small package delivery.... 15,660 13,864 12,424 12,489 11,754 3,614 3,913 3,713 Fixed base operations..... 1,395 1,063 1,007 1,158 1,265 366 288 442 ------------- --------- --------- --------- --------- ------------- ------------- ------------- Total net revenues.......... 97,762 79,952 71,695 67,693 62,377 20,791 26,571 22,235 Costs and expenses Air transportation........ 66,032 53,797 49,246 47,747 46,154 14,383 19,215 14,704 Fixed base operations..... 1,101 1,033 956 1,082 1,150 309 175 283 Selling, general and administrative.......... 8,550 11,875 13,418 11,626 9,238 1,916 2,271 2,095 ------------- --------- --------- --------- --------- ------------- ------------- ------------- Total costs and expenses.... 75,683 66,705 63,620 60,455 56,542 16,608 21,661 17,082 ------------- --------- --------- --------- --------- ------------- ------------- ------------- Income from operations...... 22,079 13,247 8,075 7,238 5,835 4,183 4,910 5,153 Interest expense............ 109 1,072 1,469 1,106 1,131 10 196 -- Offering-related, non-recurring expenses (1)....................... -- 13,704 -- -- -- -- -- -- ------------- --------- --------- --------- --------- ------------- ------------- ------------- Income (loss) before income taxes..................... 21,970 (1,529) 6,606 6,132 4,704 4,173 4,714 5,153 Income tax expense (benefit), net (2)........ 8,767 4,200 (13) (48) 27 1,688 1,860 2,060 ------------- --------- --------- --------- --------- ------------- ------------- ------------- Net income (loss)........... $ 13,203 ($ 5,729) $ 6,619 $ 6,180 $ 4,677 $ 2,485 $ 2,854 $ 3,093 ------------- --------- --------- --------- --------- ------------- ------------- ------------- ------------- --------- --------- --------- --------- ------------- ------------- ------------- Net income per share........ $ 1.05 $ 0.20 $ 0.23 $ 0.25 Net income per share-- assuming dilution......... $ 1.04 $ 0.20 $ 0.22 $ 0.24 Pro forma information-- unaudited (3) 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 --------- --------- --------- --------- 8 THREE MONTHS YEAR ENDED YEARS ENDED SEPTEMBER 30, ENDED THREE MONTHS THREE MONTHS DECEMBER 31, ------------------------------------------ DECEMBER 31, ENDED MARCH ENDED MARCH 1997 1996 1995 1994 1993 1996 31, 1998 31, 1997 ------------- --------- --------- --------- --------- ------------- ------------- ------------- (RESTATED FOR ECC POOLING) (UNAUDITED) (UNAUDITED) 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 (1).............. 12,681 -- --------- --------- Adjusted pro forma net income.................... $ 9,963 $ 8,384 --------- --------- --------- --------- Adjusted pro forma net income per share (4)...... $ 0.80 $ 0.67 BALANCE SHEET DATA Total assets................ $ 103,986 $ 75,866 $ 49,929 $ 43,024 $ 36,822 $ 79,495 $ 107,477 $ 82,142 Total debt.................. 9,729 197 19,431 16,426 13,289 111 8,724 -- Shareholders' equity........ 80,260 66,287 20,875 18,341 17,242 70,719 84,297 73,846 - ---------------------------------- (1) Represents non-cash, non-recurring expenses incurred as a result of the Offering, effective May 31, 1996. (See Note 2 to the Consolidated Financial Statements of AirNet which are included herein.) (2) Prior to AirNet's Offering, it operated as an S Corporation under the 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. ("ECC"). (3) 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. (See Note 14 to the Consolidated Financial Statements of AirNet which are included herein.) (4) Assumes AirNet Common Shares issued in the Offering were outstanding for the entire period. (5) AirNet capitalizes costs related to the start-up activities associated with new business initiatives, such as introduction of the premium products line of business. Costs associated with these initiatives, such as personnel costs, outside services and administrative support services, are capitalized as start-up costs. During the three months ended March 31, 1998, AirNet capitalized $0.9 million of such costs, for a total of $3.4 million of start-up costs recorded on its balance sheet, included in other assets, at March 31, 1998. The start-up phase for the premium products is expected to be completed in the second quarter of 1998. In April 1998, AcSEC issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities." This Statement of Position will require all companies to write off, as a cumulative effect of a change in accounting principle, any previously capitalized start-up costs. This Statement of Position will be effective for AirNet in the first quarter of 1999. SELECTED FINANCIAL DATA FOR QUICK The selected financial data presented below as of and for the year ended December 31, 1997, each of the fiscal years in the four-year period ended June 30, 1996, and the six months ended December 31, 1996, have been derived from the Consolidated Financial Statements of Quick, which have been audited by Ernst & Young LLP for the years ended December 31, 1997 and June 30, 1996 and 1995. The selected financial data set forth below for Quick as of and for the three months ended March 31, 1998 and 1997, have been derived from unaudited financial statements of Quick that have been prepared on the same basis as the audited Consolidated Financial Statements and include all adjustments, consisting of normal recurring accruals, that Quick considers necessary for a fair presentation of the financial position and results of operations for the periods presented. 9 QUICK SELECTED FINANCIAL DATA (in thousands) SIX MONTHS THREE MONTHS THREE MONTHS YEAR ENDED YEARS ENDED JUNE 30, ENDED ENDED ENDED DECEMBER 31, ---------------------------------------------- DECEMBER 31, MARCH 31, MARCH 31, 1997 1996 1995 1994 1993 1996 1998 1997 ------------ --------- --------- ----------- ----------- ------------ ------------- ------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA Net sales............... $ 67,277 $ 41,748 $ 30,184 $ 29,501 $ 24,013 $ 24,628 $ 21,985 $ 12,702 Cost of operations...... 49,275 31,320 22,411 20,808 16,513 18,580 16,031 9,207 ------------ --------- --------- ----------- ----------- ------------ ------------- ------------- Gross profit............ 18,002 10,428 7,773 8,693 7,500 6,048 5,954 3,495 ------------ --------- --------- ----------- ----------- ------------ ------------- ------------- Expenses: Selling............... 5,788 3,562 2,702 2,592 2,342 2,225 1,727 1,262 General & administrative...... 9,411 5,745 5,235 4,957 4,489 3,477 2,621 1,899 ------------ --------- --------- ----------- ----------- ------------ ------------- ------------- 15,199 9,307 7,937 7,549 6,831 5,702 4,348 3,161 Income (loss) from operations............ 2,803 1,121 (164) 1,144 669 346 1,606 334 Interest expense, net... 512 292 116 126 115 160 171 83 ------------ --------- --------- ----------- ----------- ------------ ------------- ------------- Income (loss) before income taxes.......... 2,291 829 (280) 1,018 554 186 1,435 251 Provision for income taxes (2)............. 390 83 35 120 79 20 240 35 ------------ --------- --------- ----------- ----------- ------------ ------------- ------------- Net income (loss)....... $ 1,901 $ 746 $ (315) $ 898 $ 475 $ 166 $ 1,195 $ 216 ------------ --------- --------- ----------- ----------- ------------ ------------- ------------- ------------ --------- --------- ----------- ----------- ------------ ------------- ------------- BALANCE SHEET DATA Total assets............ $ 32,664 $ 14,085 $ 10,036 $ 9,577 $ 7,385 $ 15,470 $ 33,083 $ 13,638 Total debt.............. 10,946 6,806 4,224 3,101 2,522 5,962 9,628 3,765 Shareholders' equity.... 12,116 3,513 2,733 3,048 2,417 3,670 13,366 3,861 - ------------------------ (1) During 1997, Quick changed its fiscal year end from June 30 to December 31. As a result, the six months ended December 31, 1996 has been treated as a transition period. (2) Reflects Quick as an S Corporation during the periods presented. Accordingly, no provision for federal and certain state income taxes has been recorded. In connection with the Merger, Quick will terminate its S Corporation status and a deferred tax liability will be recognized. UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL DATA The following table summarizes certain unaudited pro forma combined selected financial data for AirNet and Quick, giving effect to the Merger as a pooling-of-interests for accounting and financial reporting purposes. Such unaudited pro forma data assumes the Merger had been effective at the beginning of the years ended December 31, 1997, September 30, 1996 and 1995 and the three months ended December 31, 1996 and March 31, 1998 and 1997 and that 3,141,356 AirNet Common Shares were issued in connection with the Merger. This unaudited pro forma selected financial data is derived from and should be read in conjunction with the historical consolidated financial statements of AirNet and Quick, including the respective footnotes to those statements and the unaudited pro forma condensed combined financial information giving effect to the Merger included elsewhere herein. THE FOLLOWING UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL DATA IS NOT NECESSARILY INDICATIVE OF RESULTS OF THE OPERATIONS OR COMBINED FINANCIAL POSITION THAT WOULD HAVE RESULTED HAD THE MERGER BEEN CONSUMMATED AT THE BEGINNING OF THE PERIODS PRESENTED, NOR IS IT NECESSARILY INDICATIVE OF THE RESULTS OF OPERATIONS OF FUTURE PERIODS OR THE FUTURE COMBINED FINANCIAL POSITION. 10 UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL DATA (in thousands, except per share data) YEARS ENDED THREE MONTHS THREE MONTHS THREE MONTHS ------------------------------------------ ENDED ENDED ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, MARCH 31, 1997 1996 1995 1996 1998 1997 ------------ ------------- ------------- ------------- ------------- ------------- STATEMENTS OF OPERATIONS DATA (1) Net revenues Check delivery..................... $ 80,707 $ 65,025 $ 58,264 $ 16,811 $ 22,370 $ 18,080 Small package delivery............. 82,937 55,612 42,608 16,690 25,898 16,415 Fixed base operations.............. 1,395 1,063 1,007 366 288 442 ------------ ------------- ------------- ------------- ------------- ------------- Total net revenues................... 165,039 121,700 101,879 33,867 48,556 34,937 Costs and expenses Air and ground transportation...... 115,307 85,117 71,657 24,283 35,246 23,911 Fixed base operations.............. 1,101 1,033 956 309 175 283 Selling, general and administrative................... 22,644 20,823 20,954 4,701 6,619 5,153 ------------ ------------- ------------- ------------- ------------- ------------- Total costs and expenses............. 139,052 106,973 93,567 29,293 42,040 29,347 ------------ ------------- ------------- ------------- ------------- ------------- Income from operations............... 25,987 14,727 8,312 4,574 6,516 5,590 Interest expense..................... 621 1,364 1,585 98 367 83 Offering-related, non-recurring expenses (2)....................... -- 13,704 -- -- -- -- ------------ ------------- ------------- ------------- ------------- ------------- Income (loss) before income taxes (3)................................ 25,366 (341) 6,727 4,476 6,149 5,507 Provision for income taxes........... 10,309 4,791 192 1,850 2,549 2,222 ------------ ------------- ------------- ------------- ------------- ------------- Net income (loss).................... $ 15,057 $ (5,132) $ 6,535 $ 2,626 $ 3,600 $ 3,285 ------------ ------------- ------------- ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------- ------------- Net income per common share.......... $ 0.96 $ 0.17 $ 0.23 $ 0.21 Net income per common share--assuming dilution........................... $ 0.94 $ 0.17 $ 0.22 $ 0.21 Pro forma information (4) Net income (loss) before taxes..... $ (341) $ 6,727 Pro forma adjustments, other than income taxes..................... 4,429 7,367 Pro forma income taxes............. 6,209 5,794 ------------- ------------- Pro forma net income (loss).......... $ (2,121) $ 8,300 ------------- ------------- ------------- ------------- Pro forma net income (loss) per common share--basic and assuming dilution........................... $ (0.19) $ 0.92 Adjusted pro forma information (5) Pro forma net income (loss)........ $ (2,121) $ 8,300 Effects of eliminating offering- related, non-recurring expense, net of tax....................... 12,681 -- ------------- ------------- Adjusted pro forma net income........ $ 10,560 $ 8,300 ------------- ------------- ------------- ------------- Adjusted pro forma net income per share--basic and assuming dilution........................... $ 0.68 $ 0.53 BALANCE SHEET DATA Total assets......................... $ 136,650 $ 89,951 $ 59,965 $ 94,965 $ 140,560 $ 95,780 Total debt........................... 20,675 7,002 23,655 6,073 18,352 3,765 Shareholders' equity................. 92,376 69,800 23,608 74,389 95,583 77,707 - ------------------------ (1) The unaudited pro forma combined statements of operations data give effect to the following adjustments as if the Merger had been completed as of the beginning of the periods indicated: (i) the 11 reduction of executive compensation costs for Quick as a result of employment agreements executed in connection with the Merger; and (ii) the recording of federal and state income taxes as if Quick's operations had been taxed as a C Corporation and the effects of the above pro forma adjustments at an assumed effective tax rate of 40%. The pro forma weighted average shares outstanding have been increased to include the 3,141,356 AirNet Common Shares expected to be issued in the Merger. The diluted pro forma weighted average shares outstanding also include the dilutive effects of the options to purchase 249,591 AirNet Common Shares to be issued in connection with the Merger. (2) Represents non-cash, non-recurring expenses incurred by AirNet as a result of the Offering, effective May 31, 1996. (3) Prior to AirNet's Offering, it operated as an S Corporation under the Code for tax purposes and, consequently, was not subject to federal and certain state income taxes. (4) Includes pro forma adjustments related to the Offering, in addition to the pro forma adjustments noted in Note (1), above. 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 Offering occurred on October 1, 1994. All such changes were effective with the consummation of the Offering on May 31, 1996. (5) Excludes the effects of $13,704,000 of non-cash, non-recurring expenses incurred as a result of AirNet's Offering, effective May 31, 1996. Adjusted pro forma net income per share data assumes the AirNet Common Shares issued in the Offering were outstanding for the entire period presented. RISK FACTORS ANY INVESTMENT IN THE AIRNET COMMON SHARES BEING OFFERED TO THE QUICK STOCKHOLDERS HEREBY INVOLVES A HIGH DEGREE OF RISK. THE QUICK STOCKHOLDERS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AIRNET--FORWARD-LOOKING STATEMENTS" IN EVALUATING THEIR INVESTMENT IN THE AIRNET COMMON SHARES. THE MERGER BACKGROUND OF THE MERGER Consistent with AirNet's strategy of pursuing strategic acquisitions, representatives of AirNet contacted Quick regarding a possible business combination in November 1997. On December 24, 1997, Quick and AirNet signed reciprocal confidentiality agreements. Within the next several weeks after the initial meeting, the principals of Quick and members of AirNet's senior management held several business and due diligence meetings to determine whether there was a basis for agreement. On January 20, 1998, Quick retained Donaldson Lufkin & Jenrette Securities Corporation ("DLJ") to provide Quick with financial advisory and investment banking services with respect to a possible business combination, and on February 4, 1998, AirNet retained Warburg Dillon Read to assist AirNet in its negotiations. On February 9, 1998, the parties executed a letter of intent. On February 10, 1998, AirNet publicly announced its intention to enter into a transaction with Quick. Thereafter, the parties proceeded to negotiate a definitive merger agreement. Such negotiations culminated with the execution of the Agreement on April 15, 1998. The consideration to be paid by AirNet in the Merger was determined by arms-length negotiation among Quick, the Quick Stockholders and AirNet, after consultation by AirNet with Warburg Dillon Read and by Quick with DLJ. 12 REASONS FOR THE MERGER AIRNET AirNet's management and the Board of Directors believe that the Merger will benefit AirNet's shareholders and strengthen AirNet by accelerating AirNet's strategic plan of developing its document and small package business. The acquisition of Quick will provide AirNet with 3,000 active customers including many Fortune 500 clients, an experienced sales force and a network of over 5,000 ground service agents. A substantial part of Quick's business involves international, next flight out, mail and distribution services, which are areas yet to be developed by AirNet. This acquisition allows AirNet to establish a solid foundation from which to grow this business. In addition, the sales force will be able to market the advantages of AirNet's unique multiple reflex air system to existing Quick customers and potential new customers of AirNet. Once the Merger is completed, AirNet believes additional value will be created through marketing, operating and scale synergies. AirNet and Quick, as a combined entity, will implement a coordinated marketing and sales approach to best serve the customer base. The ability to cross market the services of each company to the combined customer base should generate additional revenue opportunities. Also, Quick's air and ground transportation costs paid to third party providers may be reduced to the extent shipments can be redirected to fill AirNet's air and ground excess capacity. Further, value should be created since the likelihood of being able to reduce the cost per shipment by consolidating two or more next flight out shipments into one will increase as a result of the Merger. Additional economic benefit will be derived from the combined purchasing power of AirNet and Quick with respect to a wide range of areas in the business. AirNet believes the structure of the transaction is the preferable method in which to accomplish the acquisition of Quick in order to achieve the benefits described above. The current management of Quick includes the principal stockholders of Quick who will become shareholders of AirNet following the Merger. AirNet believes that the Merger will clearly align Quick management with the goals of maximizing the benefit for all AirNet shareholders. Of course, as in any business transaction, there can be no assurance that AirNet's expectations will be fulfilled. QUICK The Board of Directors of Quick believes that the terms of the Merger are fair to, and in the best interest of, Quick and the Quick Stockholders. Accordingly, the Board of Directors of Quick approved the Agreement and the Acquisition contemplated thereby, and recommended the approval and adoption of the Agreement by the Quick Stockholders. In reaching its conclusion to enter into the Agreement and to recommend that the Quick Stockholders vote for the approval and adoption of the Agreement, the Board of Directors of Quick considered a number of factors, including, but not limited, (i) the competitive environment of the courier industry generally and of priority courier providers specifically, (ii) the terms of the Agreement, (iii) the terms of other recent business combination transactions involving courier companies, (iv) the financial condition, performance, management and future prospects of each of Quick and AirNet, (v) the potential for growth, stability and enhanced services as a result of an association with AirNet, (vi) the comparative marketability of the AirNet Common Shares and (vii) the potential tax treatment of the Merger. The Board of Directors of Quick also considered certain potential disadvantages or negative factors relating to the Merger, including, but not limited to, (i) the loss of a significant degree of control by Quick's stockholders and management that would result from becoming a closely-held subsidiary of a public company, (ii) the risk that the Merger would not be consummated, (iii) the risk that the benefits 13 sought by the consummation of the Merger would not be achieved, and (iv) the relative liquidity of the AirNet Common Shares. The Board of Directors of Quick believes the Merger will provide an attractive opportunity to strengthen Quick's competitive position in the courier industry, enhance its profile among customers and achieve operational, financial and strategic goals. The Board of Directors also believes that an association with AirNet will increase Quick's potential for growth and stability. In addition, the Board of Directors believes the terms and structure of the Merger, including, but not limited to, the pooling-of-interests accounting treatment, to be favorable to Quick and the Quick Stockholders. OPINION OF AIRNET'S FINANCIAL ADVISOR AirNet's Board of Directors retained Warburg Dillon Read to act as its financial advisor in connection with the Merger. As part of its deliberations, the AirNet Board considered the oral and written analyses and advice of Warburg Dillon Read regarding the Merger. See the full text of the written Opinion of Warburg Dillon Read set out in Appendix II. On Monday, April 13, 1998, Warburg Dillon Read advised AirNet that based on the terms of the Merger as presented to Warburg Dillon Read and subject to the receipt of the executed Agreement substantially in the form and containing the terms presented at such meeting, upon AirNet's request, Warburg Dillon Read was prepared to render an Opinion as to the fairness to AirNet from a financial point of view of the consideration to be paid by AirNet pursuant to the Merger. The engagement letter between AirNet and Warburg Dillon Read does not requireWarburg Dillon Read to render an opinion as to the fairness of the Merger to AirNet's shareholders. On Wednesday, April 22, 1998, AirNet requested that Warburg Dillon Read render its Opinion in writing. Warburg Dillon Read delivered its written opinion on April 24, 1998 (effective April 13, 1998) to the AirNet Board of Directors to the effect that, and based upon and subject to the assumptions, limitations and qualifications set forth therein, as of the date thereof, the aggregate consideration to be paid by AirNet pursuant to the Agreement, without reference to the consideration to be paid to any specific shareholder, is fair to AirNet, from a financial point of view. Shareholders are encouraged to read the full text of the Warburg Dillon Read Opinion in its entirety for information with respect to the procedures followed, assumptions made, matters considered and limitations on the review undertaken by Warburg Dillon Read in arriving at its Opinion. The Warburg Dillon Read Opinion does not address the fairness of the Merger to any specific shareholders of AirNet or to the shareholders of Quick, nor does it constitute a recommendation regarding whether or not it is advisable for such shareholders to vote in favor of the Merger. The summary of the Warburg Dillon Read Opinion set forth in this Proxy Statement/Prospectus is qualified in its entirety by reference to the full text of such Opinion. Warburg Dillon Read has consented to the use of Appendix II, containing its opinion dated April 24, 1998 and incorporated elsewhere in this Proxy Statement/Prospectus, and to the references to Warburg Dillon Read under the headings "SUMMARY" and "THE MERGER" in this Proxy Statement/ Prospectus. In giving such consent, Warburg Dillon Read does not admit that it comes within the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission promulgated thereunder, nor does Warburg Dillon Read admit that it is an expert with respect to any part of the Registration Statement in which this Proxy Statement/Prospectus is included, within the meaning of the term "experts" as used in the Securities Act or the rules and regulations of the Commission promulgated thereunder. In arriving at its Opinion, Warburg Dillon Read, among other things: (i) reviewed the Agreement; (ii) reviewed certain publicly available business and financial information relating to AirNet; (iii) reviewed the reported price and trading activity for the AirNet Common Shares; (iv) reviewed certain internal non- 14 public financial information and other data provided to Warburg Dillon Read by each of AirNet and Quick relating to the business and prospects of AirNet and Quick, respectively, including financial projections prepared by the management of AirNet and Quick, respectively; (v) conducted discussions with members of the senior management of AirNet and Quick; (vi) reviewed publicly available financial and securities market data pertaining to certain publicly held companies in lines of business which Warburg Dillon Read believed to be generally comparable to Quick; and (vii) conducted such other financial studies, analyses and investigations, and considered such other information as Warburg Dillon Read deemed necessary and appropriate but none of which was individually material. The Warburg Dillon Read Opinion was necessarily based on economic, monetary, market and other conditions in effect on, and the information made available to it as of, April 13, 1998. In connection with its review, with AirNet's consent, Warburg Dillon Read did not assume any responsibility for independent verification of any of the information reviewed by it for purposes of the Opinion and, with AirNet's consent, relied upon its being complete and accurate in all material respects. Warburg Dillon Read was not requested to and did not make an independent evaluation or appraisal of any assets or liabilities (contingent or otherwise) of AirNet or Quick, nor was Warburg Dillon Read furnished with any such evaluation or appraisal. With respect to the financial estimates provided to or otherwise reviewed by or discussed with it, Warburg Dillon Read assumed, with AirNet's consent, that all of the information, including the financial forecasts, estimates, pro forma effects and projections, provided to Warburg Dillon Read by the management of AirNet and Quick, were reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of each corporation as to the future performance of their respective corporations. In arriving at the Opinion, Warburg Dillon Read did not assign any particular weight to any analysis or factor considered by it, but rather made qualitative judgments based upon its experience in rendering such opinions and on economic, monetary, market and other conditions then present as to the significance and relevance of each analysis and factor. Accordingly, Warburg Dillon Read believes that its analyses must be considered as a whole and that selecting portions of its analyses and other factors considered by it, without considering all factors and analyses, could create a misleading or incomplete view of the valuation process underlying the Opinion. With AirNet's consent, Warburg Dillon Read made numerous assumptions with respect to historical and projected financial performance, industry performance, general business and economic conditions and other matters discussed herein, many of which are beyond Quick's, AirNet's and Warburg Dillon Read's control. Any assumed estimates contained in Warburg Dillon Read's analyses are not necessarily indicative of actual values, which may be significantly more or less favorable than as set forth herein. Such estimates relating to the value of a business or securities do not purport to be appraisals or necessarily reflect the prices at which companies or securities may actually be sold or bought. In connection with rendering its opinion, Warburg Dillon Read employed a variety of valuation methods. The following discussion constitutes a summary of the material analyses considered by Warburg Dillon Read, assuming the terms of the Agreement as presented on April 23, 1998 (the "Proposed Merger"): CONTRIBUTION ANALYSIS Warburg Dillon Read calculated the contribution of Quick to AirNet with respect to budgeted 1997 and projected 1998 (based on estimates by AirNet and Quick) net income available to common shareholders, earnings before interest and taxes ("EBIT"), and revenues, as well as assets and book value of common equity at September 30, 1997. These calculations yielded amounts reflecting Quick's contribution ranging from 4% to 47% of the total pro forma combined amount, with an average contribution of 24%. 15 Based on the terms of the Merger, Quick Stockholders will own approximately 20% of the AirNet Common Shares outstanding on a pro forma basis. ANALYSIS OF SELECTED PUBLIC COMPANIES Using publicly available information, Warburg Dillon Read compared, based upon market trading values at the time, multiples of certain financial criteria of Quick to certain other companies in the overnight package delivery and freight forwarding business that in the judgment of Warburg Dillon Read were deemed generally comparable to Quick for purposes of this analysis. The group of companies used in the comparison consisted of Air Express International CP.; Aramex International Ltd.; Consolidated Delivery & Logistics Inc.; Corporate Express Inc.; Circle International Group Inc.; Fritz Companies Inc.; US Freightways Corp.; Dynamex Inc.; Eagle USA Airfreight Inc.; Expeditors International of Washington Inc.; and Mark VII Industries Inc. (collectively, the "Comparison Companies"). Warburg Dillon Read analyzed the unlevered market value (equity market value plus debt, minus cash) of the Comparison Companies as multiples of revenues, EBIT, and earnings before interest, taxes, depreciation and amortization ("EBITDA") for the budgeted 1997 period, the equity market value of the Comparison Companies as multiples of latest twelve months ("LTM") net income, and the stock price of the Comparison Companies as multiples ("P/E ratios") of First Call, Inc., estimated LTM earnings per share ("EPS") and estimated 1998 EPS, and compared these figures to similar multiples based on 1997 budgeted financial data for Quick and management estimates for 1998 for Quick at the proposed Merger price prior to the public announcement ("Proposed Merger Price"). An analysis of the unlevered market value to LTM revenues yielded ranges of 0.2x to 1.7x with a mean of 0.7x for the Comparison Companies, which compares with an implied ratio of 1.1x for Quick at the Proposed Merger Price. An analysis of the unlevered market value to LTM EBITDA yielded ranges of 6.0x to 17.7x with a mean of 12.0x for the Comparison Companies, which compares with an implied ratio of 12.0x for Quick at the Proposed Merger Price. An analysis of the unlevered market value to LTM EBIT yielded ranges of 10.4x to 21.2x with a mean of 15.8x for the Comparison Companies, which compares with an implied ratio of 13.8x for Quick at the Proposed Merger Price. An analysis of the equity market value to LTM net income yielded ranges of 14.9x to 31.1x with a mean of 21.0x for the Comparison Companies, which compares with an implied ratio of 21.1x for Quick at the Proposed Merger Price. An analysis of 1998 estimated P/E ratios yielded ranges of 11.6x to 26.1x with a mean of 18.7x for the Comparison Companies, which compares with an implied 1998 estimated P/E ratio of 17.7x for Quick at the Proposed Merger Price. No company transaction or business used in the analysis described under "Analysis of Selected Public Companies" above is identical to AirNet, Quick or the combined company. Accordingly, an analysis of the results thereof necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the transaction or the public trading or other values of the company or companies to which they are being compared. Mathematical analysis (such as determining the average or median) is not itself a meaningful method of using such generally comparable acquisition or company data. DISCOUNTED CASH FLOW ANALYSIS Warburg Dillon Read performed a discounted cash flow evaluation of Quick based upon projections supplied by the management of AirNet and Quick. Utilizing these projections, Warburg Dillon Read discounted to present value, under varying assumed discount rates, estimated future unlevered cash flows. Such analysis indicated that assuming terminal value multiples ranging from 10.0x to 14.0x EBIT and discount rates ranging from 12% to 18%, the net present value of Quick's unlevered future after-tax cash flows ranged from $72.4 million to $119.4 million. 16 PRO FORMA MERGER ANALYSIS Warburg Dillon Read also analyzed certain pro forma financial effects of the Merger on AirNet. This analysis was based upon certain assumptions made by Warburg Dillon Read with AirNet's consent and AirNet projections and Quick projections for the fiscal years 1997 and 1998 prepared by the management of AirNet and Quick, respectively. No revenue enhancements or operating cost savings were assumed in these projections. Based upon such assumptions, Warburg Dillon Read's pro forma analysis of the financial effects of the Merger indicated that these effects (before the impact of one-time transaction related costs) were neutral to AirNet's net income per share for the forecasted period ended December 31, 1997 and accretive to AirNet's net income per share for the years in the forecasted period ending December 31, 1998. PRIOR RELATIONSHIP OF AIRNET WITH WARBURG DILLON READ Warburg Dillon Read is an internationally recognized investment banking firm which, as part of its investment banking business, is engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. The Board selected Warburg Dillon Read on the basis of the firm's expertise and reputation. Warburg Dillon Read has performed and continues to perform investment banking services for AirNet. Warburg Dillon Read is familiar with AirNet, having served as lead underwriter in AirNet's Offering on May 30, 1996 and as a general financial advisor to AirNet in various other acquisition assignments. For such services, Warburg Dillon Read has received customary fees. Pursuant to the terms of an engagement letter, dated February 4, 1998, Warburg Dillon Read received a fee of $500,000 for services rendered in connection with providing the Opinion. In addition, Warburg Dillon Read will receive additional fees upon the closing of the Merger equal to 1.25% of the aggregate amount of consideration paid in the Merger, less the $500,000. AirNet has also agreed to indemnify Warburg Dillon Read and its officers, directors, employees, agents and controlling persons against certain liabilities arising in connection with its engagement. In addition, in the ordinary course of business, Warburg Dillon Read trades securities of AirNet for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities. RESALE CONSIDERATIONS WITH RESPECT TO THE AIRNET COMMON SHARES The AirNet Common Shares that will be issued if the Merger is consummated have been registered under the Securities Act and listed on the NYSE and will be freely transferable, except for AirNet Common Shares received by persons, including directors and executive officers of Quick, who may be deemed to be "affiliates" of Quick under Rule 145 promulgated under the Securities Act and by persons, including Robert J. Mitzman, who may become affiliates of AirNet. Affiliates of Quick may not sell their AirNet Common Shares acquired pursuant to the Merger, except pursuant to an effective registration statement under the Securities Act covering such AirNet Common Shares or in compliance with Rule 145 or another applicable exemption from the registration requirements of the Securities Act. Affiliates of AirNet may not sell their AirNet Common Shares (whether acquired pursuant to the Merger or otherwise), except pursuant to an effective registration statement under the Securities Act or in compliance with Rule 144 or another applicable exemption from the registration requirements of the Securities Act. Persons who may be deemed to be affiliates of an entity generally include individuals or entities that control, are controlled by, or under common control with, the entity and may include certain officers and directors of the entity as well as any shareholders who own more than 10% of the entity's capital stock. 17 FEDERAL INCOME TAX CONSEQUENCES The following is a general summary of certain material federal income tax consequences of the Merger. The discussion is based on the Code, judicial decisions and administrative regulations, rulings and practices, all of which are subject to change. The following does not address any state, local or foreign income and other tax consequences of the Merger. Neither AirNet nor the holders of AirNet Common Shares will recognize any gain or loss for federal income tax purposes as a result of the Merger. With respect to the Quick Stockholders, the consummation of the Merger is intended to constitute a tax-free reorganization pursuant to Section 368(a) of the Code. HOWEVER, EACH QUICK STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS. ANTITRUST CONSIDERATIONS Transactions such as the Merger are reviewed by the Antitrust Division or the FTC to determine whether they comply with applicable antitrust laws. Under the provisions of the HSR Act, the Merger cannot be consummated until such time as the requirements of the HSR Act have been satisfied. Certain information was filed with the Antitrust Division and the FTC under the HSR Act by AirNet and Quick on April 10, 1998. The respective waiting periods under the HSR Act expire twenty days after substantial compliance by AirNet and Quick with the request unless such waiting periods are earlier terminated by the FTC or unless the parties agree to extend such waiting periods. On April 22, 1998, AirNet and Quick received notice of early termination of the waiting periods under the HSR Act. No further approval by the Antitrust Division or the FTC is required in order to consummate the Merger. ACCOUNTING TREATMENT The Merger will be accounted for by AirNet under the "pooling-of-interests" method of accounting under the requirements of Opinion No. 16 (Business Combinations) of the Accounting Principles Board of the American Institute of Certified Public Accountants, as amended by Statements of the Financial Accounting Standards Board, and the rules and regulations of the Commission. THE AGREEMENT THIS SECTION OF THE PROXY STATEMENT/PROSPECTUS DESCRIBES THE MATERIAL ASPECTS OF THE AGREEMENT. THE FOLLOWING DESCRIPTION, HOWEVER, DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE AGREEMENT ITSELF WHICH IS ATTACHED HERETO AS APPENDIX I AND IS INCORPORATED HEREIN BY REFERENCE. CAPITALIZED TERMS USED HEREIN AND NOT OTHERWISE DEFINED SHALL HAVE THE MEANINGS ASCRIBED THERETO IN THE AGREEMENT. TERMS OF THE AGREEMENT Pursuant to the Agreement, Merger Subsidiary shall be merged with and into Quick, the separate corporate existence of Merger Subsidiary will cease and Quick will be the surviving corporation and a wholly-owned subsidiary of AirNet. In connection with the Merger, the Quick Stockholders, as a group, will receive the Merger Consideration less the Escrow Shares, in exchange for all of the issued and outstanding Quick Common Shares. REPRESENTATIONS AND WARRANTIES The Agreement includes various customary representations and warranties of the parties for transactions of this type. These include, among other things, representations and warranties by Quick as to (i) the organization and foreign qualification to do business of Quick and its subsidiaries; (ii) the authorization of 18 the execution, delivery and performance by Quick of the Agreement and its valid and binding nature; (iii) the non-contravention of the transactions contemplated by the Agreement with the organizational documents of Quick, provisions of applicable law or agreements; (iv) the capitalization of Quick; (v) the accuracy of the financial statements of Quick and other information provided to AirNet; (vi) the absence of certain changes and the conduct of the business of Quick since December 31, 1997; (vii) the absence of undisclosed liabilities; (viii) the absence of pending or threatened litigation; (ix) proper payment of taxes; (x) ERISA plans and liability; (xi) trademarks, patents, copyrights and other intellectual property rights; (xii) material contracts; (xiii) compliance with applicable law; (xiv) finders' fees; (xv) the financial projections provided by Quick to AirNet; (xvi) environmental compliance; (xvii) the absence of intercompany arrangements; and (xviii) the absence of any action which would change the intended tax or accounting treatment of the Merger. With certain limited exceptions, the representations and warranties by AirNet and Merger Subsidiary mirror the representations and warranties by Quick listed in (i), (ii), (iii), (iv), (vi), (xi), (xiii), (xiv), (xvi) and (xviii) above. In addition, AirNet and Merger Subsidiary made representations and warranties as to AirNet's public financial statements and documents filed with the Commission. The representations and warranties of each of the parties contain customary, limited carve-outs for materiality, knowledge and previously disclosed information. COVENANTS Pursuant to the Agreement, Quick and the Quick Stockholders, on the one hand, and AirNet and Merger Subsidiary, on the other, have made various covenants customary for transactions of this type. These include, on the part of Quick, covenants regarding: (i) conduct of its business and that of its subsidiaries from the date of the Agreement through the Effective Time; (ii) access to information and confidentiality; (iii) solicitation or negotiation of competing offers; and (iv) notice of certain events; and, on the part of the Quick Stockholders, covenants regarding: (a) the voting of all shares of capital stock of Quick for the Merger and the waiver of all dissenters' rights; (b) transfer of their shares of capital stock, or the voting rights with respect thereto, in order to satisfy the requirements for "pooling-of-interests" accounting treatment; and (c) the issuance of notes reflecting moneys borrowed by several of the Quick Stockholders from Quick. Such notes shall be repaid in full by no later than December 31, 1998, unless the Effective Time occurs after August 31, 1998 in which event the repayment date shall be extended. In addition, Quick agreed to amend the lease, dated September 5, 1997, between a subsidiary of Quick and Glenn and Rita L. Smoak, relating to the property located at 847 Station Street, Herndon, Virginia, and providing for early termination of such lease on terms satisfactory to AirNet (the "Herndon Lease Amendment"). With certain limited exceptions, the covenants of AirNet and Merger Subsidiary mirror the covenants by Quick listed in (ii), (iii) and (iv) above. In addition, AirNet and Merger Subsidiary covenant and agree (a) to take all necessary action to call a meeting of the AirNet shareholders for the purpose of soliciting shareholder approval of the Acquisition and to list the AirNet Common Shares to be issued in the Merger on the NYSE and (b) to assume on behalf of Robert J. Mitzman, or release him from, certain guaranties made by Mr. Mitzman with respect to obligations of Quick. 19 In addition, the parties have made certain joint covenants with respect to (i) using their reasonable efforts to consummate the transaction contemplated by the Agreement; (ii) cooperating in connection with the preparation of this Proxy Statement/Prospectus and obtaining all requisite consents, approvals or waivers; (iii) public announcements; (iv) execution of documents after the Effective Time; (v) responsibility for preparing and filing various pre- and post-Effective Time tax returns; and (vi) the qualification of the Merger as a tax-free reorganization within the meaning of Section 368(a) of the Code. With respect to tax obligations, because Quick is an S corporation for federal tax purposes, the parties have agreed that Quick may make a distribution to the Quick Stockholders of an as yet undetermined amount to reimburse the Quick Stockholders for their aggregate liability for taxes attributable to the taxable income of Quick and its subsidiaries from January 1, 1998 through the Effective Time. ADDITIONAL AGREEMENTS AirNet and Merger Subsidiary have agreed, from and after the Effective Time, to indemnify and hold harmless the present and former officers and directors of Quick in respect of acts or omissions occurring prior to the Effective Time solely in their role as officers and directors to the extent currently provided under Quick's certificate of incorporation and by-laws; PROVIDED, that such indemnification shall be subject to any limitation imposed from time to time under applicable law, and, PROVIDED, FURTHER, that such indemnification shall not apply to claims made by or on behalf of any stockholder or former stockholder of Quick. As soon as practicable after the Effective Time and subject to their fiduciary duties to the AirNet shareholders, the Board of Directors of AirNet has agreed to use its reasonable efforts to cause the shareholders of AirNet to elect Robert J. Mitzman to the Board of Directors of AirNet. For so long as Robert J. Mitzman beneficially owns 49% of the issued and outstanding AirNet Common Shares he actually receives, directly or indirectly, as his portion of the Merger Consideration, the Board of Directors of AirNet shall continue to use its reasonable efforts to cause the shareholders of AirNet to elect Mr. Mitzman as a director of AirNet. With a view to making available to the Quick Stockholders the benefits of Rules 144 and 145 promulgated under the Securities Act, and any other similar rules and regulations of the Commission which may at any time permit the Quick Stockholders to sell or distribute without registration the AirNet Common Shares received as Merger Consideration, AirNet has agreed to file with the Commission in a timely manner all reports and other documents required to be filed by AirNet under the Exchange Act. AirNet has also agreed to negotiate in good faith with Robert J. Mitzman for the purchase of Quick's facility, which is owned by Mr. Mitzman and located at 175-28 148th Avenue, Jamaica, New York, for the fair market value thereof, as determined by Cushman & Wakefield, independent third party appraisers. Such purchase shall be made pursuant to a purchase agreement (the "Airport Facility Purchase Agreement") which shall be negotiated in good faith between Mr. Mitzman and AirNet and shall contain standard indemnifications (including, but not limited to, with respect to environmental matters). At the Effective Time, each of the employee benefit plans and arrangements of Quick will remain in effect. With respect to each of the continuing employee benefits plans and arrangements, AirNet has agreed that, by no later than three years after the Effective Time, AirNet will terminate such employee benefit plan or arrangement of Quick and will, in lieu thereof, provide, or cause to be provided, to employees of Quick the same or substantially similar employee benefit plans and programs as those provided to employees of AirNet with comparable status and seniority as of the time of such termination. CONDITIONS The respective obligations of AirNet, Merger Subsidiary, Quick and the Quick Stockholders to consummate the Merger are conditioned upon, among other things: (i) all necessary approvals of the transactions contemplated by the Agreement by AirNet's shareholders and the Quick Stockholders having 20 been obtained; (ii) the expiration or termination of the applicable waiting period under the HSR Act (which occurred on April 22, 1998); (iii) the Registration Statement having been declared effective; (iv) the AirNet Common Shares to be issued to the Quick Stockholders having been approved for listing on the NYSE, subject to official notice of issuance; (v) the absence of any applicable law or regulation or judgment, injunction, order or decree prohibiting the consummation of the Merger; and (vi) the receipt of all material required authorizations, consents, waivers, orders or approvals and the making of all material required filings, notices and declarations. The obligations of AirNet and Merger Subsidiary to consummate the Merger are further conditioned upon, among other things: (i) the material accuracy of the representations and warranties of Quick and the Quick Stockholders and the material performance by them of their respective agreements and covenants required by the Agreement, along with receipt by AirNet of a certificate signed by the Chief Executive Officer and principal financial officer of Quick to such effect; (ii) the absence of any material adverse change in the business, results of operations or condition (financial or otherwise) of Quick and a certificate of the Chief Executive Officer and principal financial officer of Quick to such effect; (iii) the absence of any order by a court, arbitrator or governmental body, agency or official and of any statute, rule or regulation materially restraining or prohibiting the consummation of the Merger or the effective operation of Quick after the Effective Time; (iv) AirNet's receipt of executed employment agreements, in full force and effect as of the Effective Time, from Robert J. Mitzman, Dominique Brown and Glenn Smoak; (v) AirNet's receipt of an executed Herndon Lease Amendment; (vi) AirNet's receipt of a letter from its independent public accountants, Ernst & Young LLP (Columbus), regarding their concurrence with AirNet's conclusion as to the appropriateness of pooling-of-interests accounting treatment for the Merger; (vii) AirNet's receipt of a fairness opinion from Warburg Dillon Read to the effect that the Merger is fair to AirNet; (viii) AirNet's receipt of evidence reasonably satisfactory to it of the termination of several agreements between or among Quick and several of the Quick Stockholders; and (ix) AirNet's receipt of such documents relating to the existence of Quick and its subsidiaries and the authority of Quick to enter into and perform its obligations under the Agreement as AirNet reasonably requests. In addition to the foregoing conditions, the obligations of AirNet and Merger Subsidiary are conditioned upon Quick's income from operations, as calculated jointly by AirNet and Quick and excluding certain transaction-related costs and expenses of Quick, for the period beginning on January 1, 1998 and ending as of (x) the end of the month immediately preceding the Effective Time (if the Effective Time occurs on or after the 26th day of a month) or (y) the end of the month next preceding the Effective Time (if the Effective Time occurs before the 26th day of a month) exceeding 85% of the projected income from operations through the end of the relevant month, as previously disclosed to AirNet. The obligations of Quick and the Quick Stockholders to consummate the Merger are further conditioned upon, among other things: (i) the material accuracy of the representations and warranties of AirNet and Merger Subsidiary and the material performance by them of their respective agreements and covenants required by the Agreement, along with receipt by Quick of a certificate signed by the Chief Executive Officer and Chief Financial Officer of AirNet to such effect; (ii) the absence of any material adverse change in the business, results of operations or condition (financial or otherwise) of AirNet and a certificate of the Chief Executive Officer and Chief Financial Officer of AirNet to such effect; (iii) the absence of any order by a court, arbitrator or governmental body, agency or official and of any statute, rule or regulation materially restraining or prohibiting the consummation of the Merger or the effective operation of the business of AirNet after the Effective Time; (iv) the receipt by the Quick Stockholders of employment agreements for Robert J. Mitzman, Dominique Brown and Glenn Smoak executed by AirNet or Quick and in full force and effect as of the Effective Time; (v) Quick's receipt of a letter from its independent public accountants, Ernst & Young LLP (New York), regarding their concurrence with Quick's conclusion as to the appropriateness of pooling-of-interests accounting treatment for the Merger; (vi) the receipt by the Quick Stockholders of an executed Registration Rights Agreement; (vii) the receipt by Robert J. Mitzman of an executed Airport Facility Purchase Agreement; and (viii) Quick's receipt of such documents relating to the existence of AirNet and Merger Subsidiary and the authority of AirNet and 21 Merger Subsidiary to enter into and perform their respective obligations under the Agreement as Quick reasonably requests. WAIVERS AND AMENDMENTS The conditions to consummation of the Merger may be waived at any time by the party or parties for whose benefit they were created; PROVIDED that, after adoption of the Agreement by the Quick Stockholders, no such waiver is permitted if it would materially adversely affect the Quick Stockholders and PROVIDED FURTHER that, after approval of the Acquisition by the AirNet shareholders, no such waiver is permitted if it would materially adversely affect the AirNet shareholders. Except in certain limited circumstances, the Agreement may be amended at any time by written agreement of the parties. TERMINATION The Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time (notwithstanding any approval of the Agreement by the Quick Stockholders or of the Acquisition by the AirNet shareholders) (i) by mutual written consent of AirNet and Quick; (ii) by AirNet or Quick, if the Merger has not been consummated by September 30, 1998; (iii) by Quick, if the approval of the AirNet shareholders shall not have been obtained or if prior to the Effective Time, the directors of AirNet withdraw, modify or change their approval of the Agreement in a manner which adversely impacts the consummation of the Merger; (iv) by AirNet, if, prior to the Effective Time, the directors of Quick withdraw, modify or change their approval of the Agreement in a manner which adversely impacts the consummation of the Merger; (v) by AirNet or Quick, in the event of any law or regulation prohibiting the Merger or of any final and nonappealable judgment, injunction, order or decree enjoining AirNet or Quick from consummating the Merger; and (vi) by AirNet or Quick, upon a breach of any representation, warranty, covenant or agreement on the part of the other party, or if any representation or warranty of the other party becomes untrue, in each case such that the breach or the condition causing such breach would be incapable of being cured by September 30, 1998. In the event of termination, the Agreement shall become void except that certain provisions relating to confidentiality and expenses shall survive such termination. TERMINATION FEE Under certain circumstances, AirNet has agreed to pay Quick $1,600,000 if Quick terminates the Agreement because the shareholders of AirNet failed to approve the Merger or the directors of AirNet have, prior to the Effective Time, withdrawn, modified or changed their approval of the Agreement as a result of AirNet's having consummated or agreed in writing to consummate a transaction involving the sale of all or a significant portion of the assets or equity securities of AirNet. INDEMNIFICATION; ESCROW The Agreement provides that, subject to certain time limitations (generally until the filing of AirNet's Form 10-K for the fiscal year ending December 31, 1998 but, for the Specific Contingencies, until the second anniversary of the Effective Time, each Quick Stockholder, on the one hand, and AirNet and Merger Subsidiary, on the other, have agreed to indemnify against and hold the other party harmless from any and all damage, loss, liability and expense (including, without limitation, reasonable expenses of investigation and reasonable attorneys' fees and expenses) incurred or suffered by such other party arising out of any representation, warranty, covenant or agreement contained in the Agreement (net of any insurance proceeds and tax benefits, "Losses") but only if the aggregate of (a) all such Losses for which AirNet and Merger Subsidiary are to be indemnified exceeds $200,000 or (b) all such Losses for which the Quick Stockholders are to be indemnified exceeds $1,000,000 and then, in each case, only for such excess and only for claims equal to or greater than $25,000. 22 The Escrow Shares shall be deposited in an account (the "Escrow Account") with Bank One Trust Company, N.A., as escrow agent (the "Escrow Agent"). AirNet shall be entitled to recover any general Losses which may be suffered by AirNet for which AirNet is entitled to indemnity pursuant to the Agreement, in the case of the General Escrow Shares, or to recover any Losses arising out of the Specific Contingencies, in the case of the Specific Escrow Shares. The liability of the Quick Stockholders at and after the Effective Time is limited to the Escrow Shares. If the Effective Time does not occur, no Quick Stockholder shall have any liability under the Merger Agreement, and Quick's aggregate liability to AirNet and other indemnitees shall be limited to $1,600,000. At and after the Effective Time, the liability of AirNet is payable only in additional AirNet Common Shares and is limited to 10% of the Merger Consideration. If the Effective Time does not occur, AirNet's aggregate liability to Quick and other indemnitees shall be limited to $1,600,000. EXPENSES Whether or not the Merger is consummated, all costs and expenses incurred in connection with the Agreement shall be borne by the party incurring them. THE AIRNET ANNUAL MEETING GENERAL This Proxy Statement/Prospectus is furnished to AirNet's shareholders in connection with the solicitation on behalf of the Board of Directors of AirNet of proxies for use at the Annual Meeting to be held on Tuesday, July 14, 1998, at the Concourse Hotel, 4300 International Gateway, Columbus, Ohio, at 10:00 a.m., local time, and at any adjournment(s) thereof. This Proxy Statement/Prospectus and the accompanying form of proxy were first mailed to AirNet shareholders on or about June , 1998. MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING At the Annual Meeting, shareholders will be asked to: (1) approve the acquisition of one-fifth or more but less than one-third of the voting power of AirNet by the Quick Stockholders, as a group; (2) elect directors; (3) approve the amendment and restatement of AirNet's 1996 Incentive Stock Plan; and (4) transact such other business as may properly come before the Annual Meeting. The Board of Directors has unanimously approved the Merger and recommends a vote FOR the Acquisition, a vote FOR the election of the directors named herein and a vote FOR the proposed amendment and restatement of AirNet's 1996 Incentive Stock Plan. VOTING AT THE MEETING; RECORD DATE Only holders of record of AirNet Common Shares at the close of business on the Record Date will be entitled to vote at the Annual Meeting. As of the Record Date, there were [12,577,913] AirNet Common Shares outstanding. Each AirNet Common Share entitles the holder to one vote. A quorum for the Annual Meeting is a majority of the AirNet Common Shares outstanding. There is no cumulative voting. Other than the AirNet Common Shares, there are no voting securities of AirNet outstanding. AirNet Common Shares represented by signed proxies that are returned to AirNet will be counted toward the quorum in all matters even though they are marked as "Abstain," "Against" or "Withhold Authority" on one or more or all matters or they are not marked at all. Broker/dealers, who hold their customers' AirNet Common Shares in street name, may, under the applicable rules of the exchange and other self-regulatory organizations of which the broker/dealers are members, sign and submit proxies for such AirNet Common Shares and may vote such AirNet Common Shares on routine matters, which, under such rules, typically include the election of directors, but broker/dealers may not vote such AirNet Common Shares on other matters, which typically include significant corporate transactions such as 23 mergers and acquisitions, amendments to the charter documents of AirNet and the approval of stock compensation plans, without specific instructions from the customer who owns such AirNet Common Shares. Proxies signed and submitted by broker/dealers which have not been voted on certain matters as described in the previous sentence are referred to as broker non-votes. Such proxies count toward the establishment of a quorum. THE EFFECT OF AN ABSTENTION OR BROKER NON-VOTE ON EACH OF THE MATTERS TO BE VOTED ON AT THE ANNUAL MEETING IS THE SAME AS A "NO" VOTE. If the accompanying proxy card is properly signed and returned to AirNet prior to the Annual Meeting and not revoked, it will be voted in accordance with the instructions contained therein. If no instructions are given, the persons designated as proxies in the accompanying proxy card will vote FOR the election as directors of those persons named below and FOR all other proposals set forth herein. The Board of Directors is not currently aware of any matters other than those referred to herein which will come before the Annual Meeting. If any other matter should be presented at the Annual Meeting for action, the persons named in the accompanying proxy card will vote the proxy in their own discretion. You may revoke your proxy at any time before it is actually voted at the Annual Meeting by delivering written notice of revocation to the Secretary of AirNet, by submitting a subsequently dated proxy or by attending the Annual Meeting and voting in person. Attendance at the Annual Meeting will not, in itself, constitute revocation of the proxy. The expense of preparing, printing and mailing proxy materials to the AirNet shareholders will be borne by AirNet. In addition, proxies may be solicited personally or by telephone by officers or associates of AirNet, none of whom will receive additional compensation therefor. AirNet has engaged Corporate Investor Communications, Inc. to assist in the solicitation of proxies from AirNet shareholders at a fee of not more than $5,000 plus reimbursement of reasonable out-of-pocket expenses. AirNet will also reimburse brokerage houses and other nominees for their reasonable expenses in forwarding proxy materials to beneficial owners of the AirNet Common Shares. PROPOSAL NO. 1 PROPOSAL TO APPROVE ACQUISITION OF ONE-FIFTH OR MORE BUT LESS THAN ONE-THIRD OF THE VOTING POWER OF AIRNET The Quick Stockholders, according to the acquiring person statement provided by them to AirNet pursuant to Section 1701.831 of the GCL, do not currently own any AirNet Common Shares. As described above (see "THE AGREEMENT"), at the Effective Time of the Merger, they will receive the Merger Consideration less the Escrow Shares. As a result, immediately following the Merger, the Quick Stockholders, as a group, would be able to exercise approximately [20]% of the voting power of AirNet. Section 1701.831 of the GCL defines a "control share acquisition" to include an acquisition of AirNet's shares which would give the acquiring person voting power falling within one of the following three categories: (a) one-fifth or more but less than one-third of the voting power, (b) one-third or more but less than a majority of the voting power, and (c) a majority or more of the voting power. The Acquisition constitutes such a "control share acquisition." Pursuant to the GCL, approval of any "control share acquisition" of AirNet must be submitted to the AirNet shareholders. The Quick Stockholders have delivered to AirNet the acquiring person statement required by the GCL, a copy of which is attached hereto as Appendix III and made a part hereof. At the Annual Meeting, shareholders of AirNet will be asked to consider a proposal to allow the Quick Stockholders, as a group, to complete a "control share acquisition" with respect to AirNet's shares. 24 EFFECT OF APPROVAL OF ACQUISITION Although no vote of the shareholders of AirNet is required to approve the Merger under the GCL, the Merger cannot be consummated unless the Acquisition is approved. RECOMMENDATION AND VOTE For the Acquisition to be approved, the affirmative vote of the holders of a majority of the voting power of AirNet represented at the Annual Meeting AND the affirmative vote of the holders of a majority of the portion of such voting power excluding "Interested Shares" is required. "Interested Shares" are defined by the GCL to include (i) shares held by the Acquiring Person (I.E., the Quick Stockholders, as a group), (ii) shares held by an officer of AirNet elected or appointed by the AirNet Board of Directors, (iii) shares held by associates of AirNet who are also directors and (iv) shares purchased after a control share acquisition is announced if the aggregate consideration paid by the person acquiring such shares exceeds $250,000 or the number of shares acquired exceeds one-half of one percent of the voting power of AirNet. As indicated elsewhere in this Proxy Statement/Prospectus, officers and associate directors as a group own approximately 41.6% of the outstanding AirNet Common Shares, and the Quick Stockholders do not currently own any outstanding AirNet Common Shares. THE AIRNET BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ADOPTION OF THE PROPOSED CONTROL SHARE ACQUISITION OF ONE-FIFTH OR MORE BUT LESS THAN ONE-THIRD OF THE VOTING POWER OF AIRNET. PROPOSAL NO. 2 ELECTION OF DIRECTORS Pursuant to the Code of Regulations of AirNet, the Board of Directors has set the authorized number of directors at six. Each director holds office for a term expiring at the next Annual Meeting. The Board of Directors proposes that the six nominees described below be elected as directors, each for a new term to expire at the 1999 Annual Meeting and until his successor is duly elected and qualified, or until his earlier death, resignation or removal. The Board of Directors has no reason to believe that any of the nominees will not serve if elected, but if any of them should become unavailable to serve as a director, and if the Board designates a substitute nominee, the persons named in the accompanying proxy card will vote for the substitute nominee designated by the Board of Directors. The following information, as of March 31, 1998, with respect to the principal occupation or employment, other affiliations and business experience of each director during the last five years has been furnished to AirNet by each director. Except where indicated, each director has had the same principal occupation for the last five years. NOMINEES STANDING FOR ELECTION TO THE BOARD OF DIRECTORS GERALD G. MERCER Mr. Mercer, 50, has served as Chairman of the Board, President and Chief Executive Officer of AirNet since founding AirNet in 1974. He won Ohio's "Entrepreneur of the Year" Award in 1996 and has been a member of the Young Presidents' Organization since 1986. Mr. Mercer has been a guest speaker at several major universities throughout the country. ERIC P. ROY Mr. Roy, 42, has been a Director of AirNet since 1994 and has served as Chief Financial Officer of AirNet since 1986. Mr. Roy was named Executive Vice President and Treasurer in 1991. Mr. Roy is a member of the Audit Committee. 25 ROGER D. BLACKWELL Dr. Blackwell, 57, has been a Director of AirNet since December 1996. Dr. Blackwell has been a Professor of Marketing at The Ohio State University for more than five years and is also President and Chief Executive Officer of Roger D. Blackwell Associates, Inc., a marketing consulting firm in Columbus, Ohio. Dr. Blackwell is also a director of Intimate Brands, Inc., Worthington Foods, Inc., Checkpoint Systems, Inc., Abercrombie & Fitch Co., Max & Erma's Restaurants, Inc. and The Flex-Funds. Mr. Blackwell is a member of the Compensation Committee. TONY C. CANONIE, JR. Mr. Canonie, 51, has been a Director of AirNet since June 1996. Since 1990, Mr. Canonie has served as Chief Executive Officer of Canonie Ventures Inc., a venture capital and advisory services firm, specializing in the waste industry. He was an 18 year member and former Chapter Chairman of the Young Presidents' Organization and is a member of the Chief Executives Organization and World Presidents' Organization. Mr. Canonie is a member of the Compensation Committee. RUSSELL M. GERTMENIAN Mr. Gertmenian, 50, has been a Director of AirNet since June 1996. Mr. Gertmenian has been a partner of Vorys, Sater, Seymour and Pease LLP since 1979 and currently serves as a member of such firm's Executive Committee. Mr. Gertmenian is a director of Liqui-Box Corporation, a manufacturer of flexible plastic packaging systems. Mr. Gertmenian is a member of the Audit Committee. J.F. KEELER, JR. Mr. Keeler, 57, has been a Director of AirNet since June 1996. Mr. Keeler is President, Chief Executive Officer and Chairman of the Board of The Fishel Company, a national utilities construction firm, which he first joined in 1967. Mr. Keeler is a director of Bank One, N.A. and Metatec Corporation and serves on the Board of Directors of the Columbus Chamber of Commerce. Mr. Keeler is a member of the Audit and Compensation Committees. ADDITIONAL DIRECTOR AirNet has agreed, as soon as practicable after the Effective Time of the Merger, to take such action as may be necessary to elect Robert J. Mitzman to the Board of Directors. Pursuant to the authority granted in the Code of Regulations, promptly after the Effective Time of the Merger, AirNet's Board of Directors will increase the authorized number of directors to seven and appoint Mr. Mitzman to fill the vacancy created by that increase. For so long as Mr. Mitzman owns at least 49% of the AirNet Common Shares he receives, directly or indirectly, as his portion of the Merger Consideration, the AirNet Board of Directors will continue to use reasonable efforts to cause him to be elected to the Board of Directors. ROBERT J. MITZMAN Robert J. Mitzman, 42, has served as Chairman of the Board and President of Quick since its incorporation in 1981. Mr. Mitzman recently appeared on the CNN program "Business Unusual" and was the subject of a feature article in THE WASHINGTON POST. In addition, he has recently been honored as one of the top 100 entrepreneurs in the United States by SUCCESS magazine. He is also a member of both the Air Courier Conference of America and the New York Chapter of the Young President's Organization. 26 NOMINATION PROCEDURE The AirNet Code of Regulations provides that shareholder nominations for election to the AirNet Board of Directors must be in writing and must be personally delivered or mailed to the Secretary of AirNet not less than 60 nor more than 90 days prior to any meeting of shareholders called for the election of directors; provided, however, that if less than 70 days' notice or public disclosure of the date of the meeting is given or made, such nomination must be received at the principal executive offices of AirNet not later than close of business on the tenth day following the day on which the notice of the date of the meeting was mailed or public disclosure was made thereof. Such notification must contain the following information: (a) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the shareholder is a recordholder of shares of AirNet entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the shareholder and each nominee or any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (d) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Commission had the nominee been nominated, or intended to be nominated, by the Board of Directors of AirNet; and (e) the consent of each nominee to serve as a director of AirNet if so elected. The chairman of the Annual Meeting may refuse to acknowledge the nomination of any person not made in compliance with the AirNet Code of Regulations. RECOMMENDATION AND VOTE Under Ohio law and AirNet's Code of Regulations, the six nominees for election to the Board of Directors receiving the greatest number of votes will be elected. AirNet Common Shares represented by the accompanying proxy card will be voted FOR the election of the nominees named in "Nominees Standing for Election to the Board of Directors" unless authority to vote for one or more nominees is withheld. Shareholders may withhold authority to vote for the entire slate as nominated or, by writing the name of one or more nominees in the space provided in the proxy card, withhold the authority to vote for such nominee or nominees. AirNet Common Shares as to which the authority to vote is withheld will be counted for quorum purposes but will not be counted toward the election of directors, or toward the election of the individual nominees specified on the form of proxy. THE AIRNET BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ELECTION OF ITS NOMINEES FOR DIRECTORS, WHICH IS DESIGNATED AS PROPOSAL NO. 2 ON THE ENCLOSED PROXY CARD. 27 EXECUTIVE OFFICERS OF AIRNET The following table sets forth, as of March 31, 1998, certain information concerning the executive officers of AirNet. The executive officers are elected annually and serve at the pleasure of the Board of Directors. NAME AGE POSITION - ---------------------- --- -------------------------------------------------------------- Gerald G. Mercer 50 Chairman of the Board, President and Chief Executive Officer Eric P. Roy 42 Director, Executive Vice President, Treasurer and Chief Financial Officer Donald D. Strench 41 Vice President, Corporate Development Glenn M. Miller 51 Vice President, Operations Guy S. King 45 Vice President, Sales Kendall W. Wright 50 Vice President, Sales William R. Sumser 42 Vice President, Finance, Controller and Secretary Jeffrey B. Harris 38 Vice President, Sales Gerald G. Mercer has served as Chairman of the Board, President and Chief Executive Officer of AirNet since founding AirNet in 1974. He won Ohio's "Entrepreneur of the Year" Award in 1996 and has been a member of the Young Presidents' Organization since 1986. Mr. Mercer has been a guest speaker at several major universities throughout the country. Eric P. Roy has been a Director of AirNet since 1994 and has served as Chief Financial Officer of AirNet since 1986. Mr. Roy was named Executive Vice President and Treasurer in 1991. Donald D. Strench has served AirNet as Vice President, Corporate Development since April 1996. Prior to joining AirNet, Mr. Strench served in various financial positions for American Airlines, Inc. between September 1986 and March 1996, including Vice President, Corporate Development (American Eagle). Glenn M. Miller has served as Vice President, Operations for AirNet since 1975. Guy S. King has served as Vice President, Sales for AirNet since 1989. Prior to 1989, Mr. King served AirNet in numerous functions dating back to 1976, including dispatch and pilot, before eventually founding AirNet's small package delivery division in 1984. Mr. King has served on the Board of Directors of the Air Courier Conference of America since 1993. Kendall W. Wright has served as Vice President, Sales for AirNet since 1988. William R. Sumser has served AirNet as Vice President and Secretary since March 1996, as Controller since 1988 and as Assistant Vice President from 1988 through March 1996. Mr. Sumser is responsible for AirNet's daily cash management, financial reporting and purchasing functions. Jeffrey B. Harris has served AirNet as Vice President, Sales since October 1997. Prior to joining AirNet in June 1996 as the West Coast Manager for Banking Sales, Mr. Harris served as Vice President and Senior Transit Product Manager for Mellon Bank from 1994 to 1996 and as Vice President for Nations Bank from 1992 to 1994. Pursuant to an Employment Agreement, dated April 14, 1998 (the "Mitzman Agreement"), between AirNet and Robert J. Mitzman, as of the Effective Time of the Merger, Mr. Mitzman will become Executive Vice President of AirNet, in charge of sales and marketing, and President of Quick. The Mitzman Agreement has a term of five years and provides for an annual base salary of $285,000 and participation in the various bonus and benefit plans available to similarly situated executive officers. If Mr. Mitzman's employment is terminated by AirNet without "cause" (as defined in the Mitzman Agreement) or by Mr. Mitzman for "good reason" (also as defined), he will be entitled to receive all 28 unpaid amounts of his base salary, bonus and benefits under the benefit plans in which he participated and have his base salary and benefits under benefit plans continued at the rate then in effect for one year thereafter. Upon termination of employment by reason of death or disability, Mr. Mitzman or his beneficiary will be entitled to receive all unpaid amounts of base salary, bonus and benefits under the benefit plans in which he participated. Upon termination of employment for any other reason, Mr. Mitzman or his beneficiary will be entitled to receive all unpaid amounts of base salary and benefits under benefit plans in which he participated. BENEFICIAL OWNERSHIP OF AIRNET COMMON SHARES The following table sets forth the number and percentage of outstanding AirNet Common Shares beneficially owned by (i) each director of AirNet; (ii) each executive officer of AirNet included in the Summary Compensation Table; (iii) all directors and executive officers of AirNet as a group; and (iv) each person known by AirNet to own beneficially more than five percent of any class of AirNet's voting securities, in each case, as of June 11, 1998 (except as otherwise noted). AirNet believes that each individual or entity named has sole investment and voting power with respect to the AirNet Common Shares indicated as beneficially owned by such individual or entity, except as otherwise noted. The address of each of the executive officers and directors is c/o AirNet, 3939 International Gateway, Columbus, Ohio 43219. AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP (1) AIRNET COMMON SHARES WHICH CAN BE ACQUIRED UPON AIRNET EXERCISE OF NAME OF COMMON SHARES OPTIONS PERCENT OF CLASS (2) BENEFICIAL OWNER OR PRESENTLY EXERCISABLE -------------------- NUMBER OF PERSONS IN GROUP HELD WITHIN 60 DAYS TOTAL PRE-MERGER POST-MERGER - ---------------------------------------- ------------- -------------- --------- -------- --------- Gerald G. Mercer (3)(4)................. 4,349,041 60,000 4,409,041 34.9% 27.9% Eric P. Roy (3)(5)...................... 189,975 32,000 221,975 1.8% 1.4% Donald D. Strench (3)................... 3,269 18,000 21,269 (6) (6) Glenn M. Miller (3)..................... 360,434 23,000 383,434 3.0% 2.4% Guy S. King (3)......................... 91,087 23,000 114,087 (6) (6) William R. Sumser (3)................... 61,816 23,000 84,816 (6) (6) Kendall W. Wright (3)(7)................ 27,381 -- 27,381 (6) (6) Roger D. Blackwell...................... 7,700 2,000 9,700 (6) (6) Tony C. Canonie, Jr..................... 10,000 2,000 12,000 (6) (6) Russell M. Gertmenian (8)............... 5,000 2,000 7,000 (6) (6) J.F. Keeler, Jr. (9).................... 10,185 2,000 12,185 (6) (6) All directors and executive officers as a group (12 persons).................. 5,115,888 193,000 5,308,888 41.6% 33.4% Wellington Management Company LLP (10).................................. 728,400 -- 728,400 5.8% 4.6% 75 State Street Boston, MA 02109 AMVESCAP PLC (11)....................... 738,500 -- 738,500 5.9% 4.7% 11 Devonshire Square London EC2M 4YR England - ------------------------ (1) Unless otherwise indicated, the beneficial owner has sole voting and dispositive power as to all AirNet Common Shares reflected in the table. 29 (2) The percent of class on a pre-Merger basis is based upon the sum of (i) 12,577,913 AirNet Common Shares outstanding on June 11, 1998, and (ii) the number of AirNet Common Shares as to which the named person has the right to acquire beneficial ownership upon the exercise of options exercisable within 60 days of June 11, 1998; and the percent of class on a post-Merger basis is based on that number of AirNet Common Shares plus the Merger Consideration. (3) Individual named in the Summary Compensation Table. (4) Of such 4,349,041 AirNet Common Shares, 1,010,000 AirNet Common Shares are held of record by Mr. Mercer's wife, and 524,992 AirNet Common Shares are held in the Gerald G. Mercer 5/30/96 Grantor Annuity Trust, of which Mr. Mercer is the sole trustee. Mr. Mercer possesses sole voting and dispositive power with respect to the AirNet Common Shares held in the trust. (5) Of such 189,975 AirNet Common Shares, 1,000 AirNet Common Shares are held of record by each of Mr. Roy's two minor children, 80,000 AirNet Common Shares are held in the Revocable Trust Created by Eric P. Roy and 80,000 AirNet Common Shares are held in the Revocable Trust Created by Carol P. Roy, Mr. Roy's wife. Mr. Roy and his wife are co-trustees of each of the trusts and share voting and dispositive power with respect to the AirNet Common Shares held in such trusts. (6) Represents ownership of less than 1% of the outstanding AirNet Common Shares. (7) Of such 27,381 AirNet Common Shares, 4,829 AirNet Common Shares are held by Mr. Wright's wife. (8) Of such 5,000 AirNet Common Shares, 2,100 AirNet Common Shares are held of record by Mr. Gertmenian's wife. (9) Of such 10,185 AirNet Common Shares, 7,500 AirNet Common Shares are held by the J.F. Keeler, Jr. Limited Partnership, of which Mr. Keeler is the sole general partner. Mr. Keeler possesses sole voting and investment power with respect to the AirNet Common Shares held by the limited partnership. (10) Based on information contained in filings with the Commission (the latest of which is dated January 12, 1998), Wellington Management Corporation LLP is deemed to have beneficial ownership of 728,400 AirNet Common Shares as of December 31, 1997. The filing also indicates that the reporting person is deemed to have shared voting power over 422,400 of such AirNet Common Shares and shared dispositive power over 728,400 AirNet Common Shares. (11) Based on information contained in filings with the Commission (the latest of which is dated February 9, 1998), AMVESCAP PLC is deemed to have beneficial ownership of 738,500 AirNet Common Shares as of December 31, 1997, all of which AirNet Common Shares it is deemed to share voting and investment power with AVZ, Inc., AIM Management Group, Inc., AMVESCAP Group Services, Inc., INVESCO, Inc., INVESCO North America Holdings, Inc., INVESCO Capital Management, Inc., INVESCO Funds Group, Inc., INVESCO Management and Research, Inc., and INVESCO Realty Advisors, Inc. Those filings with the Commission also indicate that the reporting persons disclaim beneficial ownership of such AirNet Common Shares. COMMITTEES AND MEETINGS OF THE BOARD The Board of Directors held five regularly scheduled or special meetings during the fiscal year ended December 31, 1997 (the "1997 fiscal year"). The Board of Directors has two standing committees: the Audit Committee and the Compensation Committee. Each current member of the Board attended at least 75% of the aggregate of the total number of meetings of the Board of Directors and of the committees on which he served during the 1997 fiscal year. AUDIT COMMITTEE. The Audit Committee reviews and approves the scope and results of any outside audit of AirNet and the fees therefor and makes recommendations to the Board of Directors or 30 management concerning auditing and accounting matters and the selection of outside auditors. The Audit Committee held two regularly scheduled or special meetings during the 1997 fiscal year. COMPENSATION COMMITTEE. The Compensation Committee reviews, considers and acts upon matters of salary and other compensation and benefits of all executive officers and certain other associates of AirNet, as well as acts upon all matters concerning, and exercises such authority as is delegated to it under the provisions of, any benefit, retirement or pension plan maintained by AirNet for the benefit of such executive officers or other associates. The Compensation Committee held nine regularly scheduled or special meetings during the 1997 fiscal year. COMPENSATION OF DIRECTORS Directors who are officers or associates of AirNet receive no additional compensation for their services as members of the Board of Directors or as members of Board committees. In 1997, directors who were not officers or associates of AirNet ("Non-Employee Directors") were paid a quarterly fee of $1,500, as well as additional fees of $1,000 for each meeting of the Board or of a Board committee attended. In 1998, each Non-Employee Director will be paid a quarterly fee of $3,500, as well as additional fees of $1,500 for each meeting of the Board attended. In addition, in 1998, all members of a committee of the Board, other than the chairman of such committee, will receive a fee of $1,000 for attending a committee meeting; while the chairman will receive a fee of $2,000. AirNet's directors are reimbursed for out-of-pocket expenses incurred in connection with their service as directors, including travel expenses. In addition, pursuant to AirNet's 1996 Incentive Stock Plan, each Non-Employee Director received an option in 1997 to purchase 2,000 AirNet Common Shares. If the proposal to amend and restate the 1996 Incentive Stock Plan is approved (see "PROPOSAL TO AMEND AND RESTATE THE AIRNET SYSTEMS, INC. 1996 INCENTIVE STOCK PLAN"), each Non-Employee Director who is then serving on the Board will automatically be granted an option to purchase 20,000 AirNet Common Shares effective on the date of the Annual Meeting and any individual who thereafter becomes a Non-Employee Director will automatically be granted an option to purchase 20,000 AirNet Common Shares effective on the date on which he is appointed or elected to the Board of Directors. In each case, the option will vest in five equal annual installments beginning on the date of grant, with such vesting being accelerated upon the occurrence of certain events. The exercise price of each option granted to a Non-Employee Director is equal to the fair market value of the AirNet Common Shares on the date of grant. Each option granted to a Non-Employee Director has a ten-year term. EXECUTIVE COMPENSATION SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION The following table shows, for the fiscal years ended December 31, 1997, September 30, 1996 and 1995 and the three months ended December 31, 1996, compensation awarded or paid to, or earned by, AirNet's Chief Executive Officer during 1997 and the six other most highly compensated executive officers of AirNet (the "Named Executive Officers"). 31 SUMMARY COMPENSATION TABLE LONG-TERM COMPENSATION ------------- SECURITIES ANNUAL COMPENSATION UNDERLYING ------------------------ OPTIONS/ SARS ALL OTHER NAME AND PRINCIPAL POSITION PERIOD SALARY BONUS (1) COMPENSATION - ------------------------------------ ------------------ ---------- ------------ ------------- ------------- Gerald G. Mercer 12 mos 12/31/97 $ 410,776 -- 20,000 $ 4,750(2) Chairman of the Board, 12 mos 9/30/96 706,667 $ 593,424 40,000 4,499 President and Chief 12 mos 9/30/95 826,376 1,161,333 -- 6,022 Executive Officer 3 mos 12/31/96 100,000 -- -- -- Eric P. Roy 12 mos 12/31/97 282,408 -- 12,000 4,750(2) Executive Vice President, 12 mos 9/30/96 181,333 157,630 20,000 56,615 Treasurer and Chief 12 mos 9/30/95 129,332 167,646 -- 59,363 Financial Officer 3 mos 12/31/96 68,750 -- -- -- Donald D. Strench (3) 12 mos 12/31/97 197,885 80,000 8,000 4,750(2) Vice President, 12 mos 9/30/96 78,750 43,750 10,000 -- Corporate Development 12 mos 9/30/95 -- -- -- -- 3 mos 12/31/96 43,750 8,750 -- -- Glenn M. Miller 12 mos 12/31/97 205,385 -- 8,000 4,750(2) Vice President, 12 mos 9/30/96 156,333 168,823 15,000 145,107 Operations 12 mos 9/30/95 129,332 235,681 -- 146,787 3 mos 12/31/96 50,000 -- -- -- Guy S. King 12 mos 12/31/97 205,385 -- 8,000 4,750(2) Vice President, Sales 12 mos 9/30/96 156,333 133,114 15,000 27,895 12 mos 9/30/95 129,332 144,857 -- 31,380 3 mos 12/31/96 50,000 -- -- -- William R. Sumser 12 mos 12/31/97 205,385 -- 8,000 4,750(2) Vice President, Finance, 12 mos 9/30/96 120,000 86,738 15,000 10,719 Controller and Secretary 12 mos 9/30/95 75,962 72,232 -- 13,385 3 mos 12/31/96 50,000 -- -- -- Kendall W. Wright 12 mos 12/31/97 205,385 -- 8,000 4,750(2) Vice President, Sales 12 mos 9/30/96 156,333 135,474 15,000 24,421 12 mos 9/30/95 129,332 148,918 -- 26,763 3 mos 12/31/96 50,000 -- -- 142 - ------------------------ (1) These numbers represent options for AirNet Common Shares granted pursuant to AirNet's 1996 Incentive Stock Plan. See the table under "OPTION GRANTS BETWEEN OCTOBER 1, 1996 AND DECEMBER 31, 1997" for more detailed information on such options. (2) "All Other Compensation" for the Named Executive Officers consists of amounts contributed by AirNet to the accounts of the Named Executive Officers under the Savings Plan (as defined below). See "--Section 401(k) Savings Plan." (3) Mr. Strench joined AirNet in April, 1996. 32 SECTION 401(K) SAVINGS PLAN AirNet maintains a defined contribution savings plan which is intended to qualify under Section 401(k) of the Code (the "Savings Plan"). Under the terms of the Savings Plan, all associates who have worked a minimum of six months for AirNet may contribute up to 15% of their annual earnings to the Savings Plan. AirNet may elect, in its discretion, to make a matching contribution to the Savings Plan. Currently, AirNet's annual matching contributions under the Savings Plan do not exceed 3% of total compensation. In addition, AirNet may elect, in its discretion, to make profit-sharing contributions on behalf of eligible associates. GRANTS OF OPTIONS The following table sets forth information concerning individual grants of options made from October 1, 1996 through December 31, 1997 to each of the Named Executive Officers. AirNet has never granted stock appreciation rights. OPTION GRANTS BETWEEN OCTOBER 1, 1996 AND DECEMBER 31, 1997 POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF ANNUAL RATES OF STOCK SECURITIES % OF TOTAL PRICE APPRECIATION UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM (2) OPTIONS TO ASSOCIATES IN PRICE ---------------------- NAME GRANTED (1) PERIOD ($/SHARE) EXPIRATION DATE 5% 10% - -------------------------------- ----------- ---------------- ----------- ---------------- ---------- ---------- Gerald G. Mercer................ 13,400 4.7% $ 14.25 April 10, 2007 $ 120,087 $ 304,325 6,600 2.3 15.68 April 10, 2007 49,710 140,453 Eric P. Roy..................... 12,000 4.3 14.25 April 10, 2007 107,541 272,530 Donald D. Strench............... 8,000 2.8 14.25 April 10, 2007 71,694 181,687 Glenn M. Miller................. 8,000 2.8 14.25 April 10, 2007 71,694 181,687 Guy S. King..................... 8,000 2.8 14.25 April 10, 2007 71,694 181,687 William R. Sumser............... 8,000 2.8 14.25 April 10, 2007 71,694 181,687 Kendall W. Wright............... 8,000 2.8 14.25 April 10, 2007 71,694 181,687 - ------------------------ (1) These options were granted under the AirNet's 1996 Incentive Stock Plan. All of such options are fully vested. At the discretion of the Compensation Committee, such options may have stock-for-stock exercise and tax withholding features, which allow the holders, in lieu of paying cash for the exercise price and any tax withholding, to have AirNet commensurably reduce the number of AirNet Common Shares to which the holders would otherwise be entitled upon exercise of such options. (2) The amounts reflected in this table represent certain assumed rates of appreciation only. Actual realized values, if any, on option exercises will be dependent on the actual appreciation of the AirNet Common Shares over the term of the options. There can be no assurances that the Potential Realizable Values reflected in this table will be achieved. 33 OPTION EXERCISES AND HOLDINGS The following table sets forth information with respect to options exercised between October 1, 1996 and December 31, 1997 and unexercised options held as of December 31, 1997 by each of the Named Executive Officers. AGGREGATED OPTION EXERCISES BETWEEN OCTOBER 1, 1996 AND DECEMBER 31, 1997 AND FISCAL YEAR-END OPTION VALUES VALUE OF UNEXERCISED IN- THE-MONEY NUMBER OF NUMBER OF SECURITIES OPTIONS AT SECURITIES UNDERLYING OPTIONS AT FISCAL FISCAL YEAR UNDERLYING YEAR END END (1) OPTIONS VALUE ------------------------------ ----------- NAME EXERCISED REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE - -------------------------------------------- ----------- ---------- ----------- ----------------- ----------- Gerald G. Mercer............................ -- -- 60,000 -- $ 406,427 Eric P. Roy................................. -- -- 32,000 -- 227,000 Donald D. Strench........................... -- -- 18,000 -- 128,000 Glenn M. Miller............................. -- -- 23,000 -- 163,000 Guy S. King................................. -- -- 23,000 -- 163,000 William R. Sumser........................... -- -- 23,000 -- 163,000 Kendall W. Wright........................... 23,000 $ 140,000 -- -- -- NAME UNEXERCISABLE - -------------------------------------------- ----------------- Gerald G. Mercer............................ -- Eric P. Roy................................. -- Donald D. Strench........................... -- Glenn M. Miller............................. -- Guy S. King................................. -- William R. Sumser........................... -- Kendall W. Wright........................... -- - ------------------------ (1) "Value of Unexercised In-the-Money Options at Fiscal Year End" is based upon the fair market value of AirNet Common Shares on December 31, 1997 ($21.50) less the exercise price of in-the-money options at December 31, 1997. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS PURCHASE OF AIRNET HEADQUARTERS In October 1997, AirNet purchased its corporate and operational headquarters at 3939 International Gateway in Columbus, Ohio for $4.1 million from Mr. Mercer, which represented fair market value as determined by an independent appraisal performed by Kohr Royer Griffith, Inc. In addition to the building, AirNet assumed Mr. Mercer's 25-year land lease with The Port Authority of Columbus ("Port Authority"), which expires on December 31, 2009. The complex has 80,000 square feet, of which AirNet utilizes approximately 73,000 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. Prior to the purchase, AirNet leased the facility from Mr. Mercer and paid a base rent of $75,000 per month and made payments, on behalf of Mr. Mercer, to the Port Authority of approximately $9,500 per month for use of the land upon which the facility is located. AirNet paid rent of approximately $864,000 for the year ended December 31, 1997 and approximately $254,000 for the three months ended December 31, 1996 to Mr. Mercer. AirNet believes that the terms of the sublease were no less favorable to AirNet than those reasonably available from unrelated third parties for comparable space. FLOAT CONTROL, INC./CHEXS PARTNERSHIP On October 24, 1996, AirNet acquired Float Control, Inc. ("Float Control"), which was a company owned by certain executive officers of AirNet and other individuals and which owned an interest in The Check Exchange System Company (the "CHEXS Partnership"), in a merger transaction. As the result of such merger transaction, AirNet currently owns 19% of the CHEXS Partnership; Littlewood, Shain and Company, an unaffiliated third party, owns 15%; and affiliates of The Huntington National Bank own the remaining interests. The CHEXS Partnership operates a national net settlement switch utilized by members of the National Clearing House Association (the "NCHA"), which the CHEXS Partnership 34 helped to found. The national net settlement switch operates as a clearinghouse for NCHA member banks, pursuant to which such banks are able to settle transactions with other NCHA members by utilizing the switch rather than having to maintain a separate account with each such member. Canceled bank checks which are settled through the NCHA typically are routed through AirNet's air transportation system. Pursuant to the merger transaction, Messrs. Mercer, Roy, Miller, King, Wright and Sumser, all of whom are executive officers of AirNet, received AirNet Common Shares having a fair market value at the time of the merger transaction of $1,424,994, $74,089, $176,690, $42,743, $42,743 and $19,949, respectively, in exchange for their shares of Float Control. In determining the value of the shares of Float Control, AirNet utilized an evaluation of the value of the CHEXS Partnership prepared by an unaffiliated third party evaluation firm. AirNet believes that the terms of the merger transaction were fair to AirNet and were no less favorable to AirNet than those reasonably available from unrelated third parties. PERFORMANCE GRAPH The following line graph compares the percentage change in AirNet's cumulative total shareholder return (as measured by dividing (i) the sum of (A) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (B) the difference between the price of AirNet Common Shares at the end and the beginning of the measurement period; by (ii) the price of AirNet Common Shares at the beginning of the measurement period) against the cumulative return of the Russell 2000 and of the NYSE Combined Transportation Index ("NYSE Transportation") for the period from May 30, 1996 to December 31, 1997. The AirNet Common Shares became registered under Section 12 of the Exchange Act on May 30, 1996. The comparison assumes $100 was invested on May 30, 1996 in AirNet Common Shares and in each of the foregoing indices and assumes reinvestment of dividends. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AIRNET SYSTEMS VS. RUSSELL 2000 VS. NYSE TRANSPORTATION Indexed Price Performance 5/30/96 - 12/31/97 ANS Russell 2000 NYSE Transportation May-96 100.00 100.00 100.00 Jun-96 114.29 96.19 98.76 Sep-96 101.79 96.13 98.19 Dec-97 105.36 100.63 105.50 Mar-97 114.29 95.07 107.33 Jun-97 116.96 110.00 124.19 Sep-97 172.32 125.94 137.70 Dec-97 153.57 121.28 139.63 35 REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN AIRNET'S PREVIOUS FILINGS UNDER THE SECURITIES ACT OR THE EXCHANGE ACT THAT MIGHT INCORPORATE FUTURE FILINGS, INCLUDING THIS PROXY STATEMENT/PROSPECTUS, IN WHOLE OR IN PART, THIS REPORT AND THE GRAPH SET FORTH ABOVE UNDER "--PERFORMANCE GRAPH" SHALL NOT BE INCORPORATED BY REFERENCE INTO ANY SUCH FILINGS. The Compensation Committee of the Board of Directors of AirNet (the "Committee") is comprised of three outside directors, none of whom is or was formerly an officer of AirNet. During the 1997 fiscal year, none of AirNet's executive officers served on the board of any entity of which a Committee member was an executive officer or on the compensation committee of any entity of which any director of AirNet was an executive officer. The Committee has retained outside legal counsel. ROLE OF THE COMPENSATION COMMITTEE Prior to AirNet's Offering, which was consummated on June 5, 1996, AirNet had no Compensation Committee, and decisions concerning compensation of executive officers of AirNet were made by AirNet's Chief Executive Officer. Following the Offering, the Committee undertook the oversight responsibility for AirNet's executive compensation program. In general, AirNet's compensation program for executive officers consists of three main elements: a base salary, a discretionary bonus and periodic grants of stock options. The Committee believes that it is important to pay competitive salaries but also to make a high proportion of the executive officers' total compensation at risk in order to cause the executive officers to focus on both the short-term and the long-term interests of AirNet's shareholders. Therefore, the bonus (which permits individual performance to be recognized on an annual basis, and which is based, in part, on an evaluation of the contribution made by the executive officer to company performance) and stock option grants (which directly tie the executive officer's long-term remuneration to stock price appreciation realized by AirNet's shareholders) are important components of the overall compensation package. In March 1998, the Committee retained Plante & Moran to perform a comprehensive review of AirNet's compensation policy. The Committee has received Plante & Moran's report and will consider Plante & Moran's recommendations with respect to compensation for the 1998 fiscal year. However, the Committee has not taken any actions with respect to such report. BASE SALARY Base salary is reviewed annually and may be adjusted on individual performance, business unit performance and industry analysis and comparisons. To date, the Committee has not utilized compensation consultants, but it may do so in future years to assist the Committee with respect to industry analysis and comparisons. With respect to the 1997 fiscal year, no specific weight was assigned to any of the factors mentioned above in determining 1997 base salaries for the Chief Executive Officer and the other executive officers. Prior to AirNet's Offering, AirNet had elected to be treated as an S Corporation under subchapter S of the Code for federal tax purposes and comparable state tax laws. As a result of the S Corporation election, AirNet's pre-existing shareholders were taxed directly on AirNet's income, whether or not such income was distributed, and AirNet was not subject to federal income tax at the corporate level. As a result of the S Corporation status, AirNet's executive officers, and particularly Mr. Mercer, received significant cash distributions in addition to sizable salaries and bonuses, as reflected in the Summary Compensation Table for the 1995 fiscal year. In connection with AirNet's Offering, which occurred with only four months remaining in AirNet's 1996 fiscal year, AirNet's compensation arrangements with its executive officers were restructured to reduce the amount of cash compensation, particularly with respect to Mr. Mercer. In addition, AirNet's 36 S Corporation status terminated in connection with the Offering, and the income distributions to the pre-existing shareholders therefore also ceased. Mr. Mercer, as AirNet's Chief Executive Officer, recommended the base salaries for the executive officers for the remainder of the 1996 fiscal year, including a reduction of more than 50% for himself, at the time of the Offering, and the Committee accepted Mr. Mercer's recommendation BONUS PLAN As described above, at the time of the Offering, AirNet's compensation arrangements with its executive officers were restructured. At such time, it was determined that bonuses payable with respect to the 1996 fiscal year would not exceed 60% of annual base salaries based on the four months remaining in AirNet's 1996 fiscal year upon the completion of the Offering. Based upon the considerations set forth below, none of which was assigned specific weight, the Committee determined to award bonuses to the Chief Executive Officer and each of the other executive officers, other than Mr. Strench, equal to the full 60% of annualized base salary for the remaining four months in the 1996 fiscal year. Mr. Strench joined AirNet in April 1996, shortly before the Offering, and therefore did not participate in the significant pre-offering compensation package. For that reason and because of his performance since joining AirNet, the Committee awarded Mr. Strench a bonus equal to the full 60% of his base salary for the entire period of his employment during the 1996 fiscal year. In awarding the full 60% bonuses, the Committee was persuaded by the following factors: (i) AirNet successfully completed its Offering at $14 per share, the top end of the range, and the underwriters exercised their over-allotment option in full, thereby providing an additional $11.8 million in capital to AirNet; (ii) simultaneously with the Offering, AirNet was able to negotiate a new $50.0 million, unsecured credit facility with NBD Bank with a LIBOR funding option; (iii) AirNet's stock price has remained steady following the Offering; and (iv) the Committee believes that AirNet has developed and, to date, is successfully implementing a growth strategy which includes making acquisitions and developing AirNet's small package division. STOCK OPTIONS The purpose of AirNet's 1996 Incentive Stock Plan is to attract and retain key personnel and directors of AirNet and to enhance their interest in AirNet's continued success. The maximum number of AirNet Common Shares with respect to which awards may be granted under the 1996 Incentive Stock Plan is 1,150,000, and the maximum number which any of the Named Executive Officers may receive is 50,000. The Board is proposing that the AirNet shareholders approve the amendment and restatement of the 1996 Stock Incentive Plan which would increase the number of AirNet Common Shares available thereunder to 2,050,000. During 1997, AirNet granted stock options to each of its officers, the details of which are provided in "EXECUTIVE COMPENSATION--Grant of Options." These grants were based upon subjective analyses of each such key employee's function, salary, length of service, performance and value to AirNet, as well as the recommendations of AirNet's Chief Executive Officer, with no specific weighting given to any of such factors. With respect to Mr. Mercer and the other executive officers who were employed by AirNet prior to the Offering and who, for the most part, took significant reductions in the cash portion of their compensation package as a result of the restructuring in connection with the Offering, the Committee believed that it was important to keep such executives incentivized to continue their performance on behalf of AirNet and its shareholders. 37 SECTION 162(m) COMPLIANCE Section 162(m) of the Code places certain restrictions on the amount of compensation in excess of $1,000,000 which may be deducted for each executive officer. AirNet intends to satisfy the requirements of Section 162(m) should the need arise. SUBMITTED BY THE COMPENSATION COMMITTEE OF AIRNET: TONY C. CANONIE, JR., CHAIRMAN ROGER D. BLACKWELL J.F. KEELER, JR. PROPOSAL NO. 3 PROPOSAL TO AMEND AND RESTATE THE AIRNET SYSTEMS, INC. 1996 INCENTIVE STOCK PLAN The AirNet Systems, Inc. 1996 Incentive Stock Plan (the "Incentive Stock Plan") was established for the purpose of attracting and retaining key personnel, including consultants and advisors to and directors of AirNet, and to enhance their interest in AirNet's continued success and to allow all AirNet associates an opportunity to have an ownership interest in AirNet. The Incentive Stock Plan provides for the grant of incentive stock options ("ISOs") and non-qualified stock options ("NQSOs"), restricted stock and performance shares (individually, an "Award" or, collectively, "Awards"). In addition, the Incentive Stock Plan provides for the purchase of AirNet Common Shares through payroll deduction by all associates of AirNet who have satisfied certain eligibility requirements. The number of AirNet Common Shares currently authorized for issuance under the Incentive Stock Plan is 1,150,000, subject to adjustment to reflect certain corporate events, including stock splits and similar transactions. As of June 11, 1998 (the Record Date for the Annual Meeting), options covering an aggregate of 223,025 AirNet Common Shares had been exercised; options covering an aggregate of 543,625 AirNet Common Shares were outstanding; 250,000 AirNet Common Shares have been reserved for the Associate Stock Purchase Program under the Incentive Stock Plan; and a total of 87,150 AirNet Common Shares were available for future grants of Awards. As discussed in "SUMMARY--Terms of the Proposed Merger," pursuant to the terms of the Agreement, the outstanding options to purchase Class A Common Stock of Quick will be converted into options to purchase an aggregate of 249,591 AirNet Common Shares. The number of AirNet Common Shares available for the grant of new Awards under the Incentive Stock Plan is not sufficient to enable AirNet to make the Awards to the former option holders of Quick contemplated by the Agreement or the Awards which AirNet expects to make over the next several years. The Board also believes that AirNet should have the flexibility to grant Awards to meet competitive conditions and the particular circumstances of the key personnel who may be eligible to receive Awards. For these reasons, the Board is recommending the amendment of the Incentive Stock Plan to make additional 900,000 AirNet Common Shares available thereunder. The Board is also recommending certain amendments to the provisions of the Incentive Stock Plan addressing the automatic grant of options to Non-Employee Directors. 38 DESCRIPTION OF AMENDMENTS On May 13, 1998, the Board of Directors of AirNet adopted, effective upon shareholder approval at the Annual Meeting, the following amendments to the Incentive Stock Plan (the "Amendments"): 1. The Incentive Stock Plan has been amended, subject to shareholder approval, to increase the number of AirNet Common Shares which may be issued thereunder from 1,150,000 to 2,050,000 AirNet Common Shares. 2. The Incentive Stock Plan has been amended, subject to shareholder approval, to replace the annual grant to Non-Employee Directors of an option covering 2,000 AirNet Common Shares with a one-time grant of an option covering 20,000 AirNet Common Shares. Such option will vest in five equal annual installments beginning on the date of grant, with such vesting being accelerated upon the occurrence of certain events described in the Incentive Stock Plan. The Amendments are discussed in greater detail below. OPERATION OF THE INCENTIVE STOCK PLAN There follows a summary of the Incentive Stock Plan, as proposed to be amended and restated. This summary is qualified in its entirety by reference to the copy of the AirNet Systems, Inc. Amended and Restated 1996 Incentive Stock Plan attached hereto as Appendix IV. AIRNET COMMON SHARES AVAILABLE UNDER THE INCENTIVE STOCK PLAN If the Amendments are approved, the aggregate number of AirNet Common Shares for which Awards may be made under the Incentive Stock Plan will increase from 1,150,000 to 2,050,000 AirNet Common Shares. The AirNet Common Shares covered by the Incentive Stock Plan will be made available from the authorized but unissued AirNet Common Shares or from AirNet Common Shares held in treasury. If there is a forfeiture, termination or cancellation of any Award without the issuance of AirNet Common Shares, the AirNet Common Shares subject to such Award will be available for future grants. The Incentive Stock Plan contains customary provisions with respect to adjustments for stock splits and similar transactions and the rights of participants upon mergers and other business combinations. ADMINISTRATION OF THE INCENTIVE STOCK PLAN The Incentive Stock Plan is administered by the Compensation Committee of the AirNet Board of Directors (the "Committee"). The Committee has the discretion to select from among eligible associates those to whom Awards will be granted and determine the terms and conditions applicable to each Award. With respect to all non-executive officers (I.E., associates who are not subject to the provisions of Section 16 of the Exchange Act), AirNet's Chief Executive Officer may make recommendations to the Committee. The Committee also has the sole and complete authority to interpret the provisions of the Incentive Stock Plan. The Committee's decisions will be binding on AirNet and participants in the Incentive Stock Plan. ELIGIBILITY Key associates of, and consultants and advisors to, AirNet and its subsidiaries who can make substantial contributions to the successful performance of AirNet and its subsidiaries are eligible to be granted Awards under the Incentive Stock Plan. As described in "EXECUTIVE COMPENSATION-Report of the Compensation Committee on Executive Compensation," the grant of options under the Incentive Stock Plan is a significant element of AirNet's executive compensation program. The following table sets forth the number and average exercise price of options granted under the Incentive Stock Plan to: (i) each of the Named Executive Officers; (ii) all current executive officers of AirNet as a group; (iii) each of the directors of AirNet; (iv) all current directors of AirNet who are not executive officers of AirNet as a group; and (v) all associates of AirNet and its subsidiaries, including all current officers of 39 AirNet and its subsidiaries who are not executive officers of AirNet, as a group. No other Awards have been made under the Incentive Stock Plan. No options have been granted to associates of any of the directors or executive officers and, other than the persons identified in the following table, no person has received 5% or more of the options granted under the Incentive Stock Plan. OPTIONS GRANTED UNDER INCENTIVE STOCK PLAN -------------------------------- AVERAGE EXERCISE NAME OR GROUP NUMBER PRICE - -------------------------------------------------------------------------------- --------- --------------------- Gerald G. Mercer................................................................ 60,000 $ 14.73 Eric P. Roy..................................................................... 32,000 14.41 Donald D. Strench............................................................... 18,000 14.39 Glenn M. Miller................................................................. 23,000 14.41 Guy S. King..................................................................... 23,000 14.41 Kendall W. Wright............................................................... 23,000 14.41 William R. Sumser............................................................... 23,000 14.41 Jeffrey B. Harris............................................................... 15,000 14.42 All current executive officers of AirNet as a group............................. 217,000 14.50 Roger D. Blackwell.............................................................. 2,000 14.75 Tony C. Canonie, Jr............................................................. 2,000 14.75 Russell M. Gertmenian........................................................... 2,000 14.75 J. F. Keller, Jr................................................................ 2,000 14.75 All current directors of AirNet who are not executive officers of AirNet as a group......................................................................... 8,000 14.75 All associates of AirNet and its subsidiaries (including all current officers of AirNet and its subsidiaries who are not executive officers of AirNet) as a group......................................................................... 587,850 14.15 - ------------------------ It is estimated that approximately 820 associates of AirNet and its subsidiaries are currently eligible to participate in the Incentive Stock Plan (including the Named Executive Officers). However, no determination has been made as to the individual identity of the persons to whom future Awards may be granted or the number of AirNet Common Shares which may be allocated to any specific person or persons, other than with respect to the NQSOs which are to be automatically granted to the Non-Employee Directors (i.e., Messrs. Blackwell, Canonie, Gertmenian and Keeler) under the circumstances described in "--Terms of Awards--Director Options" and options to purchase an aggregate of 249,591 AirNet Common Shares which are to be granted to the former holders of options to purchase Class A Common Stock of Quick pursuant to the terms of the Agreement as described in "SUMMARY--Terms of the Proposed Merger." It is anticipated that the Committee's determination of which eligible associates will be granted Awards in the future and terms thereof will be based on each individual's present and potential contribution to the success of AirNet and its subsidiaries. The maximum number of AirNet Common Shares for which certain individuals (the Chief Executive Officer and the four other highest paid officers) may receive options (ISOs and NQSOs) is limited to 50,000 AirNet Common Shares over a one-year period. DURATION No Award under the Incentive Stock Plan may be granted after May 1, 2006. 40 TERMS OF AWARDS OPTIONS The Committee may grant NQSOs to associates, advisors and consultants but may grant ISOs only to associates. The Committee has discretion to fix the exercise price of such options, which, in the case of an ISO, may not be less than the fair market value of the AirNet Common Shares on the date of grant. The fair market value of the AirNet Common Shares on June , 1998 was $ . In the case of an ISO granted to a 10% shareholder of AirNet, the exercise price may not be less than 110% of the fair market value of the AirNet Common Shares on the date of grant. The Committee also has broad discretion as to the terms and conditions under which such options will be exercisable. ISOs expire not later than ten years after the date on which they are granted (or five years in the case of an ISO granted to a 10% shareholder of the Company). The exercise price of the options may be satisfied in cash or, in the discretion of the Committee, by exchanging AirNet Common Shares owned by the option holder, or by a combination of cash and AirNet Common Shares. DIRECTOR OPTIONS Each Non-Employee Director currently receives an annual grant of an NQSO to purchase 2,000 AirNet Common Shares at an exercise price equal to the fair market value of the AirNet Common Shares on the date of grant. If the proposal to amend and restate the Incentive Stock Plan is approved, each Non-Employee Director who is then serving on the Board will automatically be granted an NQSO to purchase 20,000 AirNet Common Shares effective on the date of the Annual Meeting and any individual who thereafter becomes a Non-Employee Director will automatically be granted an option to purchase 20,000 Common Shares effective on the date he is appointed or elected to the Board. In each case, the NQSO will vest in five equal annual installments beginning on the date of grant, with such vesting being accelerated if AirNet merges with another entity and is not the surviving entity, or in the event all or substantially all of AirNet's assets or stock is acquired by another entity. A director NQSO will be exercisable until the earlier of (i) the tenth anniversary of the date of grant and (ii) three months (one year in the case of a director who becomes disabled or dies) after the date the director ceases to be a director; provided, however, that if a director ceases to be a director after having been convicted of, or pled guilty to, a felony, the director NQSO will be canceled on the date the director ceases to be a director. The exercise price of the director NQSOs may be satisfied in cash or, in the discretion of the Committee, by exchanging AirNet Common Shares owned by the director, or by a combination of cash and AirNet Common Shares. RESTRICTED STOCK AWARDS An award of restricted stock is an award of AirNet Common Shares that is subject to such restrictions as the Committee deems appropriate, including forfeiture conditions and restrictions on transfer for a period specified by the Committee. Awards of restricted stock may be granted under the Incentive Stock Plan for or without consideration. Restrictions on restricted stock may lapse in installments based on factors selected by the Committee. The Committee, in its sole discretion, may waive or accelerate the lapsing of restrictions in whole or in part. Prior to the expiration of the restricted period, except as otherwise provided by the Committee, a participant who has been granted restricted stock will, from the date of grant, have the rights of a shareholder of the Company in respect of such AirNet Common Shares, including the right to vote such AirNet Common Shares and to receive dividends and other distributions thereon, subject to the restrictions set forth in the Incentive Stock Plan and in the instrument evidencing such Award. The shares of restricted stock will be held by AirNet, or by an escrow agent designated by AirNet, during the restricted period and may not be sold, assigned, transferred, pledged or otherwise encumbered until the restrictions have lapsed. The Committee has authority to determine the duration of the restricted period and the conditions under which restricted stock may be forfeited, as well as the other terms and conditions of such awards. 41 PERFORMANCE SHARE AWARDS A performance share award is an award of a number of units that represent the right to receive a specified number of AirNet Common Shares or cash, or both, upon satisfaction of certain specified performance goals, subject to such terms and conditions as the Committee determines. Performance share awards will be earned to the extent such performance goals established by the Committee are achieved over a period of time specified by the Committee. The Committee has discretion to determine the value of each performance share award, to adjust the performance goals as it deems equitable to reflect events affecting AirNet or changes in law or accounting principles or other factors, and to determine the extent to which performance share awards that are earned may be paid in the form of cash, AirNet Common Shares or a combination of both. ASSOCIATE STOCK PURCHASE PROGRAM All associates of AirNet who have at least one year of service with AirNet are given the opportunity to purchase AirNet Common Shares under the Incentive Stock Plan through the Associate Stock Purchase Program. Pursuant to this payroll deduction program, associates are able to purchase AirNet Common Shares during four quarterly offering periods each year at a price equal to the lesser of 85% of fair market value on the first business day of each offering period and 85% of fair market value on the last business day of each offering period. Certain restrictions contained in Section 423 of the Code apply to this payroll deduction program, including a limitation on the maximum value of AirNet Common Shares that may be purchased by an individual associate in any calendar year. Upon purchase of AirNet Common Shares through payroll deduction, AirNet will issue share certificates to the participating associates. As of June 11, 1998 (the Record Date for the Annual Meeting), 10,464 of the 250,000 AirNet Common Shares reserved for issuance under the Associate Stock Purchase Program had been purchased. GENERAL The Committee has broad discretion as to the specific terms and conditions of each Award and any rules applicable thereto, including the effect, if any, of a change in control of AirNet. The terms of each Award are to be evidenced by a written instrument delivered to the participant. The AirNet Common Shares issued under the Incentive Stock Plan are subject to applicable tax withholding by AirNet which, to the extent permitted under Rule 16b-3 under the Exchange Act, may be satisfied by the withholding of AirNet Common Shares issuable under the Incentive Stock Plan. Any Awards granted under the Incentive Stock Plan may not be assigned or transferred except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order. AMENDMENTS AND TERMINATION The Incentive Stock Plan may be amended or terminated at any time by the Board of Directors; provided, however, that no such amendment or termination may adversely affect a grantee's or an option holder's rights under any Award previously granted under the Incentive Stock Plan, except with the consent of such grantee or option holder. In addition, no amendment may be made without shareholder approval if the Committee determines that such approval is necessary to comply with any tax or regulatory requirement, including any approval that is required as a prerequisite for exemptive relief from Section 16 of the Exchange Act, for which or with which the Committee determines that it is desirable to qualify or comply. FEDERAL INCOME TAX MATTERS Based on current provisions of the Code and the existing regulations thereunder, the anticipated federal income tax consequences in respect of ISOs, NQSOs, restricted stock and performance share awards made under the Incentive Stock Plan and participation in the Associate Stock Purchase Program are as described below. The following discussion is not intended to be a complete statement of applicable law and is based upon federal income tax laws as in effect on the date hereof. 42 ISOS An option holder who is granted an ISO does not recognize taxable income either on the date of grant or on the date of exercise. However, upon the exercise of the ISO, the difference between the fair market value of the AirNet Common Shares received and the exercise price is a tax preference item potentially subject to the alternative minimum tax. However, on the later sale or other disposition of the AirNet Common Shares, generally only the difference between the fair market value of the AirNet Common Shares on the exercise date and the amount realized on the sale or disposition is includable in alternative minimum taxable income. Upon disposition of AirNet Common Shares acquired upon the exercise of an ISO, capital gain or loss is generally recognized in an amount equal to the difference between the amount realized on the sale or disposition and the exercise price. However, if the option holder disposes of the AirNet Common Shares within two years of the date of grant or within one year from the date of the issuance of the AirNet Common Shares to the option holder (a "Disqualifying Disposition"), then the option holder will recognize ordinary income, as opposed to capital gain, at the time of the disposition. In general, the amount of ordinary income recognized will be equal to the lesser of (i) the amount of gain realized on the disposition, or (ii) the difference between the fair market value of the AirNet Common Shares received on the date of exercise and the exercise price. Any remaining gain or loss is treated as a short-term, mid-term or long-term capital gain or loss, depending upon the period of time the AirNet Common Shares have been held. AirNet is not entitled to a tax deduction upon either the exercise of an ISO or the disposition of AirNet Common Shares acquired pursuant to such exercise, except to the extent that the option holder recognizes ordinary income in a Disqualifying Disposition. Ordinary income from a Disqualifying Disposition will constitute compensation but will not be subject to tax withholding, nor will it be considered wages for payroll tax purposes. If the holder of an ISO pays the exercise price, in whole or in part, with already-owned AirNet Common Shares, the exchange should not affect the ISO tax treatment of the exercise. Upon such exchange, and except for Disqualifying Dispositions, no gain or loss is recognized by the option holder upon delivering already-owned AirNet Common Shares for payment of the exercise price. The AirNet Common Shares received by the option holder, equal in number to the already-owned AirNet Common Shares exchanged therefor, will have the same basis and holding period for capital gain purposes as the already-owned AirNet Common Shares. The option holder, however, will not be able to use the prior holding period for the purpose of satisfying the ISO statutory holding period requirements. AirNet Common Shares received by the option holder in excess of the number of already-owned Common Shares will have a basis of zero and a holding period which commences as of the date the AirNet Common Shares are issued to the option holder upon exercise of the ISO. If the exercise of an ISO is effected using AirNet Common Shares previously acquired through the exercise of an ISO, the exchange of the already-owned AirNet Common Shares will be considered a disposition of such Common Shares for the purpose of determining whether a Disqualifying Disposition has occurred. NQSOS An option holder receiving an NQSO does not recognize taxable income on the date of grant of the NQSO, provided the NQSO does not have a readily ascertainable fair market value at the time it is granted. In general, the option holder must recognize ordinary income at the time of exercise of the NQSO in the amount of the difference between the fair market value of the AirNet Common Shares on the date of exercise and the exercise price. The ordinary income recognized will constitute compensation for which tax withholding generally will be required. The amount of ordinary income recognized by an option holder will be deductible by AirNet in the year that the option holder recognizes the income if AirNet complies with the applicable withholding requirements. 43 If the sale of the AirNet Common Shares could subject the option holder to liability under Section 16(b) of the Exchange Act, the option holder generally will recognize ordinary income only on the date that the option holder is no longer subject to such liability in an amount equal to the fair market value of the AirNet Common Shares on such date less the exercise price. Nevertheless, the option holder may elect under Section 83(b) of the Code within 30 days of the date of exercise to recognize ordinary income as of the date of exercise, without regard to the restriction of Section 16(b). AirNet Common Shares acquired upon exercise of an NQSO will have a tax basis equal to their fair market value on the exercise date or other relevant date on which ordinary income is recognized, and the holding period for the AirNet Common Shares generally will begin on the date of exercise or such other relevant date. Upon subsequent disposition of the AirNet Common Shares, the option holder will recognize long-term capital gain or loss if the option holder has held the AirNet Common Shares for more than 18 months prior to disposition, mid-term capital gain or loss if the option holder has held the AirNet Common Shares for at least one year but less than 18 months, or short-term capital gain or loss if the option holder has held the AirNet Common Shares for one year or less. If the holder of an NQSO pays the exercise price, in whole or in part, with already-owned AirNet Common Shares, the option holder will recognize ordinary income in the amount by which the fair market value of the AirNet Common Shares received exceeds the exercise price. The option holder will not recognize gain or loss upon delivering such already-owned AirNet Common Shares to AirNet. AirNet Common Shares received by an option holder, equal in number to the already-owned AirNet Common Shares exchanged therefor, will have the same basis and holding period as such already-owned AirNet Common Shares. AirNet Common Shares received by an option holder in excess of the number of such already-owned AirNet Common Shares will have a basis equal to the fair market value of such additional AirNet Common Shares as of the date ordinary income is recognized. The holding period for such additional AirNet Common Shares will commence as of the date of exercise or such other relevant date. RESTRICTED STOCK AWARD An associate who is granted a restricted stock award will not be taxed upon the acquisition of such AirNet Common Shares so long as the interest in such AirNet Common Shares is subject to a substantial risk of forfeiture. Upon lapse or release of the restrictions, the associate will be taxed at ordinary income tax rates on an amount equal to either the current fair market value of the AirNet Common Shares (in the case of lapse or termination) or the sale price (in the case of a sale), less any consideration paid for the AirNet Common Shares. AirNet will be entitled to a corresponding deduction. The basis of restricted stock held after lapse or termination of restrictions will be equal to its fair market value on the date of lapse or termination of restrictions, and upon subsequent disposition, any further gain or loss will be a long-term, mid-term or short-term capital gain or loss, depending upon the length of time the AirNet Common Shares are held. An associate who is granted a restricted stock award may elect, within 30 days of such grant, under Section 83(b) of the Code to be taxed at ordinary income tax rates on the full fair market value of the restricted stock at the time of issuance (less any consideration paid). The basis of the AirNet Common Shares so acquired will be equal to the fair market value at such time. If the election is made, no tax will be payable upon the subsequent lapse or termination of the restrictions, and any gain or loss upon disposition will be a capital gain or loss. PERFORMANCE SHARE AWARDS The grant of a performance share award will not result in income for the grantee or in a deduction for AirNet. Upon the receipt of AirNet Common Shares or cash under a performance share award, the grantee will recognize ordinary income and AirNet will be entitled to a deduction measured by the fair 44 market value of the AirNet Common Shares plus any cash received. Income tax withholding will be required. ASSOCIATE STOCK PURCHASE PROGRAM The Associate Stock Purchase Program is intended to qualify as an "employee stock purchase plan" within the meaning of Section 423 of the Code. Generally, participants will recognize taxable income only on the disposition of AirNet Common Shares purchased under the Program. Any participant who disposes of AirNet Common Shares purchased under the Program will recognize ordinary income in the year of such disposition in an amount equal to the lesser of (i) the excess of the fair market value of the AirNet Common Shares at disposition over the purchase price of the AirNet Common Shares; or (ii) the excess of the fair market value of the AirNet Common Shares at the time the right to purchase was granted over the purchase price. Any remaining gain will be taxed as a capital gain in the year of disposition. If, however, the sales price is less than the purchase price paid by the participant, the participant will recognize a capital loss. If the participant has held the AirNet Common Shares acquired upon exercise of the right to purchase less than one year, the capital gain or loss will be short-term; if the participant has held such AirNet Common Shares for at least one year but less than 18 months, the capital gain or loss will be mid-term; and if the participant has held such AirNet Common Shares for at least 18 months, the capital gain or loss will be long-term. Generally, in the event of a disposition of AirNet Common Shares by a participant, the amount of ordinary income attributable to the participant because of such disposition is deductible by AirNet as an employer business deduction in the year of disposition. OTHER MATTERS The Incentive Stock Plan is intended to comply with Section 162(m) of the Code with respect to options granted thereunder. Section 162(m) of the Code prohibits a publicly-held corporation, such as AirNet, from claiming a deduction on its federal income tax return for compensation in excess of $1 million paid for a given fiscal year to the chief executive officer (or person acting in that capacity) at the close of the corporation's fiscal year and the four most highly compensated officers of the corporation, other than the chief executive officer, at the end of the corporation's fiscal year. The $1 million compensation deduction limitation does not apply to performance-based compensation. The Internal Revenue Service has issued regulations under Section 162(m) setting forth a number of provisions which compensatory plans must contain for the compensation paid thereunder to qualify as "performance-based" for purposes of Section 162(m). AirNet is seeking shareholder approval of the Incentive Stock Plan as amended and restated in a good faith effort to qualify compensation received thereunder, in respect of options, as "performance-based" for purposes of Section 162(m). RECOMMENDATION AND VOTE The Board of Directors of AirNet unanimously recommends that the shareholders vote for the proposal to approve the amendment and restatement of the Incentive Stock Plan. Unless otherwise directed, the persons named in the enclosed proxy will vote the AirNet Common Shares represented by all proxies received prior to the Annual Meeting, and not properly revoked, in favor of the proposal to approve the amendment and restatement of the Incentive Stock Plan. Shareholder approval of the proposed amendment and restatement of the Incentive Stock Plan will require the affirmative vote of the holders of a majority of the AirNet Common Shares, present in person or by proxy, and entitled to vote on the proposal. 45 DESCRIPTION OF CAPITAL STOCK OF AIRNET GENERAL The authorized capital stock of AirNet consists of 40,000,000 AirNet Common Shares and 10,000,000 preferred shares, par value $.01 per share. As of June 11, 1998, 12,753,400 AirNet Common Shares were issued and 12,577,913 were outstanding. In addition, 326,686 authorized AirNet Common Shares have been reserved and remain available for issuance under AirNet's 1996 Incentive Stock Plan. There are no preferred shares issued and outstanding. AIRNET COMMON SHARES Holders of AirNet Common Shares are entitled to one vote for each AirNet Common Share held of record on all matters presented to a vote of shareholders, including the election of directors. Holders of AirNet Common Shares have no cumulative voting rights and no preemptive rights to purchase or subscribe for any stock or other securities. There are no conversion rights or redemption or sinking fund provisions with respect to the AirNet Common Shares. Subject to preferences that may be applicable to any outstanding preferred shares and subject to the applicable debt instruments of AirNet, holders of AirNet Common Shares are entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution or winding up of the affairs of AirNet, holders of AirNet Common Shares are entitled to share pro rata in the distribution of the assets of AirNet remaining after payment or provision for payment of liabilities and the liquidation payments to holders of outstanding preferred shares. All outstanding AirNet Common Shares are, and the AirNet Common Shares offered hereby when issued in accordance with the terms of Agreement will be, fully paid and nonassessable. The AirNet Common Shares are listed on the NYSE. PREFERRED SHARES AirNet's Board of Directors has the authority to issue up to 10,000,000 preferred shares in one or more series and to fix, by resolution, the designations, preferences and relative, participating, optional or other rights, if any, but currently not the voting rights, and the qualifications, limitations or restrictions thereof, if any, including the number of shares in such series (which the Board may increase or decrease as permitted by Ohio law), liquidation preferences, dividend rates, conversion rights and redemption provisions of the shares constituting any series, without any further vote or action by AirNet's shareholders. Any series of preferred shares so issued could have priority over the AirNet Common Shares with respect to dividend or liquidation rights or both. In addition, the issuance of preferred shares, or the issuance of rights to purchase such shares, could have the effect of delaying, deferring or preventing a change of control of AirNet or an unsolicited acquisition proposal. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the AirNet Common Shares is First Chicago Trust Company of New York. ANTI-TAKEOVER EFFECTS OF AMENDED ARTICLES, CODE OF REGULATIONS AND THE OHIO GENERAL CORPORATION LAW Certain provisions of the Amended Articles and Code of Regulations of AirNet and of the GCL summarized in the following paragraphs may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider in the shareholder's best interest, including those attempts that might result in a premium over the market price for the shares held by shareholders. 46 NO SHAREHOLDER ACTION BY WRITTEN CONSENT Section 1701.54 of the GCL requires that an action by written consent of the shareholders in lieu of a meeting be unanimous, except that, pursuant to Section 1701.11, the code of regulations may be amended by an action by written consent of holders of shares entitling them to exercise two-thirds of the voting power of the corporation or, if the articles of incorporation or code of regulations otherwise provide, such greater or lesser amount, but not less than a majority. The AirNet Code of Regulations provides that no action to amend the Code of Regulations may be taken by a written consent of shareholders without a meeting. This provision may have the effect of delaying, deferring or preventing a tender offer or takeover attempt that a shareholder might consider in the shareholder's best interest. SUPERMAJORITY VOTING PROVISIONS The AirNet Code of Regulations provides that the provisions relating to the elimination of shareholder action by written consent to amend the Code of Regulations, removal of directors only for cause, indemnification of directors and supermajority voting may not be repealed or amended in any respect, and no other provision may be adopted, amended or repealed which would have the effect of modifying or permitting the circumvention of such provisions, without the vote of the holders of not less than 66 2/3% of the total voting power of AirNet. ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS The AirNet Code of Regulations provides that shareholders seeking to bring business before an annual meeting of shareholders, or to nominate candidates for election as directors at an annual or special meeting of shareholders, must provide timely notice thereof in writing. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of AirNet not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be received no later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. The Code of Regulations also specifies certain requirements for a shareholder's notice to be in proper written form. These provisions may preclude some shareholders from bringing matters before the shareholders at an annual or special meeting or from making nominations for directors at an annual or special meeting; provided that nothing in such provisions shall prevent any shareholder from submitting a shareholder proposal in compliance with Rule 14a-8 of the Exchange Act. CONTROL SHARE ACQUISITION STATUTE Section 1701.831 of the GCL (the "Control Share Acquisition Statute") requires shareholder approval of any proposed "control share acquisition" of an Ohio corporation. A "control share acquisition" is the acquisition, directly or indirectly, by any person (including any individual, partnership, corporation, limited liability company, society, association or two or more persons who have a joint or common interest) of shares of a corporation that, when added to all other shares of the corporation that may be voted, directly or indirectly, by the acquiring person, would entitle such person to exercise or direct the exercise of 20% or more (but less than 33 1/3%) of the voting power of the corporation in the election of directors or 33 1/3% (but less than a majority) of such voting power or a majority or more of such voting powers. Under the Control Share Acquisition Statute, the control share acquisition must be approved in advance by the holders of a majority of the outstanding voting shares represented at a meeting at which a quorum is present and by the holders of a majority of the portion of the outstanding voting shares represented at such a meeting excluding the voting shares owned by the acquiring shareholder and certain "interested shares," including shares owned by officers elected or appointed by the directors of the corporation and by directors of the corporation who are also employees of the corporation. 47 The purpose of the Control Share Acquisition Statute is to give shareholders of Ohio corporations a reasonable opportunity to express their views on a proposed shift in control, thereby reducing the coercion inherent in an unfriendly takeover. The provisions of the Control Share Acquisition Statute grant to the shareholders of AirNet the assurance that they will have adequate time to evaluate the proposal of the acquiring person, that they will be permitted to vote on the issue of authorizing the acquiring person's purchase program to go forward in the same manner and with the same proxy information that would be available to them if a proposed merger of AirNet were before them and, most importantly, that the interests of all shareholders will be taken into account in connection with such vote and the probability will be increased that they will be treated equally regarding the price to be offered for their AirNet Common Shares if the implementation of the proposal is approved. The Control Share Acquisition Statute applies not only to traditional tender offers but also to open market purchases, privately negotiated transactions and original issuances by an Ohio corporation, whether friendly or unfriendly. The procedural requirements of the Control Share Acquisition Statute could render approval of any control share acquisition difficult in that a majority of the voting power of AirNet, excluding "interested shares" must be voted in favor of the acquisition. It is recognized that any corporate defense against persons seeking to acquire control may have the effect of discouraging or preventing offers which some shareholders might find financially attractive. On the other hand, the need on the part of the acquiring person to convince the shareholders of AirNet of the value and validity of such acquiring person's offer may cause such offer to be more financially attractive in order to gain shareholder approval. MERGER MORATORIUM STATUTE Chapter 1704 of the GCL (the "Merger Moratorium Statute") generally prohibits a wide range of business combinations and other transactions (including mergers, consolidations, asset sales, loans, disproportionate distributions of property and disproportionate issuances or transfers of shares or rights to acquire shares) between an Ohio corporation and a person that owns, alone or with other related parties, shares representing at least 10% of the voting power of such corporation (an "Interested Shareholder") for a period of three years after such person becomes an Interested Shareholder, unless, prior to the date that the Interested Shareholder became such, the directors approve either the transaction or the acquisition of the corporation's shares that resulted in the person becoming an Interested Shareholder. Following the three-year moratorium period, the corporation may engage in covered transactions with an Interested Shareholder only if, among other things (i) the transaction receives the approval of the holders of 2/3 of all the voting shares and the approval of the holders of a majority of the voting shares held by persons other than an Interested Shareholder or (ii) the remaining shareholders receive an amount for their shares equal to the higher of the highest amount paid in the past by the Interested Shareholder for the corporation's shares or the amount that would be due the shareholders if the corporation were to dissolve. The Merger Moratorium Statute is designed to prevent many of the self-dealing activities that often accompany highly-leveraged acquisitions by prohibiting an Interested Shareholder from using the corporation or its assets or shares for the Interested Shareholder's special benefit. The Merger Moratorium Statute will encourage potential tender offerors to negotiate with the Board of Directors of AirNet to ensure that the shareholders of AirNet receive fair and equitable consideration for their shares. However, the Merger Moratorium Statute presents potential pitfalls for unwary shareholders. Close attention to the impact of common corporate actions, such as the grant of stock options and loans to Interested Shareholders in the ordinary course of business, is necessary to determine whether such actions are encompassed by the Merger Moratorium Statute. 48 COMPARISON OF CAPITAL STOCK OF AIRNET AND QUICK Quick is a closely-held corporation with five stockholders, including Robert J. Mitzman, Dominique Brown and Glenn R. Smoak. See "SELECTED INFORMATION ABOUT QUICK-Capital Stock of Quick." Such persons' rights as stockholders have been governed primarily by discussions and agreements among these five individuals. Following the Merger, the Quick Stockholders will hold AirNet Common Shares, which are shares of an Ohio corporation which is a public company, and their rights will be governed by Ohio law and AirNet's Amended Articles and Code of Regulations. Accordingly, the material difference between the present rights of the Quick Stockholders and their rights as holders of AirNet Common Shares is that following the Merger, they will be shareholders in a public company governed by Ohio law and AirNet's Amended Articles and Code of Regulations rather than such discussions and agreements. Set forth below is a summary of the material provisions of Ohio law and the Amended Articles and Code of Regulations of AirNet which will govern the rights of the Quick Stockholders as shareholders of AirNet after the Merger. MERGERS AND CONSOLIDATIONS Under the GCL, an agreement of merger or consolidation must be approved by the directors of each constituent corporation and adopted by shareholders of each constituent Ohio corporation (other than the surviving corporation in the case of a merger) holding at least two-thirds of the corporation's voting power, unless a different proportion (but not less than a majority of the voting power) is specified in the articles. AirNet's Amended Articles require the approval of a majority of the voting power of AirNet instead of two-thirds. In the case of a merger, the agreement must also be adopted by the shareholders of the surviving corporation by similar vote, if one or more of the following conditions exist: (a) the articles or regulations of the surviving corporation then in effect require that the agreement be adopted by the shareholders or by the holders of a particular class of shares of that corporation; (b) the agreement conflicts with the articles or regulations of the surviving corporation then in effect, or changes the articles or regulations, or authorizes any action that, if it were being made or authorized apart from the merger, would otherwise require adoption by the shareholders or by the holders of a particular class of shares of that corporation; (c) the merger involves the issuance or transfer by the surviving corporation to the shareholders of the other constituent corporation or corporations of such number of shares of the surviving corporation as will entitle the holders of the shares immediately after the consummation of the merger to exercise one-sixth or more of the voting power of that corporation in the election of directors; or (d) the agreement of merger makes such change in the directors of the surviving corporation as would otherwise require action by the shareholders or by the holders of a particular class of shares of that corporation. OTHER CORPORATE TRANSACTIONS Subject to certain exceptions, under the GCL, unless the articles specify a different proportion but not less than a majority of the voting power, the approval of two-thirds of the voting power of a corporation is required for (i) the consummation of combinations and majority share acquisitions involving the transfer or issuance of such number of shares as would entitle the holders thereof to exercise at least one-sixth of the voting power of an Ohio corporation in the election of directors immediately after the consummation of such transaction, (ii) the disposition of all or substantially all of the corporation's assets other than in the regular course of business and (iii) voluntary dissolutions. The AirNet Amended Articles require the approval of a majority of the voting power rather than two-thirds. ANTI-TAKEOVER EFFECTS OF AMENDED ARTICLES, CODE OF REGULATIONS AND THE OHIO GENERAL CORPORATION LAW See "DESCRIPTION OF CAPITAL STOCK OF AIRNET--Anti-takeover Effects of Amended Articles, Code of Regulations and the Ohio General Corporation Law." 49 SPECIAL MEETINGS Under the GCL, persons who may call a special meeting of shareholders include the chairman of the board; the president, or, in case of the president's absence, death or disability, the vice-president authorized to exercise the authority of the president in the absence of the latter; the directors by action at a meeting or a majority of the directors acting without a meeting; persons holding 25% or more of the voting power of all shares entitled to vote, unless the articles or regulations specify a smaller or larger portion, but not more than 50%; or such other officers or persons as the articles or regulations may authorize. The AirNet Code of Regulations authorizes the Chairman of the Board, the President (or, in the event of his absence, death or disability, the Vice President authorized to exercise the authority of the President in the absence of the latter), the Secretary or the Board of Directors to call a special meeting of shareholders. In addition, the AirNet Code of Regulations authorizes a special meeting of shareholders to be called by persons holding at least fifty percent (50%) of all shares outstanding and entitled to vote thereat. CLASS VOTING Under the GCL, holders of a particular class of shares are entitled to vote as a separate class if the rights of such class are affected by mergers, consolidations or amendments to the articles. REMOVAL OF DIRECTORS AND FILLING OF VACANCIES Under the AirNet Code of Regulations, a director or directors may be removed from office, only for cause and only by the vote of the holders of at least a majority of the voting power of AirNet which entitles them to elect directors in place of those to be removed. Vacancies in the Board of Directors of AirNet and any newly-created directorships resulting from any increase in the number of the directors may be filled by the directors, acting by the vote of a majority of the directors then in office, even if less than a quorum. A director elected to the Board to fill a vacancy would hold office for the unexpired portion of the term of the director whose place has been filled. A director elected by the Board to fill a newly-created directorship resulting from an increase in the number of directors would hold office until the next election of the class for which the director was elected. AMENDMENT OF THE AMENDED ARTICLES AND CODE OF REGULATIONS Under the GCL, an amendment to the articles must be adopted by the affirmative vote of the holders of shares entitling them to exercise two-thirds of the voting power of the corporation on the proposal, or such different proportion (but not less than a majority of the voting power) as is provided in the articles. The AirNet Amended Articles reduce the vote required to amend any provision of the Amended Articles to a majority. Under the GCL, an amendment to the regulations may be adopted by the shareholders at a meeting held for that purpose, by the affirmative vote of the holders of shares entitling them to exercise a majority of the voting power on the proposal or without a meeting with the written consent of the holders of shares entitling them to exercise two-thirds of the voting power on the proposal, unless the articles or regulations require a greater or lesser proportion but not less than a majority of the voting power. The AirNet Code of Regulations provides that the provisions relating to the elimination of shareholder action by written consent to amend the Code of Regulations, removal of directors only for cause, indemnification of directors and supermajority voting may not be repealed or amended in any respect, and no other provision may be adopted, amended or repealed which would have the effect of modifying or permitting the circumvention of such provisions, without the vote of the holders of not less than 66 2/3% of the total voting power of AirNet. Other amendments of the AirNet Code of Regulations require the affirmative vote of the holders of a majority of the voting power on such proposal. 50 APPRAISAL RIGHTS Under the GCL, dissenting shareholders are entitled to appraisal rights in connection with the lease, sale, exchange, transfer or other disposition of all or substantially all of the assets of a corporation and in connection with amendments to its articles which change the rights of shareholders in a substantially prejudicial manner. In addition, shareholders of an Ohio corporation being merged into a new corporation are also generally entitled to appraisal rights. Shareholders of an acquiring corporation are entitled to appraisal rights in a merger, combination or majority share acquisition in which such shareholders are entitled to voting rights. DIVIDENDS An Ohio corporation may pay dividends out of surplus, however created, in cash, property or shares. An Ohio corporation must notify its shareholders if a dividend is paid out of capital surplus REPURCHASES Under the GCL, a corporation may repurchase its own shares if authorized to do so by its articles or under certain other circumstances but may not do so if immediately thereafter its assets would be less than its liabilities plus its stated capital, if any, or if the corporation is insolvent or would be rendered insolvent by such a purchase or redemption. Article FIFTH of the Amended Articles permits AirNet to repurchase shares to the extent permitted by law. DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION Under Section 1701.13(E) of the Ohio Revised Code, directors, officers, employees and agents of Ohio corporations have an absolute right to indemnification for expenses (including attorneys' fees) actually and reasonably incurred by them to the extent they are successful in defense of any action, suit or proceeding, including derivative actions, brought against them, or in defense of any claim, issue or matter asserted in such proceeding. A director or officer is entitled to such indemnification if his success is "on the merits or otherwise," thus mandating indemnification if the indemnitee is successful on the merits or if he is successful, for example, in asserting a procedural defense, such as a claim that the action is barred by the applicable statute of limitations or if he is released pursuant to a negotiated settlement without making payment or providing other consideration. Directors (but not officers, employees or agents) are entitled to mandatory payment of expenses by the corporation as they are incurred, in advance of the final disposition of the action, suit or proceeding, provided the director agrees to cooperate with the corporation concerning the matter and to repay the amount advanced if it is proved by clear and convincing evidence that his act or failure to act was done with deliberate intent to cause injury to the corporation or with reckless disregard for the corporation's best interests. The GCL permits a corporation to indemnify directors, officers, employees or agents of the corporation in circumstances where indemnification is not mandated by the statute if certain statutory standards are satisfied. A corporation may grant indemnification in actions other than actions brought by, or derivatively in the right of, the corporation if the indemnitee has acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Such indemnification is permitted against expenses (including attorneys' fees) as well as judgments, fines and amounts paid in settlement actually and reasonably incurred by the indemnitee. An Ohio corporation may also provide indemnification in actions brought by, or derivatively in the right of, the corporation for attorneys' fees and expenses actually and reasonably incurred in connection with the defense or settlement of an action if the officer, director, employee or agent acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation. Ohio law does not expressly authorize indemnification against judgments, fines and amounts paid in 51 settlement in such actions. The corporation may not indemnify a director, officer, employee or agent in such actions for attorneys' fees and expenses if the director, officer, employee or agent is adjudged to be liable to the corporation for negligence or misconduct in the performance of his duties to the corporation, unless and only to the extent that a court determines that, despite the adjudication of liability, such person is fairly and reasonably entitled to indemnity. The GCL grants express power to an Ohio corporation to purchase and maintain insurance or furnish similar protection, including but not limited to trust funds, letters of credit and self-insurance, for director, officer, employee or agent liability. Such insurance may be purchased for, or other protection provided to, any director, officer, employee or agent, regardless of whether that individual is otherwise eligible for indemnification by the corporation. The AirNet Code of Regulations provides for indemnification consistent with Section 1701.13(E) of the Ohio Revised Code. The Code of Regulations provides that AirNet must indemnify officers and directors against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement incurred in connection with any pending, threatened or completed action (whether criminal, civil, administrative or investigative) by reason of the fact that such individual is or was a director, officer, manager or agent of AirNet or is or was serving at the request of AirNet as a director, trustee, officer, employee, member, manager or agent of another corporation or other entity so long as such individual acted in good faith and in a manner he reasonably believed was in, or not opposed to, the best interests of AirNet and, with respect to any criminal matter, he had no reasonable cause to believe his conduct was unlawful. The Code of Regulations forbids AirNet from indemnifying an officer or director if such person is adjudged to be liable for acting with reckless disregard to the best interests of AirNet or misconduct (other than negligence) in the performance of his duty to AirNet unless and only to the extent a court, in view of all the circumstances, concludes that such person is fairly and reasonably entitled to such indemnity as the court deems proper. The AirNet Code of Regulations creates a presumption that a director or officer has acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of AirNet, and with respect to any criminal matter, to have had no reasonable cause to believe his conduct was unlawful. Because of this presumption, AirNet believes that a director or officer will not have the initial burden of showing that he acted in good faith or in a manner he reasonably believed to be in, or not opposed to, the best interests of AirNet. In addition, the Code of Regulations requires AirNet to advance expenses on behalf of officers and directors if they agree in writing to repay such amounts if they are not successful in the litigation. The AirNet Code of Regulations states that the indemnification provided thereby is not exclusive of any other rights to which any person seeking indemnification may be entitled. Additionally, the Code of Regulations provides that AirNet may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of AirNet, or who is or was serving another entity at the request of AirNet, against any liability asserted against him and incurred by him in such capacity, or arising out of his status as such, whether or not AirNet would have the obligation or power to indemnify him under the Code of Regulations. The Code of Regulations also authorizes AirNet to purchase and maintain trust funds, letters of credit or self-insurance on behalf of any person who is or was a director, officer, employee or agent of AirNet or who is serving or has served another entity at the request of AirNet. Ohio has codified the directors' common law duty of care and, in part, their common law duty of loyalty. Section 1701.59(B) of the Ohio Revised Code provides in pertinent part: "A director shall perform his duties as a director, including his duties as a member of any committee of the directors upon which he may serve, in good faith, in a manner he reasonably believes to be in or not opposed to the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances." Under Ohio law, a director is not liable for monetary damages unless it is proved by clear and convincing evidence that his action or failure to act was undertaken with deliberate intent to cause injury to 52 the corporation or with reckless disregard for the best interests of the corporation. This higher standard of proof must be met in any action brought against a director for breach of his duties, including any action involving or affecting (i) a change or potential change in control of the corporation; (ii) a termination or potential termination of a director's service to the corporation as a director; or (iii) a director's service in any other position or relationship with the corporation. The higher standard of proof, however, does not affect the liability of directors for unlawful loans, dividends or distributions under Section 1701.95 of the Ohio Revised Code. There is no comparable provision limiting the liability of officers, employees or agents of Ohio corporations. Ohio law provides specific statutory authority for directors, when determining what they reasonably believe to be in the best interests of the corporation, to consider, in addition to the interests of the corporation's shareholders, other factors such as the interests of the corporation's employees, suppliers, creditors and customers; the economy of the state and nation; community and societal considerations; the long-term and the short-term interests of the corporation and its shareholders; and the possibility that these interests may be best served by the continued independence of the corporation. UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The following unaudited pro forma condensed combined financial statements are presented to show the impact of the Merger on AirNet's historical financial position and results of operations. The Merger is reflected in the unaudited pro forma condensed combined financial information under the pooling-of-interest method of accounting. See "THE MERGER--Accounting Treatment". The unaudited pro forma condensed combined balance sheet assumes that the Merger was consummated on March 31, 1998, and the unaudited pro forma condensed combined statements of operations assume the Merger was consummated as of the beginning of each of the periods presented. In each instance, it was assumed 3,141,356 AirNet Common Shares were issued in connection with the Merger. The pro forma information should be read in conjunction with the historical consolidated financial statements of AirNet and Quick, including the respective footnotes to those statements, and the financial data regarding AirNet and Quick included herein. THE FOLLOWING PRO FORMA INFORMATION IS NOT NECESSARILY INDICATIVE OF RESULTS OF THE OPERATIONS OR COMBINED FINANCIAL POSITION THAT WOULD HAVE RESULTED HAD THE MERGER BEEN CONSUMMATED AT THE BEGINNING OF THE PERIODS PRESENTED, NOR IS IT NECESSARILY INDICATIVE OF THE RESULTS OF OPERATIONS OF FUTURE PERIODS OR THE FUTURE COMBINED FINANCIAL POSITION. 53 AIRNET SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS MARCH 31, 1998 (IN THOUSANDS, EXCEPT SHARE DATA) PRO FORMA PRO FORMA AIRNET QUICK ADJUSTMENTS COMBINED ---------- ---------- ----------- ----------- ASSETS Current assets: Cash and cash equivalent...................................... $ 726 $ 303 $ $ 1,029 Marketable securities......................................... -- 287 287 Accounts receivable: Trade, less allowances...................................... 11,496 15,052 26,548 Shareholders, affiliates and associates..................... 161 1,263 1,424 Spare parts and supplies...................................... 6,731 -- 6,731 Deposits and prepaids......................................... 6,236 1,760 7,996 ---------- ---------- ----------- ----------- Total current assets............................................ 25,350 18,665 44,015 Net property and equipment...................................... 69,899 3,026 72,925 Other assets: Intangibles, net of accumulated amortization.................. 5,463 11,317 16,780 Investment in partnerships and other.......................... 6,765 75 6,840 ---------- ---------- ----------- ----------- Total assets.................................................... $ 107,477 $ 33,083 $ $ 140,560 ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable.............................................. $ 4,288 $ 3,200 $ $ 7,488 Salaries and related liabilities.............................. 1,496 -- 1,496 Accrued expenses.............................................. 588 6,152 6,740 Taxes payable................................................. 3,424 -- 3,424 Deferred taxes................................................ 229 570 799 Due to shareholder............................................ -- 296 296 Current portion of capital leases............................. -- 306 306 Current portion of notes payable.............................. 24 7,025 7,049 ---------- ---------- ----------- ----------- Total current liabilities....................................... 10,049 17,549 27,598 Notes payable, less current portion............................. 8,700 -- 8,700 Capital leases, net of current portion.......................... -- 773 773 Due to shareholder, net of current portion...................... -- 1,228 1,228 Deferred compensation........................................... -- 167 167 Deferred tax liability.......................................... 4,431 -- 2,080(2) 6,511 Shareholders' equity Common Shares, $0.01 par value; 12,753,400 shares issued; 15,894,756 pro forma........................................ 127 12 20(5) 159 Additional paid-in capital.................................... 79,281 6,507 (2,100) 83,688 Retained earnings............................................. 8,641 6,722 15,363 Unrealized gain on marketable securities...................... -- 125 125 Treasury shares: 181,587 shares held at cost.................. (3,752) -- (3,752) ---------- ---------- ----------- ----------- Total shareholders' equity...................................... 84,297 13,366 (2,080) 95,583 ---------- ---------- ----------- ----------- Total liabilities and shareholders' equity...................... $ 107,477 $ 33,083 $ 0 $ 140,560 ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- 54 AIRNET SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA PRO FORMA AIRNET QUICK ADJUSTMENTS COMBINED ---------- ---------- ----------- ----------- Net revenues Check delivery................................................ $ 80,707 $ -- $ $ 80,707 Small package delivery........................................ 15,660 67,277 82,937 Fixed base operations......................................... 1,395 -- 1,395 ---------- ---------- ----------- ----------- Total net revenues.............................................. 97,762 67,277 165,039 Costs and expenses Air and ground transportation................................. 66,032 49,275 115,307 Fixed base operations......................................... 1,101 -- 1,101 Selling, general and administrative........................... 8,550 15,199 (1,105)(1) 22,644 ---------- ---------- ----------- ----------- Total costs and expenses........................................ 75,683 64,474 (1,105) 139,052 ---------- ---------- ----------- ----------- Income from operations.......................................... 22,079 2,803 1,105 25,987 Interest expense................................................ 109 512 621 ---------- ---------- ----------- ----------- Income before income taxes...................................... 21,970 2,291 1,105 25,366 Provision for income taxes...................................... 8,767 390 1,152(2) 10,309 ---------- ---------- ----------- ----------- Net income...................................................... $ 13,203 $ 1,901 $ (47) $ 15,057 ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- Net income per share............................................ $ 1.05 $ 0.71 $ 0.96 Net income per share--assuming dilution......................... $ 1.04 $ 0.67 $ 0.94 Weighted average common shares outstanding: Basic......................................................... 12,577 2,682 15,719 Assuming dilution............................................. 12,706 2,838 15,976 55 AIRNET SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA) AIRNET YEAR ENDED QUICK YEAR SEPTEMBER 30, ENDED JUNE PRO FORMA PRO FORMA 1996 30, 1996 ADJUSTMENTS COMBINED ------------- ----------- ----------- ----------- Net revenues Check delivery............................................ $ 65,025 $ -- $ $ 65,025 Small package delivery.................................... 13,864 41,748 55,612 Fixed base operations..................................... 1,063 -- 1,063 ------------- ----------- ----------- ----------- Total net revenues.......................................... 79,952 41,748 121,700 Costs and expenses Air and ground transportation............................. 53,797 31,320 85,117 Fixed base operations..................................... 1,033 -- 1,033 Selling, general and administrative....................... 11,875 9,307 (359)(1) 20,823 ------------- ----------- ----------- ----------- Total costs and expenses.................................... 66,705 40,627 (359) 106,973 ------------- ----------- ----------- ----------- Income from operations...................................... 13,247 1,121 359 14,727 Interest expense............................................ 1,072 292 1,364 Offering-related, non-recurring expenses.................... 13,704 -- 13,704 ------------- ----------- ----------- ----------- Income (loss) before income taxes........................... (1,529) 829 359 (341) Provision for income taxes.................................. 4,200 83 508(2) 4,791 ------------- ----------- ----------- ----------- Net income (loss)........................................... $ (5,729) $ 746 $ (149) $ (5,132) ------------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- Pro forma information (3) Net income (loss) before taxes............................ $ (1,529) $ 829 $ 359 $ (341) Pro forma adjustments, other than income taxes............ 4,429 -- -- 4,429 Pro forma income taxes.................................... 5,618 83 508 6,209 ------------- ----------- ----------- ----------- Pro forma net income (loss)................................. $ (2,718) $ 746 $ (149) $ (2,121) ------------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- Pro forma net income (loss) per share--basic and assuming dilution.................................................. $ (0.34) $ 0.30 $ (0.19) Weighted average common shares outstanding: Basic..................................................... 8,055 2,496 11,196 Assuming dilution......................................... 8,491 2,496 11,632 Adjusted pro forma information (4) Pro forma net income (loss)............................... $ (2,718) $ 746 $ (149) $ (2,121) Effects of eliminating offering-related, non-recurring expense, net of tax..................................... 12,681 -- 12,681 ------------- ----------- ----------- ----------- Adjusted pro forma net income............................... $ 9,963 $ 746 $ (149) $ 10,560 ------------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- Adjusted pro forma net income per share--basic and assuming dilution........................ $ 0.80 $ 0.30 $ 0.68 Adjusted pro forma weighted average common shares--basic and assuming dilution......................................... 12,464 2,496 15,605 56 AIRNET SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1995 (IN THOUSANDS, EXCEPT SHARE DATA) AIRNET YEAR ENDED QUICK YEAR SEPTEMBER 30, ENDED JUNE PRO FORMA PRO FORMA 1995 30, 1995 ADJUSTMENTS COMBINED ------------- ----------- ----------- ----------- Net revenues Check delivery............................................ $ 58,264 $ -- $ $ 58,264 Small package delivery.................................... 12,424 30,184 42,608 Fixed base operations..................................... 1,007 -- 1,007 ------------- ----------- ----------- ----------- Total net revenues.......................................... 71,695 30,184 101,879 Costs and expenses Air and ground transportation............................. 49,246 22,411 71,657 Fixed base operations..................................... 956 -- 956 Selling, general and administrative....................... 13,418 7,937 (401)(1) 20,954 ------------- ----------- ----------- ----------- Total costs and expenses.................................... 63,620 30,348 (401) 93,567 ------------- ----------- ----------- ----------- Income (loss) from operations............................... 8,075 (164) 401 8,312 Interest expense............................................ 1,469 116 1,585 ------------- ----------- ----------- ----------- Income (loss) before income taxes........................... 6,606 (280) 401 6,727 Provision (benefit) for income taxes........................ (13) 35 170(2) 192 ------------- ----------- ----------- ----------- Net income (loss)........................................... $ 6,619 $ (315) $ 231 $ 6,535 ------------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- Pro forma information(3) Net income (loss) before taxes............................ $ 6,606 $ (280) $ 401 $ 6,727 Pro forma adjustments, other than income taxes............ 7,367 -- 7,367 Pro forma income taxes.................................... 5,589 35 170 5,794 ------------- ----------- ----------- ----------- Pro forma net income (loss)................................. $ 8,384 $ (315) $ 231 $ 8,300 ------------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- Pro forma net income (loss) per share--basic and assuming dilution.................................................. $ 1.43 $ (0.13) $ 0.92 Weighted average common shares outstanding: Basic..................................................... 5,857 2,496 8,998 Assuming dilution......................................... 5,857 2,496 8,998 Adjusted pro forma information(4) Pro forma net income (loss)............................... $ 8,384 $ (315) $ 231 $ 8,300 Effects of eliminating Offering-related, non-recurring expense, net of tax..................................... -- -- -- -- ------------- ----------- ----------- ----------- Adjusted pro forma net income (loss)........................ $ 8,384 $ (315) $ 231 $ 8,300 ------------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- Adjusted pro forma net income (loss) per share--basic and assuming dilution(4)...................................... $ 0.67 $ (0.13) $ 0.53 Adjusted pro forma weighted average common shares--basic and assuming dilution....................... 12,464 2,496 15,605 57 AIRNET SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA PRO FORMA AIRNET QUICK ADJUSTMENTS COMBINED --------- --------- -------------- ----------- Net revenues Check delivery.................................................. $ 16,811 $ -- $ $ 16,811 Small package delivery.......................................... 3,614 13,076 16,690 Fixed base operations........................................... 366 -- 366 --------- --------- ----- ----------- Total net revenues................................................ 20,791 13,076 33,867 Costs and expenses Air and ground transportation................................... 14,383 9,900 24,283 Fixed base operations........................................... 309 -- 309 Selling, general and administrative............................. 1,916 2,918 (133)(1) 4,701 --------- --------- ----- ----------- Total costs and expenses.......................................... 16,608 12,818 (133) 29,293 --------- --------- ----- ----------- Income from operations............................................ 4,183 258 133 4,574 Interest expense.................................................. 10 88 98 --------- --------- ----- ----------- Income before income taxes........................................ 4,173 170 133 4,476 Provision for income taxes........................................ 1,688 18 144(2) 1,850 --------- --------- ----- ----------- Net income........................................................ $ 2,485 $ 152 $ (11) $ 2,626 --------- --------- ----- ----------- --------- --------- ----- ----------- Net income per common share....................................... $ 0.20 $ 0.06 $ 0.17 Net income per share--assuming dilution........................... $ 0.20 $ 0.06 $ 0.17 Weighted average common shares outstanding: Basic........................................................... 12,580 2,496 15,721 Assuming dilution............................................... 12,580 2,496 15,721 58 AIRNET SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA PRO FORMA AIRNET QUICK ADJUSTMENTS COMBINED --------- --------- ----------- ----------- Net revenues Check delivery.................................................. $ 22,370 $ -- $ $ 22,370 Small package delivery.......................................... 3,913 21,985 25,898 Fixed base operations........................................... 288 -- 288 --------- --------- ----------- ----------- Total net revenues................................................ 26,571 21,985 48,556 Costs and expenses Air and ground transportation................................... 19,215 16,031 35,246 Fixed base operations........................................... 175 -- 175 Selling, general and administrative............................. 2,271 4,348 6,619 --------- --------- ----------- ----------- Total costs and expenses.......................................... 21,661 20,379 42,040 --------- --------- ----------- ----------- Income from operations............................................ 4,910 1,606 6,516 Interest expense.................................................. 196 171 367 --------- --------- ----------- ----------- Income before income taxes........................................ 4,714 1,435 6,149 Provision for income taxes........................................ 1,860 240 449(2) 2,549 --------- --------- ----------- ----------- Net income........................................................ $ 2,854 $ 1,195 $ (449) $ 3,600 --------- --------- ----------- ----------- --------- --------- ----------- ----------- Net income per share.............................................. $ 0.23 $ 0.39 $ 0.23 Net income per share--assuming dilution........................... $ 0.22 $ 0.36 $ 0.22 Weighted average common shares outstanding: Basic........................................................... 12,529 3,064 15,670 Assuming dilution............................................... 12,782 3,286 16,108 59 AIRNET SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA PRO FORMA AIRNET QUICK ADJUSTMENTS COMBINED --------- --------- -------------- ----------- Net revenues Check delivery.................................................. $ 18,080 $ -- $ $ 18,080 Small package delivery.......................................... 3,713 12,702 16,415 Fixed base operations........................................... 442 -- 442 --------- --------- ----- ----------- Total net revenues................................................ 22,235 12,702 34,937 Costs and expenses Air and ground transportation................................... 14,704 9,207 23,911 Fixed base operations........................................... 283 -- 283 Selling, general and administrative............................. 2,095 3,161 (103)(1) 5,153 --------- --------- ----- ----------- Total costs and expenses.......................................... 17,082 12,368 (103) 29,347 --------- --------- ----- ----------- Income from operations............................................ 5,153 334 103 5,590 Interest expense.................................................. -- 83 83 --------- --------- ----- ----------- Income before income taxes........................................ 5,153 251 103 5,507 Provision for income taxes........................................ 2,060 35 127(2) 2,222 --------- --------- ----- ----------- Net income........................................................ $ 3,093 $ 216 $ (24) $ 3,285 --------- --------- ----- ----------- --------- --------- ----- ----------- Net income per share.............................................. $ 0.25 $ 0.09 $ 0.21 Net income per share--assuming dilution........................... $ 0.24 $ 0.09 $ 0.21 Weighted average common shares outstanding: Basic........................................................... 12,622 2,496 15,763 Assuming dilution............................................... 12,637 2,496 15,778 60 AIRNET SYSTEMS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (1) Represents the effects of employment agreements dated April 14, 1998 by and between AirNet or Quick and each of Robert J. Mitzman, Dominique Brown and Glenn R. Smoak as if the agreements were in effect at the beginning of the periods presented. (2) Currently, Quick operates as an S Corporation under the Code. The pro forma adjustments reflect the recording of federal and certain state income taxes as if Quick were a C Corporation for the periods presented and include the tax effects of the above pro forma adjustments. In addition, Quick will record a net deferred tax expense of $2,080,000 as a result of the termination of Quick's S Corporation status. (3) September 30, 1996 and 1995 balances include pro forma adjustments related to AirNet's Offering, in addition to the pro forma adjustments noted in Notes (1) and (2), above. 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 Offering occurred on October 1, 1994. All such changes were effective with the consummation of the Offering on May 31, 1996. (4) Excludes the effects of $13,704,000 of non-cash, non-recurring expenses incurred as a result of AirNet's Offering, effective May 31, 1996. Adjusted pro forma net income per share data assumes the AirNet Common Shares issued in the Offering were outstanding for the entire period presented. (5) Reflects the 3,141,356 AirNet Common Shares expected to be issued in the Merger, net of the conversion of Quick Common Shares to AirNet Common Shares. (6) During 1997, AirNet changed its fiscal year end from September 30 to December 31. As a result, the three months ended December 31, 1996 has been treated as a transition period. During 1997, Quick also changed its fiscal year end from June 30 to December 31. As a result, Quick's data for the years ended June 30, 1996 and 1995 have been combined with AirNet's data for the years ended September 30, 1996 and 1995, respectively. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AIRNET GENERAL AirNet's Consolidated Financial Statements have been and will be affected by several factors, including the following. ACQUISITIONS AirNet has completed five acquisitions since September, 1996 as follows: (i) MIDWAY AVIATION, INC. All of the outstanding shares of common stock of Midway Aviation, Inc. ("Midway"), a regional air carrier of canceled checks, were acquired for $3.1 million cash. The results of Midway's operations are included in the financial data since its purchase date, September 26, 1996. (ii) FLOAT CONTROL, INC. All of the outstanding shares of common stock of Float Control were acquired for 0.2 million of AirNet Common Shares and approximately $0.7 million cash. Float Control holds a 19% interest in the CHEXS Partnership, an industry leader in payment initiatives. The results of Float Control's operations are included in the financial data since its purchase date, October 24, 1996. 61 (iii) EXPRESS CONVENIENCE CENTER, INC. All of the outstanding shares of common stock of ECC, a national small package forwarder, were acquired for 0.1 million of AirNet Common Shares on January 30, 1997. The transaction was treated as a pooling-of-interests. Consequently, all financial data has been restated to reflect the operations of ECC. (iv) PACIFIC AIR CHARTER, INC. All of the outstanding shares of common stock of Pacific Air Charter, Inc. ("PAC"), a regional airline in the business of transporting canceled checks, were acquired for $0.4 million cash. The results of PAC's operations are included in the financial data since its purchase date, June 6, 1997. (v) DATA AIR COURIER, INC. All of the outstanding shares of common stock of Data Air Courier, Inc. ("Data Air"), a national transporter of canceled checks and small packages through a ground delivery network and commercial airlines, were acquired for $4.0 million cash. The results of Data Air's operations are included in the financial data since its purchase date, July 31, 1997. INITIAL PUBLIC OFFERING On June 5, 1996, AirNet completed the Offering, raising net proceeds of approximately $82.7 million. Proceeds were used to repay outstanding debt, repurchase an outstanding warrant, make distributions to former shareholders and to provide working capital to finance future acquisitions and internal growth. Pursuant to the terms of the Offering, AirNet issued 6,440,000 AirNet Common Shares at $14.00 per share. WIE WARRANT AND COVENANT NOT TO COMPETE In 1988, AirNet purchased certain assets of Wright International Express, Inc. ("WIE"). In connection with the purchase agreement, AirNet entered into a non-compete agreement that required annual payments to the former WIE shareholders. Upon the closing of the Offering, the non-compete agreement was terminated, resulting in a non-cash, non-recurring expense of $2.6 million. Also in consideration for the purchase of WIE, AirNet issued a warrant to a former WIE shareholder which was exercisable upon the closing of an initial public offering. Upon closing of the Offering, AirNet purchased the WIE warrant for $29.9 million and canceled the warrant, resulting in a reduction in shareholders' equity. AirNet received a tax benefit from the repurchase and cancellation of the WIE warrant of approximately $7.0 million. The tax benefit from this asset was realized as cash savings through the offset of subsequent tax liabilities. The tax benefit had no effect on AirNet's statements of operations. CHANGE IN S CORP STATUS AND DISTRIBUTIONS Prior to the Offering, AirNet operated as an S Corporation under Subchapter S of the Code and comparable provisions of certain state tax laws, and historically paid no federal income tax. While an S Corporation, AirNet made distributions to its shareholders for the purpose of funding their income tax payments on the income generated by AirNet, which income is taxable to the shareholders whether or not distributed. In addition, in connection with the Offering and the conversion to a C Corporation status, AirNet made distributions of the accumulated adjustments accounts ("AAA distributions") totaling $21.0 million, which approximated the value of AirNet's AAA account at the time of the Offering. AirNet has been responsible for federal and state income taxes from the date of the termination of its S Corporation status in connection with the Offering. NON-CASH, NON-RECURRING EXPENSES AirNet incurred significant non-cash, non-recurring expenses in conjunction with the Offering. These expenses included (i) $14.8 million of compensation expense related to the portion of AAA distributions to certain executive officers not previously recorded as expense in connection with the termination of AirNet's S Corporation status, plus the difference between the net offering price and the net book value 62 per share held by the executives under certain stock purchase agreements, which predated the Offering; and (ii) $2.6 million related to the write-off of the WIE covenant not to compete. These expenses were offset with a $1.7 million elimination of a deferred compensation liability associated with certain stock purchase agreements and a $2.0 million elimination of a liability related to deferred compensation agreements with certain executive officers. RESULTS OF OPERATIONS TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO TWELVE MONTHS ENDED SEPTEMBER 30, 1996 During 1997, AirNet changed its fiscal year end from September 30 to December 31. Revenues were a record $97.8 million in the twelve months ended December 31, 1997 ("fiscal 1997"), an increase of $17.8 million, or 22.3%, over the twelve months ended September 30, 1996 ("fiscal 1996"). Net revenues from check delivery increased $15.7 million, or 24.1%. Of the increase in revenues from check delivery, $2.9 million can be attributed to price increases effective January 1, 1997 and 1996 and approximately $8.7 million can be attributed to the Midway, PAC and Data Air acquisitions. 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, offset by a decrease in the number of flying days from 200 in fiscal 1996 to 199 in fiscal 1997. Net revenues from small package delivery increased $1.8 million, or 13.0%, from fiscal 1996 to fiscal 1997 due to increased activity from both new and existing customers. Total costs and expenses were $75.7 million in fiscal 1997, an increase of $9.0 million, or 13.5%, over fiscal 1996 levels, resulting in income from operations of $22.1 million in fiscal 1997 compared to $13.2 million in fiscal 1996. Air transportation expenses were up $12.2 million, or 22.7%, while selling, general and administrative expenses decreased $3.3 million, or 28.0%, for the fiscal year. Air transportation costs increased due, in part, to the addition of air and ground personnel required to service a larger fleet of aircraft and the increased volume of activity. Fuel expense increased $2.0 million, or 24.4%, over the period primarily due to a 24% increase in flight hours. Maintenance expense also increased $1.0 million, or 14.3%, due to the increased flight hours and the increased size of the fleet, from 94 aircraft at September 30, 1996 to 113 at December 31, 1997. AirNet's costs for shipping packages on commercial airlines increased $3.0 million due to the addition of Data Air check delivery shipments and an increase in SameDay small package shipments, of which a significant portion are moved during daytime hours when AirNet's aircraft do not fly. Selling, general and administrative expenses decreased primarily due to the restructuring of executive compensation plans (which resulted in a $1.8 million decrease), the termination of stock purchase agreements (which resulted in a $2.1 million decrease) and the termination of a covenant not to compete (which resulted in a $0.9 million decrease). All were effective in conjunction with the Offering in May 1996. The stock purchase agreements were with certain executive officers and had been tied to the appreciation in the book value of the AirNet Common Shares. The covenant not to compete required payments based on AirNet's cash flow and debt-to-equity ratio. These decreases were offset by an increase in wages related to the hiring of additional personnel, general insurance increases and increases in the amounts paid for legal, accounting and consulting services. Interest costs decreased $1.0 million as a result of the repayment of outstanding debt in June 1996 with proceeds from the Offering. Borrowings did not resume on AirNet's credit facility until September 1997. During fiscal 1996, AirNet incurred $13.7 million of non-cash, non-recurring expenses in connection with its Offering. These expenses included (i) $14.8 million of compensation expense related to the portion of AAA distributions to certain executive officers not previously recorded as expense in connection with the termination of AirNet's S Corporation status, plus the difference between the net offering price and 63 the net book value per share held by the executives under certain stock purchase agreements which predated the Offering and (ii) $2.6 million related to the write-off of a covenant not to compete with former WIE shareholders. These expenses were offset with a $1.7 million elimination of a deferred compensation liability associated with the stock purchase agreements and a $2.0 million elimination of a liability related to deferred compensation agreements with certain executive officers. AirNet recorded tax expense of $8.8 million for fiscal 1997 on income for the period. AirNet operated as an S Corporation under the Code from 1988 until it elected to terminate its S Corporation status in conjunction with the Offering. Under its Subchapter S election, AirNet was not subject to federal and certain state income taxes at the corporate level for the fiscal 1996 period prior to the Offering, except for the portion of business that related to the ECC acquisition, which was taxed as a C Corporation. AirNet recorded net deferred tax expense of $1.8 million for fiscal 1996. The fiscal 1996 pro forma information reflects the effects of certain Offering-related transactions on the statements of operations as if they occurred at the beginning of the periods presented. See Note (3) to the AirNet Selected Financial Data table. TWELVE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO TWELVE MONTHS ENDED SEPTEMBER 30, 1995 Revenues were a then-record $80.0 million in fiscal 1996, an increase of $8.3 million, or 11.5%, over fiscal 1995. Of the increase, $2.0 million is attributable to price increases effective January 1, 1996 and 1995. Revenues from check delivery increased $6.8 million, or 11.6%, primarily due to increased business activity and increases in total weight shipped, while small package delivery revenues increased $1.4 million, or 11.6%, due primarily to increased activity from both new and existing customers. Total costs and expenses were $66.7 million in fiscal 1996, an increase of $3.1 million, or 4.8%, over 1995 levels, resulting in income from operations of $13.2 million in fiscal 1996 compared to $8.1 million in fiscal 1995. Air transportation expenses were up $4.6 million, or 9.2%, while selling, general and administrative expenses decreased $1.5 million, or 11.5%, for the year. Air transportation costs increased due, in part, to the addition of air and ground personnel required to service a larger fleet of aircraft and the increased volume of activity. In addition, depreciation expense increased $1.1 million, or 15.1%, due to the increased size of AirNet's fleet, which grew from 78 aircraft at September 30, 1995 to 94 at September 30, 1996. The increase in depreciation expense was offset by a reduction in lease expense as a result of AirNet's strategy to acquire rather than lease aircraft. A rise in fuel prices coupled with increased flight hours contributed to a $0.7 million, or 9.8%, increase in aircraft fuel expense. Selling, general and administrative expenses decreased primarily due to the restructuring of executive compensation plans (which resulted in a $0.5 million decrease), the termination of stock purchase agreements (which resulted in a $0.5 million decrease) and the termination of a covenant not to compete (which resulted in a $1.4 million decrease). All were effective in conjunction with the Offering in May 1996. These decreases were offset by an increase in consulting fees incurred with the reconstruction of executive compensation and employee stock option plans and increased wages related to the hiring of additional personnel. Interest costs decreased $0.4 million as a result of the repayment of all outstanding debt in June 1996 with proceeds from the Offering. AirNet incurred $13.7 million of non-cash, non-recurring expenses in connection with its Offering. These expenses included (i) $14.8 million of compensation expense related to the portion of AAA distributions to certain executive officers not previously recorded as expense in connection with the termination of AirNet's S Corporation status, plus the difference between the net offering price and the net book value per share held by the executives under certain stock purchase agreements, which predated the Offering and (ii) $2.6 million related to the write-off of a covenant not to compete with former WIE 64 shareholders. These expenses were offset with a $1.7 million elimination of a deferred compensation liability associated with the stock purchase agreements and a $2.0 million elimination of a liability related to deferred compensation agreements with certain executive officers. AirNet operated as an S Corporation under the Code from 1988 until it elected to terminate its S Corporation status on May 30, 1996. In connection with the termination of the S Corporation status, AirNet recorded a net tax liability of $2.4 million as a result of the cumulative effect of deferred income taxes attributable to its change in status. In addition, AirNet recorded net deferred tax expense of $1.8 million for fiscal 1996 related to the income tax expense on operating income since May 30, 1996, offset by the favorable tax effect of the write-off of the covenant not to compete with former WIE shareholders. Pro forma information reflects the effects of certain Offering-related transactions on the statements of operations as if they occurred at the beginning of the periods presented. See Note (3) to the AirNet Selected Financial Data table. THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1995 Revenues were a record $20.8 million in the three months ended December 31, 1996, an increase of $2.4 million, or 13.0%, over the three months ended December 31, 1995. Of the increase, $0.6 million is attributable to price increases effective January 1, 1996. Revenues from check delivery increased $1.9 million, or 12.9%, primarily due to increased business activity and increases in total weight shipped, while small package delivery revenues increased $0.4 million, or 10.9%, due primarily to increased activity from both new and existing customers. Total costs and expenses were $16.6 million in the three months ended December 31, 1996, an increase of $0.4 million, or 2.5%, over same 1995 period, resulting in income from operations of $4.2 million in the 1996 period, compared to $2.2 million in the 1995 period. Air transportation expenses were up $1.5 million, or 12.0%, while selling, general and administrative expenses decreased $1.2 million, or 39.1%, for the comparable periods. Air transportation costs increased due, in part, to the addition of air and ground personnel required to service a larger fleet of aircraft and the increased volume of activity. A rise in fuel prices coupled with increased flight hours contributed to a $0.4 million, or 20.7%, increase in aircraft fuel expense. Selling, general and administrative expenses decreased primarily due to the restructuring of executive compensation plans and the termination of stock purchase agreements (which resulted in a $0.7 million decrease) and the termination of a covenant not to compete (which resulted in a $0.4 million decrease). All were effective in conjunction with the Offering in May 1996. Interest costs decreased $0.4 million as a result of the repayment of all outstanding debt in June 1996 with proceeds from the Offering. AirNet operated as an S Corporation under the Code from 1988 until it elected to terminate its S Corporation status in conjunction with the Offering. Under its Subchapter S election, AirNet was not subject to federal and certain state income taxes at the corporate level for fiscal 1996, except for the portion of business that related to the ECC acquisition, which was taxed as a C Corporation, and the period subsequent to the Offering in May 1996. AirNet recorded tax expense of $1.7 million for the three months ended December 31, 1996. THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997 Revenues were $26.6 million for the three months ended March 31, 1998, an increase of $4.3 million, or 19.5%, over the same period of 1997. Revenues from check delivery increased $4.3 million, or 23.7%. Of the increase, $1.1 million is attributable to price increases effective January 1, 1998 and $3.1 million can be attributed to the acquisitions of Data Air, a national transporter of canceled checks and small packages through a ground delivery network and the commercial airlines, in July 1997, and PAC, a regional airline in the business of transporting canceled checks, in June 1997. The balance is due to increased business 65 activity and increases in total weight shipped. Small package delivery revenue increased $0.2 million, or 5.4%. This increase is primarily attributable to the Data Air acquisition, offset by the loss of certain wholesale customers. These increases in air transportation revenues were offset by a $0.2 million decrease in revenues generated by AirNet's retail fuel sales and maintenance division. Total costs and expenses were $21.7 million for the three months ended March 31, 1998, an increase of $4.6 million, or 26.8%, over the same period in 1997, resulting in income from operations of $4.9 million for the three months ended March 31, 1998, compared to $5.2 million for the same period of 1997. Air transportation expenses were up $4.5 million, or 30.7%. Selling, general and administrative expenses increased $0.2 million, or 8.4%, for the three month period. Air transportation costs increased primarily as a result of the acquisition of Data Air and AirNet's emphasis on building its operational infrastructure in anticipation of growth in the small package delivery area. The costs associated with shipping packages on commercial airlines increased $1.5 million over the same quarter of 1997 due to the addition of Data Air check delivery shipments and an increase in SameDay small package shipments, of which a significant portion are moved during daytime hours when AirNet's aircraft do not fly. Ground courier costs increased $1.7 million and courier vehicle costs were up $0.3 million due to the Data Air acquisition and the build up of the infrastructure. Depreciation expense increased $0.5 million, or 24.8%, due to the increased size of AirNet's aircraft fleet, which grew from 99 aircraft at March 31, 1997 to 115 owned aircraft at March 31, 1998, and an increased fleet of ground vehicles. Fuel expense increased $0.1 million, or 4.1%, due to increased flying hours, offset by lower fuel prices. Despite the increase in the size of the aircraft fleet and the increased flight hours, maintenance expense was down due to unusually good flying weather experienced in the first quarter. Interest costs were $0.2 million for the quarter ended March 31, 1998. AirNet began borrowing on its line of credit in September 1997, after being essentially debt free since its Offering in May 1996. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW FROM OPERATING ACTIVITIES Net cash flow from operating activities was $22.0 million for the year ended December 31, 1997 and $3.3 million for the three months ended March 31, 1998, compared to $18.3 million for the year ended September 30, 1996 and $4.2 million for the three months ended March 31, 1997. 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 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, restricts the amount of additional debt and requires prior bank approval for certain acquisitions. As of March 31, 1998, AirNet had drawn $8.5 million on the credit facility, a $1.0 million decrease from its balance at December 31, 1997. INVESTING ACTIVITIES Capital expenditures totaled $30.1 million for the year ended December 31, 1997 and $4.8 million for the three months ended March 31, 1998 compared to $14.3 million for the year ended September 30, 1996 and $4.4 million for the three months ended March 31, 1997. Of the $30.1 million and $4.8 million, approximately $11.8 million and $0.5 million, respectively, were incurred in connection with the purchase of 25 new aircraft, ten of which were previously leased by AirNet. The remainder was incurred primarily for flight equipment and delivery vehicles. AirNet anticipates it will spend approximately $20.0 million on capital items in 1998, excluding any acquisitions of new businesses. AirNet anticipates it will continue to 66 acquire aircraft and flight equipment as necessary to maintain growth and continue offering quality service to its customers. In October 1997, AirNet purchased its current headquarters in Columbus, Ohio from Gerald G. Mercer, AirNet's President and Chief Executive Officer, for $4.1 million in cash, which represented fair market value as determined by an independent appraisal. AirNet is currently in discussions with the Port Authority to construct a new headquarters facility at the Columbus International Airport. Upon the completion of the new facility, AirNet intends to sell its current headquarters to the Port Authority in exchange for credits to be applied to a land lease for the new facility. No definitive agreements have been reached. AirNet leases additional space at 4700 East Fifth Avenue, also located on Columbus International Airport grounds. Upon completion of AirNet's new headquarters, this lease is expected to be terminated and AirNet is expected to purchase the 4700 East Fifth Avenue facility from the Port Authority. During 1997, AirNet completed three acquisitions of companies for an aggregate $4.4 million in cash and 0.1 million AirNet Common Shares. See Note 3 to the Consolidated Financial Statements included herein. On April 14, 1998, AirNet signed a definitive agreement to acquire Quick, an international overnight delivery company, for approximately 3.4 million AirNet Common Shares. This transaction is expected to be accounted for as a pooling-of-interests and is subject to certain consents, opinions and approvals, including approval of both companies' shareholders. In August, 1997, AirNet implemented a stock repurchase program. During 1997, AirNet repurchased 0.3 million of the 0.6 million AirNet Common Shares that were authorized for repurchase, for an aggregate of $5.8 million. The AirNet Common Shares were purchased at what management believes were reasonable prices. The repurchase program was implemented primarily to provide AirNet Common Shares to fund currently outstanding stock options and the Associate Stock Purchase Program, without dilution. In March 1998, AirNet terminated the repurchase program in anticipation of signing a definitive agreement to acquire Quick. 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 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). When these holidays fall on Monday through Thursday, AirNet's revenues 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 requires additional costs for de-icing, hangar rental and other aircraft services. 67 SELECTED QUARTERLY DATA The following is a summary of the unaudited quarterly results of operations, restated for the ECC pooling, for the quarterly periods ended (in thousands, except per share data): QUARTERS ENDED -------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ----------- --------- ------------ ------------ 1998 Net revenues................................................... $ 26,571 -- -- -- Income from operations......................................... 4,910 -- -- -- Net income..................................................... 2,854 -- -- -- Net income per share........................................... $ .23 -- -- -- Net income per share--assuming dilution........................ .22 -- -- -- 1997 Net revenues................................................... $ 22,235 $ 23,062 $ 26,247 $ 26,218 Income from operations......................................... 5,153 5,808 6,022 5,096 Net income..................................................... 3,093 3,504 3,598 3,008 Net income per share........................................... $ .25 $ .28 $ .29 $ .24 Net income per share--assuming dilution........................ .24 .28 .28 .24 1996 Net revenues................................................... $ 19,208 $ 20,992 $ 21,355 $ 20,791 Income from operations......................................... 2,240 3,798 5,017 4,183 Historical net income (loss)................................... 1,868 (12,239) 2,823 2,485 Pro forma net income (loss).................................... 2,081 (9,780) 2,823 2,485 Pro forma net income (loss) per share--basic and assuming dilution..................................................... $ .36 $ (1.22) $ .23 $ .20 Adjusted pro forma net income(1)............................... 2,081 2,901 2,823 2,485 Adjusted pro forma net income per share(2) --basic and assuming dilution..................................................... .17 .23 .23 .20 - ------------------------ (1) Excludes the effects of the Offering-related non-cash, non-recurring expenses. (2) Assumes all AirNet Common Shares issued during the Offering were outstanding for the entire period. 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 130, "Reporting Comprehensive Income", and Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information". Both Statements are effective for AirNet in 1998. Statement No. 130 requires separate reporting of certain items affecting shareholders' equity outside of those included in arriving at net income. These items are already disclosed by AirNet. Statement No. 131 establishes requirements for reporting information about operating segments in annual and interim statements. This statement may require a change in AirNet's financial reporting; however, the extent of this change, if any, has not been determined. 68 AirNet capitalizes costs related to the start-up activities associated with new business initiatives, such as introduction of the premium products line of business. Costs associated with these initiatives, such as personnel costs, outside services and administrative support services, are capitalized as start-up costs. During the three months ended March 31, 1998, AirNet capitalized $0.9 million of such costs, for a total of $3.4 million of start-up costs recorded on its balance sheet, included in other assets, at March 31, 1998. The start-up phase for the premium products is expected to be completed in the second quarter of 1998. In April 1998, AcSEC issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities." This Statement of Position will require all companies to write off, as a cumulative effect of a change in accounting principle, any previously capitalized start-up costs. This Statement of Position will be effective for AirNet in the first quarter of 1999. YEAR 2000 IMPACT ON INFORMATION SYSTEMS A small portion of AirNet's computer programs was written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process certain transactions, send invoices or engage in similar normal business activities. AirNet has completed an assessment of its computer systems and will have to modify or replace small portions of its software so that all of its computer systems will function properly with respect to dates in the year 2000 and thereafter. The project is expected to be completed by December 31, 1998. However, the completion date is dependent on the availability and receipt of certain software from a vendor in early 1998 and the satisfactory integration of such software into AirNet's systems. Management does not expect costs related to the year 2000 modifications and replacements to be material to AirNet's overall operations. AirNet has also performed a review of its aircraft to ensure operational compliance with year 2000 date-sensitive components. AirNet believes its aircraft and related components are in compliance with such measures. However, AirNet is aware that the Federal Aviation Administration ("FAA") has announced that it is currently encountering difficulties in modifying its operating systems for compliance with year 2000 issues. If the FAA is not able to correct its year 2000 problems in the appropriate time frame, it could result in a material adverse affect on AirNet's ability to schedule and execute aircraft arrivals and departures. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 (the "Litigation Reform Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information so long as these statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying factors that could cause actual results to differ materially from those discussed in the statement. AirNet desires to take advantage of the "safe harbor" provisions of the Litigation Reform Act. Certain information, particularly information regarding future economic performance and finances and plans and objectives of management, contained, or incorporated by reference, in this Proxy Statement/ Prospectus is forward-looking. When used in this Proxy Statement/Prospectus, the words "anticipate", "estimate", "expect", "may", "plan", "project" and similar expressions are intended to be among statements that identify forward-looking statements. 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 other possible factors not listed, 69 could affect AirNet's actual results and cause such results to differ materially from those expressed in forward-looking statements: COMPETITION The market for scheduled air and ground delivery service is highly competitive. AirNet's bank services division competes primarily against the Federal Reserve's Interdistrict Transportation System ("ITS"), which has significantly greater financial and other resources than AirNet. The Federal Reserve is regulated by the Monetary Control Act of 1980 (the "Monetary Control Act"), which in general requires that the Federal Reserve price its services on a cost basis plus a set percentage private market adjustment. Failure by the Federal Reserve to comply with the Monetary Control Act could have an adverse competitive impact on 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 United Parcel Service ("UPS") and Federal Express Corporation ("FedEx")) have also entered the business of same-day 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 such an 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 banking industry analysts have predicted the development of various forms of imaging technology that could reduce or eliminate the need for prompt delivery of canceled checks. Similarly, technological advances in the nature of "electronic mail" and "telefax" have affected the demand for on-call delivery services by small package delivery customers. While none of these technological advances have had a significant adverse impact 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 One of AirNet's business strategies is to increase its revenues, earnings and market share through the acquisition of companies that will complement its existing operations or provide it with an entry into markets it does not currently serve. Growth through acquisition involves substantial risks, including the risk of improper valuation of the acquired business and the risk of inadequate integration. There can be no 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 AirNet. AirNet may finance future acquisitions by using AirNet 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 AirNet Common Shares. In the event the AirNet Common Shares do not maintain a sufficient valuation, or potential acquisition candidates are unwilling to accept the AirNet 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 its is able to obtain additional capital through future debt or equity financing. There can be no assurance that AirNet will be able to obtain such financing or that, if available, such financing will be on terms acceptable to AirNet. 70 DEPENDENCE ON KEY PERSONNEL AirNet's operations are dependent on the continued efforts of its executive officers and on its senior management, particularly Gerald G. Mercer, AirNet's President and Chief Executive Officer, and Eric P. Roy, AirNet's Executive Vice President, Treasurer and Chief Financial Officer. If the executive officers of AirNet become unable or decide not to continue in their present positions, or if a material number of such senior management fail to continue with AirNet and AirNet is unable to attract and retain other skilled associates, AirNet's business could be adversely affected. AirNet does not currently have an employment agreement with any of its executive officers. As discussed in "THE AGREEMENT--Conditions," Robert J. Mitzman, Dominique Brown and Glenn R. Smoak will enter into employment agreements with AirNet or Quick as of the Effective Time of the Merger. 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 AirNet'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. BUSINESS OF AIRNET OVERVIEW OF AIRNET'S BUSINESS AirNet ExpressSM, the integrated national air transportation network of AirNet, operates between 100 cities in more than 40 states and delivers over 18,000 time-critical shipments each working day. AirNet's check delivery service, which generates approximately 84% of AirNet's revenues, is the leading transporter of canceled checks and related information for the U.S. banking industry, meeting more that 2,200 daily deadlines. AirNet's small package service, which generates approximately 15% 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 accounts for approximately 1% of AirNet's revenues, also offers retail aviation fuel sales and related ground services for customers in Columbus, Ohio. During 1997, AirNet acquired Data Air and PAC. Both companies were in the business of transporting cancelled checks. In addition, ECC was acquired to provide an expanded customer base in the small package market. AirNet operated a fleet of 115 aircraft (29 Learjets and 86 light twin engine aircraft) as of March 31, 1998, which fly approximately 105,000 miles per operating night, primarily Monday through Thursday. AirNet also provides ground pick-up and delivery services throughout the nation seven days per week, utilizing a fleet of approximately 250 company-owned ground vehicles as well as a ground transportation network of over 300 independent contractors. AirNet uses its air and ground network to support its 71 banking industry customers, as well as its LateNight, BusinessDay and SameNight small package customers. AirNet also utilizes commercial airlines to provide SameDay delivery service for certain 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. AirNet has consistently achieved on-time performance levels exceeding 97%. In order to maintain this performance, AirNet utilizes a number of proprietary customer service and management information systems to track, sort, dispatch and control the flow of checks and small packages throughout AirNet's delivery system. Delivery times and certain shipment information are available on-line and through the Internet. AirNet believes that the market for reliable, time-critical deliveries is growing as a result of a number of global trends, including: (i) global business strategies aimed at serving customers' time critical needs for the dissemination of printed and graphic information; (ii) medical laboratories requiring same-day deliveries; and (iii) corporations requiring just-in-time inventory parts to lower production costs. AirNet believes that its flexible and reliable air transportation network and its demonstrated expertise in providing time-critical deliveries to the banking industry for over 24 years position AirNet to provide such additional services at premium prices. AirNet 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. BUSINESS STRATEGY The principal components of AirNet's operating and growth strategy are as follows: GROW AIRNET'S SMALL PACKAGE DELIVERY SERVICE AirNet delivers packages on a same-day/same-night basis for its small package customers, utilizing its air transportation system and the commercial airline system. Through its LateNight and BusinessDay premium products, which were introduced in 1997, AirNet believes that it offers a more flexible pick-up and delivery schedule than those offered by other national and regional carriers and appeals to customers with time-sensitive delivery requirements. AirNet expanded its small package sales force throughout 1997 and intends to utilize an aggressive marketing strategy for premium products to the legal community, financial printers, the entertainment industry and other potential customers requiring these specialized services. AirNet also believes its air and ground delivery network provides a solid foundation from which to consolidate the operations of other high-quality ground couriers and regional air freight operators in the business of providing time-critical shipment needs. The fragmented nature of the air and ground package delivery industry, outside of the major national carriers, provides such opportunities. In addition to expanding both the air and ground route structures, AirNet is also focused on aligning with companies that have demonstrated a level of expertise in the sales and marketing aspects of the industry. During 1997, AirNet completed three acquisitions, representing approximately $11.7 million in 1997 sales. FOCUS ON UNIQUE AIRCRAFT TYPE AND ROUTE STRUCTURE 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 and several mini-hubs across the nation, enables 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. Six strategically located maintenance bases help minimize aircraft down 72 time. AirNet's focus on Learjets and light twin engine aircraft has also enabled it to develop an in-house expertise in purchasing, flying, maintaining and operating its fleet. ATTRACT, RETAIN AND MOTIVATE THE HIGHEST QUALITY PERSONNEL AVAILABLE As a service organization, AirNet recognizes the importance of hiring, retaining and motivating the highest quality personnel available who are focused on a set of core values designed by AirNet to provide a working environment where accountability, integrity, quality performance, open communication, team management and responsibility are explicitly stated goals. AirNet provides its associates with competitive compensation and benefits packages, including a company-wide stock option program. AirNet believes that its compensation and benefit package and corporate culture will give it a significant competitive advantage in attracting and motivating its associates. EXPAND ITS BANK SERVICES WITHIN THE BANKING INDUSTRY AirNet intends to strengthen its leadership position in the transportation of canceled bank checks by adding additional weekend ground routes to its current structure. The additional routes will utilize AirNet's ground operations infrastructure while allowing AirNet to present a seamless canceled check transportation structure to its banking customers. GROUND 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, Ohio, packages are off-loaded, fine sorted by destination and reloaded onto the aircraft. During the thirty to forty minute sort period, the aircraft are 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. AirNet operates a fleet of approximately 250 ground transportation vehicles, all of which are owned by AirNet. AirNet utilizes a computerized system for monitoring vehicle maintenance and conducts in-house training sessions throughout the year to maximize safety. Vehicles range in size from passenger cars to full-size vans, depending on the market being served. In addition, where appropriate, AirNet utilizes over 300 independent contractors to further augment its ground delivery network. FLIGHT OPERATIONS AirNet's flight operations are headquartered in Columbus. AirNet hires licensed pilots meeting certain experience requirements. All new pilots attend a company-run, two-week training program. This flight school includes training on AirNet's flight simulator prior to any actual flight time. 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 AirNet's delivery process. AirNet also utilizes commercial airlines primarily to transport shipments during the day 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 commercial flight in the country and schedule ground pick-up and delivery personnel appropriately. 73 AIRCRAFT FLEET AirNet owns and operates a fleet of 115 aircraft. AirNet's fleet was comprised of the following aircraft at March 31, 1998: MAXIMUM MAXIMUM MAXIMUM PAYLOAD (1) RANGE (2) SPEED (3) AIRCRAFT TYPE NUMBER (LBS.) (N. MILES) (KNOTS) - ------------------------------------------------ ------------- ----------- ----------- ------------- Learjets, Model 35/35A.......................... 25 4,200 2,000 440 Learjets, Model 25.............................. 4 3,500 1,000 440 Piper Navajo Chieftain.......................... 16 1,500 800 175 Piper Aerostar.................................. 13 1,000 900 190 Beech Baron..................................... 41 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 most reliable, fastest and most fuel efficient small jet aircraft available in the world. 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 either equip these aircraft with approved hush kits, allowing them to continue operations in most airports or phase-out the Learjet 25's from scheduled operations and replace them with the more efficient Learjet 35 or other Stage Three 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 15 and 20 years old. These aircraft are reasonably priced and are relatively modern, as they have undergone no significant design changes in the last 20 years. Further, when appropriately maintained (AirNet performs its own major inspections and overhauls on its aircraft fleet), 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 70 experienced aircraft and avionics technicians in six separate locations across the country (Columbus, Dallas, Denver, Hartford, Minneapolis 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 certain of the piston engines can be overhauled on-site, thereby reducing aircraft downtime and controlling costs. Avionics trouble-shooting and repair, done internally by AirNet since 1989, provide for maximum efficiency and minimum aircraft downtime for its entire fleet. DELIVERY SERVICES A typical shipment is picked up from the sending bank or a small package 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. 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 74 into AirNet's ComCheck or AirNet Connect computer systems, where it is available to AirNet's customer satisfaction 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 AirNet's aircraft. At the destination city, the shipment is off-loaded for the final time and delivered by AirNet 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 AirNet 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. 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's SameDay service provides canceled check delivery services to banking customers meeting daytime banking deadlines and to other small package 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. CUSTOMERS 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. 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 the first quarter of 1998 accounted for approximately 84% of AirNet's revenues. This customer list represents all 100 of the nation's largest bank holding companies. AirNet's time-critical canceled check delivery service enables AirNet's banking customers to offer competitive products and pricing. Small package delivery customers, which accounted for 15% of AirNet's revenues for the first quarter of 1998, include industrial and service corporations, medical companies, national integrated carriers and consolidating freight forwarders. Although AirNet maintains a base of small package delivery customers who ship nightly, it is also expanding its services to retail customers who tend to ship less frequently. No single customer accounted for more than 10% of AirNet's fiscal 1997 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 with Shared Responsibilities; and (vi) Remember to Enjoy Life - It's a Gift! All AirNet personnel are part of a 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 AirNet personnel. AirNet also aggressively compensates for performance, with excellent performance recognized and rewarded through incentive-based compensation. 75 ASSOCIATES The chart below summarizes AirNet's workforce at March 31, 1998, 1997 and 1996. 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. MARCH 31, ------------------------------- DEPARTMENT 1998 1997 1996 - --------------------------------------------------------------------- --------- --------- --------- Management/Administration............................................ 209 157 111 Flight............................................................... 177 161 124 Maintenance.......................................................... 76 67 72 Driver/Courier/Ramp/Sort............................................. 811 418 314 --------- --------- --------- Total.............................................................. 1,273 803 621 COMPETITION The air and ground courier industry is highly competitive. AirNet's primary competitor is the Federal Reserve's ITS. The actions of the Federal Reserve are regulated by the Monetary Control Act, which, in summary, requires the Federal Reserve to price its services at actual cost plus a private sector adjustment factor. 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, FedEx and UPS, both carry canceled checks where the deadlines being pursued fit into their existing system, but this has not represented a significant market share of this industry 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. AirNet competes with commercial airlines and numerous other carriers in its small package transportation business. AirNet's market share in this industry is less than 1%. AirNet believes that this market represents a significant expansion opportunity. AirNet also has a minor presence in the same-day or next- flight-out industry. AirNet believes that there are a number of competitors in this industry. To the extent AirNet elects to increase its presence in the same-day industry, it will compete against these companies. AirNet will emphasize its information technology, competitive pricing and historically high on-time performance levels to compete in this market. REGULATION AirNet is regulated under Part 135 of the Federal Aviation Regulations by the FAA. In connection with the operation of Company vehicles and aircraft, AirNet is subject to regulation by the U. S. Department of Transportation with respect to the handling of hazardous materials. 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. Failure of AirNet to comply with the applicable regulations could result in substantial fines or possible revocation of one or more of AirNet's operating permits. 76 ENVIRONMENTAL MATTERS AirNet believes that compliance with environmental matters has not had, and is not expected to have, a material effect on operations. 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. PROPERTIES AirNet owns its corporate and operational headquarters at 3939 International Gateway in Columbus, Ohio. The complex has 80,000 square feet, of which AirNet utilizes approximately 73,000 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 is currently in discussions with the Port Authority to construct a new headquarters facility at the Columbus International Airport. Upon the completion of the new facility, AirNet intends to sell its current headquarters to the Port Authority in exchange for credits to be applied to a land lease for the new facility. No definitive agreements have been reached. AirNet leases additional space at 4700 East Fifth Avenue, also located on Columbus International Airport grounds. The space is used for administrative support personnel. Upon completion of AirNet's new headquarters, this lease is expected to be terminated and AirNet is expected to purchase the 4700 East Fifth Avenue facility from the Port Authority. AirNet operates at approximately 50 additional locations throughout the country. The 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 AirNet's Consolidated Financial Statements, included herein. LEGAL PROCEEDINGS There are no pending legal proceedings involving AirNet other than routine litigation incidental to AirNet's business. In the opinion of AirNet's management, such proceedings should not, individually or in the aggregate, have a material adverse effect on AirNet's results of operations or financial condition. SUMMARY OF AIRNET RECENT DEVELOPMENTS In April 1998, AirNet signed a letter of intent to purchase Mercury Business Services, an overnight delivery company specializing in the legal industry, for approximately $4.5 million in AirNet Common Shares. The transaction is subject to the signing of a definitive agreement and certain consents and approvals. MARKET FOR AIRNET COMMON SHARES AND RELATED SHAREHOLDER MATTERS Effective June 3, 1997, the AirNet Common Shares began trading on the NYSE under the symbol "ANS". Prior to June 3, 1997, the AirNet Common Shares of AirNet were traded on The Nasdaq National 77 Market under the symbol "ANSY". The table below sets forth the high and low reported prices of the AirNet Common Shares for the periods indicated. 1998 1997 1996 -------------------- -------------------- -------------------- QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW - ----------------------------------- --------- --------- --------- --------- --------- --------- March 31........................... $ 29.50 $ 20.81 $ 16.75 $ 13.75 -- -- June 30 (1)........................ -- -- 18.00 14.25 $ 16.00 $ 14.50 September 30....................... -- -- 27.06 16.25 16.00 10.75 December 31........................ -- -- 26.12 19.25 16.00 12.25 - ------------------------ (1) The 1996 period represents the period from May 31, 1996 (the date of the Offering) through June 30, 1996. AirNet has not paid any dividends on the AirNet 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 of AirNet. Certain restrictive covenants in AirNet's revolving credit facility impose limitations on the payment of dividends by AirNet. Such covenants prohibit AirNet from paying cash dividends on the AirNet Common Shares in excess of 50% of net income. On June 11, 1998, there were approximately 2,200 holders of AirNet Common Shares, based upon the number of holders of record and the number of individual participants in certain security position listings. SELECTED INFORMATION ABOUT QUICK GENERAL Quick (together with its subsidiaries) is a domestic and international specialty courier transportation company. Quick combines an understanding of domestic and international transportation complexities, a network of worldwide independent agents and a proprietary information system, to provide customized courier transportation services. Quick believes that its lack of restrictive operational parameters, such as pre-determined pick up and delivery times and dates, is an important factor in differentiating Quick in the specialty transportation industry. Although Quick also provides traditional on-demand delivery services, Quick's focus has been the resolution of unique logistics, transportation and delivery issues and providing superior customer service. Quick was founded in 1981 and is headquartered in New York, New York. Quick maintains a 30,000 square foot operational center at the John F. Kennedy International Airport. Quick also maintains nine other offices in the United States with locations in each of New York City, Boston, Washington, D.C., Chicago, Orlando, Dallas, Minneapolis, Phoenix and Los Angeles. Quick employs approximately 400 associates. Quick's active client base of approximately 3,000 clients includes Fortune 500 companies, investment banks, entertainment companies, legal partnerships, medical concerns and commercial banks. Quick provides its services internationally, primarily through its independent delivery agents and third party commercial air carriers. In the United States, approximately 20 local sales representatives and five regional sales representatives target local businesses, while Quick's seasoned national marketing executives focus on larger accounts and businesses with multi-city and multi-national requirements. Quick's sales force includes product specialists that seek new applications of Quick's primary services in an effort to provide superior logistics solutions. Quick's proprietary software and management information systems provide real-time tracking of domestic and international shipments, as well as the capability to coordinate and track multiple distributions of time critical deliveries. In addition, these systems allow Quick to customize the complex logistics, delivery and reporting demands of its clients. Quick's growth strategy also includes the acquisition of entities to enhance Quick's core capabilities. Quick has acquired and integrated four businesses since 1995, including, in 1996, the acquisition of an 78 international mail and logistics company and, in 1997, a domestic same-day courier service. Quick's other initiatives have included the expansion of Quick's sales force, development of new product lines, the cross-selling of existing product lines, investment in management information systems, and the conducting of strategic marketing and public relations campaigns. PRODUCTS AND SERVICES Quick offers a portfolio of products and services, including domestic and international courier, international mail distribution and logistics services. Quick's ability to structure appropriate logistics solutions based upon broad service offerings, combined with an understanding of complex international markets, and a utilization of proprietary information systems, allows Quick to act as a one-stop source for its clients' delivery and logistics requirements. DOMESTIC AND INTERNATIONAL COURIER SERVICES Domestic and international courier services combine an understanding of domestic and international transportation complexities, a network of worldwide independent agents and a proprietary information system, to provide customized and unique courier services. By utilizing third party carriers and independent ground agents and maintaining a 24 hour, seven day per week operational infrastructure, Quick is generally unencumbered by typical restraints on operational parameters, such as pick up and delivery deadlines and holiday restrictions. Quick believes this flexibility has enabled it to offer clients unique solutions to difficult transportation requirements. DOMESTIC COURIER SERVICES Domestic courier services accounted for approximately 49% of Quick's total revenue in the three months ended March 31, 1998. Within its domestic service offerings, Quick provides the delivery and service options described below: SAME-DAY/NEXT FLIGHT OUT ("NFO") SERVICE uses commercial airlines to transport parcels. This service is offered on demand, 24 hours a day and is targeted at a variety of industries that have time-sensitive delivery needs. MIDNIGHT SPECIAL SERVICE offers clients the flexibility of having packages picked up on-demand until midnight with guaranteed delivery to certain destinations by 9 a.m. the next business day. This service utilizes routing on chartered flights. DOMESTIC POUCH service offers pre-scheduled overnight delivery. This product is designed to offer clients later pick-up and earlier delivery times in comparison to the services offered by major air express companies. DOMESTIC PRIORITY FREIGHT offers on-demand, non-consolidated freight delivery for larger shipments. Transit times vary depending upon the level of service desired and final destination. Quick offers customized crating and packaging materials needed to ensure safe delivery for specialized shipments. CHARTER SERVICE is available on specially chartered flights for both domestic and international shipments. It is designed for clients requiring special delivery and handling accommodations for high volume shipments. SPECIAL HAND CARRY SERVICE utilizes individuals to personally escort packages door-to-door from pick-up to final destination. Special Hand Carry Service is Quick's premier on-demand priority service for clients requiring the greatest in speed, reliability and service. 79 INTERNATIONAL COURIER SERVICE International courier services accounted for approximately 17.5% of Quick's total revenue in the three months ended March 31, 1998. Within its international service offerings, Quick provides the delivery and service options described below: INTERNATIONAL SPECIAL SERVICE utilizes NFO service on commercial airlines for the shipment of parcels internationally. This service is offered on-demand 24 hours a day, seven days a week. INTERNATIONAL PRIORITY SERVICE uses NFO delivery for all shipments. This service is not as flexible as the International Special Service because it is not available during off peak hours and on weekends. It is contingent upon pre-determined routing which increases the shipment's transit time. INTERNATIONAL QUICK AIR SERVICE provides for the international shipment of parcels using alternative routing and is designed to offer clients efficient international delivery service at lower prices. The majority of packages shipped using this service are pre-scheduled and transit times typically exceed International Priority Service and International Special Service. INTERNATIONAL PRIORITY FREIGHT SERVICE offers NFO, on-demand, non-consolidated delivery. Quick will customize crates and any packaging materials needed to ensure safe delivery. SPECIAL HAND CARRY SERVICE is also provided on an international basis. A Quick agent or employee is selected to accomplish each delivery based upon the appropriate language, cultural and operational experience necessary to facilitate the delivery process. INTERNATIONAL MAIL DISTRIBUTION Quick's mail delivery service ("QuickMail") offers an alternative to traditional mail distribution and delivery. QuickMail combines an understanding of international mail distribution complexities, a network of worldwide independent agents and mail distribution wholesalers, relationships with foreign postal services and a proprietary information system, to provide customized and unique mail distribution services. It accommodates high volume distribution for clients requiring more efficient transit times and reliability than those generally offered by traditional postal services. QuickMail utilizes numerous mail distribution options, depending on the volume, commodity and frequency of the material being distributed. Quick has established multiple routing and postal options to lessen the adverse effect of events that might otherwise inhibit mail delivery into a particular country or region. These options include hand delivery, direct injection into the postal system of the destination country, and injection into a foreign postal system for remail to the destination country. One of the key attributes of QuickMail is that it offers automated reporting and tracking capabilities that are available at any time after a job order is initiated in the Quick system. Quick's growing volume of international mail often enables it to negotiate favorable fees with foreign post offices, mail wholesalers and international agents. QuickMail services accounted for approximately 26.5% of Quick's total revenue in the three months ended March 31, 1998. Within its QuickMail offerings, Quick provides the delivery and service options described below. QUICKMAIL PRIORITY is a first class distribution service designed to route parcels in the fastest, most reliable manner using a combination of direct entry, hand delivery and remail, as appropriate given the particular delivery requirements. QUICKMAIL PRINTED MATTER is a cost effective distribution service for non-urgent deliveries. QuickMail Printed Matter uses less rapid delivery methods, but offers clients reliable and more economical delivery service. 80 QUICKMAIL PUBLICATION is a distribution service for heavyweight publishing material such as magazines, catalogs and journals. Routings are customized depending upon the frequency of the material, individual piece weight and total volume of shipment. QUICKMAIL PARCEL is a distribution service for heavyweight dutiable and non-dutiable material and items. Routings are tailored to distribute the material with speed and accountability. LOGISTICS SERVICES In an effort to customize delivery solutions for its clients, Quick has developed logistics services that are offered in conjunction with domestic, international, and QuickMail services. Logistics services include field support, fulfillment, pick and pack, and "STAT" services. These services reduce the clients' involvement in the preparation of the materials for delivery. These services are ideal for clients who require warehousing, inventory management and special logistical support functions. The Logistics services offered by Quick are described below: FIELD SUPPORT SERVICES provide secure regional warehousing and same-day, NFO or 9 a.m. delivery of time-sensitive products. Critical and regularly used inventory can be safely stored in facilities throughout the world. Logistics response services are available 24 hours a day, 365 days per year. This service enables Quick's clients to maintain time-sensitive inventories at regional facilities. All warehoused items are tracked using Quick's proprietary real-time inventory system. PICK AND PACK SERVICE is designed for clients who require frequent deliveries with special handling and packaging instructions. Customer items are pulled from inventory, packaged and shipped as per special customer instructions. FULFILLMENT SERVICE offers list management, labeling, collating, stuffing and shipping of clients' direct mail, catalogues, or billing statements. For example, Quick distributes time-sensitive financial information to 2,000 banks worldwide for one of its clients. Quick manages this entire process from computerized list maintenance, to coordinating the timing with the printer, purchasing the envelopes, and calculating maximum efficiency for the mailings. In addition, Quick offers this service in conjunction with QuickMail for cost and transit time savings for international mailings. STAT SERVICE provides highly specialized transportation services for biomedical materials for medical transplants and research. Quick regularly consults with a council of board certified medical specialists concerning proper packaging, transportation and delivery of biomedical materials, taking into account medical restrictions and all applicable governmental regulations. COMPETITION Quick operates in a highly competitive environment. Quick believes that the principal competitive factors in the markets in which it competes are reliability, quality, breadth of service and price. Price competition for basic delivery services is particularly intense. Quick's principal competitors in both the international and domestic delivery industry generally include privately-held companies that operate in only one locality and local affiliates of large, nationally-known transportation companies, with no one competitor dominating the market. Although Quick believes that its pricing is competitive, Quick also seeks to differentiate itself in its industry by offering, through a single source, a unique and broad selection of products and services. In both the domestic and international markets, Quick believes that it competes on the basis of its ability to reliably and consistently provide a wide array of delivery services, ranging from basic delivery services to complex international delivery services, on a customized basis for its clients. Quick believes that this provides it with an important advantage in the highly fragmented delivery and logistics service industry. However, Quick has numerous national, regional and international competitors in its existing and proposed markets, many of which have substantially greater financial and other resources than Quick. 81 CAPITAL STOCK OF QUICK There is no established public trading market for any class of common equity of Quick. The authorized capital stock of Quick consists of 20,000 Quick Common Shares and 3,000 shares of Class A Common Stock, par value $1.00 per share. As of the Effective Time of the Merger, there will be 12,586 Quick Common Shares issued and outstanding, and outstanding options to purchase 1,000 shares of Class A Common Stock, which will be converted into options to purchase an aggregate of 249,591 AirNet Common Shares upon consummation of the Merger. Quick has five holders of Quick Common Shares, two of whom hold options to purchase additional Quick Common Shares, and nine holders of options to purchase shares of Class A Common Stock. Since its inception, Quick has not paid any dividends on the shares of any of Quick's capital stock. The following table furnishes certain information as to the shares of Quick capital stock beneficially owned by each of the current directors of Quick, by the executive officers of Quick whose total salary and bonus for Quick's 1997 fiscal year exceeded $100,000 and by all directors and executive officers of Quick as a group. No other person beneficially owns more than 5% of the outstanding shares of Quick capital stock. AIRNET COMMON SHARES, OR OPTIONS TO PERCENTAGE QUICK CLASS A COMMON PURCHASE AIRNET NAME OF BENEFICIAL OWNER QUICK OWNERSHIP STOCK WHICH CAN BE PERCENTAGE OWNERSHIP COMMON SHARES, OR NUMBER OF PERSONS IN COMMON SHARES OF QUICK COMMON ACQUIRED UPON EXERCISE OF OF QUICK CLASS A TO BE RECEIVED GROUP (1) PRESENTLY HELD SHARES OPTIONS COMMON STOCK IN MERGER (2) - ------------------------- -------------- ----------------- ------------------------- --------------------- --------------- Robert J. Mitzman,....... 8,284.7 67.49% 0 0 2,067,789 President and Director Dominique Brown,......... 1,623.6(3) 13.22% 0 0 405,236 Executive Vice President, Secretary, Treasurer and Director Karl Daigle,............. 852.7(3) 6.94% 0 0 212,827 Director Glenn Smoak,............. 1,166.0 9.50% 0 0 291,023 Director All directors and 11,927.0 97.15% 0 0 2,976,875 executive officers as a group (4 persons)...... POST-MERGER NAME OF BENEFICIAL OWNER PERCENTAGE OR NUMBER OF PERSONS IN OWNERSHIP OF GROUP (1) AIRNET (2) - ------------------------- ------------- Robert J. Mitzman,....... 13.2% President and Director Dominique Brown,......... 2.6% Executive Vice President, Secretary, Treasurer and Director Karl Daigle,............. 1.4% Director Glenn Smoak,............. 1.9% Director All directors and 19.1% executive officers as a group (4 persons)...... - ------------------------------ (1) The beneficial owner has sole voting and investment power with respect to all of the Quick capital stock reflected in the table. (2) Assumes that (a) the Merger has been consummated with an assumed exchange ratio of 249.5913 AirNet Common Shares for each Quick Common Share, resulting in the issuance of an aggregate of 3,141,356 AirNet Common Shares and (b) the granting by AirNet of options to purchase an aggregate of 249,591 Common Shares to the holders of options to purchase shares of Quick Class A Common Stock. (3) Ms. Brown and Mr. Daigle hold options (the "Quick Common Share Options") to purchase 254 and 55 additional Quick Common Shares, respectively. Assuming that the Quick Common Share Options are exercised prior to the consummation of the Merger, Ms. Brown would receive an additional 63,396 AirNet Common Shares and Mr. Daigle would receive an additional 13,728 AirNet Common Shares in the Merger. Ms. Brown and Mr. Daigle have granted options to Tomas Miguens to purchase 254 and 55 of their respective Quick Common Shares. 82 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF QUICK RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997 Revenues were $22.0 million in the three months ended March 31, 1998, an increase of $9.3 million, or 73.1%, over the three months ended March 31, 1997. The increase in revenues is primarily attributable to volume increases from Quick's existing client base and the acquisitions of Genesis Worldwide Courier ("Genesis") and Sterling Courier Systems, Inc. ("Sterling"), which accounted for $2.3 million and $5.1 million in revenues, respectively, during such period. These acquisitions occurred in August and September of 1997. In the first three months of 1998 as compared to the same period in 1997, net revenues from international priority shipments increased approximately $0.7 million to $3.8 million; domestic priority shipments increased $5.9 million to $10.8 million; and international mail shipments increased $1.6 million to $5.8 million. Cost of operations for the three months ended March 31, 1998 increased $6.8 million, or 74.1%, to $16.0 million from $9.2 million for the three months ended March 31, 1997. This increase was primarily the result of the increased revenues in the three months ended March 31, 1998, including the acquisitions of Sterling and Genesis, which accounted for $4.8 million of the increase. As a percent of revenues, such costs increased to 72.9% for the three months ended March 31, 1998 as compared to 72.5% for the previous year's period. Selling, general and administrative expenses for the three months ended March 31, 1998 increased $1.2 million, or 37.6%, to $4.3 million as compared to the same period in 1997. The increase primarily resulted from costs associated with the operations of Genesis of $0.3 million and Sterling of $0.7 million and additional corporate management and support staff of $0.2 million, and depreciation and amortization. Net interest expense for the twelve months ended December 31, 1997 increased $0.2 million, or 75.3%, to $0.5 million from $0.3 million for the twelve months ended June 30, 1996. The increase resulted primarily from higher average borrowings. TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO TWELVE MONTHS ENDED JUNE 30, 1996 During 1997, Quick changed its year end from June 30 to December 31. Revenues were $67.3 million for the twelve months ended December 31, 1997, an increase of $25.5 million, or 61.2%, over the twelve months ended June 30, 1996. The increase in revenues is primarily attributable to volume increases from Quick's existing client base. The increase in revenues is also attributable to the Genesis and Sterling acquisitions, which accounted for $3.6 million and $6.1 million in revenues, respectively. For the twelve months ended December 31, 1997, as compared to the twelve months ended June 30, 1996, net revenues from international priority shipments increased $5.4 million to $14.8 million; domestic priority shipments increased $9.9 million to $28.4 million; and international mail shipments increased $8.9 million to $20.9 million. Cost of operations for the twelve months ended December 31, 1997 increased $18.0 million, or 57.3%, to $49.3 million from $31.3 million for the twelve months ended June 30, 1996. This increase was partially attributable to an increase in transportation costs of $10.7 million and an increase in labor costs of $1.8 million, which were the result of an increase in business activity. In addition, the acquisitions of Genesis and Sterling increased costs by $0.9 million and $4.6 million, respectively. As a percent of revenues, cost of operations decreased to 73.2% for the twelve months ended December 31, 1997 as compared to 75% for the previous period. This decrease and the corresponding increase in gross profit margin resulted from higher profitability associated with Genesis and higher overall margins. 83 Selling, general and administrative expenses for the twelve months ended December 31, 1997 increased $5.9 million, or 63.4%, to $15.2 million from $9.3 million for the twelve months ended June 30, 1996. The increase primarily resulted from costs associated with the operations of Genesis of $0.5 million and Sterling of $0.9 million, increases in officer compensation expense of $0.6 million, additional corporate management and support staff of $1.1 million, increased depreciation and amortization of $0.3 million and increased sales commission expense of $1.3 million resulting from increased revenues. Net interest expense for the twelve months ended December 31, 1997 increased $0.2 million, or 75.3%, to $0.5 million from $0.3 million for the twelve months ended June 30, 1996. The increase resulted primarily from higher average borrowings. TWELVE MONTHS ENDED JUNE 30, 1996 COMPARED TO TWELVE MONTHS ENDED JUNE 30, 1995 Revenues were $41.7 million for the twelve months ended June 30, 1996, an increase of $11.6 million, or 38.3%, over the twelve months ended June 30, 1995. For the twelve months ended June 30, 1996, as compared with the twelve months ended June 30, 1995, net revenues from international priority shipments increased $1.0 million to $9.5 million; domestic priority shipments increased $3.9 million to $18.5 million; and international mail shipments increased $6.4 million to $12.1 million. Of the $6.4 million increase in international mail, $5.7 million was attributable to the acquisition of Specialty Mailing, Inc. ("SMI") in October 1995. $1.0 million of the increase in domestic revenue was attributable to a new contract with a bio-medical concern. Cost of operations for the twelve months ended June 30, 1996 increased $8.9 million, or 39.8%, to $31.3 million from $22.4 million for the twelve months ended June 30, 1995. This increase was primarily the result of the increased revenues in fiscal 1996 and the acquisition of SMI, which accounted for $4.9 million of such increase. As a percent of sales, cost of operations increased to 75.0% for the twelve months ended June 30, 1996 as compared to 74.2% for the previous period. This increase and the corresponding decrease in gross profit margin resulted from lower than expected profitability associated with SMI. Selling, general and administrative expenses for the twelve months ended June 30, 1996 increased $1.4 million, or 17.3%, to $9.3 million from $7.9 million for the twelve months ended June 30, 1995. Such increase is primarily related to the costs associated with the operations of SMI, which accounted for $0.8 million of the increase, and increased commission expense resulting from increased revenues. Net interest expense for the fiscal year ended June 30, 1996 increased $0.2 million, or 151.7%, to $0.3 million from $0.1 million for the fiscal year ended June 30, 1995. The increase resulted primarily from higher average borrowings. SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1995 Revenues were $24.6 million for the six months ended December 31, 1996, an increase of $5.2 million, or 27.0%, over the six months ended December 31, 1995. For the six months ended December 31, 1996, as compared with the same six month period in 1995, net revenues from international priority shipments increased approximately $0.7 million to $4.9 million; domestic priority shipments decreased $0.7 million to $8.5 million; and international mail shipments increased $3.4 million to $8.4 million. Of the $3.4 million increase in international mail, $2.7 million is attributable to the acquisition of SMI in October 1995. Cost of operations for the six months ended December 31, 1996 increased $3.9 million, or 26.0%, to $18.6 million from $14.7 million for the six months ended December 31, 1995. This increase was primarily the result of the increase in sales for the six month period ended December 31, 1996, as discussed above. During such period, transportation costs increased $3.4 million and labor costs increased $0.5 million. As a percent of sales, cost of operations decreased to 75.7% for the six month period ended December 31, 1996 from 75.9% for the previous year's period. The increase in gross profit margin resulted from higher international priority revenue which offset the lower gross profit margins associated with SMI. 84 Selling, general and administrative expenses for the six months ended December 31, 1996 increased $1.6 million, or 38.0%, to $5.7 million from $4.1 million for the six months ended December 31, 1995. The increase primarily related to officer compensation expense of $0.2 million, the addition of corporate management and support staff of $0.5 million, increased commission expense of $0.2 million resulting from increased revenues and increased depreciation and amortization expense. Net interest expense for the six months ended December 31, 1996 increased $0.1 million, or 25.0%, to $0.2 million from $0.1 million for the six months ended December 31, 1995. The increase resulted primarily from higher average borrowings. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW FROM OPERATING ACTIVITIES Net cash flow from operating activities was $3.0 million for the twelve months ended December 31, 1997, compared to $1.2 million for the twelve months ended June 30, 1996. Net cash flows from operating activities for the three months ended March 31, 1998 were $1.4 million. CURRENT CREDIT ARRANGEMENTS In September 1997, Quick entered into a revolving credit agreement with a bank under which Quick may borrow up to 85% of eligible accounts receivable (as defined therein), up to a maximum $10 million in borrowings. The credit facility is secured by substantially all of the assets of Quick and expires on September 30, 2000. The credit agreement requires the maintenance of certain minimum net worth and cash flow levels, imposes certain limitations on payments of dividends and requires prior bank approval for certain acquisitions. In addition, Quick has an additional $4 million line of credit subject to similar terms. As of March 31, 1998, Quick had drawn $7.0 million under the revolving credit agreement. INVESTING ACTIVITIES During the twelve months ended December 31, 1997 and the twelve months ended June 30, 1996, Quick spent approximately $1.0 million and $0.4 million, respectively, on purchases of property and equipment. In addition, Quick also entered into equipment finance leases for $0.5 million and $0.7 million in 1997 and 1996, respectively. These expenditures related primarily to improvements in technology to support Quick's infrastructure. During the three months ended March 31, 1998, Quick spent approximately $0.2 million on capital expenditures. During the twelve months ended December 31, 1997, Quick completed three acquisitions for aggregate consideration of approximately $9.0 million, consisting of approximately $0.6 million in cash, the issuance of 2,277 Quick Common Shares and notes payable totaling $3.8 million. YEAR 2000 IMPACT ON INFORMATION SYSTEMS Quick believes that it does not have any significant Year 2000 issues. Quick continuously monitors such issues, relative to both its internal and customer needs. Quick is aware that this issue could have significant implications if not properly evaluated. DISSENTERS' RIGHTS Shareholders of AirNet have no dissenters' rights with respect to the Merger, the Acquisition or any other matter to be considered at the Annual Meeting. The Quick Stockholders have waived their dissenters' rights with respect to the Merger. 85 LEGAL MATTERS The validity of the AirNet Common Shares offered hereby will be passed upon for AirNet by Vorys, Sater, Seymour and Pease LLP, Columbus, Ohio. Russell M. Gertmenian, a partner in Vorys, Sater, Seymour and Pease LLP, is a director of AirNet and beneficially owns 5,000 AirNet Common Shares and holds an option to purchase 2,000 AirNet Common Shares. As of May 8, 1998, members of Vorys, Sater Seymour and Pease LLP and attorneys employed thereby, together with members of their immediate families, beneficially owned an aggregate of approximately 10,950 AirNet Common Shares. EXPERTS The consolidated financial statements of AirNet at December 31, 1997 and 1996, and for the years ended December 31, 1997 and September 30, 1996 and 1995, and the three months ended December 31, 1996, and the consolidated financial statements of Quick at December 31, 1997 and 1996 and for the years ended December 31, 1997 and June 30, 1996 and 1995, and the six months ended December 31, 1996, included in this Proxy Statement/Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Ownership of and transactions in the AirNet Common Shares by executive officers, directors and persons who own more than 10% of the AirNet Common Shares are required to be reported to the Commission pursuant to Section 16 of the Exchange Act. Based solely on a review of the copies of reports furnished to AirNet and representations of certain executive officers and directors, AirNet believes that during the fiscal year ended December 31, 1997, its officers, directors and greater than 10% beneficial owners complied with such filing requirements. INDEPENDENT AUDITORS AirNet engaged Ernst & Young LLP as its independent auditors to audit its consolidated financial statements for the 1997 fiscal year. Ernst & Young LLP, a certified public accounting firm, has served as AirNet's independent auditors since 1989. AirNet's Audit Committee will make its selection of AirNet's independent auditors for the 1998 fiscal year at its next meeting, which will be held after the Annual Meeting. A representative of Ernst & Young LLP is expected to be present at the Annual Meeting to respond to appropriate questions and to make such statements as he may desire. SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING AirNet shareholders seeking to bring business before the 1999 Annual Meeting of Shareholders, or to nominate candidates for election as directors at such Annual Meeting of Shareholders, must provide timely notice thereof in writing. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of AirNet not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the 1999 Annual Meeting is given or made to the shareholders, notice by the shareholder to be timely must be received no later than the close of business on the tenth day following the day on which such notice of the date of the 1999 Annual Meeting was mailed or such public disclosure was made. The AirNet Code of Regulations specify certain requirements for a shareholder's notice to be in proper written form. The foregoing requirements will not, however, prevent any shareholder from submitting a shareholder proposal in compliance with Rule 14a-8 of the Exchange Act. Pursuant to Rule 14a-8, proposals by shareholders intended to be presented at the 1999 Annual Meeting of Shareholders must be in the form 86 specified in that Rule and received by the Secretary of AirNet no later than , 1999, to be included in AirNet's proxy, notice of meeting and proxy statement relating to such meeting and should be mailed to AirNet Systems, Inc., 3939 International Gateway, Columbus, Ohio 43219, Attention: Secretary. OTHER BUSINESS The Board of Directors is aware of no other matter that will be presented for action at the 1998 Annual Meeting. If any other matter requiring a vote of the shareholders properly comes before the Annual Meeting, the persons authorized under management proxies will vote and act according to their best judgments in light of the conditions then prevailing. ANNUAL REPORT On March 30, 1998, AirNet's 1997 Annual Report to Shareholders containing audited financial statements for the fiscal year ended December 31, 1997 was mailed to all shareholders of record on March 9, 1998. A copy of such Annual Report to Shareholders is being mailed herewith to all persons who were shareholders of record on the Record Date but were not shareholders on March 9, 1998. The form of proxy and the Proxy Statement/Prospectus have been approved by the Board of Directors of AirNet and are being mailed and delivered to shareholders by its authority. 87 INDEX TO FINANCIAL STATEMENTS PAGE ---------------- CONSOLIDATED FINANCIAL STATEMENTS OF AIRNET SYSTEMS, INC.--YEARS ENDED DECEMBER 31, 1997, SEPTEMBER 30, 1996 AND 1995 AND THREE MONTHS ENDED DECEMBER 31, 1996 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED): Report of Independent Auditors.................................................................. F-2 Consolidated Balance Sheets at December 31, 1997 and 1996 and March 31, 1998 (unaudited)........ F-3 Consolidated Statements of Operations for the years ended December 31, 1997 and September 30, 1996 and 1995 and for the three months ended December 31, 1996 and for the three months ended March 31, 1998 and 1997 (unaudited)........................................................... F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1997 and September 30, 1996 and 1995 and for the three months ended December 31, 1996 and for the three months ended March 31, 1998 and 1997 (unaudited)........................................................... F-5 Consolidated Statements of Equity for the years ended September 30, 1995 and 1996, three months ended December 31, 1996 and year ended December 31, 1997 and three months ended March 31, 1998 (unaudited)................................................................................... F-6 Notes to Consolidated Financial Statements...................................................... F-7 to F-20 CONSOLIDATED FINANCIAL STATEMENTS OF Q INTERNATIONAL COURIER, INC.--YEAR ENDED DECEMBER 31, 1997, SIX MONTHS ENDED DECEMBER 31, 1996, YEARS ENDED JUNE 30, 1996 AND 1995 AND THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED): Report of Independent Auditors.................................................................. F-21 Consolidated Balance Sheets at December 31, 1997 and 1996 and March 31, 1998 (unaudited)........ F-22 Consolidated Statements of Operations for the year ended December 31, 1997, six months ended December 31, 1996, years ended June 30, 1996 and 1995 and three months ended March 31, 1998 and 1997 (unaudited).......................................................................... F-23 Consolidated Statements of Stockholders' Equity for the three months ended March 31, 1998 (unaudited), year ended December 31, 1997, six months ended December 31, 1996 and years ended June 30, 1996 and 1995........................................................................ F-24 Consolidated Statements of Cash Flows for the year ended December 31, 1997, six months ended December 31, 1996 and years ended June 30, 1996 and 1995 and three months ended March 31, 1998 and 1997 (unaudited).......................................................................... F-25 and F-26 Notes to Consolidated Financial Statements...................................................... F-27 to F-33 F-1 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, 1997 and 1996 and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 1997, September 30, 1996 and 1995 and for the three months ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AirNet Systems, Inc. and its subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for the years ended December 31, 1997, September 30, 1996 and 1995 and for the three months ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. /s/ Ernst & Young LLP Columbus, Ohio February 18, 1998 F-2 AIRNET SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, ---------------------------- MARCH 31, 1997 1996 1998 ------------- ------------- ------------- (RESTATED FOR (UNAUDITED) ECC POOLING) ASSETS Current assets: Cash and cash equivalents....................... $ 2,125,137 $ 9,631,663 $ 725,996 Accounts receivable: Trade, less allowances of $123,000 and $23,000 at December 31, 1997 and 1996, respectively................................ 10,966,790 6,440,545 11,496,087 Shareholders, affiliates, and associates...... 85,714 207,571 160,475 Spare parts and supplies........................ 6,053,488 5,012,284 6,731,307 Deposits and prepaids........................... 5,847,774 3,737,008 6,235,909 ------------- ------------- ------------- Total current assets.............................. 25,078,903 25,029,071 25,349,774 Net property and equipment........................ 67,578,533 45,658,488 69,898,876 Other assets: Intangibles, net of accumulated amortization of $1,671,000 and $1,334,000 at December 31, 1997 and 1996, respectively........................ 5,425,938 1,673,861 5,463,081 Investment in partnerships and other............ 5,902,664 3,018,621 6,764,836 Deferred tax asset.............................. -- 4,115,057 -- ------------- ------------- ------------- Total assets...................................... $ 103,986,038 $ 79,495,098 $ 107,476,567 ------------- ------------- ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................................ $ 4,033,036 $ 2,938,730 $ 4,287,984 Salaries and related liabilities................ 1,606,006 1,677,563 1,495,749 Accrued expenses................................ 1,311,366 443,453 588,358 Taxes payable................................... 2,386,256 -- 3,423,979 Deferred taxes.................................. 229,288 208,995 229,288 Current portion of notes payable................ 23,923 -- 23,923 ------------- ------------- ------------- Total current liabilities......................... 9,589,875 5,268,741 10,049,281 Notes payable, less current portion............... 9,705,645 110,787 8,699,894 Deferred tax liability............................ 4,430,538 3,397,062 4,430,538 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 12,753,400, 12,621,081 and 12,753,400 shares issued at December 31, 1997 and 1996 and March 31, 1998, respectively..... 127,534 126,211 127,534 Additional paid-in capital...................... 79,778,803 78,008,030 79,281,468 Retained earnings............................... 5,787,017 (7,415,733) 8,640,572 Treasury shares; 263,570 shares held at cost at December 31, 1997 and 181,587 at March 31, 1998.......................................... (5,433,374) -- (3,752,720) ------------- ------------- ------------- Total shareholders' equity........................ 80,259,980 70,718,508 84,296,854 Total liabilities and shareholders' equity........ $ 103,986,038 $ 79,495,098 $ 107,476,567 ------------- ------------- ------------- ------------- ------------- ------------- See notes to consolidated financial statements F-3 AIRNET SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED ---------------------------------------- THREE MONTHS THREE MONTHS SEPTEMBER SEPTEMBER ENDED ENDED MARCH 31, DECEMBER 31, 30, 30, DECEMBER 31, ------------------------ 1997 1996 1995 1996 1998 1997 ------------ ------------ ------------ ------------ ----------- ----------- (RESTATED FOR ECC POOLING) (UNAUDITED) NET REVENUES Air transportation, net of excise tax of $2,113,000, $716,000 and $1,810,000 for the years ended December 31, 1997, September 30, 1996 and 1995 and $407,000 for the three months ended December 31, 1996: Check delivery........................... $80,707,349 $65,024,522 $58,263,706 $16,811,390 $22,369,802 $18,079,852 Small package delivery................... 15,660,080 13,863,772 12,424,306 3,613,636 3,913,251 3,712,718 Fixed base operations...................... 1,394,827 1,063,583 1,006,529 366,432 287,916 442,125 ------------ ------------ ------------ ------------ ----------- ----------- Total net revenues........................... 97,762,256 79,951,877 71,694,541 20,791,458 26,570,969 22,234,695 COSTS AND EXPENSES Air transportation......................... Wages and benefits....................... 11,252,976 9,862,436 9,195,208 2,551,549 2,956,613 2,741,401 Aircraft fuel............................ 10,176,283 8,177,970 7,444,878 2,310,809 2,575,583 2,474,253 Aircraft maintenance..................... 7,489,323 6,551,792 6,033,739 1,810,075 1,688,364 1,902,116 Ground couriers and other outside services............................... 14,817,610 12,369,737 11,399,012 3,192,743 5,065,305 3,334,892 Depreciation and amortization............ 8,363,196 8,510,214 7,391,127 2,274,088 2,321,569 1,859,910 Other.................................... 13,933,358 8,324,198 7,782,042 2,243,936 4,607,274 2,391,074 Fixed base operations...................... 1,100,741 1,033,068 955,792 309,352 175,485 282,927 Selling, general and administrative........ 8,550,125 11,875,089 13,418,129 1,915,960 2,271,286 2,094,822 ------------ ------------ ------------ ------------ ----------- ----------- Total costs and expenses..................... 75,683,612 66,704,504 63,619,927 16,608,512 21,661,479 17,081,395 ------------ ------------ ------------ ------------ ----------- ----------- Income from operations....................... 22,078,644 13,247,373 8,074,614 4,182,946 4,909,490 5,153,300 Interest expense............................. 108,894 1,072,390 1,468,964 9,623 195,935 768 Offering-related non-recurring expenses...... -- 13,704,398 -- -- -- -- ------------ ------------ ------------ ------------ ----------- ----------- Income (loss) before income taxes............ 21,969,750 (1,529,415 ) 6,605,650 4,173,323 4,713,555 5,152,532 Provision for (benefit from) income taxes.... 8,767,000 1,764,000 (13,150 ) 1,688,000 1,860,000 2,060,000 Tax provision due to change in tax status.... -- 2,435,771 -- -- -- -- ------------ ------------ ------------ ------------ ----------- ----------- ------------ ------------ ------------ ------------ ----------- ----------- Net income (loss)............................ $13,202,750 $(5,729,186 ) $ 6,618,800 $ 2,485,323 $ 2,853,555 $ 3,092,532 ------------ ------------ ------------ ------------ ----------- ----------- ------------ ------------ ------------ ------------ ----------- ----------- Net income per common share.................. $ 1.05 $ 0.20 $ 0.23 $ 0.25 ------------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- Net income per share--assuming dilution...... $ 1.04 $ 0.20 $ 0.22 $ 0.24 ------------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- Pro forma information: Historical income (loss) before income taxes.................................... $(1,529,415 ) $ 6,605,650 Pro forma adjustments other than income taxes.................................... 4,429,470 7,367,337 ------------ ------------ Pro forma income before taxes.............. 2,900,055 13,972,987 Pro forma taxes on income.................. 5,618,437 5,589,195 ------------ ------------ Pro forma net income (loss)................ $(2,718,382 ) $ 8,383,792 ------------ ------------ ------------ ------------ Pro forma net income (loss) per common share--basic and assuming dilution....... $ (0.34 ) $ 1.43 ------------ ------------ ------------ ------------ See notes to consolidated financial statements F-4 AIRNET SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED THREE MONTHS THREE MONTHS ------------------------------------------ ENDED ENDED MARCH 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, ---------------------- 1997 1996 1995 1996 1998 1997 ------------ ------------- ------------- ------------ ---------- ---------- (RESTATED FOR ECC POOLING) (UNAUDITED) Operating activities Net income (loss)..................... $13,202,750 $(5,729,186) $ 6,618,800 $2,485,323 $2,853,555 $3,092,532 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Offering related non-recurring, non- cash expenses..................... -- 13,704,398 -- -- -- -- Depreciation........................ 8,431,420 8,584,888 7,475,979 2,289,798 2,350,451 2,301,896 Amortization of intangibles......... 352,902 351,327 435,902 67,230 112,615 67,230 Deferred taxes...................... 5,168,826 4,202,002 -- 1,688,000 -- 2,060,000 Provision for losses on accounts receivable........................ 83,656 12,170 12,100 9,000 45,000 10,961 Deferred compensation............... -- 445,147 275,464 -- -- -- Loss (gain) on disposition of assets............................ 615,979 81,931 73,472 (187,685) 36,570 12,791 Cash provided by (used in) operating assets and liabilities: Accounts receivable................. (2,588,765) (419,331) 428,617 996,052 (649,058) (1,754,674) Spare parts and supplies............ (1,004,911) (892,318) (441,864) 183,633 (677,819) (398,816) Prepaid expenses.................... (2,004,152) (679,264) (749,713) (697,759) (388,135) (792,039) Accounts payable.................... (149,394) (698,536) 650,877 (1,224,659) 254,948 (346,481) Accrued expenses.................... 857,276 (254,819) 180,554 (109,906) (723,008) (330,086) Taxes payable....................... 2,386,256 -- -- -- 1,037,723 -- Salaries and related liabilities.... (546,168) (409,126) 258,789 413,225 (110,257) 307,243 Other, net.......................... (2,829,822) 22,801 45,538 (100,478) (862,172) (28,279) ------------ ------------- ------------- ------------ ---------- ---------- Net cash provided by operating activities.......................... 21,975,853 18,322,084 15,264,515 5,811,774 3,280,413 4,202,278 Investing activities Acquisition of Pacific Air Charter, Inc., net of cash acquired.......... (240,323) -- -- -- -- -- Acquisition of Data Air Courier, Inc., net of cash acquired................ (4,122,922) -- -- -- (30,483) -- Acquisition of Midway Aviation, Inc., net of cash acquired................ (52,576) (2,810,416) -- -- -- -- Acquisition of Float Control, Inc., net of cash acquired................ -- -- -- (719,519) -- -- Purchases of property and equipment... (30,061,866) (14,341,182) (14,587,658) (9,168,991) (4,781,564) (4,448,484) Payments for covenants not to compete............................. (105,000) -- -- -- (119,275) (105,000) Proceeds from sales of property and equipment........................... 592,223 -- 321,059 2,230,000 74,200 427,293 ------------ ------------- ------------- ------------ ---------- ---------- Net cash used in investing activities.......................... (33,990,464) (17,151,598) (14,266,599) (7,658,510) (4,857,122) (4,126,191) Financing activities Proceeds from the issuance of Common Shares--net......................... -- 82,697,107 -- -- -- -- Exercise of stock options............. 2,100,710 -- -- -- 1,183,319 35,000 Purchase of Donald Wright Warrant..... -- (29,901,785) -- -- -- -- Proceeds from shareholder notes receivable.......................... -- 323,096 41,287 -- -- -- Net borrowings (repayments) under the revolving credit facility........... 9,500,000 -- 1,350,000 -- (1,000,000) -- Repayment of long-term debt........... (1,560,205) (21,994,710) (10,328,874) (85,792) (5,751) (110,787) Proceeds from the issuance of long-term debt...................... 229,568 2,760,000 11,983,775 -- -- -- Purchase of treasury stock............ (5,761,988) -- -- -- -- -- Distributions to shareholders......... -- (23,807,806) (4,125,946) -- -- -- ------------ ------------- ------------- ------------ ---------- ---------- Net cash provided by (used in) financing activities................ 4,508,085 10,075,902 (1,079,758) (85,792) 177,568 (75,787) ------------ ------------- ------------- ------------ ---------- ---------- Net increase (decrease) in cash....... (7,506,526) 11,246,388 (81,842) (1,932,528) (1,399,141) 300 Cash and cash equivalents at beginning of period........................... 9,631,663 317,803 399,645 11,564,191 2,125,137 9,631,663 ------------ ------------- ------------- ------------ ---------- ---------- Cash and cash equivalents at end of period.............................. $2,125,137 $11,564,191 $ 317,803 $9,631,663 $ 725,996 $9,631,963 ------------ ------------- ------------- ------------ ---------- ---------- ------------ ------------- ------------- ------------ ---------- ---------- F-5 AIRNET SYSTEMS, INC. CONSOLIDATED STATEMENTS OF EQUITY COMMON SHARES NOTES -------------------- ADDITIONAL RECEIVABLE NUMBER OF PAID-IN RETAINED TREASURY FROM SHARES AMOUNT CAPITAL EARNINGS SHARES SHAREHOLDERS TOTAL ---------- -------- ----------- ------------ ----------- ------------ ------------ Balance October 1, 1994--restated for ECC Pooling........................... 5,856,561 $ 58,566 $ 482,709 $ 18,164,186 $ -- $(364,383) $ 18,341,078 Net income.............................. -- -- -- 6,618,800 -- -- 6,618,800 Repayment of notes...................... -- -- -- -- -- 41,287 41,287 Shareholder distributions............... -- -- -- (4,125,946) -- -- (4,125,946) ---------- -------- ----------- ------------ ----------- ------------ ------------ Balance September 30, 1995.............. 5,856,561 58,566 482,709 20,657,040 -- (323,096) 20,875,219 Net loss................................ -- -- -- (5,729,186) -- -- (5,729,186) Repayment of notes...................... -- -- -- -- -- 323,096 323,096 Shareholder distributions............... -- -- -- (2,807,806) -- -- (2,807,806) Issuance of Common Shares, net of Offering-related expenses............. 6,440,000 64,400 82,632,507 -- -- -- 82,696,907 AAA distributions related to S Corp shareholders.......................... -- -- -- (21,000,000) -- -- (21,000,000) Purchase of Donald Wright Warrant....... -- -- (29,901,785) -- -- -- (29,901,785) Exercise of Jeffrey Wright Warrant...... 167,227 1,672 (1,472) -- -- -- 200 Reclassification of undistributed S Corp retained earnings..................... -- -- 1,021,104 (1,021,104) -- -- -- Tax benefit related to cancellation of Donald Wright Warrant................. -- -- 7,000,000 -- -- -- 7,000,000 Compensation expense related to stock purchase agreements................... -- -- 14,830,039 -- -- -- 14,830,039 ---------- -------- ----------- ------------ ----------- ------------ ------------ Balance September 30, 1996.............. 12,463,788 124,638 76,063,102 (9,901,056) -- -- 66,286,684 Net income.............................. -- -- -- 2,485,323 -- -- 2,485,323 Issuance of Common Shares--acquisition of Float Control...................... 157,293 1,573 1,944,928 -- -- -- 1,946,501 ---------- -------- ----------- ------------ ----------- ------------ ------------ Balance December 31, 1996............... 12,621,081 126,211 78,008,030 (7,415,733) -- -- 70,718,508 Net income.............................. -- -- -- 13,202,750 -- -- 13,202,750 ECC cash for fractional shares.......... -- -- (29) -- -- -- (29) Exercise stock options.................. 128,525 1,285 1,821,536 -- -- -- 1,822,821 Exercise stock options with treasury shares................................ -- -- (103,483) -- 328,614 -- 225,131 Issue shares for Associate Stock Purchase Program...................... 3,794 38 52,749 -- -- -- 52,787 Purchase treasury shares................ -- -- -- -- (5,761,988) -- (5,761,988) ---------- -------- ----------- ------------ ----------- ------------ ------------ Balance December 31, 1997............... 12,753,400 127,534 79,778,803 5,787,017 (5,433,374) -- 80,259,980 Net income (unaudited).................. -- -- -- 2,853,555 -- -- 2,853,555 Exercise stock options with treasury shares................................ -- -- (500,843) -- 1,608,637 -- 1,107,794 Issue common shares for Associate Stock Purchase Program...................... -- -- 3,508 -- 72,017 -- 75,525 ---------- -------- ----------- ------------ ----------- ------------ ------------ Balance March 31, 1998 (unaudited)...... 12,753,400 $127,534 $79,281,468 $ 8,640,572 $(3,752,720) -- $ 84,296,854 ---------- -------- ----------- ------------ ----------- ------------ ------------ ---------- -------- ----------- ------------ ----------- ------------ ------------ F-6 AIRNET SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 late night pickup with early morning delivery of small 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. On May 14, 1997, the Board of Directors of the Company approved a change in the fiscal year end of the Company from September 30 to December 31. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION Revenue on air transportation services is recognized when the packages are picked up for delivery to their destination. Revenue on fixed based operations is recognized when the maintenance services are complete or fuel is delivered. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of highly liquid investments which are unrestricted as to withdrawal or use, and which have an original maturity of three months or less. Cash equivalents are stated at cost, which approximates market value. ACCOUNTS RECEIVABLE For 1997, approximately 83% and 63% 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. SPARE PARTS AND SUPPLIES Spare parts and supplies are valued at the lower of cost (weighted average method) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Engine, overhauls and major inspections, which have been capitalized and included in flight equipment, are depreciated and amortized on the basis of hours flown. Airframes, other flight equipment and other property and equipment (primarily furniture and equipment, F-7 AIRNET SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) leasehold improvements and vehicles) are depreciated using the straight-line method over 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 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. PREPAID EXPENSES The Company prepays certain engine repair and overhaul services under manufacturer service plans. Such prepaid balances were $2,299,477 and $1,543,832 at December 31, 1997 and 1996, respectively, and are included with prepaid expenses on the balance sheet. START-UP COSTS The Company capitalizes costs related to the start-up activities associated with new business initiatives, such as introduction of new services. Costs associated with these initiatives, such as personnel costs, outside services and administrative support services are capitalized as start-up costs. Upon completion of the start-up phase, these costs will be amortized over sixty months. At December 31, 1997, the Company had $2,522,338 of start-up costs recorded on its balance sheet included in other assets. INCOME TAXES Prior to the Offering, the Company's income was taxed under the provisions of Subchapter S of the Internal Revenue Code of 1986, which provides that in lieu of corporate income taxes, the shareholders of the S Corporation are taxed on their proportionate share of the Company's taxable income. Upon completion of the Company's initial public offering ("the "Offering") in May 1996, the Company ceased to qualify as an S Corporation and was subject to corporate income taxes. Under the liability method of accounting for income taxes, 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. INTANGIBLES Intangibles include non-competition agreements with former competitors and goodwill generated through the acquisition of companies. The balances are being amortized on the straight-line method over periods ranging from one to 25 years. The carrying value of goodwill is reviewed if the facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, F-8 AIRNET SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying value of the goodwill will be reduced by the estimated shortfall of cash flows. STATEMENT OF CASH FLOWS Cash paid for interest was $108,894, $1,239,871 and $1,264,522 for the years ended December 31, 1997, September 30, 1996 and 1995, respectively. No interest was paid in the three months ended December 31, 1996. Cash paid for taxes was $1,311,785 for the year ended December 31, 1997 and $236,681 for the three months ended December 31, 1996. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, The Financial Accounting Standards Board ("FASB") issued Statement No. 130, "Reporting Comprehensive Income", and Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information". Both Statements are effective for the Company in 1998. Statement No. 130 requires separate reporting of certain items affecting shareholders' equity outside of those included in arriving at net income. These items are already disclosed by the Company. Statement No. 131 establishes requirements for reporting information about operating segments in annual and interim statements. This statement may require a change in the Company's financial reporting; however, the extent of this change, if any, has not been determined. 2. INITIAL PUBLIC OFFERING On May 29, 1996, the registration statement related to the Company's initial public offering was declared effective by the SEC and its stock began trading on May 31, 1996. Pursuant to the terms of the Offering, the Company issued 6,440,000 shares of common stock, including 840,000 shares issued through the underwriters' full exercise of their over-allotment option on June 11, 1996, at $14.00 per share. Net proceeds of the offering totaled $83,848,800 before deducting expenses of $1,151,893. The following is a summary of transactions related to the Company's public offering: AAA DISTRIBUTIONS Prior to the Offering, the Company made $21,000,000 in distributions to the S Corporation shareholders for the undistributed earnings associated with the Company's S Corporation status (referred to as "AAA distributions"). These distributions were made through the Company's issuance of promissory notes to such shareholders. The notes were subsequently repaid with the Offering proceeds. TERMINATION OF STOCK PURCHASE AGREEMENTS On April 1, 1994, the Company entered into stock purchase agreements with seven executive officers, in which these officers purchased an aggregate of 1,484,908 shares of common stock for an aggregate purchase price of $364,000, paid through the delivery of promissory notes. Upon completion of the Offering, the stock purchase agreements were terminated and the seven officers repaid the balances due on the notes totaling $283,856. The transaction resulted in a decrease in notes receivable from shareholders and a corresponding increase in cash for the year ended September 30, 1996. F-9 AIRNET SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. INITIAL PUBLIC OFFERING (CONTINUED) In addition, as a result of the termination of the stock purchase agreements, the Company incurred a non-recurring, non-cash charge of $14,830,039, which increased paid-in capital. The charge is not tax deductible and represents a portion of the $21,000,000 of AAA distributions to the seven executive officers not previously recorded as compensation expense, plus the difference between the net offering price and the net book value of the 1,484,908 shares of common stock held by the officers at the termination date of the agreements. This distribution of undistributed earnings to the former S Corporation shareholders also eliminated a $1,654,328 deferred compensation liability related to the stock purchase agreements and resulted in a non-recurring, non-cash reduction of expense in the statement of operations for the year ended September 30, 1996. TERMINATION OF DEFERRED COMPENSATION AGREEMENTS Prior to the Offering, the Company entered into deferred compensation agreements with certain executive officers, pursuant to which the Company was obligated to pay these officers deferred compensation equal to a percentage of the increase on the Company's net book value. Upon completion of the Offering, the officers agreed to terminate the agreements and forgive the remaining balances totaling $2,029,675 due to them. This transaction resulted in a decrease of the deferred compensation liability and a non-recurring, non-cash reduction of expense in the statement of operations for the year ended September 30, 1996. TERMINATION OF THE WRIGHT AGREEMENT AND PURCHASE OF WARRANTS In 1988, the Company purchased certain assets of Wright International Express, Inc. ("WIE"). In consideration for the agreement of WIE and for Donald Wright not to compete with the Company, the Company entered into the Wright Agreement. The Wright Agreement, as amended, required annual payments tied to the cash flows and the debt to equity ratio of the Company, to Donald Wright and certain designees. In addition, the Company issued a warrant to Donald Wright to purchase 2,483,537 shares of common stock and a warrant to Jeffrey Wright (Donald Wright's son) to purchase 167,227 shares of common stock. Both warrants were exercisable upon the closing of a public offering. Upon the closing of the Offering, the Company purchased the Donald Wright Warrant for $29,901,785 and canceled the warrant. Gerald G. Mercer, the Company's Chairman and Chief Executive Officer purchased the Jeffrey Wright Warrant for $2,013,413 and exercised it subsequent to the completion of the Offering. In connection with the repurchase and cancellation of the Donald Wright Warrant and the corresponding tax treatment, the Company has recognized a related tax benefit estimated to be approximately $7,000,000. The benefit was realized as cash savings by offsetting subsequent tax liabilities. The tax benefit will have no effect on the Company's current or future statements of operations. The benefit has been reflected as additional paid-in capital on the balance sheet. Upon cancellation of the Donald Wright Warrant, the Wright Agreement was also terminated in its entirety and no further payments will be made. In addition, the remaining net book value of a covenant not to compete totaling $2,558,362, which was recorded at the inception of the Wright Agreement, was also written off, resulting in a non-recurring, non-cash expense for the year ended September 30, 1996. F-10 AIRNET SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. INITIAL PUBLIC OFFERING (CONTINUED) STATEMENT OF OPERATIONS IMPACT OF OFFERING TRANSACTIONS The following is a summary of the Offering-related transactions and their effect on the statement of operations for the year ended September 30, 1996: INCREASE/(DECREASE) TO INCOME ------------------ Compensation expense related to the stock purchase agreements................................. $ (14,830,039) Write-off of Wright Agreement covenant not to compete......................................... (2,558,362) Elimination of deferred compensation liability related to the stock purchase agreements....... 1,654,328 Elimination of the liability for the deferred compensation agreements......................... 2,029,675 ------------------ $ (13,704,398) ------------------ ------------------ 3. ACQUISITIONS Effective July 31, 1997, the Company acquired all of the outstanding common shares of Data Air Courier, Inc. ("Data Air"), whose primary business involves 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 $4,120,000 and resulted in goodwill of approximately $3,684,000, which will be amortized over 25 years. The Company also entered into a five-year covenant not to compete for $50,000. 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 following are pro forma results of operations for AirNet and Data Air as though they were combined as of the beginning of the periods presented: YEARS ENDED ----------------------------- DECEMBER 31, SEPTEMBER 30, THREE MONTHS ENDED 1997 1996 DECEMBER 31, 1996 -------------- ------------- ------------------- Net revenues................................................. $ 106,787,351 $ 95,381,318 $ 24,534,388 Net income (loss)............................................ 12,878,577 (4,778,345) 2,442,171 Net income per share......................................... $ 1.02 -- $ .19 Net income per share--assuming dilution...................... $ 1.01 -- $ .19 Pro forma net income (loss)--unaudited....................... -- $ (1,767,541) -- Pro forma net income (loss) per share--basic and assuming dilution--unaudited........................................ -- $ (.22) -- Effective June 6, 1997, the Company acquired all of the outstanding shares of Pacific Air Charter, Inc. ("PAC") for approximately $450,000 in cash. PAC operates 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 $171,445, which will be 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 F-11 AIRNET SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS (CONTINUED) estimated fair values as of June 6, 1997. The results of PAC's operations since the effective date of the purchase have been included in the Company's accompanying financial statements. 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 include small package delivery services within the United States and certain other countries. All of the stock of ECC was exchanged for 145,953 Common Shares of the Company. The Company also entered into three covenant not to compete agreements for a total of $205,000, which will be amortized over three- and five-year periods. The financial statements of the Company have been restated to include ECC for all periods presented. Effective October 24, 1996, the Company acquired Float Control, Inc. for 157,293 Common Shares and approximately $720,000 in cash. Float Control was previously partially owned by certain executive officers of the Company, among others, and owns a 19% interest in the Check Exchange System Co., an industry leader in payment initiatives. Float Control accounts for its investment in the Check Exchange System under the equity method of accounting. At December 31, 1997, Float Control's recorded investment in the Check Exchange System was $2,940,000. Effective September 26, 1996, the Company acquired all of the outstanding shares of common stock of Midway Aviation, Inc. ("Midway"), a regional air courier located in Dallas, Texas. The Company accounted for the acquisition under the purchase method of accounting. The purchase price of the acquisition totaled approximately $3,100,000 in cash and resulted in goodwill of $1,201,080, which will be amortized over 25 years, and covenants not to compete totaling $84,000, which will be amortized over the terms of the agreements ranging from one to five years. The acquired assets and assumed liabilities, including goodwill, have been recorded at their estimated fair values as of the purchase date. The Company's consolidated financial statements include the results of operations of Midway since the purchase date. 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following: DECEMBER 31, ----------------------------- 1997 1996 -------------- ------------- Flight equipment.............................................. $ 100,141,574 $ 82,014,487 Other property and equipment.................................. 14,812,777 6,817,332 -------------- ------------- 114,954,351 88,831,819 Less accumulated depreciation................................. 47,375,818 43,173,331 -------------- ------------- $ 67,578,533 $ 45,658,488 -------------- ------------- -------------- ------------- F-12 AIRNET SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. NOTES PAYABLE The Company had borrowings as follows: DECEMBER 31, ------------------------ 1997 1996 ------------ ---------- Term notes.......................................................... $ 229,568 $ 110,787 Revolving credit facility........................................... 9,500,000 -- ------------ ---------- 9,729,568 110,787 Current portion of notes payable.................................... 23,923 -- ------------ ---------- $ 9,705,645 $ 110,787 ------------ ---------- ------------ ---------- Simultaneously with the closing of the Offering, the Company entered into a new credit agreement to replace the existing agreement. The new credit agreement provides the Company with a $50,000,000 unsecured revolving credit facility. The agreement has a five-year term and is scheduled to expire on June 5, 2001. The agreement may be extended in one-year increments at any point through June 5, 2001. The agreement bears interest at the Company's option of a fixed rate determined by the Eurodollar rate, a negotiated rate or a floating rate. The floating rate is based on the sum of (a) a margin plus (b) the greater of (i) the prime rate and (ii) the sum of .5% plus the federal funds rate in effect from time to time. The new agreement limits the availability of funds to certain specified percentages of accounts receivable, inventory and the wholesale value of aircraft and equipment. In addition, the agreement requires the maintenance of certain minimum net worth and cash flow levels, imposes certain limitations on payments of dividends, restricts the amount of additional debt and requires prior bank approval of acquisitions with consideration of more than $3,000,000. In conjunction with purchase of the Company's facility in October, 1997, the Company incurred a $263,297 note payable. The terms of the note require monthly principal and interest payments of $4,167 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 provides for the issuance of incentive and non-qualified stock options, restricted stock and performance shares and a stock purchase plan (collectively "Awards"). The Plan also provides for each outside director to receive 2,000 stock options annually if certain requirements are met. The maximum number of newly issued shares available for issuance under the Plan is 1,150,000 through 2006. The Plan is administered by the Compensation Committee of the Board of Directors, which determines the terms and conditions applicable to the Awards. The exercise price of each option equals the market price of the Company's stock on the date of grant and an option's maximum term is ten years. Option vesting periods range from no vesting to three years of full-time service with the Company. 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 because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock Based Compensation", requires use of option valuation models that were not developed for use in valuing 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. F-13 AIRNET SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. 1996 INCENTIVE STOCK PLAN (CONTINUED) Pro forma information regarding net income and earnings per share is required by Statement 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 a Black-Scholes option pricing model with the following weighted average assumptions for 1997 and 1996: risk free interest rates of 6.5%, volatility factors of the expected market price of the Company's common shares of 59.1% and a weighted average expected life of the options of 7.88 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's associate stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its associate stock options. 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: YEARS ENDED ---------------------------- DECEMBER 31, SEPTEMBER 30, THREE MONTHS ENDED 1997 1996 DECEMBER 31, 1996 ------------- ------------- ------------------- Net income (loss), adjusted for FAS 123....................... $ 11,586,756 $(8,711,077) $ 2,466,746 Net income (loss) per share, adjusted for FAS 123: Basic....................................................... $ .92 $ (1.08) $ .20 Assuming dilution........................................... $ .91 $ (1.08) $ .20 A summary of the Company's stock option activity and related information follows (in thousands, except per share price data): YEARS ENDED ------------------------------------------------------ THREE MONTHS ENDED DECEMBER 31, 1997 SEPTEMBER 30, 1996 DECEMBER 31, 1996 -------------------------- -------------------------- -------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ----------- ------------- ----------- ------------- ----------- ------------- Outstanding at beginning of period....... 523 $ 14.18 -- $ -- -- $ -- Granted.................................. 282 14.40 530 14.18 527 14.18 Exercised................................ 145 14.17 -- -- -- -- Canceled................................. 9 14.12 3 14.00 4 14.00 --- ------ --- ------ --- ------ Outstanding at end of period............. 651 14.28 527 14.18 523 14.18 Options exercisable at end of period.............................. 587 14.28 500 14.19 495 14.19 Weighted average fair value of options granted during the period............................. -- $ 9.96 -- $ 9.81 -- $ 0.00 F-14 AIRNET SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. 1996 INCENTIVE STOCK PLAN (CONTINUED) options outstanding as of December 31, 1997 ranged from $14 to $17 per share. The weighted average remaining contractual life of those options is 7.88 years. 7. LEASE OBLIGATIONS The Company leased certain aircraft under noncancellable operating leases which expired in 1997. Total rental expense under the flight equipment operating leases was $104,184, $772,900 and $1,042,653, for the years ended December 31, 1997, September 30, 1996 and 1995, respectively and $75,841 for the three months ended December 31, 1996. The Company also leases facility space at various locations throughout the United States. The Company incurred lease expense of $1,149,391, $859,709 and $784,283 for the years ended December 31, 1997, September 30, 1996 and 1995, respectively and $227,694 for the three months ended December 31, 1996. As of December 31, 1997, future minimum lease payments by year and in the aggregate under noncancellable operating leases with initial or remaining terms exceeding one year are as follows: 1998-- $129,455; 1999--$105,697; and 2000--$23,493. 8. RELATED PARTY TRANSACTIONS In October 1997, the Company purchased its corporate and operational headquarters for $4.1 million 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 $864,336, $887,053 and $707,305 for the years ended December 31, 1997 and September 30, 1996 and 1995, respectively, and $253,584 for the three months ended December 31, 1996. The Company believes the terms of this lease and purchase were no less favorable than those reasonably available from unaffiliated third parties. During fiscal 1996, the Company made improvements to its corporate and operational headquarters, which was leased from its majority shareholder. The Company paid approximately $775,000 for the improvements. The balance was repaid, in full, by the majority shareholder in fiscal 1996. The Company historically leased certain aircraft from Dwarf Leasing, Inc., a corporation owned by certain executive officers of the Company. Total lease expenses were $20,800 and $99,000 for the years ended September 30, 1996 and 1995. In fiscal 1995 and 1996, the Company purchased these aircraft for $250,000 and $205,000, respectively. The Company believes the terms of such leases and purchases 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 approximately $379,000, $393,000, and $355,000 for the years ended December 31, 1997, September 30, 1996 and 1995, respectively and $79,000 for the three months ended December 31, 1996. F-15 AIRNET SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. INCOME TAXES Income taxes are summarized as follows: THREE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, 1997 1996 1995 1996 ------------ ------------- ------------- ------------- Current: Federal........................ $3,058,448 $ -- $ -- $ -- State and local................ 539,726 -- -- -- ------------ ------------- ------------- ------------- 3,598,174 -- -- -- Deferred: Federal........................ 4,393,502 1,524,000 (13,150) 1,441,694 State and local................ 775,324 240,000 -- 246,306 ------------ ------------- ------------- ------------- 5,168,826 1,764,000 (13,150) 1,688,000 ------------ ------------- ------------- ------------- $8,767,000 $ 1,764,000 $ (13,150) $ 1,688,000 ------------ ------------- ------------- ------------- ------------ ------------- ------------- ------------- Significant components of the Company's deferred tax liabilities and assets are as follows: DECEMBER 31, -------------------------- 1997 1996 ------------ ------------ Long-term deferred tax assets: Tax benefit of net operating loss carry forwards................ $ -- $ 4,115,057 ------------ ------------ Long-term deferred tax liabilities: Property and equipment.......................................... $ 4,280,231 $ 3,397,062 Other........................................................... 150,307 -- ------------ ------------ Total long-term deferred tax liabilities.......................... $ 4,430,538 $ 3,397,062 ------------ ------------ ------------ ------------ Current deferred tax assets: Health insurance reserves....................................... $ 72,000 $ 72,000 Other........................................................... 49,147 44,005 ------------ ------------ Total current assets.............................................. 121,147 116,005 Current deferred tax liabilities: Prepaid expenses................................................ 350,435 233,000 Trade receivables............................................... -- 92,000 ------------ ------------ Total current liabilities......................................... 350,435 325,000 ------------ ------------ Net current deferred tax liabilities.............................. $ 229,288 $ 208,995 ------------ ------------ ------------ ------------ F-16 AIRNET SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. INCOME TAXES (CONTINUED) 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 (loss) before income taxes are as follows: THREE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, 1997 1996 1995 1996 ------------ ------------- ------------- ------------- Tax expenses (benefit) at federal statutory rate on pretax income (loss)............................... $7,469,715 $ (499,000) $ 2,245,921 $ 1,418,930 Add (deduct): Nondeductible Offering-related expenses............ -- 3,790,000 -- -- S Corporation status benefits...................... -- (1,925,000) (2,251,977) -- State taxes, net of Federal benefit................ 1,260,859 240,000 -- 246,306 Other.............................................. 36,426 158,000 (7,094) 22,764 ------------ ------------- ------------- ------------- Total Taxes.......................................... $8,767,000 $ 1,764,000 $ (13,150) $ 1,688,000 ------------ ------------- ------------- ------------- ------------ ------------- ------------- ------------- Upon the completion of the Offering, the Company ceased to qualify as an S Corporation and was subject to corporate income taxes. The Company recorded current tax expense of $1,764,000 related to its operations from May 30, 1996 to September 30, 1996, which includes the deductibility of the $2,558,362 write-off of the Wright Agreement covenant not to compete. In addition, the Company recorded an additional net tax liability of approximately $2,436,000 resulting from the cumulative effect of deferred income taxes attributable to its change in tax status (from S Corporation to C Corporation). 11. NET INCOME PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share. Statement No. 128 replaced the previously reported primary and fully diluted net income per share with basic and diluted net income per share. Unlike primary net income per share, basic net income per share excludes any dilutive effects of options, warrants and convertible securities. Diluted net income per share is very similar to the previously reported fully diluted net income per share. All net income per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement F-17 AIRNET SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. NET INCOME PER SHARE (CONTINUED) No. 128 requirements. The following table sets forth the computation of basic and diluted net income per share: THREE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED MARCH 31, DECEMBER 31, SEPTEMBER 30 SEPTEMBER 30, DECEMBER 31, -------------------------- 1997 1996 1995 1996 1998 1997 ------------ ------------ ------------- ------------ ------------ ------------ (UNAUDITED) Numerator: Net income...................... $13,202,750 -- -- $2,485,323 $ 2,853,555 $ 3,092,532 Pro forma net income (loss)-- unaudited..................... -- $(2,718,382) $ 8,383,792 -- -- -- Denominator: Basic--weighted average shares outstanding................... 12,577,487 8,055,490 5,856,561 12,580,048 12,529,327 12,621,470 Diluted......................... Stock options--associates, officers and directors........ 128,821 -- -- -- 252,273 15,640 Convertible warrants............ -- 435,742 -- -- -- -- Adjusted weighted average shares outstanding................... 12,706,308 8,491,232 5,856,561 12,580,048 12,781,600 12,637,110 Net income per share.............. $ 1.05 -- -- $ .20 $ .23 $ .25 Net income per share--assuming dilution........................ $ 1.04 -- -- $ .20 $ .22 $ .24 Pro forma net income (loss) per share--basic and assuming dilution--unaudited............. -- $ (.34) $ 1.43 -- -- -- 12. CONTINGENCIES The Company is subject to claims and lawsuits in the ordinary course of its business. In the opinion of management, the outcome of these actions, which are not clearly determinable at the present time, are either adequately covered by insurance, or if not insured, will not, in the aggregate, have a material adverse impact upon the Company's financial position or the results of future operations. F-18 AIRNET SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. THREE MONTHS ENDED DECEMBER 31, 1995 DATA (UNAUDITED) Effective May 14, 1997, the Company elected to change its year end from September 30 to December 31. Therefore, the three months ended December 31, 1996 has been treated as a transition period. The following is a summary of the financial results for the three months ended December 31, 1995: Net revenues....................................................................................... $ 18,397,436 Operating income................................................................................... 2,193,706 Net income......................................................................................... 1,819,107 Pro forma net income............................................................................... 1,982,117 Pro forma net income per share (basic and assuming dilution)....................................... $ .34 Weighted average shares outstanding................................................................ 5,856,561 14. PRO FORMA INFORMATION (UNAUDITED) PRO FORMA STATEMENTS OF OPERATIONS ADJUSTMENTS The pro forma statements of operations information presents the pro forma effects on the historical financial information reflecting certain transactions as if they had occurred as of the beginning of the periods presented. The following adjustments have been reflected in the pro forma statements of operations: YEARS ENDED SEPTEMBER 30, -------------------------- 1996 1995 ------------ ------------ The elimination of interest expense related to the debt repaid........................ $ 1,038,710 $ 1,452,066 The elimination of payments under the Wright Agreement................................ 750,527 2,074,004 The elimination of amortization expense related to the covenant not to compete asset write-off........................................................................... 169,148 253,722 The elimination of deferred compensation expense for certain officers................. 135,041 307,695 A reduction of compensation expense for executive officers based on new employment agreements.......................................................................... 346,699 952,387 The elimination of employee stock purchase agreement expense for certain officers..... 1,989,345 2,327,463 ------------ ------------ Total pro forma adjustments other than income taxes................................... $ 4,429,470 $ 7,367,337 ------------ ------------ ------------ ------------ PRO FORMA NET INCOME (LOSS) PER SHARE Pro forma net income (loss) per share amounts are based on the weighted average number of shares of common stock outstanding during the periods, including effect of the 2,483,537 and 167,227 shares related to the Donald Wright and Jeffrey Wright Warrants, respectively. Supplemental pro forma net income (loss) per share would have been ($0.25) and $.85 for the years ended September 30, 1996 and 1995, respectively, based on the weighted average number of shares of common stock outstanding during the periods, plus the number of shares used to repay debt. F-19 AIRNET SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. SUBSEQUENT EVENTS Effective February 10, 1998, the Company entered into a letter of intent to acquire Q International Courier, Inc., an international overnight delivery company, for approximately 3,391,000 common shares. The transaction is subject to satisfactory execution of a definitive agreement and certain consents, opinions and approvals, including approval of both companies' shareholders. F-20 REPORT OF INDEPENDENT AUDITORS The Stockholders Q International Courier, Inc. We have audited the consolidated balance sheets of Q International Courier, Inc. and its subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1997, the six months ended December 31, 1996 and the years ended June 30, 1996 and 1995. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Q International Courier, Inc. and its subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for the year ended December 31, 1997, the six months ended December 31, 1996 and the years ended June 30, 1996 and 1995 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP New York, New York March 16, 1998 F-21 Q INTERNATIONAL COURIER, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31 -------------------------- MARCH 31, 1997 1996 1998 ------------ ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents............................... $ 1,142 $ 237 $ 303 Marketable securities................................... 332 341 287 Accounts receivable, net of allowance for doubtful accounts of $281 in 1997, $321 in 1996 and $311 in 1998.................................................. 14,773 8,361 15,052 Due from affiliate...................................... -- 2,377 -- Due from stockholders................................... 601 529 1,263 Prepaid expenses and other current assets............... 1,394 871 1,760 ------------ ------------ ------------ Total current assets...................................... 18,242 12,716 18,665 Property and equipment, net of accumulated depreciation and amortization........................................ 2,902 1,900 3,026 Intangible assets, net of accumulated amortization........ 11,445 778 11,317 Other assets.............................................. 75 76 75 ------------ ------------ ------------ Total assets.............................................. $ 32,664 $ 15,470 $ 33,083 ------------ ------------ ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable to bank $ 5,950 $ 5,100 $ 7,025 Current portion of capital lease obligations............ 301 191 306 Accounts payable........................................ 2,470 1,177 3,200 Accrued expenses........................................ 6,578 4,441 6,152 Notes payable to stockholder............................ 2,541 -- 296 Deferred income taxes................................... 450 220 570 ------------ ------------ ------------ Total current liabilities................................. 18,290 11,129 17,549 Capital lease obligations, net of current portion......... 850 671 773 Notes payable to stockholder............................ 1,304 -- 1,228 Deferred compensation..................................... 104 -- 167 Commitments and contingencies Stockholders' equity:..................................... Common stock--$1 par value; 20,000 shares authorized, 12,277, 12,277 and 10,000 shares issued and outstanding at March 31, 1998 and December 31, 1997 and 1996, respectively................................ 12 10 12 Class A common stock--$1 par value; 3,000 shares authorized, no shares issued and outstanding at March 31, 1998 and December 31, 1997 and 1996............... -- -- -- Additional paid-in capital.............................. 6,507 9 6,507 Retained earnings....................................... 5,527 3,626 6,722 Unrealized gain on marketable securities................ 70 25 125 ------------ ------------ ------------ Total stockholders' equity................................ 12,116 3,670 13,366 ------------ ------------ ------------ Total liabilities and stockholders' equity................ $ 32,664 $ 15,470 $ 33,083 ------------ ------------ ------------ ------------ ------------ ------------ See accompanying notes. F-22 Q INTERNATIONAL COURIER, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) SIX MONTHS THREE MONTHS THREE MONTHS YEAR ENDED ENDED YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, MARCH 31, MARCH 31, 1997 1996 1996 1995 1998 1997 ------------ ------------ ----------- ----------- ------------- ------------- (UNAUDITED) (UNAUDITED) Net sales.................... $ 67,277 $ 24,628 $ 41,748 $ 30,184 $ 21,985 $ 12,702 Cost of operations........... 49,275 18,580 31,320 22,411 16,031 9,207 ------------ ------------ ----------- ----------- ------------- ------------- Gross profit................. 18,002 6,048 10,428 7,773 5,954 3,495 ------------ ------------ ----------- ----------- ------------- ------------- Expenses: Selling.................... 5,788 2,225 3,562 2,702 1,727 1,262 General and administrative........... 9,411 3,477 5,745 5,235 2,621 1,899 ------------ ------------ ----------- ----------- ------------- ------------- Total expenses............... 15,199 5,702 9,307 7,937 4,348 3,161 ------------ ------------ ----------- ----------- ------------- ------------- Income (loss) from operations................. 2,803 346 1,121 (164) 1,606 334 Interest expense, net........ 512 160 292 116 171 83 ------------ ------------ ----------- ----------- ------------- ------------- Income (loss) before provision for income taxes...................... 2,291 186 829 (280) 1,435 251 Provision for income taxes... 390 20 83 35 240 35 ------------ ------------ ----------- ----------- ------------- ------------- Net income (loss)............ $ 1,901 $ 166 $ 746 $ (315) $ 1,195 $ 216 ------------ ------------ ----------- ----------- ------------- ------------- ------------ ------------ ----------- ----------- ------------- ------------- See accompanying notes. F-23 Q INTERNATIONAL COURIER, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ACCUMULATED OTHER TOTAL SHARES ADDITIONAL RETAINED COMPREHENSIVE STOCKHOLDERS' ISSUED AMOUNT PAID-IN CAPITAL EARNINGS INCOME (LOSS)* EQUITY --------- ----------- --------------- ----------- ----------------- ------------ Balance, June 30, 1994 10,000 $ 10 $ 9 $ 3,029 $ -- $ 3,048 Net loss.......................... -- -- -- (315) -- (315) --------- --- ------ ----------- ----- ------------ Balance, June 30, 1995.............. 10,000 10 9 2,714 -- 2,733 Net income.......................... -- -- -- 746 -- 746 Adjustment to unrealized gains (losses) on marketable securities........................ -- -- -- -- 34 34 --------- --- ------ ----------- ----- ------------ Balance, June 30, 1996.............. 10,000 10 9 3,460 34 3,513 Net income.......................... -- -- -- 166 -- 166 Adjustment to unrealized gains (losses) on marketable securities........................ -- -- -- -- (9) (9) --------- --- ------ ----------- ----- ------------ Balance, December 31, 1996.......... 10,000 10 9 3,626 25 3,670 Net income.......................... -- -- -- 1,901 -- 1,901 Issuance of common stock for acquisitions...................... 2,277 2 6,498 -- -- 6,500 Adjustment to unrealized gains (losses) on marketable securities........................ -- -- -- -- 45 45 --------- --- ------ ----------- ----- ------------ Balance, December 31, 1997.......... 12,777 12 6,507 5,527 70 12,116 Net income.......................... -- -- -- 1,195 -- 1,195 Adjustments to unrealized gains (losses) on marketable securities........................ -- -- -- -- 55 55 --------- --- ------ ----------- ----- ------------ Balance, March 31, 1998 (Unaudited)....................... 12,277 $ 12 $ 6,507 $ 6,722 $ 125 $ 13,366 --------- --- ------ ----------- ----- ------------ --------- --- ------ ----------- ----- ------------ - ------------------------ *Represents unrealized gains (losses) on available-for-sale securities. See accompanying notes. F-24 Q INTERNATIONAL COURIER, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) SIX MONTHS THREE MONTHS THREE MONTHS YEAR ENDED ENDED YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, MARCH 31, MARCH 31, 1997 1996 1996 1995 1998 1997 ------------ ------------ ----------- -------------- ------------- ------------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)................. $ 1,901 $ 166 $ 746 $ (315) $ 1,195 $ 216 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization................ 1,030 363 567 382 337 186 Accretion of interest expense..................... 31 -- -- -- 29 -- Deferred income taxes......... 116 (130) 57 23 120 35 Provision for doubtful accounts.................... -- 45 90 205 30 11 Deferred compensation......... 104 -- -- -- 63 -- Changes in operating assets and liabilities: Accounts receivable......... (1,200) (340) (616) (139) (309) 244 Prepaid expenses and other current assets............ (183) (396) (81) (196) (366) 163 Other assets................ 6 (24) (22) -- -- -- Accounts payable and accrued expenses.................. 1,145 2,383 449 (372) 304 139 ------------ ------------ ----------- ------- ------------- ------------- Net cash provided by (used in) operating activities............ 2,950 2,067 1,190 (412) 1,403 994 ------------ ------------ ----------- ------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of businesses, net of cash acquired................... (645) (181) (669) -- (4) -- Repayment of note receivable...... -- -- -- 200 Sale (purchase) of marketable securities, net................. 54 -- (164) (12) 100 1 Purchase of property and equipment, net.................. (972) (243) (369) (588) (329) (220) Due from stockholders............. (72) (263) (172) 52 (662) (39) Due (from) to affiliate, net...... 400 (949) (1,154) (238) -- 1,934 Property and equipment deposit, net............................. (174) (95) 165 (165) -- -- ------------ ------------ ----------- ------- ------------- ------------- Net cash used in investing activities...................... (1,409) (1,731) (2,363) (751) (895) 1,676 ------------ ------------ ----------- ------- ------------- ------------- F-25 Q INTERNATIONAL COURIER, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS) SIX MONTHS THREE MONTHS THREE MONTHS YEAR ENDED ENDED YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, MARCH 31, MARCH 31, 1997 1996 1996 1995 1998 1997 ------------ ------------ ----------- -------------- ------------- ------------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from bank loans.......... $ 15,594 $ 5,450 $ 10,350 $ 5,800 $ 4,250 $ 1,750 Principal payments on bank loans........................... (16,000) (6,250) (8,350) (4,900) (3,175) (3,900) Principal payments on notes payable to stockholders......... -- -- -- -- (2,350) -- Principal payments on capital lease obligations............... (230) (85) (123) (93) (72) (47) ------------ ------------ ----------- ------- ------------- ------------- Net cash provided by (used in) financing activities............ (636) (885) 1,877 807 (1,347) (2,197) ------------ ------------ ----------- ------- ------------- ------------- Net change in cash and cash equivalents..................... 905 (549) 704 (356) (839) 473 Cash and cash equivalents at beginning of period............. 237 786 82 438 1,142 237 ------------ ------------ ----------- ------- ------------- ------------- Cash and cash equivalents at end of period....................... $ 1,142 $ 237 $ 786 $ 82 $ 303 $ 710 ------------ ------------ ----------- ------- ------------- ------------- ------------ ------------ ----------- ------- ------------- ------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest........................ $ 499 $ 160 $ 288 $ 122 $ 258 $ 83 ------------ ------------ ----------- ------- ------------- ------------- ------------ ------------ ----------- ------- ------------- ------------- Cash paid during the year for income taxes.................... $ 51 $ 23 $ 9 $ 16 $ 64 $ 5 ------------ ------------ ----------- ------- ------------- ------------- ------------ ------------ ----------- ------- ------------- ------------- Fixed asset additions financed under capital leases............ $ 519 $ 41 $ 705 $ 316 $ -- $ -- ------------ ------------ ----------- ------- ------------- ------------- ------------ ------------ ----------- ------- ------------- ------------- Accrued purchase of intangible assets.......................... $ -- $ -- $ 181 $ -- $ -- $ -- ------------ ------------ ----------- ------- ------------- ------------- ------------ ------------ ----------- ------- ------------- ------------- Issuance of common stock for acquisitions.................... $ 6,500 $ -- $ -- $ -- $ -- $ -- ------------ ------------ ----------- ------- ------------- ------------- ------------ ------------ ----------- ------- ------------- ------------- Debt incurred for acquisitions.... $ 3,814 $ -- $ -- $ -- $ -- $ -- ------------ ------------ ----------- ------- ------------- ------------- ------------ ------------ ----------- ------- ------------- ------------- See accompanying notes. F-26 Q INTERNATIONAL COURIER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION The consolidated financial statements include the accounts of Q International Courier, Inc. and, in 1997 and 1998, its wholly-owned subsidiaries, Sterling Courier, Inc. ("Sterling"), Straightline Courier, Inc. and QuickStat, Inc. (collectively referred to as the "Company"). All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The Company is a domestic and international courier. The Company's customer base is composed of various customers within several industries, and such customers are primarily located throughout the United States. Prior to 1997, the Company had two affiliates, Genesis Worldwide Courier ("Genesis") and Quick International Courier of Illinois, Inc. ("Illinois"), which were related by common ownership of three individuals. Genesis was owned 50% by another individual and Illinois was owned 20% by another individual. Effective February 1997, Illinois was merged into the Company and has been accounted for in a manner similar to that of a pooling of interest. Accordingly, the operations of Illinois have been included in the Company's results of operations as if the acquisition occurred at the beginning of the year, and for all prior years presented. Effective August 31, 1997, the 50% stockholder of Genesis sold his interest to two of the three remaining Genesis stockholders and Genesis was merged into the Company. In connection with the merger of Genesis the Company issued 1,111 shares of the Company's common stock valued at $2,000,000. The acquisition of Genesis has been accounted for by the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets based on their estimated fair values at the date of acquisition. The operating results have been included in the Company's results of operations from the date of acquisition. In September 1997, the Company, through Sterling, acquired all of the outstanding stock of Sterling Courier Systems, Inc., for $8,970,000, consisting of $656,000 in cash, 1,166 shares of the Company's common stock, valued at $4,500,000 and notes totaling $3,814,000 (including $300,000 for a noncompete agreement) payable to Sterling Courier System's former stockholder. Included in the notes is a $2,000,000 noninterest bearing note that has been discounted at 7.5% to $1,664,000, and is payable on September 30, 2002. The discount is being accreted into interest expense over the life of the note. The remaining note bore interest at 7.0% and was fully repaid on January 2, 1998. In addition, the Company entered into an employment agreement and operating lease with the former stockholder. The acquisition has been accounted for by the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets based on their estimated fair values at the date of acquisition. The operating results of the acquisition have been included in the Company's results of operations from the date of acquisition. In October 1995, the Company acquired certain assets of Specialty Mailing, Inc. ("SMI") for 10% of all sales, as defined, originated by certain former employees of SMI for the year ended September 30, 1996. The acquisition was accounted for by the purchase method of accounting and, accordingly, the purchase price of $850,000 has been allocated to the assets based on their estimated fair values at the date of acquisition. The operating results of the acquisition were included in the Company's results of operations from the date of acquisition. F-27 Q INTERNATIONAL COURIER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED) 2. SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS The Company considers all highly-liquid investments purchased with a maturity of three months or less to be cash equivalents. MARKETABLE SECURITIES Marketable equity securities are classified as available for sale and are carried at fair value as determined by quoted market prices, which exceeded cost by $125,000 at March 31, 1998, $70,000 at December 31, 1997 and $25,000 at December 31, 1996. The cost of securities sold is based on the average cost method. DEPRECIATION AND AMORTIZATION Depreciation of property and equipment is provided for by the straight-line method generally over five years, the estimated useful lives of the respective assets. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the respective assets. For the year ended December 31, 1997 and the six months ended December 31, 1996 the Company wrote off $51,000 and $3,000, respectively, of fully