Description

Airnet Systems, Inc. (NYSE: ANS $3.55), a specialty air carrier for time-sensitive deliveries, provides a special situation and has the potential to generate returns well over 100% in 18-24 months. The company possesses a significant hidden value with a strong likelihood of its realization to shareholders, as well as downside protection to minimize the risk involved. The following will be addressed in the discussion as elements of value for shareholders:

•shares trading at ½ their tangible book value, the majority of which will be realized because of federal legislation forcing a business transition and in effect, a liquidation of its associated assets;
•the current market’s misinterpretation of what impact the federal legislation will have on ANS, which it believes will be obsolete in a changing industry;
•in addition to the market’s misinterpretation, the company actually possessing a significant franchise value that catapults it as the front-runner in the changing industry

Company Description and Financial Overview
ANS’s provides its services under three lines: bank services, express services and aviation services. AirNet's bank service, which generates approximately 68% of its revenues, specializes in physically transporting cancelled checks and related information for the United States banking industry, servicing over 90% of the country’s top 100 banks. Airnet’s express service, which generates approximately 29% of its revenues, provides specialized, high-priority delivery services. The Company's aviation services product line, which accounts for approximately 3% of its revenues, offers on-demand cargo charters, retail aviation fuel sales and related ground services to its customers in Columbus, Ohio.

(000s)
Market Cap 35,962
Outstanding Debt 35,201
Cash 1,519
Enterprise Value 69,644

TTM EBITDA 22,383
Cap Rate 32.14%


Trailing 12 Months (000s)
Sales 151,580 Sales/Share 14.96
Cogs 107,820 EPS 0.17
SG&A 21,390 TBV per share 7.94
EBIT 22,370 FCF per share 1.53
Taxes 1,340 EBITDA per share 3.96
EBIAT 21,030
Depr. 17,783
CAPX 18,710 Price/Sales 0.24
ChgWC 4,650 P/E 20.67
FCF 15,453 P/TBV 0.45
P/FCF 2.33
TTM Net Income 1,740 P/EBITDA 0.90



Recent Events
Prior to a discussion of the value for shareholders going forward, recent concerns have arisen because of an event that dates back to September 2002 when a Business Week article quoted an anonymous, disgruntled shareholder expressing concerns over the future of the company. The market later assumed the person to be Gerald Mercer, the company’s founder and former CEO, who in the following months liquidated 50% of his ownership and resigned his post of 28 years. His ownership, which was previously over 16% of the company, has now been reduced to slightly above 8%. Digging deeper below the surface as to what the situation was and is however, one will discover that Mercer did not leave the company because of internal turmoil, or accounting issues, or anything of that kind. He remains in frequent contact with current management and the 50% liquidation of his ownership has nothing to do with the potential deterioration of the business’ operations. Take a wild guess at why someone would need to sell 50% of their net worth. Exactly. Gerald Mercer and his wife divorced, forcing him to liquidate half of his assets. Now that he has reached the 50% mark and minimal selling prior to his divorce, there is strong reason to believe he will not continue to sell shares.

Passage of ‘Check 21-Check Clearing for the 21st Century’
‘Check 21,’ a piece of federal legislation passed in October, allows financial institutions to make a complete transition from clearing a hard copy of checks to electronic processing. Therefore, the need no longer exists for financial institutions to pay companies such as Airnet Systems to courier physical copies. The market has perceived this as an elimination of 68% of Airnet’s revenues as well as a majority of future cash flows. This, in addition to the Mercer situation, has had a damaging effect on the company’s stock price, which traded as high as $11.00 in March, 2002.
There is no doubt that the legislation has opened up the floodgates for companies to enter an evolving industry in the search for profits, which has created a situation where quite a few technology companies are all vying for the opportunity to sell their products and services to financial institutions. This is where ANS’s franchise value exists. The company recently announced that it was approached by NetDeposit, a wholly owned subsidiary of Zions Bancorp. that provides the electronic imaging solutions, to form an alliance and provide the end-to-end ‘Image Replacement Documents’ solutions necessary for banks to process checks. The release also contained the formation of FastForward, LLC as a wholly owned subsidiary of ANS, with plans for a Q1 2004 rollout of their first product.
A question that arises is why NetDeposit, which operates in the tech industry, would approach ANS, which operates in the air freight industry. Given the high switching costs for banks using the check-imaging infrastructure, the first technology company that is able to provide a bank with its services, essentially locks in its ability to generate revenues as well as prevent others from entering the market. AirNet Systems has provided the service, although in a different way, to over 90% of the top 100 banks for 28 years and thus established the relationships necessary to continue to do so. So, not only, as management has suggested, will they continue to provide the services, the capital expenditures required to develop the technologies were spent by NetDeposit, as well as every other company vying for space.
Over the course of the business transition, as the physical transportation of checks is needed less and less, ANS is forced to liquidate the associated assets for cash, which will serve as an asset realization for shareholders whether the revenue becomes obsolete or not. Given the assets do not have to be used solely for the purpose of check transportation, and can be sold for alternative uses, the downside to their liquidation value is limited. Depending on the amount of time it takes for banks to entirely substitute from physical to electronic check transport will the realization of liquidated aircrafts occur, which many in the banking industry believe to be 12-18 months after October 2004.
ANS is trading at .4 times its price to tangible book value, most of which is made up of a stable accounts receivable balance, an 80k square foot building in Ohio, and the following 120 aircrafts used for operations:

- (34) Learjet 35s
- (1) Learjet 60
- (4) Learjet 25s
- (7) Cessna Caravan Cargomasters
- (18) Piper Navajo Chieftains
- (40) Beechcraft Barons
- (16) Cessna C-310s

The company’s total tangible assets are $145.185 million while total liabilities are $64.8 million, with 10.13 million shares outstanding.
ANS’s current business is generating $14.96/share in revenue, $.17/share in earnings, $3.96 in EBITDA, and $1.53/share in free cash flow. At $3.55, its respective multiples are: 0.24 times revenue, 20.67 times earnings, 2.33 times free cash flow, and 0.9 times EBITDA. Given the ‘perceived’ risk of the company’s bank operations becoming obsolete, one can assume, if ‘Check 21’ operations were implemented quickly starting October 4, 2004 by financial institutions, ANS has approximately the next 12 months of sustained earnings, followed by 12 months of diminishing revenue generated by the aircrafts. If the banking operation segment becomes obsolete, and the company looses the associated earnings, they can expect $3.06/share in free cash flow until October 2004 and $0.49/share in free cash flow there after from the remaining operations, assuming revenues drop off completely and none are generated from the FastForward subsidiary. Therefore, due to the almost impossible task of determining electronic check imaging revenues, the liquidation of bank-related aircrafts should net approximately $5.39/share, totaling a company with a net cash value of at least $6.92, which is well above the current market price of $3.55/share. One must remember and let this serve as a limited downside risk, because it assumes that Airnet Systems will not continue operating in the check transportation industry, which, given the recent circumstances, is not likely.

Catalyst

•the initiation, which has already occurred, of a transition from physical to electronic check processing
•the product rollout in Q1 of 2004
•the announcement of contracts signed with financial institutions to offer technology solutions
•October of 2004, when the first check image can be processed electronically, therefore reducing the need for physical transportation; this forces the company to liquidate the associated aircrafts and thus allow shareholders to realize the value