**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM10-K**

 

| **ý** |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|------------|--------|-----------------------------------------------------------------------------------------------|
|       |   |                                                                                          |
|       |   | **FOR  THE FISCAL YEAR ENDED DECEMBER 31, 2002**                                              |
|       |   |                                                                                          |
|       |   | **OR**                                                                                        |
|       |   |                                                                                          |
| **o**      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

** **

**CommissionFile Number 1-13025**

** **

**AirNet Systems, Inc.**

(Exact name ofregistrant as specified in its charter)

 

## ***An Ohio Corporation***

I.R.S. EmployerIdentification No. 31-1458309

 

**3939 International Gateway**

**Columbus, Ohio 43219**

(Address ofprincipal executive offices) (Zip Code)

 

**614-237-9777**

(Registrant’stelephone number, including area code)

 

Securitiesregistered pursuant to Section 12(b) of the Act:

AirNet Systems, Inc. common shares, $.01 par value,are registered on the New York Stock Exchange

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.   Yes   ý   No   o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in rule 12b-2 of theAct ).   Yes   o   No   ý

 

The aggregate marketvalue of the voting stock held by non-affiliates of the registrant based on theprice at which the common equity was last sold as of the last business day ofthe registrant’s most recently completed second quarter was $67,407,695.

 

The number of shares ofthe registrant’s common stock outstanding as of March 20, 2003: 10,112,317.

 

Portions of theregistrant’s definitive Proxy Statement for its Annual Meeting of Shareholdersto be held on May 9, 2003, are incorporated by reference into Part III of thisAnnual Report on Form 10-K.

** **

 

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**INDEX**

 
|           |                                                                                            |
|----------------|-------------------------------------------------------------------------------------------------|
| PART I         |
| Item 1:        | Business                                                                                        |
| Item  2:       | Properties                                                                                      |
| Item  3:       | Legal Proceedings                                                                               |
| Item  4:       | Submission of Matters to  a Vote of Security Holders                                            |
|           |
| PART II        |
| Item  5:       | Market for Registrant’s  Common Equity and Related Stockholder Matters                     |
| Item  6:       | Selected Financial Data                                                                         |
| Item  7:       | Management’s Discussion  and Analysis of Financial Condition and Results of Operation      |
| Item  7A:      | Quantitative and  Qualitative Disclosures about Market Risk                                     |
| Item  8:       | Financial Statements and  Supplementary Data                                                    |
| Item  9:       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure           |
|           |
| PART III       |                                                                                            |
| Item  10:      | Directors and Executive  Officers of the Registrant                                             |
| Item  11:      | Executive Compensation                                                                          |
| Item  12:      | Security Ownership of  Certain Beneficial Owners and Management and Related Stockholder Matters |
| Item  13:      | Certain Relationships  and Related Transactions                                                 |
| Item  14:      | Controls and Procedures                                                                         |
|           |
| PART IV        |
| Item  15:      | Exhibits, Financial  Statement Schedules and Reports on Form 8-K                                |
|           |                                                                                            |
| Signatures     |
|           |                                                                                            |
| Certifications |
|           |                                                                                            |
| Exhibit Index  |
|                |                                                                                                 |  |

** **

2

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** **

**PARTI**

 

**ITEM 1 -BUSINESS**

 

**General**

 

AirNet Systems, Inc. is aspecialty air carrier for time-sensitive deliveries, operating between 100 U.S.cities and delivering over 20,000 time-critical shipments each workingday.  AirNet’s Bank service, whichgenerates approximately 68% of AirNet’s revenues, is the leading transporter ofcancelled checks and related information for the U.S. banking industry, meetingmore than 2,200 daily deadlines.

 

AirNet’s Express service,which generates approximately 29% of AirNet’s revenues, provides specialized,high-priority delivery services.  InDecember 2002, AirNet was awarded a General Services Administration Federal SupplySchedule, Indefinite Delivery/Indefinite Quantity contract to provide domesticexpress delivery services to U.S. federal government agencies.  This contract will allow us to providespecialized, highly sensitive, and expedited transportation solutions tovarious governmental agencies at pre-negotiated rates.

 

AirNet’s Aviationservices product line, which accounts for approximately 3% of AirNet’srevenues, began offering a broader array of passenger charter services in 2002.Through the use of seven passenger-configured Learjets, passenger charters areoffered 24 hours per day, seven days per week. This product line also offerson-demand cargo charters, retail aviation fuel sales and related groundservices to customers in Columbus, Ohio.

 

In addition to the sevenpassenger-configured Learjets, AirNet operates a fleet of 122 aircraft (33Learjets, 15 Cessna Caravans and 74 light twin engine aircraft), that flyapproximately 120,000 miles per operating night, primarily Monday throughThursday.  On-demand cargo charterservices are offered 24 hours per day, seven days per week.  AirNet also provides ground pick-up anddelivery services throughout the nation seven days per week, using acombination of company personnel and a network of approximately 250 vendors andindependent contractors.  AirNet’sintegrated air and ground network provides support for our base customers,primarily concentrated in the banking, medical and critical parts industries.  AirNet also uses commercial airlines toprovide same-day delivery service for some of our Bank service and Expressservice customers.  Later pick-ups andearlier deliveries than those offered by other national carriers are thedifferentiating characteristics of AirNet’s time-critical deliverynetwork.  AirNet uses a number ofproprietary customer service and management information systems to track, sort,dispatch and control the flow of checks and small packages throughout AirNet’sdelivery system.  Delivery times andselected shipment information are available on-line through the Internet.

 

AirNet Systems, Inc. wasincorporated as a C-corporation under the laws of the State of Ohio onFebruary 15, 1996.  AirNet’sprincipal executive offices are located at 3939 International Gateway,Columbus, Ohio 43219, and our telephone number is (614) 237-9777.  AirNet’s web site address is www.airnet.com (this uniform resourcelocation (URL) is an inactive textual reference only and is not intended toincorporate our website into this report).

 

**Business strategy**

 

We will continue topursue our multi-year strategy to transform AirNet into a company thatmaximizes utilization of its unique airline by responding to growthopportunities for our Express business, while also continuing to respond to theneeds of our bank customers.  Thisdiversification will likely require significant changes in our route structureand a greater investment in sales and marketing during the transition.

 

We are adapting tochanges in the banking industry by reconfiguring our operational structure andits associated costs to align it with the volume and revenue changes.  We have also developed a new pricing modelfor our major bank customers to attract greater volumes and benefit both AirNetand our bank customers.

 

Our Express customersvalue our speed and customer service, and AirNet intends to focus ontime-critical markets, and time-definite delivery markets such as medical,radioactive pharmaceutical, on-demand cargo charters and just-in-timeinventories, in which our airline offers customers competitive advantages intheir industries through our speed and customer service.  We believe our flexible and reliable airnetwork and demonstrated expertise in providing time-critical deliveries to thebanking industry for over 28 years positions us to provide these expandedservices to the Express market.

 

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**Product lines**

 

AirNet provides itsservices under 3 product lines:  Bankservices, Express services and Aviation services.

 

*Bankservices*

Bank services primarilyconsist of cancelled check delivery. AirNet also transports items, such as proof of delivery reports andinteroffice mail, for many of the same Bank customers.  AirNet has historically priced its Bankservices based on the tier of service, and by the pound, on acustomer-by-customer basis.  The U.S.banking industry, including commercial banks, savings banks and Federal Reservebanks, represents AirNet’s largest category of customers and accounted forapproximately 68% of our revenues in 2002, 75% in 2001 and 74% in 2000. Thiscustomer list represents over 100 of the nation’s largest bank holdingcompanies.  AirNet’s time-criticalcancelled check delivery service allows our banking customers to offercompetitive products and pricing.

 

*Expressservices*

Express revenuesaccounted for 29% of AirNet’s revenues in 2002, 24% in 2001 and 26% in2000.  Within Express services, AirNethas several product offerings including Medical, Air Courier, Retail andMercury Business Services.

 

Medical services areoffered to customers requiring specialized handling, the transportation ofwhich is often highly regulated by varying governmental authorities.  Targeted markets within medical includeproducers and recipients of radioactive pharmaceuticals, diagnostic specimens,blood, human tissue and organs.  AirNetalso provides passenger charter services to organ transplant teams requiringtime-critical travel to donor/recipient medical centers.

 

Air courier servicesprovide transportation solutions to forwarders, integrators and couriercompanies.  AirNet provides late-nightservices beyond most integrators’ and forwarders’ deadlines.

 

Retail services areprovided to end consumers whose shipment needs are highly time sensitive ortime definite.  Target markets includejust-in-time manufacturers and critical parts suppliers.

 

Mercury Business Servicesprovides nationwide overnight delivery from the Boston, Chicago and New Yorkmetropolitan areas.  Shipments arepicked up by a Mercury courier, processed and then forwarded to a third partycarrier to transport and deliver. Target markets include law firms and small professional services firmsin dense business districts.

 

*Aviationservices*

The Aviation servicesproduct line was expanded in 2001 to increase utilization of our airline beyondhistorical nighttime flights and to capitalize on our aircraft maintenanceexpertise.  The Aviation servicesproduct line offers passenger charter services, on-demand cargo charters, andoperates a fixed base operation from our Columbus, Ohio facility, offeringretail aviation fuel sales and related ground services.

 

**Delivery service offerings**

 

AirNet provides thefollowing types of delivery service: ANX (transported via the AirNet airline), AMC (AirNet Mission Critical),SDX (transported via third-party carriers), ground-only and on-demand cargocharter.

 

*ANXservice*

AirNet’s ANX service isdesigned around three sets of deadlines. Basic deadlines, which have a hub timein Columbus between 9:30 p.m. and 10:00 p.m., provide delivery service between12:01 a.m. and 2:00 a.m. to approximately the northeastern third of thenation.  Premium deadlines, which have ahub time between 11:00 p.m. and 11:30 p.m. in Columbus and Charlotte, providedelivery service at approximately 3:00 a.m. to the eastern half of thenation.  Finally, City deadlines, whichhave a hub time in Columbus between 4:00 a.m. and 5:30 a.m., provide deliveryservice at approximately 8:00 a.m. to all cities served by the network.

 

Bank ANX shipments arepre-sorted by bank personnel and packaged in AirNet-supplied bags color-codedto easily identify the final destination. ANX Express shipments are packaged in either AirNet-provided packagingor the customers’ packaging.  An ANXshipment is typically picked up by an AirNet courier and transported to thelocal airport where the airbill is scanned using bar code technology, andinformation pertaining to the shipper, receiver, airbill number and applicabledeadline is captured. This data is then downloaded into AirNet’s ComCheck orAirNet Connect computer system, where it is available to AirNet’s customerservice representatives (“CSRs”).

 

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Upon arrival at AirNet’sColumbus hub or one of our mini-hubs, the shipment is off-loaded, sorted by destinationand reloaded onto an aircraft. At the destination city, the shipment isoff-loaded for the final time and delivered by courier to the receiver.  When delivered, the airbill is once againscanned and delivery information is downloaded into AirNet’s computer system.Delivery information for all shipments is then available on-line to thecustomers and CSRs.  AirNet’s customerservice department is available to handle any inquiries, discrepancies orsupply requests, as well as provide proof of delivery documentation, all ofwhich are value-added features of AirNet’s service.

 

*AMCservice*

AirNet Mission Criticalservice is available when customers require enhanced levels of special care inchain of custody, communications, or operating controls on their ANX shipments.

 

*SDXservice*

AirNet’s SDX serviceprovides cancelled check delivery services to Bank customers meeting daytimebanking deadlines, and to Express customers requiring next-flight-out timing.These shipments are typically picked up by AirNet couriers and transported viacommercial airlines or other integrators to destination cities where couriersaccept the packages and deliver them to the destinations.

 

*Groundonly*

Ground only services areprovided to customers with specialized handling requirements that matchAirNet’s unique delivery capabilities in select markets.

 

*On-demandcargo charter*

On-demand cargo charterservices are provided to customers requiring the full use of an aircraft fordedicated deliveries.  Charters may bescheduled in advance or on an as-needed basis.

 

**Passengercharter services**

 

AirNet’s private charterservice provides travelers a safe, fast, and convenient way to travel.  Private charter service is available 24hours a day, 7 days a week primarily within the continental United States andneighboring countries.   In addition toserving retail customers, AirNet provides charter services through third-partycharter brokers.  AirNet operates itsprivate charter service from four locations across the country (Columbus, Dallas,Lancaster, PA and Bedford, MA).  Allpassenger charter pilots are Airline Transport Pilot rated – the highest Federal Aviation Administration (“FAA”) ratingpossible.

 

**Operations**

 

*Airline capacity management*

 

Capacity management is animportant factor in achieving profitable growth of the company.  The airline is positioned around a flexiblenational route structure designed to facilitate late pick-up and early deliverytimes, minimize delays and simplify flight scheduling.  AirNet’s hub-and-spoke system, with aprimary hub in Columbus, Ohio and several mini-hubs across the nation (Atlanta,Chicago, Charlotte, Dallas, Denver, Des Moines and New York), allows AirNet tomatch the varying load capacities of our aircraft with the shipment weight andvolume of each destination city and to consolidate shipments at our hubs. Thehubs are located primarily in less congested regional airports. Theselocations, in conjunction with AirNet’s off-peak departure and arrival times,provide easy take-off and landings, convenient loading and unloading, and fastrefueling and maintenance.  Volume loadfactors by aircraft, departure city-pairs and lane segments are keycontributors to profitability, as is the mix of aircraft and overall fleetutilization.  Scales and scanners havebeen installed in some of our customer’s facilities in order to capture weighton an end-point basis. This data allows us to create point-to-point routes onspecific lane segments, where appropriate, which reduces excess capacity in thehub-and-spoke route system.

 

*Aircraft maintenance*

 

AirNet employs aircraftand avionics technicians in eight separate locations across the country(Columbus, Dallas, Denver, Hartford, Minneapolis, New Orleans, Birmingham andPhiladelphia), performing all levels of maintenance from 100-hour inspectionson our light twin-engine aircraft to 7,200-hour/12-year inspections on ourfleet of Learjets.  AirNet has anin-house engine shop at the Columbus facility where some of the piston enginesare overhauled on-site, thereby reducing aircraft downtime and controllingcosts.  AirNet also performs avionicstroubleshooting and repair at the Columbus facility to provide for maximumefficiency and minimum aircraft downtime for the fleet.

 

5

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*Flight operations*

 

AirNet’s flightoperations are headquartered in Columbus, Ohio.  AirNet utilizes an extensive screening process to evaluatepotential pilots prior to hiring. These pilots meet stringent companyqualifications, as well as all required Federal Aviation Administrationrequirements.  All new pilots mustsatisfactorily complete a five-week training program conducted by AirNet’sflight training staff prior to assignment of pilot duties.  This training program includes flightsimulator training prior to any actual flight time in an aircraft, as well asintensive ground instruction.  Additionally, new pilots gain operating experience in a structured setting prior to assignment in order to gaina familiarity with AirNet’s route system and the unique demands of the flight environment.

 

AirNet’s central dispatchsystem ties together all components of the air operation. Departure and arrivaltimes are continuously updated, and weather conditions throughout the nationare constantly monitored. AirNet dispatchers remain in constant contact withpilots, out-based hub managers, fuelers, maintenance technicians and grounddelivery personnel to ensure that no gaps exist in the delivery process.  AirNet also uses commercial airlines,primarily to transport shipments during the daytime and weekend hours when ouraircraft are operating under a limited flight schedule.  Operations personnel utilize *FlightTrax,*acomputerized flight tracking system that allows them to track the status ofevery AirNet and commercial flight in the country and schedule ground pick-upand delivery personnel appropriately.

 

*Ground operations*

 

AirNet manages its groundservices through a combined use of employed team member couriers andapproximately 250 outside independent contractor and vendor couriers.  Team members are typically utilized on thescheduled routes that occur each operational day.  Independent contractors and vendors are typically used for ad hocpick-up and delivery services, allowing us to better match our ground costswith our volume streams.  Dispatchingfunctions related to ground delivery services occur at both the Columbus, Ohiohub and on a regional basis in some of the major cities served.

 

Shipments are typicallypicked up by a courier and delivered to the originating airport where AirNetground support personnel load the shipments into aircraft. Upon arrival at themain hub in Columbus, Ohio, packages are off-loaded, sorted by destination andreloaded onto aircraft.  During thethirty to forty minute sort period, AirNet ground support personnel refuel theaircraft.  Fueling operations inColumbus include trained fuelers and ground support equipment, including sevenfuel trucks and approximately 86,500 gallons of fuel storage capacity.  Contracted fixed base operators at localairports typically perform out-based fueling of aircraft.

 

**Regulation**

 

AirNet holds an aircarrier certificate granted by the FAA pursuant to Part 135 of the Federal Aviation Regulations.This certificate is of unlimited duration and remains in effect so long asAirNet maintains its standards of safety and meets the operational requirementsof the regulations.  The FAA’sregulatory authority relates primarily to operational aspects of air transportation,including aircraft standards and maintenance, personnel and ground facilities.

 

InAugust 2002, the FAA issued rules mandating repairs on certain Piper Navajoaircraft.  The ruling, in response to incidents experienced byother owners involving the aircraft’s crankshaft, immediately grounded theaircraft until the mandated repairs were made. AirNet’s airline fleet currently includes two such grounded aircraft (seven as of December 31,2002), which will remain grounded until replacement engines or repair partsbecome available.

 

TheU. S. Department of Transportation (“DOT”) and Transportation SecurityAdministration (“TSA”) have regulatory authority concerning operational andsecurity concerns in transportation, respectively, including safety, insuranceand hazardous materials.  AirNet holdsvarious operational certificates issued by these agencies, including partystatus to DOT E-7060, which permits AirNet to transport specific volumes oftime-critical radioactive pharmaceuticals.

 

AirNetis also subject to Food and Drug Administration regulation of ourtransportation of pharmaceuticals.

 

Inaddition to federal regulations, AirNet’s operations are subject to variousstate and local regulations, and in many instances, require permits andlicenses from state authorities.

 

AirNetbelieves that we have all permits, approvals and licenses required to conductour operations and that we are in compliance with applicable regulatoryrequirements relating to our operations including all applicable noiselevel regulations.  AirNet is workingproactively with various local governments to minimize noise issues; however,future noise pollution regulations could require the replacement of several ofour aircraft.

 

6

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**Seasonality**

 

See“Item 7:  Management’s Discussion andAnalysis of Financial Condition and Results of Operations” under the heading“Seasonality and Variability in Quarterly Results”.

 

**Competition**

 

The air and groundcourier industry is highly competitive. AirNet’s primary competitor in the transportation of cancelled checks isthe Federal Reserve’s Check Relay Network. The actions of the Federal Reserveare regulated by the Monetary Control Act, which requires the Federal Reserveto price its services at actual cost plus a set percentage private sectoradjustment factor. AirNet believes that the purpose of the Monetary Control Actis to curtail the possibility of predatory pricing by the Federal Reserve whenit competes with the private sector. No assurance beyond the remedies of lawcan be given that the Federal Reserve will comply with the Monetary ControlAct.

 

In the private sector,there are a large number of smaller, regional carriers that transport cancelledchecks, none with a significant interstate market share. The two largest privatesector air couriers, Federal Express Corporation (“FedEx”) and United ParcelService (“UPS”), both carry cancelled checks where the deadlines being pursuedfit into their existing system, but this has not represented a significantmarket share of this industry market to date. AirNet provides customizedservice for our customer base, often with later pick-ups and earlier deliveriesthan the large, national couriers provide. Both FedEx and UPS utilize AirNet’s transportation network for certainsituations where they require customized service.

 

AirNet competes withcommercial airlines and numerous other carriers in its Express deliverybusiness.  AirNet estimates its marketshare in this industry at less than 1%. AirNet believes that this market represents a significant expansionopportunity for ultra time-critical shipments requiring later pick-ups orearlier deliveries than are typically provided by major integrators and freightforwarders.  AirNet believes that we arein an excellent position to leverage the use of our unique air network system,our proprietary information technology and our historically high on-timeperformance level to compete in this market.

 

In the passenger charterbusiness, AirNet competes with other owner/operators of small business jets andcharter brokers.  We believe ournationwide network of maintenance and related support facilities provides addedflexibility in deploying and servicing the passenger charter aircraft fleet tomeet customer demands.

 

**Environmental matters**

 

AirNet believes thatcompliance with applicable laws and regulations governing environmental mattershave not had, and are not expected to have, a material effect on AirNet’scapital expenditures, operations or competitive position.

 

**Employees**

 

As of December 31, 2002AirNet employed 1,045 persons.  AirNet’semployees are not represented by any union or covered by any collectivebargaining agreement.  AirNet hasexperienced no work stoppages and believes that our relationship with employeesis good.

 

**ITEM 2****- PROPERTIES**

 

**Operating facilities**

 

AirNet owns its corporateand operational headquarters at 3939 International Gateway in Columbus,Ohio.  The complex has 80,000 squarefeet and sits on land owned by the Port Authority of Columbus.  AirNet has a 25-year land lease with thePort Authority, which expires on December 31, 2009 and contains a 20-yearrenewal option.  AirNet’s headquartersis currently used for operations, training, aircraft maintenance, vehiclemaintenance and general and administrative functions.

 

AirNet leases additionalspace at 4700 East Fifth Avenue, also located on Port Authority of Columbusland.  The space is used foradministrative support personnel.

 

AirNet operates atapproximately 40 additional locations throughout the country. These locations,which are leased from unrelated third parties, generally include office spaceand/or a section of the lessor’s hangar or ramp.

 

7

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**Fleet**

 

*Cargo-airline aircraft*

 

The following table showsinformation about our cargo-airline aircraft fleet as of December 31, 2002:

** **
| **Aircraft Type**      |   | **Owned** |   | **Leased** |   | **Payload(1)** |   | **Range(2)** |   | **Speed(3)** |   |
|------------------------|--------|-----------|--------|------------|--------|----------------|--------|--------------|--------|--------------|--------|
|                   |   |      |   |       |   |           |   |         |   |         |   |
| Learjets, Model 35/35A |   | 30        |   |       |   | 3,800          |   | 1,700        |   | 440          |   |
|                   |   |      |   |       |   |           |   |         |   |         |   |
| Learjets, Model 25     |   | 4         |   |       |   | 3,000          |   | 1,000        |   | 440          |   |
|                   |   |      |   |       |   |           |   |         |   |         |   |
| Cessna Caravans        |   | 7         |   | 7          |   | 3,400          |   | 825          |   | 170          |   |
|                   |   |      |   |       |   |           |   |         |   |         |   |
| Piper Navajo(4)        |   | 18        |   |       |   | 1,500          |   | 800          |   | 170          |   |
|                   |   |      |   |       |   |           |   |         |   |         |   |
| Beech Baron            |   | 40        |   |       |   | 1,000          |   | 800          |   | 170          |   |
|                   |   |      |   |       |   |           |   |         |   |         |   |
| Cessna 310             |   | 16        |   |       |   | 900            |   | 800          |   | 170          |   |
|                   |   |      |   |       |   |           |   |         |   |         |   |
| Total                  |   | 115       |   | 7          |   |           |   |         |   |         |   |

 

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(1)          Maximum payload inpounds for a one-hour flight plus required fuel reserves.

(2)          Maximum range innautical miles, assuming zero wind, full fuel and maximum payload.

(3)          Maximum speed inknots, assuming maximum payload

(4)          Includes aircraftgrounded until replacement engines or repair parts become available (seven asof December  31, 2002).

 

An inventory of spareengines and parts is maintained for each aircraft type.

 

TheLearjet 35 is among the fastest, most reliable and most fuel-efficient smalljet aircraft available in the world and meets all Stage Three noiserequirements currently being implemented across the country.  The Learjet 25 is a smaller jet aircraftwith slightly smaller payload and range capabilities.  The Learjet 25 is not Stage Three compliant and likely will bephased out of scheduled operations in 2003.

 

TheCessna Caravan Super Cargomaster aircraft is a turbo-prop aircraft that travelsat a similar speed to the Piper Aerostar aircraft previously in the fleet, butwith over four times the payload of the Aerostar.

 

ThePiper Navajo, Beech Baron and Cessna 310 are twin-engine piston aircraft.

 

*Passengercharter aircraft*

 

The following table showsinformation about our passenger charter aircraft fleet as of December 31, 2002:

** **
| **Aircraft Type**      |   | **Owned** |   | **Leased or  Managed** |   | **Seating(1)** |   | **Range(2)** |   | **Speed(3)** |   |
|------------------------|--------|-----------|--------|------------------------|--------|----------------|--------|--------------|--------|--------------|--------|
|                   |   |      |   |                   |   |           |   |         |   |         |   |
| Learjets,  Model 35A   |   | 3         |   | 1                      |   | 8              |   | 1,700        |   | 440          |   |
| Learjets,  Model 60(4) |   | 1         |   | 2                      |   | 8              |   | 2,300        |   | 440          |   |
| Total                  |   | 4         |   | 3                      |   |           |   |         |   |         |   |

 

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(1)          Maximum number of persons

(2)          Maximum range innautical miles, assuming zero wind, full fuel and full payload.

(3)          Maximum speed in knots,assuming full payload

(4)          Includes one aircraftoperated under a management agreement

 

An inventory of parts ismaintained for each type of Learjet.

 

The Learjet 60 is amidsize business jet with transcontinental range and meets all Stage Three noise requirements.

 

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*Vehicles*

 

AirNet operates a fleetof approximately 125 ground transportation vehicles.   Vehicles range in size from passenger cars to full sizedvans.  AirNet also rents lightweighttrucks for certain weekend ground routes. In 2001, AirNet entered into a leasing agreement with a third partyprovider and began replacing owned vehicles with leased vehicles, asreplacement became necessary.  AirNetleased 81 vehicles as of December 31, 2002 and intends to lease all groundtransportation vehicles as replacement becomes necessary.

 

**ITEM 3****- LEGALPROCEEDINGS**

 

There are no pendinglegal proceedings involving AirNet other than routine litigation incidental toour business. In the opinion of AirNet’s management, these proceedings shouldnot, individually or in the aggregate, have a material adverse effect onAirNet’s results of operations or financial condition.

 

**ITEM 4****-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

No matters were submittedto a vote of security holders during the fourth quarter of 2002.

 

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** **

**Executive officers of the registrant**

 

The following tableidentifies the executive officers of AirNet as of March 20, 2003.  The executive officers serve at the pleasureof the Board of Directors and in the case of Messrs. Biggerstaff, Sumser andHarris pursuant to employment agreements.

 
| **Name**            |   | **Age** |   | **Positions**                                                              |
|---------------------|--------|---------|--------|----------------------------------------------------------------------------|
|                |   |    |   |                                                                       |
| Joel E. Biggerstaff |   | 46      |   | Chairman of the Board,  Chief Executive Officer and President              |
| William R. Sumser   |   | 47      |   | Chief Financial  Officer, Treasurer, Secretary and Vice President, Finance |
| Jeffery B. Harris   |   | 43      |   | Senior Vice President,  Sales                                              |
| Craig A. Leach      |   | 46      |   | Vice President,  Information Systems                                       |
| Stephen K. Lister   |   | 43      |   | Vice President, Airline  Operations                                        |
| Wynn D. Peterson    |   | 39      |   | Vice President,  Corporate Development                                     |
| Kendall W. Wright   |   | 55      |   | Vice President,  Operations                                                |

 

Joel E. Biggerstaff hasserved as AirNet’s Chairman of the Board since August 2001, Chief ExecutiveOfficer since April 2000, and as President and Chief Operating Officer sinceAugust 1999.  Prior to joining AirNet,Mr. Biggerstaff served as President of the Southern Region of Corporate ExpressDelivery Systems, a national expedited distribution service, from February 1998through July 1999.  From September 1996through February 1998, Mr. Biggerstaff provided transportation consultingservices and prior to September 1996, he held various positions within RyderSystem, Inc., including Regional Vice President and General Manager.

 

William R. Sumser hasserved AirNet as the Chief Financial Officer since January 1, 2000, asTreasurer since March 1999, and as the Vice President, Finance and Secretarysince March 1996.  He also served asController from 1988 through 1999.

 

Jeffery B. Harris hasserved AirNet as Senior Vice President, Sales since May 2000.  Mr. Harris served as Vice President, Salesin the banking division from October 1997 to May 2000.  Prior to joining AirNet in June 1996 as theRelationship Manager for Banking Sales, Mr. Harris served as Vice President andSenior Transit Product Manager for Mellon Bank, N.A. from 1994 to 1996.

 

Craig A. Leach has servedas Vice President, Information Systems since January 2000.  Mr. Leach established AirNet’s InformationSystems Department in 1985 and was named Director of Information Systems in1996.

 

Stephen K. Lister wasappointed Vice President, Airline Operations in February 2001.  Mr. Lister has served AirNet in a variety ofcapacities since 1982.

 

Wynn D. Peterson, CFA,has served as Vice President, Corporate Development since February 2000.  He joined AirNet in 1997 as Manager ofCorporate Development.  Prior to joiningAirNet, Mr. Peterson served as a Portfolio Manager for Deseret Mutual from 1993to 1997.

 

Kendall W. Wright hasserved as Vice President, Operations since 2001.  He served as Vice President, Sales from 1988 through 2000.

 

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** **

**PARTII**

 

**ITEM 5****- MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

The common shares ofAirNet Systems, Inc. trade on the New York Stock Exchange under the symbol“ANS”.  The table below sets forth thehigh and low sales prices of the common shares reported for the periodsindicated.

 
|              |   | **2002** |   | **2001** |   |
|-------------------|--------|----------|--------|----------|--------|
| **Quarter ended** |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
| March  31         |   | $        | 11.05  |     | $      | 7.50 |   | $ | 4.60 |   | $ | 3.69 |   |
| June 30           |   | 10.45    |   | 7.50     |   | 6.85 |   | 4.35 |   |
| September  30     |   | 8.92     |   | 4.38     |   | 8.00 |   | 5.00 |   |
| December  31      |   | 6.13     |   | 4.05     |   | 8.24 |   | 5.60 |   |
|                   |        |          |        |          |        |  |  |  |  |  |  |  |  |

 

AirNet has not paid anydividends on our common shares and does not intend to pay any dividends in theforeseeable future.  AirNet anticipatesusing future earnings to finance operations and future growth and development.

 

On March 20, 2003, therewere approximately 2,000 holders of AirNet common shares, based upon the numberof holders of record and the number of individual participants in certainsecurity position listings.

 

11

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**ITEM 6****-SELECTED FINANCIAL DATA**

 

**Statement of Operations Data**

 
| **(in  thousands, except per share data)**                   |   | **Years  Ended December 31,** |        |
|--------------------------------------------------------------|--------|-------------------------------|-------------|
|                                                         |   | **2002**                      |        | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| **Net  Revenues**                                            |   |                          |        |   |   |   |   |   |   |   |   |
| Bank  services                                               |   | **$**                         | **101,023** |   | $ | 104,778 |   | $ | 100,070 |   | $ | 98,950 |   | $ | 93,206 |   |
| Express services                                             |   | **42,529**                    |        | 33,870 |   | 34,465 |   | 28,773 |   | 18,607 |   |
| Aviation services                                            |   | **5,360**                     |        | 1,850 |   | 754 |   | 975 |   | 1,943 |   |
| **Total  net revenues**                                      |   | **148,912**                   |        | 140,498 |   | 135,289 |   | 128,698 |   | 113,756 |   |
|                                                         |   |                          | ** **  |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Costs  and Expenses**                                      |   |                          |        |   |   |   |   |   |   |   |   |
| Operating expenses                                           |   | **121,202**                   |        | 107,713 |   | 104,587 |   | 97,866 |   | 83,648 |   |
| Selling, general, and  administrative (Note  1)              |   | **20,434**                    |        | 19,376 |   | 16,203 |   | 17,775 |   | 13,855 |   |
| **Total  costs and expenses**                                |   | **141,636**                   |        | 127,089 |   | 120,790 |   | 115,641 |   | 97,503 |   |
|                                                         |   |                          |        |   |   |   |   |   |   |   |   |
| Income from operations                                       |   | **7,276**                     |        | 13,409 |   | 14,499 |   | 13,057 |   | 16,253 |   |
|                                                         |   |                          |        |   |   |   |   |   |   |   |   |
| Acquisition termination  charge (Note 2)                     |   | **—**                    |        | — |   | — |   | — |   | 5,570 |   |
| Impairment on investment  (Note 3)                           |   | **—**                    |        | 1,744 |   | — |   | — |   | — |   |
| Interest expense                                             |   | **1,649**                     |        | 1,668 |   | 2,283 |   | 2,477 |   | 1,336 |   |
|                                                         |   |                          |        |   |   |   |   |   |   |   |   |
| Income before income  taxes                                  |   | **5,627**                     |        | 9,997 |   | 12,216 |   | 10,580 |   | 9,347 |   |
|                                                         |   |                          |        |   |   |   |   |   |   |   |   |
| Income tax expense, net                                      |   | **2,256**                     |        | 4,803 |   | 4,961 |   | 4,308 |   | 3,711 |   |
|                                                         |   |                          |        |   |   |   |   |   |   |   |   |
| Income before cumulative  effect of accounting change        |   | **3,371**                     |        | 5,194 |   | 7,255 |   | 6,272 |   | 5,636 |   |
|                                                         |   |                          |        |   |   |   |   |   |   |   |   |
| Cumulative effect of  accounting change, net of tax (Note 4) |   | **(1,868**                    | )           | — |   | — |   | (2,488 | ) | — |   |
|                                                         |   |                          |        |   |   |   |   |   |   |   |   |
| **Net  income**                                              |   | **$**                         | **1,503**   |   | $ | 5,194 |   | $ | 7,255 |   | $ | 3,784 |   | $ | 5,636 |   |
|                                                         |   |                          |        |   |   |   |   |   |   |   |   |
| Income per common share  -basic and diluted                  |   |                          |        |   |   |   |   |   |   |   |   |
| Income before cumulative  effect of accounting change        |   | **$**                         | **0.33**    |   | $ | 0.49 |   | $ | 0.66 |   | $ | 0.55 |   | $ | 0.46 |   |
| Cumulative effect of  accounting change, net of tax          |   | **(0.18**                     | )           | — |   | — |   | (0.22 | ) | — |   |
| Net income                                                   |   | **$**                         | **0.15**    |   | $ | 0.49 |   | $ | 0.66 |   | $ | 0.33 |   | $ | 0.46 |   |

 

**Balance Sheet Data**

 
| **(in thousands)**        |   |       |        |   |   |    |   |   |    |   |   |
|---------------------------|--------|------------|-------------|--------|--------|---------|--------|--------|---------|--------|--------|
|                      |   |       |        |   |   |    |   |   |    |   |   |
| Total assets              |   | **$**      | **147,703** |   | $      | 133,079 |   | $      | 122,533 |   | $      | 127,281 |   | $ | 127,129 |   |
| Total debt                |   | **41,794** |        | 28,235 |   | 22,719  |   | 33,948 |    | 35,506 |   |
| Shareholders’ equity |   | **80,796** |        | 78,946 |   | 78,845  |   | 73,751 |    | 69,674 |   |
|                           |        |            |             |        |        |         |        |        |         |        |        |  |  |  |  |  |

 

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**Note 1****                 **2001 includes a$1.0 million non-recurring charge related to the retirement agreement of GeraldG. Mercer (see Note 7 to the Consolidated Financial Statements included in Item8.)

 

**Note 2**                  Represents costsincurred as a result of the termination of a planned acquisition of QInternational Courier, Inc. (“Quick”). The agreement was terminated in June 1998, resulting in a $2.4 millioncharge related to costs incurred during merger negotiations and a $3.2 millioncharge related to the settlement of a lawsuit filed by Quick.

 

**Note 3****                 **Represents 2001non-recurring charge related to the impairment of AirNet’s investment in theCheck Exchange System Company partnership (see Note 1 to the ConsolidatedFinancial Statements includedin Item 8.)

 

**Note 4**                  See Notes 1 and 2to the Consolidated Financial Statements included in Item 8 related to the 2002charge related to the impairment of goodwill in accordance with the adoption ofSFAS 142.  In 1998, the AmericanInstitute of Certified Public Accountants issued Statement of Position(SOP)  No. 98-5, Reporting on the Costsof Start-Up Activities, which requires that costs related to start-upactivities be expensed as incurred. Prior to July 1, 1998, AirNet capitalized start-up costs associated withits premium products line of business. Effective July 1, 1998, AirNet ceased capitalizing such costs and beganamortizing the previously capitalized costs over five years.  The company adopted the provisions of theSOP in its financial statements as of January 1, 1999 which resulted in thewrite-off of unamortized start-up costs at that time. 

 

12

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**ITEM 7****-MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATION**

 

**General**

 

The continued weakness inthe economy, as well as the increasing pressures on our bank revenues, requirethat we challenge the traditional bank airline as we know it today.  As we seek to balance our short and longterm needs, we are taking steps to increase sales and profitable Expressgrowth. We must adapt our fleet and aircraft mix to meet the demands of ourgrowing Express business while continuing to meet those of the changing bankenvironment.  We introduced the Caravanand eliminated the Aerostar from our fleet and, barring new route requirements,have targeted additional piston aircraft and our Learjet 25’s to be eliminatedin 2003.  We are reviewing our groundcosts for efficiencies and cost reductions, and will continue this review in2003.  The security surcharge andmodified fuel surcharge both had positive impacts during the fourth quarter of2002, and those programs will continue in 2003.  The changes in our regional structure, increased marketingefforts and adaptation of our fleet are all critical to achieving our long termgoals, but will impact our short term profits.

 

The followingmanagement’s discussion and analysis describes the principal factors affectingthe results of operations, liquidity and capital resources, as well as thecritical accounting policies, of AirNet. This discussion should be read inconjunction with the accompanying audited financial statements, which includeadditional information about our significant accounting policies, practices andthe transactions that underlie our financial results.

 

**Results of Operations**

 

*NetRevenues*

 

*2002 compared to 2001*

 

Net revenue was $148.9million in 2002 versus $140.5 million in 2001, an increase of $8.4 million, or6.0%.  Positive trends continued during2002 regarding revenue growth in Express services and Aviation services, asreflected in their contribution to AirNet’s increase in total revenue.

 

Bank services revenuedeclined $3.8 million, or 3.6%, for the year 2002 compared to 2001.  Weekday shipment volume was down 5.7% perflying day compared to last year.  Aportion of  the relative lost volume isattributable to additional volume transported during the days immediatelyfollowing the September 11th tragedies last year.  The decrease in weekday shipment volume waspartially offset by a 17.0% increase in weekend shipment volume, rate increasesimplemented in January 2002 averaging approximately 2.2%, and the implementationof a 2.3% security surcharge in September 2002.  Lower check delivery volume as a result of historically lowinterest rates and persistent weakness in the national economy, contributed tothe reduction in revenues as did increased competitive factors and additionalcost reduction initiatives by our Bank customers.

 

Express services revenueincreased $8.7 million, or 25.6%, from 2001 to 2002, primarily due to increasedshipments of radioactive pharmaceuticals and related medical products, due toincreased market penetration in select markets, and as a result of new customers utilizingAirNet’s transportation services to deliver cord blood to cryogenic facilitiesbeginning in May of 2002.  Theincrease is also partially attributable to a 5% rate increase in February 2002and an increase in the security surcharge in August 2002.  Revenue increases were achieved in alldelivery service categories, with significant increases achieved in on-demandcargo charter services (46.0% increase over 2001), ANX services (30.4% increaseover 2001), and Ground-only services (27.8% increase over 2001).

 

Aviation services revenuefor the twelve months ended December 31, 2002 was $5.4 million versus $1.9million for 2001, an increase of $3.5 million. The increase is primarily due to the addition of passenger charterservices which began operations in April 2001.

 

*2001 compared to 2000*

 

Net revenue was $140.5million in 2001 versus $135.3 million in 2000, an increase of $5.2 million, or3.9%.

 

Net revenue from Bankservices increased $4.7 million, or 4.7%, for the year 2001 compared to2000.  This increase was primarily theresult of price increases, effective in January 2001, additional volumetransported in the days immediately following the September 11, 2001 tragedy,and a 6.8% increase in weekend weight shipped.

 

Net revenue from Expressservices decreased $0.6 million, or 1.7%, from 2000 to 2001.  Although revenue from charter and ANX hazmatincreased $3.0 million in 2001 over 2000 levels, primarily due to increasedshipments of radioactive pharmaceuticals and related medical products, theincreases were offset by revenue decreases over 2000 levels from a

 

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parts fulfillmentcustomer totaling approximately $3.0 million, primarily in the SDX servicesarea.  Mercury Business Services revenueincreased slightly over the prior year, primarily due to a 4.3% increase inshipment volume.

 

Aviation services revenuewas $1.9 million for the year ended December 31, 2001, an increase of  $1.1 million over 2000.  This increase was primarily a result of newinitiatives in the passenger and on-demand cargo charter product offering.

 

*OperatingExpenses and Income from Operations*

 

*2002 compared to 2001*

 

Costs and expensesincreased $14.5 million, or 11.4%, over prior year levels, resulting in incomefrom operations of $7.3 million in 2002 compared to $13.4 million in 2001.  Higher depreciation and an increase inaircraft lease expense as a result of the expansion of the aircraft fleet represented$3.0 million and $1.0 million of expense increase, respectively.  The remaining expense increase is largelyattributable to an 11.1% increase in hours flown.  Cargo-airline hours flown increased 9.6% in 2002 (approximately101,000 hours versus 92,000 hours in 2001). Passenger charter aircraft flew approximately 1,625 hours in 2002 versusapproximately 250 hours in 2001.

 

Wages and benefitsincreased $3.0 million, or 15.6%, over prior year levels.  AirNet had, on average, 25 more pilotsduring 2002 when compared to 2001, a 12.8% increase.  The increase in pilots was largely due to the addition of pilotsin passenger charter services.  Otheroperations staff increased 7.6% in 2002 to support the growth in Expressvolume.

 

Aircraft fuel expenseincreased $3.0 million, or 24.0%, over prior year.  Approximately $0.5 million of the increase is attributable to theincrease in passenger charter service volume. The remainder of the increase is due to the increase in cargo-airlinehours flown and higher average fuel prices, which were not fully offset by theCompany’s fuel surcharge programs.  Thebank fuel surcharge program was modified in August 2002 to help offset timingdifferences between market prices and the index used for determining surchargeamounts.  During 2001 and throughJanuary 2002, AirNet’s Express customers paid a 4% temporary fuel surcharge onmost revenue under a separate program. In February 2002, AirNet rescinded its 4% fuel surcharge on Expressservices and implemented a surcharge program using the Oil Price Index Summary– Columbus, Ohio (OPIS-CMH index).

 

Aircraft maintenanceexpense increased $1.3 million, or 12.3%, over 2001 levels primarily due to theincrease in hours flown.

 

Contracted air costsdecreased $1.6 million, or 10.2%, over 2001 levels primarily due to decreaseddependency on outside providers as a result of adding aircraft and pilots.

 

Ground courier costsincreased $1.5 million, or 6.3%, over 2001 levels primarily due to a 22.6%increase in the number of Express shipments (excluding Mercury BusinessServices), partially offset by a 16.4% decrease in courier personnel.  The decrease in courier personnel is theresult of AirNet’s strategy to better align its ground costs with shipmentvolumes through the use of vendors and independent contractors.

 

Excluding the increase inaircraft lease expense discussed above, other operating costs increased $2.2million, or 20.0%, over 2001 levels. The increase is largely attributable to an increase in aircraftinsurance due to the expansion of the fleet and higher premiums, increased crewtraining costs due to the addition of pilots and new types of aircraft to thefleet, increased workers’ compensation expense due to the increase in pilotsand support personnel, increased rent expense due to expanded regional officesand an increase in security related costs.

 

Excluding thenon-recurring charge in 2001 discussed below, selling, general andadministrative expenses increased $2.0 million, or 11.0%, over 2001 levelsprimarily due to an increase in payroll, as the result of additional staffingof the regional support and sales staffs and information technology personnel,and an increase in outside services.  Inaccordance with Statement of Financial Accounting Standards (SFAS) No. 142, *Goodwill**and OtherIntangible Assets*, AirNet eliminated amortization of goodwill,effective January 1, 2002.  The effectof this change on 2002 results was a reduction of amortization expense ofapproximately $342,000 (or $207,000, net of tax).

 

*2001 compared to 2000*

 

In 2001, costs andexpenses increased $6.3 million, or 5.2%, over 2000 levels, resulting in incomefrom operations of $13.4 million in 2001 compared to $14.5 million in 2000.

 

Wages and benefitsincreased $1.2 million, or 6.7%, primarily due to the addition of 30 new pilotsand 16 new maintenance technicians over prior year levels, as well as anincrease in the payout for the company-wide incentive compensation program.

 

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Net fuel expenseincreased $1.1 million primarily due to increased prices and hours flown.

 

Maintenance expenseincreased $2.1 million over 2000 levels primarily due to additional hours flownin support of the air system and added charter services.

 

The addition of pilotseliminated a shortage encountered in 2000 and allowed AirNet to fully staff itsnightly routes and staff on-demand cargo charter aircraft.  AirNet spent $0.9 million less transportingpackages on commercial airlines in 2001 primarily due to a change in theExpress revenue mix, explained above, and less commercial volume during theSeptember 11, 2001 tragedies.

 

Ground costs were down$2.5 million, or 9.7%, due to an 11.7% decrease in courier personnel and thechange in the Express revenue mix as explained above.  The decrease in courier personnel is the result of AirNet’sstrategy to better align its ground costs with shipment volumes through the useof vendors and independent contractors.

 

Selling, general andadministrative expenses were up $3.2 million over 2000 levels, includingapproximately $1.5 million in increased payroll due to the establishment of ournew regional structure and the addition of sales representatives.  Costs were also incurred to implementscale/scanner technologies in many of our bank customer locations.  In addition, the Board of Directors approveda retirement agreement with Gerald G. Mercer, Founder and former Chairman ofAirNet.  Under the terms of theagreement, Mr. Mercer retired as Chairman and a Director effective August 3,2001.  A non-recurring $1.0 millioncharge was recorded in the second quarter 2001 to cover wages and benefitsassociated with this agreement.

 

*ImpairmentCharges*

 

In 2002, AirNet recordeda $1.9 million, or $0.18 per diluted share, non-cash after-tax charge inaccordance with its adoption of SFAS No. 142. A review of goodwill associated with the 1998 purchase of MercuryBusiness Services, indicated that the $3.1 million (pretax) of remaininggoodwill related to this acquisition was impaired as of January 1, 2002, andtherefore an impairment charge was recorded. Under the transition provisions of SFAS No. 142, this non-cash charge isa cumulative effect of accounting change as of January 1, 2002.

 

In 2001, AirNet recordeda non-recurring $1.7 million impairment charge on its investment in The CheckExchange System Company (“CHEXS”) through Float Control, Inc.  AirNet Systems, Inc. wholly owns FloatControl, Inc., which holds a 19% interest in CHEXS.  Float Control accounts for its investment in CHEXS under theequity method of accounting.  During2001, CHEXS received notice that one of its customers, who accounted for asignificant portion of CHEXS’ revenue, would not renew its contract with CHEXSbeyond August 2001.  As a result, the$1.7 million impairment charge on investment was recorded in the second quarter.  This charge included approximately $0.3million of goodwill.

 

No impairment chargeswere recorded in 2000.

 

*InterestExpense*

 

Interest costs were $1.6million in 2002, $1.7 million in 2001, and $2.3 million in 2000.  Decreased interest rates offset the effectsof the $13.6 million increase in debt from 2001 to 2002, primarily to fund thepurchase of aircraft in 2002, and the effects of the $5.5 million increase indebt from 2000 to 2001, primarily to fund the $5.0 million purchase of commonstock from Mr. Mercer pursuant to his retirement agreement in 2001.

 

*IncomeTaxes*

 

AirNet recorded taxexpense of $2.3 million for 2002, $4.8 million for 2001, and $5.0 million for2000.  AirNet’s effective tax rate,excluding the effect of impairment charges, was 40.1% in 2002, 40.9% for 2001,and 40.6% for 2000.  Including theeffect of the impairment in the investment in the CHEXS partnership, which isnot expected to have a tax benefit, the effective tax rate for 2001 was 48.0%.

 

*Net Income and Earnings Per Share*

 

Income prior to thenon-cash charge pursuant to SFAS No. 142 was $3.4 million, or $0.33 per dilutedshare, in 2002.  Net income was $1.5million, or $0.15 per diluted share, for the year 2002 compared to $5.2 million,or $0.49 per diluted share, for the year 2001, and $7.3 million, or $0.66 perdiluted share, in 2000.  Excluding thenon-recurring charges associated with the CHEXS investment write-down andGerald Mercer’s retirement agreement, 2001 net income would have been $7.5million, or $0.71 per diluted share.

 

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**Liquidity and Capital Resources**

 

AirNet has historicallymet its working capital needs with cash flows from operations.  Cash flows from operations were $17.7million for 2002, $25.7 million for 2001, and $28.6 million for 2000.

 

Under the terms of Mr. Mercer’s retirementagreement, AirNet purchased 818,330 common shares from Mr. Mercer at a totalcost of $5.0 million in July 2001.  Thisprivately negotiated transaction was funded through a revolving bank creditfacility and AirNet intends to hold these common shares in treasury.   Under the terms of the agreement, Mr. Mercer also had the option to sellup to $250,000 of AirNet common shares each quarter to AirNet based on thencurrent market prices.  Mr. Mercerexercised his option and sold 52,410 AirNet common shares to AirNet at a totalcost of $249,996, effective January 2, 2003.

 

Alsounder the terms of his retirement agreement, Mr. Mercer retained his rights tosell his remaining AirNet common shares to private investors at any time inaccordance with applicable laws.  On orabout December 26, 2002, Mr. Mercer sold an aggregate of 733,200 common sharesto seven separate investors in privately negotiated transactions.  On December 24, 2002, he made a gift of256,800 common shares to Spring Hill Camps, which sold those common shares tothree separate investors, one of which also purchased common shares from Mr.Mercer, in privately negotiated transactions. In connection with and as a condition to the investors’ consummatingthose transactions, AirNet granted registration rights in respect to the990,000 common shares collectively purchased by these investors from Mr. Merceror Spring Hill Camps.  AirNet has fileda registration statement with respect to those common shares under theSecurities Act of 1933, as amended, for resale on behalf of the investors.  AirNet expects the registration statement tobe declared effective shortly following the filing of this form 10-K.

 

In February 2000, AirNetannounced a stock repurchase program allowing AirNet to purchase up to $3.0million of its common shares.  During2000, AirNet purchased $2.4 million in common shares funded by cash flows fromoperations.  There was no repurchaseactivity under this program in 2001 or 2002. As such, purchases of approximately $0.6 million of the company’s commonshares may still be made in the open market or through privately negotiatedtransactions.  Such future purchaseswould be considered based on current market conditions and the stock price.

 

Followingis a summary of AirNet’s long-term capital investments (in millions):

 
|                                            |   | **2002** |   | **2001** |   | **2000** |   |
|-------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                            |   |     |   |     |   |     |   |
| Aircraft                                        |   | $        | 12.2   |     | $      | 13.2     |   | $ | 2.8 |   |
| Aircraft  improvements, engines and inspections |   | 15.7     |   | 12.5     |   | 11.8     |   |
| Increase  in prepaid engine costs               |   | 2.3      |   | 1.3      |   | 1.0      |   |
| Other                                           |   | 0.5      |   | 0.4      |   | 0.5      |   |
| Total                                           |   | $        | 30.7   |     | $      | 27.4     |   | $ | 16.1 |   |

 

Costs of major aircraftinspections, overhauls and engine work are capitalized as incurred anddepreciated based on hours flown.  Theoriginal costs of airframes are depreciated based on the straight-line methodover the estimated useful life of the aircraft.  Aircraft maintenance costs not meeting AirNet’s capitalizationrequirements are expensed as incurred. In 2002, the engines of approximately 24 (20 in 2001, and 10 in 2000) ofAirNet’s Learjet 35 aircraft are covered under Manufacturer Service Plans(MSPs), in which AirNet prepays certain repair and overhaul costs.  These prepayments, which totaled approximately$7.0 million at December 31, 2002 (approximately $4.7 million and $3.4 millionat December 31, 2001 and 2000, respectively), are classified in fixed assets onthe balance sheet.  Amortization onthese prepaid balances does not begin until services have been performed, atwhich time the prepaid balances are reclassified into depreciable assetcategories and depreciated based on hours flown.  AirNet intends to cover all of its Lear 35 jet engines under MSPplans over the next several years as major overhauls on the non-covered enginesbecome due.

 

AirNet anticipates itwill spend between $20 million and $30 million in total capital expenditures in2003.

 

Although AirNet hashistorically financed long-term capital investments through the use ofinternally generated cash from operations or revolving bank credit facilities,all forms of financing are considered when evaluating the resources committedfor capital.  Based upon suchconsideration, AirNet entered into two five-year term loans in 2002 totalingapproximately $3.0 million with fixed interest rates of 5.77%, each secured byan aircraft, and a $3.0 million term loan with a floating interest rate based upon LIBOR, securedby two aircraft.

 

OnJanuary 4, 2002, AirNet entered into operating leases for four Cessna Caravan208 aircraft each with a lease term of three years.  On September 26, 2002 the lease terms were extended an additionalyear.  On January 4, 2002 AirNet alsoentered into operating leases for two Cessna Caravan 208B aircraft, one with alease term of 3.5 years and one with a lease term of 4.5 years.  On April 22, 2002 AirNet entered into anoperating lease for a Cessna Caravan 208B aircraft with an

 

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initiallease term of four months.  Subsequentto the initial lease term, the lease automatically extends for 30-dayincremental periods unless either party gives a 30-day written notice. On June13, 2002 AirNet entered into a cancelable operating lease for a Learjet 60 witha six-month lease term.  On August 29,2002 AirNet entered into an operating lease for a Learjet 35.  The lease term was until February 5,2003.  Under the terms of the lease,AirNet was unconditionally obligated to purchase the aircraft at the end of thelease, and consummated such purchase on January 31, 2003 for approximately $1.4million.

 

AirNet determined thatthese operating leases would provide economic benefits favorable to ownershipwith respect to market values, liquidity and after-tax cash flows. Inaccordance with accounting principles generally accepted in the United States,our operating leases are not recorded in our balance sheet; however, theminimum lease payments related to these leases are disclosed in Note 6 to theaccompanying audited financial statements.

 

InSeptember 2002, AirNet replaced its $50 million revolving creditagreement.  The new credit agreementprovides AirNet with a three-year $35 million unsecured revolving creditfacility and a five-year $20.0 million unsecured term loan.  The term loan requires quarterlyinstallments of $1.0 million.  Theagreement bears interest at AirNet’s option of a fixed rate based upon LIBORplus a margin determined by our leverage ratio as defined in the agreement, ora floating rate based on the greater of the prime rate and the sum of .5% plusthe federal funds rate in effect from time to time.  The new agreement requires the maintenance of certain minimumtangible net worth and cash flow levels, imposes certain limitations on capital expenditures and thesale of assets, and restricts the amount of additional debt.  As of December 31, 2002, there was $17.3million unused and available under the credit agreement.

 

Thefollowing table sets forth AirNet’s contractual obligations, along with thecash payments due each period (in millions):

 
|                                |   | **Payments Due  by Period** |   |
|-------------------------------------|--------|-----------------------------|--------|
|                                |   | **2003**                    |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Total** |   |
| Contractual  Obligations:           |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Long-term  Debt                     |   | $                           | 5.2    |   | $ | 5.2 |   | $ | 22.9 |   | $ | 5.3 |   | $ | 3.2 |   | $ | 41.8 |   |
| Operating  Leases                   |   | .9                          |   | .7 |   | .6 |   | .2 |   | .1 |   | 2.5 |   |
| Total  Contractual Cash Obligations |   | $                           | 6.1    |   | $ | 5.9 |   | $ | 23.5 |   | $ | 5.5 |   | $ | 3.3 |   | $ | 44.3 |   |

 

AirNet anticipates thatcash flow from operations and borrowing programs will provide adequate sourcesof liquidity and capital resources to meet our expected long-term needs for theoperation of our business, including anticipated capital expenditures.  There were no material capital commitments at December 31, 2002 otherthan for the purchase of the Learjet 35 discussed above.

 

**Seasonality and Variability in Quarterly Results**

 

AirNet’soperations historically have been somewhat seasonal relative to holidaysobserved by financial institutions. When financial institutions are closed on Monday through Thursday,AirNet’s revenue and net income are adversely affected. AirNet’s fiscal quarterending December 31 is often the most impacted by bank holidays.

 

Operatingresults are also affected by the weather. Winter weather often requires additional costs for de-icing, hangarrental and other aircraft services. AirNet generally experiences higher maintenance costs during its fiscalquarter ending March 31.

 

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**Selected Quarterly Data (unaudited)**

 

The following is asummary of the unaudited quarterly results of operations for the quarterlyperiods ended (in thousands, except per share data):

 
|                                                                |   | **Quarters  Ended,** |       |
|---------------------------------------------------------------------|--------|----------------------|------------|
|                                                                |   | **March 31**         |       | **June 30** |   | **September  30** |   | **December  31** |   |
| **2002**                                                            |   |                 | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Net  revenues                                                       |   | **$**                | **35,480** | ** ** | **$** | **37,425** | ** ** | **$** | **38,540** | ** ** | **$** | **37,466** | ** ** |
| Income  from operations                                             |   | **2,227**            | ** ** | **2,208** | ** ** | **2,539** | ** ** | **1** | ** ** |
| Income  before cumulative effect of accounting change               |   | **1,143**            | ** ** | **1,108** | ** ** | **1,441** | ** ** | **(321** | **)** |
| Cumulative  effect of accounting change                             |   | **(1,868**           | **)**      | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| Net  income (loss) – Note 1                                    |   | **(725**             | **)**      | **1,108** | ** ** | **1,441** | ** ** | **(321** | **)** |
| Per  share – basic and diluted:                                |   |                 | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Income  before cumulative effect of accounting change               |   | **$**                | **.11**    | ** ** | **$** | **.11** | ** ** | **$** | **.14** | ** ** | **$** | **(.03** | **)** |
| Cumulative  effect of accounting change                             |   | **$**                | **(.18**   | **)** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| Net  income (loss) – Note 1                                    |   | **$**                | **(.07**   | **)** | **$** | **.11** | ** ** | **$** | **.14** | ** ** | **$** | **(.03** | **)** |
|                                                                |   |                 | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **2001**                                                            |   |                 | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Net  revenues                                                       |   | **$**                | **34,322** | ** ** | **$** | **35,358** | ** ** | **$** | **35,327** | ** ** | **$** | **35,490** | ** ** |
| Income  from operations                                             |   | **2,706**            | ** ** | **2,737** | ** ** | **3,980** | ** ** | **3,986** | ** ** |
| Net  income (loss) – Note 2                                    |   | **1,320**            | ** ** | **(354** | **)** | **2,101** | ** ** | **2,127** | ** ** |
| Net  income (loss) per share – basic and diluted – Note 2 |   | **$**                | **.12**    | ** ** | **$** | **(.03** | **)** | **$** | **.20** | ** ** | **$** | **.21** | ** ** |

 

----

Note 1 – The Companyadopted Statement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets* in2002.  In accordance with the transitionprovisions of this Statement during the fourth quarter of 2002, the Companyrecorded the cumulative effect of the accounting change effective January 1,2002.  Therefore, the unauditedquarterly results of operations for the three months ended March 31, 2002 havebeen restated as follows:

 
| Net  earnings as previously reported                |   | $      | 1,143  |   |
|-----------------------------------------------------|--------|--------|--------|--------|
| Cumulative  effect of accounting change, net of tax |   | (1,868 | )      |
| Net  earnings (loss) as restated                    |   | $      | (725   | )      |
|                                                |   |   |   |
| Earnings  per share (basic and diluted)             |   |   |   |
| Net  earnings as previously reported                |   | $      | .11    |   |
| Cumulative  effect of accounting change, net of tax |   | (.18   | )      |
| Net  earnings (loss) as restated                    |   | $      | (.07   | )      |

 

Note 2 – Includes effectsof second quarter non-recurring charges totaling $2.3 million, net of tax,related to $1.7 million impairment in CHEXS investment and $1.0 million chargerelated to Gerald G. Mercer’s retirement agreement (see Notes 1 and 7 to theConsolidated Financial Statements in Item 8, respectively.) A $0.4 million taxbenefit was recognized on the Mercer agreement and no tax benefit wasrecognized on the investment impairment. Excluding the effects of the two charges, income for the second quartertotaled $2.0 million (or $0.18 per diluted share).

 

**CriticalAccounting Policies and Estimates**

 

The preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States requires management to adopt accounting policiesand make significant judgments and estimates to develop amounts reflected anddisclosed in the financial statements. In many cases, there are alternativepolicies or estimation techniques that could be used. We maintain a thoroughprocess to review the application of our accounting policies and to evaluatethe appropriateness of the estimates; however, even under optimalcircumstances, estimates routinely require adjustment based on changingcircumstances and the receipt of new or better information.

 

18

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The policies andestimates discussed below include the financial statement elements that areeither the most judgmental or involve the selection or application ofalternative accounting policies, and are material to our financial statements.Management has discussed the development and selection of these criticalaccounting policies and estimates with the Audit Committee of our Board ofDirectors and with our independent auditors.

 

*Allowance for Uncollectible Accounts Receivable*

 

Like many companies, weexperience some credit loss on our trade accounts receivable. Historically, ourcredit losses from bad debts have not fluctuated materially because our creditmanagement processes have been effective. We also recognize billing adjustmentsto revenue and accounts receivable for certain discounts, money back serviceguarantees and billing corrections.

 

Estimates for creditlosses and billing adjustments are regularly updated based on historicalexperience of bad debts, adjustments processed, and current collections trends.Allowances for these future adjustments aggregated $0.9 million at December 31,2002 and $0.7 million at December 31, 2001. We consider the sensitivity and subjectivity of these estimates to bemoderate, as changes in economic conditions and pricing arrangements cansignificantly affect the estimates used to determine the allowances.

 

*Major Aircraft Maintenance*

 

Costs of major aircraftinspections, overhauls and engine work are capitalized as incurred anddepreciated based on hours flown.  Theoriginal costs of airframes are depreciated based on the straight-line methodover the estimated useful life of the aircraft.  Aircraft maintenance costs not meeting AirNet’s capitalizationrequirements are expensed as incurred. The engines of approximately 24 of AirNet’s 33 Learjet 35 aircraft arecovered under Manufacturer Service Plans (MSPs), in which AirNet prepayscertain repair and overhaul costs. These prepayments, which totaled $7.0 million and $4.7 million atDecember 31, 2002 and 2001, respectively, are classified in fixed assets on thebalance sheet.  Amortization on theseprepaid balances does not begin until services have been performed, at whichtime the prepaid balances are reclassified into depreciable asset categoriesand depreciated based on hours flown. AirNet intends to cover all of its Lear 35 jet engines under MSP plansover the next several years as major overhauls on the non-covered enginesbecome due.

 

*Self-insuranceaccruals*

 

We are self-insured up tocertain limits for costs associated with workers’ compensation claims andbenefits paid under employee health care programs. At December 31, 2002 we hadtotal self-insurance accruals reflected in our balance sheet of approximately$1.7 million ($1.1 million at December 31, 2001).

 

The measurement of thesecosts requires the consideration of historical loss experience and judgmentsabout the present and expected levels of cost per claim.  We account for these costs primarily throughmeasurement of claims outstanding and projected payments.  We believe our recorded obligations forthese expenses are consistently measured on a conservative basis; however,changes in health costs, accident frequency and severity, and other factors canmaterially affect the estimates for these liabilities.

 

# ***Incentive Compensation Plans***

 

AirNetmaintains a company-wide incentive compensation plan with payouts tied to theachievement of quarterly company earnings goals and personal/departmentalgoals.  Bonuses are calculated as apercent of base pay, depending on participation levels, which vary betweenmanagement and staff levels.

 

Weaccrue for costs related to the company earnings portion of the plan based onactual quarterly results.  At December31, 2002, no accrual existed for this portion of the plan, as the quarterlytargets were not met.  At December 31,2001, we recorded a $0.2 million accrual for company earnings-related goals metduring the year.

 

Weaccrue for costs related to the personal/departmental goals portion of the planbased on estimated achievement rates of set goals applied to individuals’ basepay rates.  Payouts may be madequarterly or annually, depending on the nature of the goals.  At December 31, 2002, a $0.6 million accrualwas recorded for the personal/departmental goals portion of the plan.  In 2001, all personal/departmental goalswere paid annually, resulting in a $1.0 million accrual at December 31, 2001.

 

19

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*Income Taxes*

 

AirNet accounts forincome taxes under the liability method pursuant to Statement of FinancialAccounting Standards No. 109, *Accounting for Income Taxes*.  Under the liability method, deferred taxliabilities and assets are determined based on the differences between thefinancial reporting and tax bases of assets and liabilities using enacted taxrates and laws that will be in effect when the differences are expected toreverse.

 

*Impairmentof goodwill and other intangibles*

 

New accounting standardsadopted in 2002 require that we cease all goodwill amortization and reviewintangibles, including goodwill, for impairment on an annual basis. Aspreviously indicated, the adoption of these new rules resulted in a transitionimpairment of our recorded goodwill of $3.1 million ($1.9 million net of related deferred tax asset) in2002. The annual evaluation of goodwill impairment requires the use ofestimates about the future cash flows to determine estimated fair value.Changes in forecasted operations and changes in discount rates can materiallyaffect these estimates. However, once an impairment of goodwill has beenrecorded, it cannot be reversed.

 

**Forward-looking statements**

 

The information includedor incorporated by reference in this Annual Report on Form 10-K containsvarious “forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended, including those identified by the words “believe,”“anticipate,” “estimate,” “expect,” “intend,” “may,” “plan,” “project” andsimilar expressions.  Theseforward-looking statements reflect management’s expectations and are based uponcurrently available data; however, actual results are subject to future eventsand uncertainties, which could cause actual results to differ from thoseprojected in these statements.  Thefollowing factors, in addition to those included in the disclosure under theheading “Risk Factors” below, could cause actual results to differ materiallyfrom those expressed in forward looking statements:

 

•                       potential regulatory changes by the FAA, whichcould increase the regulation of AirNet’s business, or the Federal Reserve,which could change the competitive environment of transporting canceled checks;

 

•                       adverse weather conditions;

 

•                       potential changes in locally and federallymandated security requirements;

 

•                       increases in aviation fuel costs not fully offsetby AirNet’s fuel surcharge program;

 

•                       changes in check processing and shipment patternsof bank customers;

 

•                       acts of war and terrorist activities;

 

•                       the impact of a prolonged weakening U. S. economyon time-critical shipment volumes;

 

•                       the acceptance of AirNet’s time-critical serviceofferings within targeted Express markets;

 

•                       technological advances and increases in the useof electronic funds transfers; and

 

•                       other economic, competitive and domestic andforeign governmental factors affecting AirNet’s markets, prices and otherfacets of its operations.

 

All forward-lookingstatements are expressly qualified in their entirety by these cautionarystatements.  We assume no obligation orduty to update any of the forward-looking statements included or incorporatedby reference in this Annual Report on Form 10-K except to the extent requiredby law.

 

**Risk Factors**

 

**Competition from other providers ofexpress air and ground delivery services may adversely affect our results ofoperations and financial condition.**

 

AirNet’sBank services division competes primarily against the Federal Reserve’s CheckRelay Network, which has significantly greater financial and other resourcesthan AirNet.  The Federal Reserve isregulated by the Monetary Control

 

20

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Actof 1980, which in general requires that the Federal Reserve price its serviceson an actual cost basis plus a set percentage private sector market adjustmentfactor.  Failure by the Federal Reserveto comply with the Monetary Control Act by pricing its services below therequired rates could have an adverse competitive impact on AirNet.  In addition, the Monetary Control Act may beamended, modified or repealed, or new legislation affecting AirNet’s businessmay be enacted. The market for express air and ground delivery service is highlycompetitive.   Although majorparticipants in the next-day and second-day air delivery market (such as UPSand FedEx) have also entered the business of same day and early morningdelivery, they have not had a material adverse effect on AirNet’s business todate.  However, the efforts of thesecompetitors could have a material adverse effect on AirNet in the future.

 

**Technological changes in the checkclearance and national payment systems may adversely affect the demand forAirNet’s Bank services from the financial services industry.**

 

Someanalysts have predicted that the increased use of electronic funds transferswill lead to a “checkless society,” which could adversely affect the demand forAirNet’s Bank services to the financial services industry.  In addition, some financial servicesindustry analysts have predicted the development of various forms of imagingtechnology that could reduce or eliminate the need for prompt delivery ofcancelled checks.  Similarly,technological advances in the nature of “electronic mail” and “telefax” haveaffected the demand for on-call delivery services by Express servicescustomers.  While none of thesetechnological advances has had a significant adverse impact on AirNet’s businessto date, these or similar technologies, or other regulatory or technologicalchanges in the check clearance and national payment systems, could have anadverse affect on AirNet’s business in the future.

 

**The passage of the Check Clearing Actof the 21st Century or similar legislation could have a significantadverse effect on AirNet’s revenues derived from check delivery services.**

 

TheCheck Clearing Act of the 21st Century (the “Check 21 Act”),formerly referred to as the Check Truncation Act, represents an initiative bythe Federal Reserve that would essentially allow for the electronification ofthe cancelled check and replace the need for expedited air transportationservices of original cancelled checks by most of AirNet’s bankingcustomers.  The Check 21 Act removes therequirement of returning an original paper check to the account holder’sinstitution and permits the use of an Image Replacement Document created from adigital image.

 

AirNetbelieves that several issues surrounding the Check 21 Act will need to beaddressed and resolved prior to passage by Congress.  Some of these issues include the current lack of specificationsfor the quality of check images to be created and used in the clearing process;the failure to establish standards for information systems platforms; and thefailure to address the potentially negative effects that the Check 21 Act couldhave on consumers’ rights.

 

Timingfor the passage of the Check 21 Act is currently unknown.  However, one congressional hearing on thematter was held in September 2002 and a second is scheduled for 2003.  Some analysts have predicted that suchlegislation would be effective in 2006 and perhaps sooner.  The passage of the Check 21 Act, or similarlegislation, could have a significant adverse affect on AirNet’s revenuesderived from check delivery services. Further, it is unclear when such an electronic clearing system might beimplemented by banking customers and how such implementation would affect theirexpedited check transportation needs.

 

**Government regulation significantly affectsour business.**

 

AirNet’sdelivery operations are subject to various federal, state and local regulationsthat in many instances require permits and licenses.  Failure by AirNet to maintain required permits or licenses, or tocomply with the applicable regulations, could result in substantial fines orpossible revocation of our authority to conduct certain of our operations.

 

AirNet’sflight operations are regulated by the FAA under Part 135 of the FederalAviation Regulations.  Among otherthings, these regulations govern permissible flight and duty time for aviationflight crews.  The FAA is currentlycontemplating certain changes in flight and duty time guidelines which, ifadopted, could increase AirNet’s operating costs.  These changes, if adopted, could also require AirNet and otheroperators 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 revenuesdirectly from the airline industry to pay for air traffic control facilitiesand personnel.  There can be noassurances that Congress will not change the current federal excise tax rate orenact new excise taxes, which could adversely affect AirNet’s business.

 

21

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**Changes to current transportationsecurity requirements or procedures could adversely impact our ability toefficiently conduct our air and ground operations to meet our current deliveryparameters or significantly increase our costs to transact those operations.**

 

Considerablefocus has been placed on package security requirements and procedures atdomestic and international airports since the September 11, 2001 tragedies andrelated incidents.  The TSA, commercial airlines, fixed based operations(where we transact a significant portion of our aircraft loading and unloadingoperations) and airport authorities are in the process of reviewing all aspectsof their security requirements.  Whilemany proposed changes are voluntary, many are being mandated by the TSA, theDOT and the FAA.

 

During 2002, the TSAimplemented screening procedures for over-the-counter cargo tendered tocommercial airlines. The new screening procedures have resulted in additionaltender time for packages we transport on the commercial airlines in certainlocations and certain times.  Inaddition, the TSA continues to review and consider additional package screeningrequirements and changes to the vendor screening procedures, which we may needto perform on packages from our customers.   Many commercial airlines are also addingsecurity surcharges to shipments.

 

Changesat fixed base operators and by local airport authorities could potentiallylimit our ramp access to our aircraft, thereby increasing tender time fromcustomers to us.  Changes in chain ofcustody requirements could also potentially cause us to incur additional coststo staff additional hours at certain locations.  In response to the new security-related procedures beingimplemented, we added a security surcharge in 2002 for our Bank and Expressservices customers.  Although thesurcharge is expected to help offset the increasing costs associated withsecurity issues, our current surcharge program may not be sufficient to coverall new costs we may incur as additional transportation safety procedures aredeveloped and/or required.

 

**Anti-takeover provisions may delay orprevent an acquisition or change in control of AirNet by a third party.**

 

Provisionsof AirNet’s amended articles and code of regulations and of the Ohio RevisedCode, together or separately, could discourage potential acquisition proposals,delay or prevent a change in control of AirNet and limit the price that certaininvestors might be willing to pay in the future for the common shares.  Among other things, these provisions requirecertain supermajority votes, establish advance notice procedures forshareholder nomination of candidates for election as directors and forshareholder proposals to be considered at shareholders’ meetings, eliminatecumulative voting in the election of directors and provide that directors mayonly be removed from office for cause.

 

AirNet’samended articles authorize the board of directors to issue up to 10,000,000preferred shares without further shareholder approval, subject to anylimitations prescribed by law and the rules and regulations of the New YorkStock Exchange.  The preferred sharescould have dividend, liquidation, conversion and other rights and privilegesthat are superior or senior to the common shares.  Issuance of preferred shares could result in the dilution of thevoting power of the common shares, adversely affect holders of the commonshares in the event of liquidation of AirNet or delay, defer or prevent achange in control of AirNet.

 

In addition, Section 1701.831 of the Ohio Revised Code containsprovisions that require shareholder approval of any proposed “control shareacquisition” of any Ohio corporation at any of three ownership thresholds:  20%, 331/3% and 50%; and Chapter 1704of the Ohio Revised Code contains provisions that restrict specified businesscombinations and other transactions between an Ohio corporation and interestedshareholders.

 

**ITEM 7A****-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

AirNetis exposed to certain market risks from transactions that are entered intoduring the normal course of business. AirNet’s primary market risk exposure relates to interest raterisk.  At December 31, 2002, we had$39.2 million outstanding on credit facilities subject to market rate changesin interest.  These facilities bearinterest at various London Interbank Offering Rates (LIBORs) and floating ratesbased on prime rates and federal fund rates. Assuming borrowing levels at December 31, 2002, a one hundred basis pointchange in interest rates would impact net interest expense by approximately$392,000 per year.

 

InFebruary 2002, AirNet entered into an interest rate swap agreement with a bankrelative to a $3.0 million term loan, with a notional amount of $3.0 millionand a fixed rate of 4.25% plus a margin based on AirNet’s funded debtratio.  At December 31, 2002, theaggregate fair value of the interest rate swap was approximately ($106,000).

 

22

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**ITEM 8****- FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

**Report of Independent Auditors**

 

 

Shareholders and Board ofDirectors

AirNet Systems, Inc.

 

 

We have audited theaccompanying consolidated balance sheets of AirNet Systems, Inc. as of December31, 2002 and 2001, and the related consolidated statements of operations,shareholders’ equity, and cash flows for each of the three years in the periodended December 31, 2002.  Our auditsalso included the financial statement schedule listed in the Index at Item 15(a) 2.  These financial statements andschedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements and schedule based on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the UnitedStates.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of AirNet Systems, Inc. atDecember 31, 2002 and 2001, and the consolidated results of its operations andits cash flows for each of the three years in the period ended December 31,2002, in conformity with accounting principles generally accepted in the UnitedStates.  Also, in our opinion, therelated financial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

 

As discussed in Note 2,in 2002 the Company changed its method of accounting for goodwill in accordancewith Statement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets*.

 

 
|                   |
|-------------------|
|              |
| Columbus, Ohio    |
| February 14, 2003 |

 

23

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**AIRNET SYSTEMS, INC.**

 

**CONSOLIDATED BALANCE SHEETS**

 
| **In  thousands, except per share data**                                                                         |   | **December 31,** |        |
|------------------------------------------------------------------------------------------------------------------|--------|------------------|-------------|
|                                                                                                             |   | **2002**         |        | **2001** |   |
| **ASSETS**                                                                                                       |   |             |        |   |   |
| Current assets:                                                                                                  |   |             |        |   |   |
| Cash and  cash equivalents                                                                                  |   | **$**            | **1,484**   |   | $ | 377 |   |
| Accounts receivable,  less allowances of $895 and $661 at December 31, 2002 and 2001, respectively               |   | **19,029**       |        | 16,803 |   |
| Inventory and spare  parts                                                                                       |   | **6,926**        |        | 6,704 |   |
| Taxes receivable                                                                                                 |   | **—**       |        | 4 |   |
| Deferred income taxes                                                                                            |   | **220**          |        | 729 |   |
| Deposits and prepaids                                                                                            |   | **3,675**        |        | 1,703 |   |
| Total current assets                                                                                             |   | **31,334**       |        | 26,320 |   |
|                                                                                                             |   |             |        |   |   |
| Net property and  equipment                                                                                      |   | **111,349**      |        | 98,872 |   |
|                                                                                                             |   |             |        |   |   |
| Other assets:                                                                                                    |   |             |        |   |   |
| Goodwill, net of  accumulated amortization of $901 and $1,383 at December 31, 2002 and 2001,  respectively       |   | **4,018**        |        | 7,080 |   |
| Other intangibles, net  of accumulated amortization of $110 and $93 at December 31, 2002 and 2001,  respectively |   | **38**           |        | 56 |   |
| Other                                                                                                            |   | **964**          |        | 751 |   |
| **Total  assets**                                                                                                |   | **$**            | **147,703** |   | $ | 133,079 |   |
|                                                                                                             |   |             |        |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                   |   |             |        |   |   |
| Current liabilities:                                                                                             |   |             |        |   |   |
| Accounts payable                                                                                                 |   | **$**            | **6,008**   |   | $ | 6,135 |   |
| Salaries and related  liabilities                                                                                |   | **4,568**        |        | 4,849 |   |
| Accrued expenses                                                                                                 |   | **897**          |        | 523 |   |
| Taxes Payable                                                                                                    |   | **499**          |        | — |   |
| Current portion of notes  payable                                                                                |   | **5,193**        |        | 33 |   |
| Total current  liabilities                                                                                       |   | **17,165**       |        | 11,540 |   |
|                                                                                                             |   |             |        |   |   |
| Other liabilities                                                                                                |   | **106**          |        | 326 |   |
| Notes payable, less  current portion                                                                             |   | **36,601**       |        | 28,202 |   |
| Deferred income taxes                                                                                            |   | **13,035**       |        | 14,065 |   |
|                                                                                                             |   |             |        |   |   |
| Shareholders’ equity:                                                                                       |   |             |        |   |   |
| Preferred shares, $.01  par value; 10,000 shares authorized; and no shares issued and outstanding                |   | **—**       |        | — |   |
| Common shares, $.01 par  value; 40,000 shares authorized; 12,753 shares issued at December 31, 2002  and 2001    |   | **128**          |        | 128 |   |
| Additional  paid-in-capital                                                                                      |   | **77,152**       |        | 77,440 |   |
| Retained earnings                                                                                                |   | **29,158**       |        | 27,656 |   |
| Accumulated other  comprehensive loss                                                                            |   | **(59**          | **)**       | (194 | ) |
| Treasury shares, 2,599  and 2,629 shares held at cost at December 31, 2002 and 2001, respectively                |   | **(25,583**      | **)**       | **(26,084** | **)** |
| Total shareholders’  equity                                                                                 |   | **80,796**       |        | 78,946 |   |
|                                                                                                             |   |             |        |   |   |
| **Total  liabilities and shareholders’ equity**                                                             |   | **$**            | **147,703** |   | $ | 133,079 |   |

 

See notes to consolidatedfinancial statements

 

24

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**AIRNET SYSTEMS, INC.**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 

In thousands, except pershare data

 
|                                                                                                                                       |   | **Year Ended December 31,** |        |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|
|                                                                                                                                       |   | **2002**                    |        | **2001** |   | **2000** |   |
|                                                                                                                                       |   |                        |        |   |   |   |   |
| **NET  REVENUES**                                                                                                                          |   |                        |        |   |   |   |   |
| Air transportation, net  of excise tax of $3,893, $3,636, and $4,216 for the years ended December 31,  2002, 2001, and 2000, respectively: |   |                        |        |   |   |   |   |
| Bank services                                                                                                                              |   | **$**                       | **101,023** |   | $ | 104,778 |   | $ | 100,070 |   |
| Express services                                                                                                                           |   | **42,529**                  |        | 33,870 |   | 34,465 |   |
| Aviation services and  other operations                                                                                                    |   | **5,360**                   |        | 1,850 |   | 754 |   |
| **Total  net revenues**                                                                                                                    |   | **148,912**                 |        | 140,498 |   | 135,289 |   |
|                                                                                                                                       |   |                        |        |   |   |   |   |
| **COSTS  AND EXPENSES**                                                                                                                    |   |                        |        |   |   |   |   |
| Wages and benefits                                                                                                                         |   | **22,405**                  |        | 19,379 |   | 18,166 |   |
| Aircraft fuel                                                                                                                              |   | **15,611**                  |        | 12,594 |   | 11,502 |   |
| Aircraft maintenance                                                                                                                       |   | **12,305**                  |        | 10,961 |   | 8,825 |   |
| Contracted air costs                                                                                                                       |   | **14,257**                  |        | 15,868 |   | 16,635 |   |
| Ground courier                                                                                                                             |   | **24,415**                  |        | 22,960 |   | 25,434 |   |
| Depreciation                                                                                                                               |   | **17,786**                  |        | 14,760 |   | 13,810 |   |
| Other                                                                                                                                      |   | **14,423**                  |        | 11,191 |   | 10,215 |   |
| Selling, general and  administrative                                                                                                       |   | **20,434**                  |        | 19,376 |   | 16,203 |   |
| **Total  costs and expenses**                                                                                                              |   | **141,636**                 |        | 127,089 |   | 120,790 |   |
| Income from operations                                                                                                                     |   | **7,276**                   |        | 13,409 |   | 14,499 |   |
| Impairment on investment                                                                                                                   |   | **—**                  |        | 1,744 |   | — |   |
| Interest expense                                                                                                                           |   | **1,649**                   |        | 1,668 |   | 2,283 |   |
| Income before income  taxes                                                                                                                |   | **5,627**                   |        | 9,997 |   | 12,216 |   |
| Provision for income  taxes                                                                                                                |   | **2,256**                   |        | 4,803 |   | 4,961 |   |
|                                                                                                                                       |   |                        |        |   |   |   |   |
| **Income before  cumulative effect of accounting change**                                                                                  |   | **3,371**                   |        | 5,194 |   | 7,255 |   |
|                                                                                                                                       |   |                        |        |   |   |   |   |
| Cumulative effect of  accounting change, net of $1,194 tax benefit                                                                         |   | **(1,868**                  | )           | — |   | — |   |
|                                                                                                                                       |   |                        |        |   |   |   |   |
| **Net  income**                                                                                                                            |   | **$**                       | **1,503**   |   | $ | 5,194 |   | $ | 7,255 |   |
|                                                                                                                                       |   |                        |        |   |   |   |   |
| Income per common share  - basic and diluted                                                                                               |   |                        |        |   |   |   |   |
| Income before cumulative  effect of accounting change                                                                                      |   | **$**                       | **0.33**    |   | $ | 0.49 |   | $ | 0.66 |   |
| Cumulative effect of  accounting change, net of tax                                                                                        |   | **(0.18**                   | )           | — |   | — |   |
| Net income                                                                                                                                 |   | **$**                       | **0.15**    |   | $ | 0.49 |   | $ | 0.66 |   |

 

See notes to consolidatedfinancial statements

 

25

----

 

**AIRNET SYSTEMS, INC.**

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

 
| **In  thousands**                                                                  |   | **Year Ended December 31,** |      |
|------------------------------------------------------------------------------------|--------|-----------------------------|-----------|
|                                                                               |   | **2002**                    |      | **2001** |   | **2000** |   |
|                                                                               |   |                        |      |   |   |   |   |
| **OPERATING  ACTIVITIES**                                                          |   |                        |      |   |   |   |   |
| Net income                                                                         |   | **$**                       | **1,503** |   | $ | 5,194 |   | $ | 7,255 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |   |                        |      |   |   |   |   |
| Non-cash charge for  investment impairment                                         |   | **—**                  |      | 1,744 |   | — |   |
| Cumulative effect of  accounting change                                            |   | **1,868**                   |      | — |   | — |   |
| Depreciation                                                                       |   | **17,786**                  |      | 14,760 |   | 13,810 |   |
| Amortization of  intangibles                                                       |   | **17**                      |      | 520 |   | 692 |   |
| Deferred taxes                                                                     |   | **588**                     |      | 2,413 |   | 1,413 |   |
| Provision for losses on  accounts receivable                                       |   | **433**                     |      | 457 |   | 171 |   |
| Loss on disposition of  assets                                                     |   | **86**                      |      | 53 |   | 68 |   |
| Cash provided by (used  in) operating assets and liabilities:                      |   |                        |      |   |   |   |   |
| Accounts receivable                                                                |   | **(2,659**                  | )         | (881 | ) | (1,476 | ) |
| Inventory and spare  parts                                                         |   | **(222**                    | )         | (87 | ) | 3,808 |   |
| Deposits and prepaids                                                              |   | **(1,972**                  | )         | (230 | ) | 260 |   |
| Accounts payable                                                                   |   | **(127**                    | )         | 497 |   | (949 | ) |
| Accrued expenses                                                                   |   | **374**                     |      | (167 | ) | 870 |   |
| Taxes payable/receivable                                                           |   | **503**                     |      | 279 |   | 2,099 |   |
| Salaries and related  liabilities                                                  |   | **(281**                    | )         | 1,579 |   | 479 |   |
| Other, net                                                                         |   | **(213**                    | )         | (404 | ) | 101 |   |
| **Net  cash provided by operating activities**                                     |   | **17,684**                  |      | 25,727 |   | 28,601 |   |
|                                                                               |   |                        |      |   |   |   |   |
| **INVESTING  ACTIVITIES**                                                          |   |                        |      |   |   |   |   |
| Purchases of property  and equipment                                               |   | **(30,702**                 | )         | (27,395 | ) | (16,160 | ) |
| Payments for covenants  not  to compete                                       |   | **—**                  |      | — |   | (15 | ) |
| Proceeds from sales of  property and equipment                                     |   | **353**                     |      | 310 |   | 414 |   |
| **Net  cash used in investing activities**                                         |   | **(30,349**                 | )         | (27,085 | ) | (15,761 | ) |
|                                                                               |   |                        |      |   |   |   |   |
| **FINANCING  ACTIVITIES**                                                          |   |                        |      |   |   |   |   |
| Proceeds from 1996  Incentive Stock Plan programs                                  |   | **198**                     |      | 84 |   | 195 |   |
| Net borrowings  (repayments) under revolving credit facilities                     |   | **(28,149**                 | )         | 5,549 |   | (11,200 | ) |
| Net borrowings under the  new revolving credit facility                            |   | **17,700**                  |      | — |   | — |   |
| Net borrowings under the  Term Loan credit facility                                |   | **19,000**                  |      | — |   | — |   |
| Net borrowings  (repayments) of long-term debt                                     |   | **5,009**                   |      | (33 | ) | (29 | ) |
| Purchase of treasury  shares, net of issuances                                     |   | **14**                      |      | (4,983 | ) | (2,355 | ) |
| **Net  cash provided by (used in) financing activities**                           |   | **13,772**                  |      | 617 |   | (13,389 | ) |
|                                                                               |   |                        |      |   |   |   |   |
| Net increase (decrease)  in cash                                                   |   | **1,107**                   |      | (741 | ) | (549 | ) |
| Cash and cash  equivalents at beginning of period                                  |   | **377**                     |      | 1,118 |   | 1,667 |   |
|                                                                               |   |                        |      |   |   |   |   |
| **Cash  and cash equivalents at end of period**                                    |   | **$**                       | **1,484** |   | $ | 377 |   | $ | 1,118 |   |

 

See notes to consolidatedfinancial statements

 

26

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**AIRNET SYSTEMS, INC.**

 

**CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY**

 

In thousands

 
|                                                                |   | **Common Shares** |       | **Additional  Paid-in  Capital** |       | **Retained  Earnings** |       | **Accumulated  Other  Comprehensive  Loss** |       | **Treasury  Shares** |       | **Total**  |       |
|---------------------------------------------------------------------|--------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|----------------------|------------|------------|------------|
| **Number  of Shares**                                               |   | **Amount**        |
|                                                                |   |              |       |                             |       |                   |       |                                        |       |                 |       |       |       |   |   |
| Balance December 31,  1999                                          |   | 12,753            |       | $                                | 128        |                   | $          | 78,182                                      |       | $                    | 15,207     |       | $          | — |   | $ | (19,766 | ) | $ | 73,751 |   |
|                                                                |   |              |       |                             |       |                   |       |                                        |       |                 |       |       |       |   |   |
| Net income                                                          |   | —            |       | —                           |       | —                 |       | 7,255                                       |       | —               |       |       |       | 7,255 |   |
| Purchase of treasury  shares                                        |   | —            |       | —                           |       | —                 |       | —                                      |       | —               |       | (2,418     | )          | (2,418 | ) |
| Issuance of treasury  shares - Director Deferred Compensation Plan  |   | —            |       | —                           |       | (132                   | )          | —                                      |       | —               |       | 195        |       | 63 |   |
| Issuance of treasury  shares - Associate Stock Purchase Program     |   | —            |       | —                           |       | (348                   | )          | —                                      |       | —               |       | 542        |       | 194 |   |
| Balance December 31,  2000                                          |   | 12,753            |       | 128                              |       | 77,702                 |       | 22,462                                      |       | —               |       | (21,447    | )          | 78,845 |   |
|                                                                |   |              |       |                             |       |                   |       |                                        |       |                 |       |       |       |   |   |
| Net income                                                          |   | —            |       | —                           |       | —                 |       | 5,194                                       |       | —               |       | —     |       | 5,194 |   |
| Loss on derivative  instruments, net of $90 tax benefit             |   | —            |       | —                           |       | —                 |       | —                                      |       | (132                 | )          | —     |       | (132 | ) |
| Cumulative effect of  accounting change, net of $42 tax benefits    |   | —            |       | —                           |       | —                 |       | —                                      |       | (62                  | )          | —     |       | (62 | ) |
| Comprehensive income                                                |   |              |       |                             |       |                   |       |                                        |       |                 |       |       |       | 5,000 |   |
|                                                                |   |              |       |                             |       |                   |       |                                        |       |                 |       |       |       |   |   |
| Purchase of treasury  shares                                        |   | —            |       | —                           |       | —                 |       | —                                      |       | —               |       | (5,000     | )          | (5,000 | ) |
| Issuance of treasury  shares - Associate Stock Purchase Program     |   | —            |       | —                           |       | (238                   | )          | —                                      |       | —               |       | 329        |       | 91 |   |
| Stock option exercises                                              |   | —            |       | —                           |       | (24                    | )          | —                                      |       | —               |       | 34         |       | 10 |   |
|                                                                |   |              |       |                             |       |                   |       |                                        |       |                 |       |       |       |   |   |
| Balance December 31,  2001                                          |   | 12,753            |       | 128                              |       | 77,440                 |       | 27,656                                      |       | (194                 | )          | (26,084    | )          | 78,946 |   |
|                                                                |   |              |       |                             |       |                   |       |                                        |       |                 |       |       |       |   |   |
| **Net  income**                                                     |   | **—**        | ** ** | **—**                       | ** ** | **—**             | ** ** | **1,503**                                   | ** ** | **—**           | ** ** | **—** | ** ** | **1,503** | ** ** |
| **Gain on  derivative instruments, net of $86 tax expense**         |   | **—**        | ** ** | **—**                       | ** ** | **—**             | ** ** | **—**                                  | ** ** | **134**              | ** ** | **—** | ** ** | **134** | ** ** |
| **Comprehensive  income**                                           |   | **—**        | ** ** | **—**                       | ** ** | **—**             | ** ** | **—**                                  | ** ** | **—**           | ** ** | **—** | ** ** | **1,637** | ** ** |
|                                                                |   |              | ** ** |                             | ** ** |                   | ** ** |                                        | ** ** |                 | ** ** |       | ** ** |   | ** ** |
| **Issuance  of treasury shares - Associate Stock Purchase Program** |   |              |       |                             | ** ** | **(263**               | **)**      |                                        | ** ** |                 | ** ** | **461**    | ** ** | **198** | ** ** |
| **Stock  option exercises**                                         |   | **—**        | ** ** | **—**                       | ** ** | **(25**                | **)**      | **—**                                  | ** ** | **—**           | ** ** | **39**     | ** ** | **14** | ** ** |
|                                                                |   |              | ** ** |                             | ** ** |                   | ** ** |                                        | ** ** |                 | ** ** |       | ** ** |   | ** ** |
|                                                                |   | **12,753**        |       | **$**                            | **128**    | ** **             | **$**      | **77,152**                                  | ** ** | **$**                | **29,158** | ** ** | **$**      | **(59** | **)** | **(25,583** | **)** | **$** | **80,796** | ** ** |
|                                                                     |        |                   |            |                                  |            |                        |            |                                             |            |                      |            |            |            |  |  |  |  |  |  |  |  |

 

See notes to consolidatedfinancial statements

 

27

----

 

**1.             SignificantAccounting Policies**

 

AirNet Systems, Inc. andits subsidiaries (“AirNet”, the “Company”) operate a fully integrated nationalair transportation network which provides delivery service for time-criticalshipments for customers in the U.S. banking industry and other industriesrequiring the express delivery of packages. AirNet also offers passenger charter services and retail aviation fuelsales and related ground services for customers at its Columbus, Ohio facility.

 

*Basis of Presentation*

 

The accompanyingconsolidated financial statements include the accounts of AirNet Systems, Inc.and its subsidiaries.  All significantintercompany accounts and transactions have been eliminated.

 

Preparation of theconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the amounts reported in the consolidated financialstatements and accompanying notes. Actual results could differ from those estimates.

 

Certain 2000 and 2001balances have been reclassified to conform with the 2002 presentation.

 

Inthe fourth quarter of 2001, AirNet restructured its sales and operationalmanagement groups. The new structure combines the Bank Delivery and ExpressDelivery sales and operational management teams under one executive managementstructure. Further, the airline and ground operations divisions continue toprovide services to all product offerings in a centralized fashion. As aresult, AirNet aligned its sales and operational product offerings under onereporting segment effective in the fourth quarter of 2001.

 

*Revenue Recognition*

 

Revenue on Express andBank services is recognized when the packages are delivered to theirdestination. Revenue related to charter services within Aviation Services isrecognized in the period in which services are rendered.  Revenue on fixed based operations withinAviation Services is recognized when the maintenance services are complete orfuel is delivered.

 

*Cash and Cash Equivalents*

 

Cash and cash equivalentsconsist of highly liquid investments which are unrestricted as to withdrawal oruse, and which have an original maturity of three months or less.  Cash equivalents are stated at cost, whichapproximates market value.

 

*Accounts Receivable*

 

The Company performsperiodic credit evaluations of its customers’ financial condition and generallydoes not require collateral.  TheCompany establishes an allowance for doubtful accounts based upon factorssurrounding the credit risks of specific customers, historical trends and otherinformation.

 

*Inventory and Spare Parts*

 

Inventory and spare partsare valued at the lower of cost (weighted average method) or market.

 

*Property and Equipment*

 

Property and equipmentare stated at cost. Costs of major aircraft inspections, overhauls and enginework are capitalized as incurred and depreciated based on hours flown.  The original costs of airframes, otherflight equipment and other property and equipment (primarily furniture andequipment, leasehold improvements, computer related hardware and software andvehicles) are depreciated based on the straight-line method over the estimateduseful lives of the assets summarized as below.  Aircraft maintenance costs not meeting AirNet’s capitalizationrequirements are expensed as incurred.

 
| Airframes                     |   | 15 years     |   |
|-------------------------------|--------|--------------|--------|
| Buildings                     |   | 30 years     |   |
| Other  flight equipment       |   | 2 - 5 years  |   |
| Other  property and equipment |   | 3 - 10 years |   |

 

28

----

 

The engines of  twenty-four of AirNet’s thirty-three Learjet35 aircraft are covered under Manufacturer Service Plans (MSPs), in which AirNetprepays certain repair and overhaul costs. These prepayments, which totaled $7,043,000 and $4,742,000 at December31, 2002 and 2001, respectively, are classified in fixed assets on the balancesheet.  Amortization on these prepaidbalances does not begin until services have been performed, at which time theprepaid balances are reclassified into depreciable asset categories anddepreciated based on hours flown.

 

*Investment in Subsidiary*

 

AirNetSystems, Inc. wholly owns Float Control, Inc., which holds a 19% interest inThe Check Exchange System Co. (“CHEXS”). Float Control accounts for its investment in CHEXS under the equitymethod of accounting.  During 2001,CHEXS received notice that one of its customers, who accounted for asignificant portion of CHEXS’s revenue, would not renew its contract with CHEXSbeyond August 2001.  As a result, FloatControl recognized a $1,744,000 impairment on its investment in CHEXS in thesecond quarter of 2001, which included a write-off of approximately $300,000 ofgoodwill.  As of December 31, 2002 and2001, Float Control’s remaining recorded investment in CHEXS totaled $384,000and is included in Other Assets – Other on the balance sheet, and representsexpected final distributions from the partnership.

 

*Income Taxes*

 

The company accounts forincome taxes under the liability method pursuant to Statement of FinancialAccounting Standards No. 109, *Accounting for Income Taxes*.  Under the liability method, deferred taxliabilities and assets are determined based on the differences between thefinancial reporting and tax bases of assets and liabilities using enacted taxrates and laws that will be in effect when the differences are expected toreverse.

 

### *Goodwilland other intangible assets*

 

AirNetadopted Statement of Financial Accounting Standards (SFAS) No. 141, *Business Combination*s, and SFAS No. 142, *Goodwill and Other Intangible Assets*,effective January 1, 2002.  SFAS No. 141requires business combinations completed after June 30, 2001, to be accountedfor using the purchase method of accounting and changes the criteria forrecording intangible assets apart from goodwill.  AirNet evaluated its goodwill and intangibles acquired prior toJune 30, 2001, and determined that all intangible assets were properlyclassified using the criteria of SFAS 141.

 

SFASNo. 142 requires that goodwill and indefinite-lived intangible assets no longerbe amortized, but instead be evaluated for impairment on a “reporting unit”basis annually, or more frequently if changes in circumstances indicateimpairment may have occurred sooner.   Areporting unit is the operating segment unless, for businesses within thatoperating segment, discrete financial information is prepared and regularlyreviewed by management, in which case such a component business is thereporting unit.

 

Theimpairment test is conducted by comparing the fair value of the reporting unit,primarily determined by computing the future discounted cash flows expected tobe generated by the reporting unit, with its carrying value and if the carryingvalue exceeds the fair value, goodwill may potentially be impaired.  If there is potential impairment, the fairvalue of the reporting unit is allocated to its assets and liabilities in amanner similar to a purchase price allocation in order to determine the impliedfair value of the reporting unit goodwill. This implied fair value is thencompared with the carrying amount of the reporting unit goodwill, and if theimplied fair value is less, an impairment loss is recognized.

 

Intangibles consist ofnon-competition agreements having determinable lives ranging from one to five years.  Intangibles are amortized on thestraight-line method over the determinable life of the asset.

 

*Financial Instruments*

 

The fair value ofAirNet’s financial instruments approximated their carrying value at December31, 2002 and 2001.

 

*Derivatives*

 

AirNethas been party to various interest rate swap agreements with banks as a hedgeagainst the interest rate risk associated with borrowing at variablerates.  These swap agreements areaccounted for as cash flow hedges.  Theobjective of the hedge is to eliminate the variability of cash flows in theinterest rate payments on the variable rate debt.  AirNet does not use derivative financial instruments forspeculative purposes.

 

InFebruary 2002, AirNet entered into a five year interest rate swap agreementwith a bank relative to a $3.0 million term loan, with a notional amount of$3.0 million and a fixed rate of 4.25% plus a margin based on AirNet’s fundeddebt ratio.  AirNet was also party totwo additional three-year swap agreements which ended in 2002, each with a $5.0million notional amount and fixed rates of 6.3% and 6.5% plus a margin based onthe Company’s funded debt ratio.

 

29

----

 

AirNetaccounts for it swap agreements under Statement of Financial AccountingStandards (SFAS) Statement No. 133, *Accounting for Derivative Instruments and HedgingActivities*, and its amendments, Statements 137 and 138.   The statements require AirNet to recognizeall derivatives on the balance sheet at fair value.  Derivatives that are not hedges are adjusted to fair valuethrough income.  If the derivative is ahedge, depending on the nature of the hedge, changes in the fair value of thederivative are either offset against the change in fair value of assets,liabilities, or firm commitments through earnings or recognized in othercomprehensive income until the hedged item is recognized in earnings.  The ineffective portion of a derivative’schange in fair value is immediately recognized in earnings.  AirNet’s adoption of SFAS  Statement No. 133 on January 1, 2001resulted in a cumulative effect of an accounting change charge of $62,155, netof tax, to accumulated other comprehensive income.  In 2002, AirNet recognized comprehensive income of $134,000, netof tax, related to the swaps, compared to a $194,000 comprehensive loss, net oftax, in 2001.  At December 31, 2002 and2001, the aggregate fair value of the interest rate swaps were approximately($106,000) and ($326,0000), respectively, and are recorded in other liabilitieson the consolidated balance sheets.

 

*Stock-Based Compensation*

 

AtDecember 31, 2002, AirNet had one stock-based employee compensation plan, whichis described more fully in Note 5.  TheCompany accounts for the plan under the recognition and measurement principlesof APB Opinion No. 25, *Accounting for StockIssued to Employees,* and related interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under the plan have an exerciseprice equal to the market value of the underlying common stock on the date ofgrant.  Pro forma information regardingnet income and earnings per share is required by SFAS No. 148, *Accounting for Stock-Based Compensation – Transitionand Disclosure*, and has been determined as if the company hadaccounted for its employee stock options under the fair value method of SFASNo. 123, *Accounting for Stock-BasedCompensation*. The fair value of these options was estimated at thedate of grant using the Black-Scholes option pricing model with the followingweighted average assumption for the years ended December 31:

 
|                                                                           |   | **2002** |   | **2001** |   | **2000** |   |
|--------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Risk free interest rate                                                        |   | 4.75     | %      | 5.0      | %      | 6.5      | %      |
| Volatility factor of expected market priceof the company’s common  shares |   | 55.3     | %      | 46.1     | %      | 60.0     | %      |
| Weighted average expected lifeof options (years)                               |   | 5.30     |   | 5.44     |   | 5.88     |   |

 

Theweighted average fair value of options granted was $4.21, $2.70 and $3.49 inthe years ended December 31, 2002, 2001 and 2000, respectively.

 

Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of SFAS No. 123, *Accounting for Stock-Based Compensation,*to stock-based employee compensation.

 
|                                                                                                                                                     |   | **Year Ended December 31** |      |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|-----------|
|                                                                                                                                                     |   | **2002**                   |      | **2001** |   | **2000** |   |
|                                                                                                                                                     |   |                       |      |   |   |   |   |
| Net income, as reported                                                                                                                                  |   | $                          | 1,503,000 |   | $ | 5,194,000 |   | $ | 7,255,000 |   |
| Deduct:   Total stock-based employee compensation expense determined under fair  value based method for all awards, net of related tax effects |   | (398,000                   | )         | (672,000 | ) | (1,027,000 | ) |
| Pro forma net income                                                                                                                                     |   | $                          | 1,105,000 |   | $ | 4,522,000 |   | $ | 6,228,000 |   |
|                                                                                                                                                     |   |                       |      |   |   |   |   |
| Net income per common share – basic and diluted:                                                                                                    |   |                       |      |   |   |   |   |
| As reported                                                                                                                                              |   | $                          | .15       |   | $ | .49 |   | $ | .66 |   |
| Pro forma                                                                                                                                                |   | $                          | .11       |   | $ | .43 |   | $ | .56 |   |

 

*Supplemental  CashFlow Data*

 

Cash paid for interestwas $1,433,000, $1,591,000, and $2,297,000 for the years ended December 31,2002, 2001, and 2000, respectively. Cash paid for taxes, net of refunds, was $1,165,000, $2,097,000, and$1,728,000 for the years ended December 31, 2002, 2001, and 2000, respectively.

 

30

----

 

**2.             Goodwilland Other Intangible Assets**

 

TheCompany adopted SFAS No. 142, *Goodwill andOther Intangible Assets* as of January 1, 2002. Application of thenonamortization provisions of the Statement resulted in an increase in netincome of $303,000 in 2002. The Company performed the transitional goodwillimpairment test using the two-step process prescribed in Statement 142 with ameasurement date of January 1, 2002. The first step is a screen of potentialimpairment, while the second step measures the amount of the impairment, ifany. The Company performed the first of the required transitional goodwillimpairment tests in the second quarter of 2002. The Company performed thesecond of the required transitional goodwill impairment tests in the fourthquarter of 2002. Under the Statement, an impairment charge resulting from thetransitional impairment tests is reflected as the cumulative effect of a changein accounting principle in the first quarter of 2002. Based on the results ofits transitional goodwill impairment test, the Company has recognized animpairment loss, net of tax, of $1,868,000, for goodwill related to the MercuryBusiness Services reporting unit as a cumulative effect of a change inaccounting principle in the first quarter of 2002. The Company performed theannual goodwill impairment test required by the Statement as of October 1,2002. The annual impairment test indicated that no additional goodwillimpairment charge was required in 2002.

 

Priorto the adoption of SFAS No. 142, AirNet’s goodwill was amortized by thestraight-line method over 25 years. Since goodwill is no longer amortized,AirNet’s reported results for 2002 are not comparable with previous years. Thefollowing table presents pro forma information assuming that AirNet adoptedSFAS 142 No. as of January 1, 2000.

 
|                                                    |   | **Year Ended  December 31,** |      |
|---------------------------------------------------------|--------|------------------------------|-----------|
|                                                    |   | **2002**                     |      | **2001** |   | **2000** |   |
| Reported  net income                                    |   | $                            | 1,503,000 |   | $ | 5,194,000 |   | $ | 7,255,000 |   |
| Adjustments:                                            |   |                         |      |   |   |   |   |
| Goodwill  amortization                                  |   | —                       |      | 342,000 |   | 342,000 |   |
| Income  taxes                                           |   | —                       |      | (135,000 | ) | (135,000 | ) |
| Adjusted  net income                                    |   | 1,503,000                    |      | 5,401,000 |   | 7,462,000 |   |
|                                                    |   |                         |      |   |   |   |   |
| Adjusted  net income per share – basic and diluted |   | $                            | .15       |   | $ | .46 |   | $ | .62 |   |

 

Followingis a progression of goodwill for the year ended December 31, 2002:

 
| Balance at January 1, 2002   |   | $          | 7,080,000 |   |
|------------------------------|--------|------------|-----------|--------|
| Goodwill acquired            |   |       |      |
| Transition impairment loss   |   | (3,062,000 | )         |
| Balance at December 31, 2002 |   | $          | 4,018,000 |   |

 

**3.             Propertyand Equipment**

 

Property and equipmentconsisted of the following at December 31:

 
|                           |   | **2002**    |        | **2001**    |   |
|--------------------------------|--------|-------------|-------------|-------------|--------|
|                           |   |        |        |        |   |
| Flight  equipment              |   | $           | 187,201,000 |        | $      | 164,838,000 |   |
| Other  property and equipment  |   | 24,554,000  |        | 22,482,000  |   |
|                           |   | 211,755,000 |        | 187,320,000 |   |
| Less  accumulated depreciation |   | 100,406,000 |        | 88,448,000  |   |
| Net  property and equipment    |   | $           | 111,349,000 |        | $      | 98,872,000 |   |

 

31

----

 

**4.             NotesPayable**

 

The Company hadborrowings as follows at December 31:

 
|                                |   | **2002**   |       | **2001**   |   |
|-------------------------------------|--------|------------|------------|------------|--------|
| Term  notes                         |   | $          | 24,094,000 |       | $      | 86,000 |   |
| Revolving  credit facility          |   | 17,700,000 |       | 28,149,000 |   |
|                                |   | 41,794,000 |       | 28,235,000 |   |
| Current  portion of notes payable   |   | 5,193,000  |       | 33,000     |   |
| Long-term  portion of notes payable |   | $          | 36,601,000 |       | $      | 28,202,000 |   |

 

In September 2002, theCompany replaced its $50 million revolving credit agreement.  The new credit agreement provides theCompany with a three-year $35 million unsecured revolving credit facilityscheduled to expire on September 30, 2005 and a five-year $20.0 millionunsecured term loan.  The term loanrequires quarterly installments of $1.0 million commencing on the last day ofDecember 2002 and continuing through September 30, 2007.  The agreement bears interest at theCompany’s option of a fixed rate based upon LIBOR plus a margin determined bythe Company’s leverage ratio as defined in the agreement, or a floating ratebased on the greater of the prime rate and the sum of .5% plus the federalfunds rate in effect from time to time. The new agreement requires the maintenance of certain minimum tangiblenet worth and cash flow levels, imposes certain limitations on capitalexpenditures and the sale of assets, and restricts the amount of additionaldebt.  As of December 31, 2002, $17.3million was unused and available under the credit agreement.

 

During the first quarterof 2002, AirNet entered into three term loans with banks.  The first note has a principal balanceof  $1,065,000 with a 60-month term, a5.77% interest rate and a $24,000 monthly principal and interest payment.  The second note has a principal balanceof  $1,467,000 with a 60-month term, a5.77% interest rate and a $33,000 monthly principal and interest payment.  The third note has a principal balance of $2,500,000 with a floatinginterest rate based upon LIBOR (London Interbank Offered Rate) and a $50,000principal payment due monthly over 60 months. Four aircraft with a net book value totaling approximately $6,840,000 atDecember 31, 2002 secure these loans.

 

Aggregatefuture maturities of long-term debt as of December 31, 2002 are as follows:

 
| 2003   |   | $          | 5,193,000  |   |
|--------|--------|------------|------------|--------|
| 2004   |   | 5,230,000  |       |
| 2005   |   | 22,900,000 |       |
| 2006   |   | 5,258,000  |       |
| 2007   |   | 3,213,000  |       |
|   |   | $          | 41,794,000 |   |

 

The Company alsomaintains standby letters of credit totaling $1,600,000 with a bank related toits insurance policy agreements.

 

In conjunction with thepurchase of the Company’s operations facility in 1997, the company issued a$263,000 term note.  The terms of thenote require monthly principal and interest payments of $4,000 through 2005 andthe note is collateralized by the facility.

 

**5.             1996Incentive Stock Plan**

 

In 1996, the Companyadopted the AirNet Systems, Inc. 1996 Incentive Stock Plan (the “Plan”).  The Plan was last amended in September2001.  The Plan provides for theissuance of incentive and non-qualified stock options, restricted stock andperformance shares and a stock purchase plan (collectively, “Awards”).  The Plan also provides for the grant ofstock options to non-employee directors. The maximum number of common shares available for issuance under thePlan is 1,650,000 through 2006.  ThePlan is administered by the Compensation Committee of the Board of Directors,which determines the terms and conditions applicable to the Awards, other thanstock options automatically granted to directors in accordance with the termsof the Plan.  The exercise price of eachoption equals the market price of a common share on the date of grant.  An option’s maximum term is ten years (fiveyears for ISOs granted to 10% shareholders). Option vesting periods range from vesting upon grant to vesting overfour years.

 

32

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A summary of theCompany’s stock option activity and related information follows (in thousands,except price per share data) for the years ended December 31:

 
|                                |   | **2002**                 |   | **2001**                               |   | **2000**                 |   |
|-------------------------------------|--------|--------------------------|--------|----------------------------------------|--------|--------------------------|--------|
|                                |   | **Common********Shares** |   | **Weighted  Average  Exercise  Price** |   | **Common********Shares** |   | **Weighted  Average  Exercise  Price** |   | **Common********Shares** |   | **Weighted  Average  Exercise  Price** |   |
|                                |   |                     |   |                                   |   |                     |   |   |   |   |   |   |   |
| Outstanding at beginning of period  |   | 1,029                    |   | $                                      | 10.05  |                     | 1,142  |   | $ | 12.45 |   | 1,158 |   | $ | 13.54 |   |
| Granted                             |   | 102                      |   | 7.78                                   |   | 208                      |   | 4.12 |   | 175 |   | 5.67 |   |
| Exercised                           |   | (3                       | )      | 5.24                                   |   | (2                       | )      | 4.51 |   | — |   | — |   |
| Cancelled                           |   | (83                      | )      | 13.33                                  |   | (319                     | )      | 14.83 |   | (191 | ) | 12.33 |   |
| Outstanding at end of period        |   | 1,045                    |   | 9.58                                   |   | 1,029                    |   | 10.05 |   | 1,142 |   | 12.45 |   |
|                                |   |                     |   |                                   |   |                     |   |   |   |   |   |   |   |
| Options exercisable at end ofperiod |   | 790                      |   | $                                      | 10.63  |                     | 688    |   | $ | 11.65 |   | 712 |   | $ | 14.09 |   |

 

Thefollowing summarizes information about stock options outstanding as of December31, 2002:

 
| **Options  Outstanding**       |   | **Options Exercisable** |   |
|--------------------------------|--------|-------------------------|--------|
| **Range  of Exercise  Prices** |   | **Number of  Options**  |   | **Weighted-  Average  Remaining  Contractual Life  (Years)** |   | **Weighted-  Average  Exercise Price** |   | **Number of  Options** |   | **Weighted-  Average  Exercise Price** |   |
|                           |   |                    |   |   |   |   |   |   |   |   |   |
| Less than $10.00               |   | 722,750                 |   | 7.1 |   | $ | 7.14 |   | 467,180 |   | $ | 7.60 |   |
|                           |   |                    |   |   |   |   |   |   |   |   |   |
| $10.01—$15.00             |   | 239,500                 |   | 3.8 |   | 14.18 |   | 239,500 |   | 14.18 |   |
|                           |   |                    |   |   |   |   |   |   |   |   |   |
| $15.01—$20.00             |   | 82,500                  |   | 5.6 |   | 17.45 |   | 82,500 |   | 17.45 |   |
|                           |   |                    |   |   |   |   |   |   |   |   |   |
| $20.01—$25.00             |   | 1,000                   |   | 5.4 |   | 22.00 |   | 1,000 |   | 22.00 |   |
|                           |   |                    |   |   |   |   |   |   |   |   |   |
|                           |   | 1,045,750               |   | 6.2 |   | $ | 9.58 |   | 790,180 |   | $ | 10.63 |   |

 

**6.             LeaseObligations**

 

The company leasesfacility space and courier vehicles at various locations throughout the UnitedStates.  In addition, in 2002, AirNetentered into operating leases for four Cessna Caravan 208 aircraft each with alease term of three years and two Cessna Caravan 208B aircraft, one with alease term of 3.5 years and one with a lease term of 4.5 years.  The three-year lease terms were subsequentlyextended an additional year.   The company incurred lease expense of  $3,747,000, $1,961,000, and $1,597,000 forthe years ended December 31, 2002, 2001 and 2000, respectively.  As of December 31, 2002, future minimumlease payments by year and in the aggregate under non-cancelable operatingleases with initial or remaining terms exceeding one year are as follows:  2003 - $923,000; 2004 - $679,000; 2005 -$610,000; 2006 - $218,000; 2007 - $109,161.

 

33

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**7.             RelatedParty Transactions**

 

During 2001, the Board ofDirectors approved a retirement agreement with Gerald G. Mercer, Founder andformer Chairman, of AirNet Systems, Inc. Under terms of the agreement, Mr. Mercer retired as Chairman and aDirector effective August 3, 2001. AirNet recorded $975,000 in selling, general and administrative expensein 2001 to cover salary continuance requirements and benefits associated withthis agreement that continue until 2003. At December 31, 2001, $757,000 was recorded in Salaries and RelatedLiabilities related to future payments under the agreement.  Additionally as part of the retirementagreement, in 2001 AirNet purchased 818,330 common shares at $6.11 per sharefrom the former Chairman at a total cost of $5.0 million.  AirNet intends to hold the common shares intreasury.  Under the terms of the agreement, Mr. Merceralso had the option to sell up to $250,000 of AirNet common shares each quarterof 2002 to AirNet based on then current market prices.  Mr. Mercer exercised his option effectiveJanuary 2, 2003 and sold 52,410 AirNet common shares to AirNet at a total costof $249,996.

 

Alsounder the terms of his retirement agreement, Mr. Mercer retained his rights tosell his remaining AirNet common shares to private investors at any time inaccordance with the applicable laws.  Onor about December 26, 2002, Mr. Mercer sold an aggregate of 733,200 commonshares to seven separate investors in privately negotiated transactions.  On December 24, 2002, he made a gift of256,800 common shares to Spring Hill Camps, which sold those common shares tothree separate investors, one of which also purchased common shares from Mr.Mercer, in privately negotiated transactions. In connection with and as a condition to the investors’ consummatingthose transactions, AirNet granted registration rights in respect to the990,000 common shares collectively purchased by these investors from Mr. Merceror Spring Hill Camps.  AirNet has fileda registration statement with respect to those common shares under theSecurities Act of 1933, as amended, for resale on behalf of the investors.  AirNet expects the registration statement tobe declared effective shortly following the filing of the Company’s AnnualReport on Form 10-K for the year ended December 31, 2002.

 

**8.             RetirementPlan**

 

The Company has a 401(k)retirement savings plan.  All associateswho 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 andprofit-sharing contributions. The Company’s contribution expense related to theplan totaled $508,000, $550,000, and $514,000 for the years ended December 31,2002, 2001, and 2000, respectively.

 

34

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**9.             IncomeTaxes**

 

Income taxes aresummarized as follows for the years ended December 31:

 
|             |   | **2002**  |      | **2001**  |   | **2000**  |   |
|------------------|--------|-----------|-----------|-----------|--------|-----------|--------|
| Current:         |   |      |      |      |   |      |   |
| Federal          |   | $         | 1,612,000 |      | $      | 2,223,000 |   | $ | 2,041,000 |   |
| State  and local |   | 397,000   |      | 470,000   |   | 801,000   |   |
|             |   | 2,009,000 |      | 2,693,000 |   | 2,842,000 |   |
| Deferred:        |   |      |      |      |   |      |   |
| Federal          |   | 341,000   |      | 1,930,000 |   | 2,037,000 |   |
| State  and local |   | (94,000   | )         | 180,000   |   | 82,000    |   |
|             |   | 247,000   |      | 2,110,000 |   | 2,119,000 |   |
|             |   | $         | 2,256,000 |      | $      | 4,803,000 |   | $ | 4,961,000 |   |

 

Significant components ofthe company’s deferred tax liabilities and assets are as follows at December31:

 
|                                    |   | **2002**    |        | **2001**    |   |
|-----------------------------------------|--------|-------------|-------------|-------------|--------|
| Long-term  deferred tax asset:          |   |        |        |        |   |
| Alternative  minimum tax credits        |   | $           | 1,057,000   |        | $      | 2,008,000 |   |
| Goodwill                                |   | 1,027,000   |        | —      |   |
| Other                                   |   | 184,000     |        | 251,000     |   |
| Long-term  deferred tax liabilities:    |   |        |        |        |   |
| Property  and equipment                 |   | (13,875,000 | )           | (14,506,000 | )      |
| Intangible  assets and other            |   | (1,428,000  | )           | (1,818,000  | )      |
| Net  long-term deferred tax liabilities |   | $           | (13,035,000 | )           | $      | (14,065,000 | ) |
|                                    |   |        |        |        |   |
| Current  deferred tax assets:           |   |        |        |        |   |
| Workers’  compensation reserves    |   | $           | 448,000     |        | $      | 314,000 |   |
| Allowance  for bad debt reserves        |   | 353,000     |        | 261,000     |   |
| Other                                   |   | 200,000     |        | 315,000     |   |
| Total  current assets                   |   | 1,001,000   |        | 890,000     |   |
|                                    |   |        |        |        |   |
| Current  deferred tax liabilities:      |   |        |        |        |   |
| Prepaid  expenses                       |   | (756,000    | )           | (135,000    | )      |
| Other                                   |   | (25,000     | )           | (26,000     | )      |
| Total  current liabilities              |   | (781,000    | )           | (161,000    | )      |
| Net  current deferred tax assets        |   | $           | 220,000     |        | $      | 729,000 |   |

 

Differences arisingbetween the provision for income taxes and the amount computed by applying thestatutory federal income tax rate to income before income taxes are as followsfor the years ended December 31:

 
|                                                    |   | **2002** |      | **2001** |   | **2000** |   |
|---------------------------------------------------------|--------|----------|-----------|----------|--------|----------|--------|
| Tax  expense at federal statutory rate on pretax income |   | $        | 1,913,000 |     | 34.0   | %        | $      | 3,399,000 |   | 34.0 | % | $ | 4,153,000 |   | 34.0 | % |
| Add:                                                    |   |     |      |     |   |     |   |   |   |   |   |   |   |
| State  taxes, net of federal benefit                    |   | 203,000  |      | 3.6      |   | 528,000  |   | 5.3 |   | 610,000 |   | 5.0 |   |
| Non-deductible  permanent differences                   |   | 140,000  |      | 2.5      |   | 876,000  |   | 8.7 |   | 198,000 |   | 1.6 |   |
| Total  taxes                                            |   | $        | 2,256,000 |     | 40.1   | %        | $      | 4,803,000 |   | 48.0 | % | $ | 4,961,000 |   | 40.6 | % |

 

35

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**10.          Net IncomePer Share**

 

The following table setsforth the computation of basic and diluted net income per share for the yearsended December 31:

 
|                                                  |   | **2002**   |      | **2001**   |   | **2000**   |   |
|-------------------------------------------------------|--------|------------|-----------|------------|--------|------------|--------|
|                                                  |   |       |      |       |   |       |   |
| Numerator:                                            |   |       |      |       |   |       |   |
| Income  before cumulative effect of accounting change |   | $          | 3,371,000 |       | $      | 5,194,000  |   | $ | 7,255,000 |   |
| Cumulative  effect of accounting change, net of tax   |   | (1,868,000 | )         | —     |   | —     |   |
| Net  income                                           |   | $          | 1,503,000 |       | $      | 5,194,000  |   | $ | 7,255,000 |   |
|                                                  |   |       |      |       |   |       |   |
| Denominator:                                          |   |       |      |       |   |       |   |
| Basic  - weighted average shares outstanding          |   | 10,141,000 |      | 10,576,000 |   | 11,067,000 |   |
|                                                  |   |       |      |       |   |       |   |
| Diluted                                               |   |       |      |       |   |       |   |
| Stock  options - associates, officer and directors    |   | 120,000    |      | 60,000     |   | —     |   |
| Adjusted  weighted average share outstanding          |   | 10,261,000 |      | 10,636,000 |   | 11,067,000 |   |
|                                                  |   |       |      |       |   |       |   |
| Net  income per share – basic and diluted:       |   |       |      |       |   |       |   |
| Income  before cumulative effect of accounting change |   | $          | .33       |       | $      | .49        |   | $ | .66 |   |
| Cumulative  effect of accounting change, net of tax   |   | .18        |      | —     |   | —     |   |
| Net  income                                           |   | $          | .15       |       | $      | .49        |   | $ | .66 |   |

 

For the years endedDecember 31, 2002, 2001, and 2000, 697,000, 787,000, and 1,142,000 stockoptions, respectively, were excluded from the diluted weighted average sharesoutstanding calculation, as their exercise prices exceeded the average fairmarket value of the underlying common shares for the year.

 

**11.          Litigationand Contingencies**

 

The Company is subject toclaims and lawsuits in the ordinary course of its business.  In the opinion of management, the outcome ofthese actions, which are not clearly determinable at the present time, areeither adequately covered by insurance, or if not insured, will not, in theaggregate, have a material adverse impact upon the Company’s financial positionor the results of future operations.

 

36

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**ITEM 9****- CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**PARTIII**

 

**ITEM 10****- DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The information calledfor in this Item 10 is incorporated herein by reference from AirNet’s definitive Proxy Statement relating tothe Annual Meeting of Shareholders to be held on May 9, 2003, under thecaptions “ELECTION OF DIRECTORS”, “EXECUTIVE COMPENSATION – EmploymentContracts and Termination of Employment and Change-In-Control Arrangements” and“SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.”  In addition, information concerning AirNet’sexecutive officers is included in the portion of Part I of this Annual Reporton Form 10-K entitled “Executive officers of the registrant.”

 

**ITEM 11****- EXECUTIVECOMPENSATION**

 

Theinformation called for in this Item 11 is incorporated herein by reference fromAirNet’s definitive Proxy Statement relating to the Annual Meeting ofShareholders to be held on May 9, 2003, under the captions “ELECTION OFDIRECTORS – Nominees Standing for Election to the Board of Directors andCompensation of Directors” and “EXECUTIVE COMPENSATION.”  Such incorporation by reference shallnot be deemed to specifically incorporate by reference the information referredto in Item 402(a)(8) of Regulation S-K.

 

**ITEM 12****- SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

 

The information called for in this Item 12 regardingsecurity ownership of certain beneficial owners and management is incorporatedherein by reference from AirNet’s definitive Proxy Statement relating to theAnnual Meeting of Shareholders to be held on May 9, 2003, under the captions“BENEFICIAL OWNERSHIP OF COMMON SHARES” and “TRANSACTIONS WITHMANAGEMENT.”

 

The information calledfor in this Item 12 regarding securities authorized for issuance under equitycompensation plans is included in the following section.

 

**Equity Compensation Plan Information**

 

AirNet has twocompensation plans under which common shares of AirNet are authorized forissuance to officers, directors or employees of AirNet and its subsidiaries inexchange for consideration in the form of goods or services:  the AirNet Systems, Inc. Amended andRestated 1996 Incentive Stock Plan (the “Incentive Stock Plan”) and the AirNetSystems, Inc. Director Deferred Compensation Plan (the “Director Plan”).  The Incentive Stock Plan has been approvedby the shareholders of AirNet, while the Director Plan has not.

 

The following table showsfor the Incentive Stock Plan, as of December 31, 2002, the number of commonshares issuable upon exercise of outstanding options and outstanding rights topurchase granted pursuant to the Associate Stock Purchase Program under theIncentive Stock Plan, the weighted average exercise price of outstandingoptions and rights to purchase and the number of common shares remainingavailable for future issuance, excluding common shares issuable upon exerciseof outstanding options and rights to purchase. The following table also shows comparable information, as of December31, 2002, for the Director Plan.

 

37

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| **Plan Category(1)**                                    |   | **Number of common  shares to be issued  upon exercise of  outstanding options,  warrants and rights   (a)** |   | **Weighted-average  exercise price of  outstanding options,  warrants and rights   (b)** |   | **Number of common  shares remaining  available for future  issuance under equity  compensation plans  (excluding common  shares reflected in  column (a))   (c)** |    |
|---------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
| Equity compensation plans  approved by shareholders     |   | 1,056,000                                                                                                    | (1)    | $                                                                                        | 9.58   | (2)                                                                                                                                                                | 463,000 | (3) |
| Equity compensation plans  not approved by shareholders |   | —                                                                                                       | (4)    | n/a                                                                                      | (5)    | —                                                                                                                                                             | (6)     |
| Total                                                   |   | 1,056,000                                                                                                    |   | $                                                                                        | 9.58   |                                                                                                                                                               | 463,000 |   |

 

----

(1)                                  Includes1,045,000 common shares issuable upon exercise of options granted under theIncentive Stock Plan and 11,000 common shares subject to outstanding rights topurchase granted pursuant to the Associate Stock Purchase Program under theIncentive Stock Plan.

 

(2)                                  Representsthe weighted-average exercise price of outstanding options.  Rights to purchase common shares under theAssociate Stock Purchase Program are priced based on 85% of the lower of theclosing market price of AirNet common shares on the first day of the period orthe closing market price on the last day of the period.  All of the 11,000 outstanding rights topurchase common shares as of December 31, 2002 under the Associate StockPurchase Program were exercised in January 2, 2003 at a price of $4.07 per share.

 

(3)                                  Includes463,000 common shares remaining available for issuance under the IncentiveStock Plan, of which 108,000 common shares are reserved for issuance under theAssociate Stock Purchase Program.

 

(4)                                  Includescommon shares reflecting the common share equivalents attributable toparticipants’ stock accounts under the Director Plan.

 

(5)                                  Pleasesee the description of the Director Plan below.

 

(6)                                  Includescommon shares remaining available for issuance at December 31, 2002 under theDirector Plan.

 

***Director Deferred Compensation Plan***

 

The Director Plan allowseach director of AirNet or one of its subsidiaries to defer all or a portion ofhis director’s fees, including the federal income tax on those deferredfees.  The deferred fees may be allocatedto (a) a cash account where the funds will earn interest at the rate prescribedin the Director Plan or (b) a stock account where the funds will be convertedinto a common share equivalent (determined by dividing the amount to beallocated to the participant’s stock account by the fair market value of theAirNet common shares when the credit to the stock account is made) and bematched by AirNet at a rate of 25% of the amount deferred by the director tothe Director Plan.  In his deferralelection, a director elects whether distribution of the amount in hisaccount(s) under the Director Plan is to be made in a single lump sum paymentor in equal annual installments payable over a period of not more than tenyears.  Distributions will commencewithin 30 days of the earlier of (i) the date specified by a director at thetime a deferral election is made or (ii) the date the director ceases to soserve.  Cash accounts will bedistributed in the form of cash and stock accounts will be distributed in theform of common shares or cash, as selected by AirNet.

 

38

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**ITEM 13****  - CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

The information calledfor in this Item 13 is incorporated herein by reference from AirNet’s definitiveProxy Statement relating to the Annual Meeting of Shareholders to be held on May 9, 2003, under the caption“TRANSACTIONS WITH MANAGEMENT.”

 

**ITEM 14 - CONTROLSAND PROCEDURES**

 

Within ninety days priorto the filing date of this Annual Report on Form 10-K, an evaluation wasperformed by AirNet Systems, Inc. under the supervision and with theparticipation of its management, including the Chief Executive Officer (the“CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of thedesign and operation of AirNet Systems, Inc.’s disclosure controls andprocedures, as contemplated by Rule13a-15 under the Securities Exchange Act of1934, as amended.  Based upon thatevaluation, AirNet’s management, including the CEO and CFO concluded thatAirNet’s disclosure controls and procedures were effective to ensure thatmaterial information relating to AirNet Systems, Inc., including itsconsolidated subsidiaries, is made known to them, particularly during theperiod for which the periodic reports are being prepared.  There have been no significant changes inthe AirNet’s internal controls or in other factors that could significantlyaffect these controls subsequent to the date of the evaluation pursuant toExchange Act Rule 13a-15 referred to above.

 

**PART IV**

 

**ITEM 15****- EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

 

(a)           Documents filed as part of thisreport

 

1.               The followingconsolidated financial statements are included in Item 8:

 

Report of independentauditors

Consolidated balancesheets as of December 31, 2002 and 2001

Consolidatedstatements of operations for the years ended December 31, 2002, 2001 and 2000

Consolidatedstatements of cash flows for the years ended December 31, 2002, 2001 and 2000

Consolidatedstatements of changes in shareholders’ equity for the years ended December 31,2002,

2001 and 2000

Notesto consolidated financial statements

 

2.             Schedule II - Valuation and Qualifying Accounts isincluded below:

 
| **COL A**                                                                                         |   | **COL B**                        |    | **COL C**                           |   | **COL D**                       |   | **COL E**           |   |
|---------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|-------------------------------------|--------|---------------------------------|--------|---------------------|--------|
|                                                                                              |   |                             |    | **Additions**                       |   |                            |   |                |   |
| **Description**                                                                                   |   | **Balance at  Start of  Period** |    | **Charged to  Costs and  Expenses** |   | **Charged to  Other  Accounts** |   | **Deductions  (1)** |   | **Balance at  End of  Period** |   |
| Year  end December 31, 2002:  Deducted from  asset accounts; Allowance for doubtful accounts |   | $                                | 660,647 |                                | $      | 432,290                         |   | $                   | 0      |   | $ | 198,049 |   | $ | 894,888 |   |
| Year  end December 31, 2001:  Deducted from  asset accounts; Allowance for doubtful accounts |   | 601,114                          |    | 457,386                             |   | 0                               |   | 397,853             |   | 660,647 |   |
| Year  end December 31, 2000:  Deducted from  asset accounts; Allowance for doubtful accounts |   | 598,076                          |    | 170,602                             |   | 0                               |   | 167,564             |   | 601,114 |   |
|                                                                                                   |        |                                  |         |                                     |        |                                 |        |                     |        |  |  |  |  |  |  |  |

 

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(1)  Uncollectible accounts written off, net ofrecoveries

 

Schedules not listedabove have been omitted because they are not required or the informationrequired to be set forth therein is included in the consolidated financialstatements or notes thereto.

 

39

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3.             Exhibits

 

The following exhibitsare included or incorporated by reference in this Annual Report on Form 10-K:

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                  |   | **Location**                                                                                                                                                                                              |   |
|------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 3.1              |   | Amended Articles of  AirNet Systems, Inc.                                                                                                                                                                        |   | Incorporated herein by  reference to Exhibit 2.1 to AirNet Systems, Inc.’s Registration Statement on  Form 8-A (File No. 0-28428) filed on May 3, 1996 (the “1996 Form 8-A”)               |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 3.2              |   | Certificate of  Amendment to the Amended Articles of AirNet Systems, Inc. as filed with the  Ohio Secretary of State on May 28, 1996                                                                             |   | Incorporated herein by  reference to Exhibit 4(b) to AirNet Systems, Inc.’s Registration Statement on  Form S-8 (Registration No. 333-08189) filed on July 16, 1996 (the “1996 Form  S-8”) |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 3.3              |   | Amended Articles of  AirNet Systems, Inc. (as amended through May 28, 1996) [for SEC reporting  compliance purposes only - not filed with the Ohio Secretary of State]                                           |   | Incorporated herein by  reference to Exhibit 4(c) to AirNet Systems, Inc.’s 1996 Form S-8                                                                                                            |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 3.4              |   | Code of Regulations of  AirNet Systems, Inc.                                                                                                                                                                     |   | Incorporated herein by  reference to Exhibit 2.2 to AirNet Systems, Inc.’s 1996 Form 8-A                                                                                                             |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 3.5              |   | Certificate regarding  adoption of amendment to Section 1.10 of the Code of Regulations of AirNet  Systems, Inc. by the shareholders on May 12, 2000                                                             |   | Incorporated herein by  reference to Exhibit 3.1 to AirNet Systems, Inc.’s Form 10-Q for the  quarterly period ended June 30, 2000 (File No. 1-13025)                                                |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 3.6              |   | Code of Regulations of  AirNet Systems, Inc. (reflecting amendments through May 12, 2000) [for SEC  reporting compliance purposes only]                                                                          |   | Incorporated herein by  reference to Exhibit 3.2 to AirNet Systems, Inc.’s Form 10-Q for the  quarterly period ended June 30, 2000 (File No. 1-13025)                                                |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 4.1              |   | Credit Agreement dated September 30, 2002, among AirNet Systems,  Inc.,  the Lenders from time to time  party thereto and The Huntington National Bank, as Administrative Agent and  Lead Arranger          |   | Incorporated herein by  reference to Exhibit 4.1 to AirNet Systems, Inc.’s Quarterly Report on Form  10-Q for the quarterly period ended September 30, 2002 (File No. 1-13025)                       |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 10.1*            |   | AirNet Systems, Inc.  Amended and Restated 1996 Incentive Stock Plan (reflects amendments through  September 7, 2001)                                                                                            |   | Incorporated herein by  reference to Exhibit 10 to AirNet Systems, Inc.’s Quarterly Report on Form  10-Q for the quarterly period ended September 30, 2001 (File No. 1-13025)                        |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 10.2             |   | Indemnification  Agreement, dated as of May 15, 1996, among AirNet Systems, Inc. and Eric P.  Roy, Glenn M. Miller, Charles A. Renusch, Guy S. King, Lincoln L. Rutter,  Kendall W. Wright and William R. Sumser |   | Incorporated herein by  reference to Exhibit 10.11 to AirNet’s Amendment No. 2 to Form S-1  Registration Statement (Registration No. 333-03092) filed on May 24, 1996  (“Amendment No. 2”) |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 10.3             |   | Indemnification  Agreement, dated as of May 15, 1996, between Mr. Mercer and AirNet Systems,  Inc.                                                                                                               |   | Incorporated herein by  reference to Exhibit 10.12 to AirNet Systems, Inc.’s Amendment No. 2                                                                                                         |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 10.4*            |   | Employment Agreement,  effective March 1, 2001, between AirNet Systems, Inc. and Joel E. Biggerstaff                                                                                                             |   | Incorporated herein by  reference to Exhibit 10.4 to AirNet Systems, Inc.’s Annual Report on Form  10-K for the fiscal year ended December 31, 2000 (File No. 1-13025)                               |   |

 

40

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| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | **Location**                                                                                                                                                                     |   |
|------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 10.5*            |   | Employment Agreement,  effective March 1, 2001, between AirNet Systems, Inc. and William R. Sumser                                                                                                                                                                                                                                                                                                                                                                               |   | Incorporated herein by  reference to Exhibit 10.5 to AirNet Systems, Inc.’s Annual Report on Form  10-K for the fiscal year ended December 31, 2000 (File No. 1-13025)      |   |
| 10.6*            |   | Employment Agreement,  effective March 1, 2001, between AirNet Systems, Inc. and Jeffrey B. Harris                                                                                                                                                                                                                                                                                                                                                                               |   | Incorporated herein by  reference to Exhibit 10.6 to AirNet Systems, Inc.’s Annual Report on Form  10-K for the fiscal year ended December 31, 2000 (File No. 1-13025)      |   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 10.7*            |   | AirNet Systems, Inc.  Director Deferred Compensation Plan effective May 27, 1998                                                                                                                                                                                                                                                                                                                                                                                                 |   | Incorporated herein by  reference to Exhibit 10.7 to AirNet Systems, Inc.’s Annual Report on Form  10-K for the fiscal year ended December 31, 1999 (File No. 1-13025)      |   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 10.8*            |   | AirNet Systems, Inc.  Salary for Options Conversion Plan, effective February 6, 2000                                                                                                                                                                                                                                                                                                                                                                                             |   | Incorporated herein by  reference to Exhibit 10.8 to AirNet Systems, Inc.’s Annual Report on Form  10-K for the fiscal year ended December 31, 2000 (File No. 1-13025)      |   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 10.9*            |   | Agreement between AirNet  Systems, Inc. and Gerald G. Mercer, dated July 17, 2001                                                                                                                                                                                                                                                                                                                                                                                                |   | Incorporated herein by  reference to Exhibit 10.9 to AirNet Systems, Inc.’s Quarterly Report on Form  10-Q for the quarterly period ended June 30, 2001 (File No. 1-13025)  |   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 10.10*           |   | Jerry Mercer Transition  Agreement, effective May 26, 2001, between AirNet Systems, Inc. and Gerald G.  Mercer                                                                                                                                                                                                                                                                                                                                                                   |   | Incorporated herein by  reference to Exhibit 10.10 to AirNet Systems, Inc.’s Quarterly Report on Form  10-Q for the quarterly period ended June 30, 2001 (File No. 1-13025) |   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 10.11*           |   | Agreement between  AirNet Systems, Inc. and Guy King, effective February 7, 2003                                                                                                                                                                                                                                                                                                                                                                                                 |   | Filed herewith                                                                                                                                                                   |   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 10.12            |   | Stock Purchase  Agreement, dated as of December 26, 2002, between Gerald G. Mercer and  Gryphon Master Fund, L.P. with AirNet Systems, Inc. as a party for purposes  of the registration rights provisions contained in Section 7 thereof and  Exhibit III attached thereto; and Schedule A to Exhibit 10.1 identifying  other substantially identical Stock Purchase Agreements between Gerald G.  Mercer and other purchasers as identified in such Schedule A to Exhibit 10.1 |   | Incorporated herein by  reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, dated  January 14, 2003 and filed on January 15, 2003 (File No. 1-13025)      |   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 10.13            |   | Stock Purchase  Agreement, dated as of January 9, 2003, between Spring Hill Camps and Bonanza  Master Fund, Ltd. with AirNet Systems, Inc. as a party for purposes of the  registration rights provisions contained in Section 7 thereof and Exhibit III  attached thereto; and Schedule A to Exhibit 10.2 identifying other  substantially identical Stock Purchase Agreements between Spring Hill Camps  and other purchasers as identified in such Schedule A to Exhibit 10.2 |   | Incorporated herein by  reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K, dated  January 14, 2003 and filed on January 15, 2003 (File No. 1-13025)      |   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 21               |   | Subsidiaries of AirNet  Systems, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | Filed herewith                                                                                                                                                                   |   |

 

41

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| **Exhibit  No.** |   | **Description**                                                                                                                             |   | **Location**   |   |
|------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|--------|
|             |   |                                                                                                                                        |   |           |   |
| 23               |   | Consent of Ernst &  Young LLP                                                                                                           |   | Filed herewith |   |
|             |   |                                                                                                                                        |   |           |   |
| 24               |   | Powers of Attorney                                                                                                                          |   | Filed herewith |   |
|             |   |                                                                                                                                        |   |           |   |
| 99               |   | Certification Pursuant  to Title 18, United States Code, Section 1350 as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002 |   | Filed herewith |   |

 

----

*    Denotes amanagement contract or compensatory plan or arrangement required to be filedpursuant to Item 14 of Form 10-K.

 

(b)           No reports on Form 8-K were filedduring the quarter ended December 31, 2002.

 

(c)           Exhibits are listed in Item 14(a)(3)above.

 

(d)           The required financial statementschedule is included in Item 14(a)(2) above.

 

42

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SIGNATURES

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this Report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| AIRNET SYSTEMS,  INC. |
|-----------------------|
|                  |
|                  |
| Dated: March 20, 2003 | By: | /s/ Joel E. Biggerstaff |   |
|                  | Joel E. Biggerstaff, Chairman  of the Board, |   |
|                  | Chief Executive Officer  and President |   |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 
| **Signature**           |   | **Title** |                                               | **Date** |
|-------------------------|--------|-----------|----------------------------------------------------|----------|
|                    |   |      |                                               |     |   |
| /s/ Joel E. Biggerstaff |   |      | Chairman of the Board,  Chief Executive Officer,   |     | March 20, 2003 |
| Joel E. Biggerstaff     |   |      | and President  (Principal Executive Officer)       |     |   |
|                    |   |      |                                               |     |   |
| *William R. Sumser      |   |      | Chief Financial Officer,  Treasurer, Secretary and |     | March 20, 2003 |
| William R. Sumser       |   |      | Vice President, Finance                            |     |   |
|                    |   |      |                                               |     |   |
| *Roger D. Blackwell     |   |      | Director                                           |     | March 20, 2003 |
| Roger D. Blackwell      |   |      |                                               |     |   |
|                    |   |      |                                               |     |   |
| *Russell M. Gertmenian  |   |      | Director                                           |     | March 20, 2003 |
| Russell M. Gertmenian   |   |      |                                               |     |   |
|                    |   |      |                                               |     |   |
| *David P. Lauer         |   |      | Director                                           |     | March 20, 2003 |
| David P. Lauer          |   |      |                                               |     |   |
|                    |   |      |                                               |     |   |
| *Bruce D. Parker        |   |      | Director                                           |     | March 20, 2003 |
| Bruce D. Parker         |   |      |                                               |     |   |
|                    |   |      |                                               |     |   |
| *James E. Riddle        |   |      | Director                                           |     | March 20, 2003 |
| James E. Riddle         |   |      |                                               |     |   |

 

----

| *By    | /s/ Joel E. Biggerstaff                |   |
|--------|----------------------------------------|--------|
|   | Joel E. Biggerstaff,  Attorney-in-Fact |

 

43

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CERTIFICATIONS

 

I,Joel E. Biggerstaff, certify that:

 

1.               I have reviewed this annual report on Form10-K of AirNet Systems, Inc.;

 

2.               Based on my knowledge, this annual reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

4.               The registrant’s other certifying officerand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and have:

 

a.               designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b.              evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

 

c.               presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officerand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions:

 

a.               all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b.              any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.               The registrant’s other certifying officerand I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
|   | /s/ Joel E. Biggerstaff                                                      |
|--------|------------------------------------------------------------------------------|
|   |                                                                         |
|   | Joel E. Biggerstaff                                                          |
|   |                                                                         |
|   | Title:  Chairman of  the Board, Chief Executive Officer,  and President |
|   |                                                                         |
|   | Dated:  March 26, 2003                                                  |

 

44

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I,William R. Sumser, certify that:

 

1.               I have reviewed this annual report on Form10-K of AirNet Systems, Inc.;

 

2.               Based on my knowledge, this annual reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

4.               The registrant’s other certifying officerand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and have:

 

a.               designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b.              evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

 

c.               presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officerand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions:

 

d.              all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

e.               any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.               The registrant’s other certifying officerand I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
|   | /s/ William R. Sumser                                                                    |
|--------|------------------------------------------------------------------------------------------|
|   |                                                                                     |
|   | William R. Sumser                                                                        |
|   |                                                                                     |
|   | Title:  Chief  Financial Officer, Treasurer, Secretary and  Vice President, Finance |
|   |                                                                                     |
|   | Dated:  March 26, 2003                                                              |

 

45

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INDEX TO EXHIBITS

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                  |   | **Location**                                                                                                                                                                                              |   |
|------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 3.1              |   | Amended Articles of  AirNet Systems, Inc.                                                                                                                                                                        |   | Incorporated herein by  reference to Exhibit 2.1 to AirNet Systems, Inc.’s Registration Statement on  Form 8-A (File No. 0-28428) filed on May 3, 1996 (the “1996 Form 8-A”)               |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 3.2              |   | Certificate of  Amendment to the Amended Articles of AirNet Systems, Inc. as filed with the  Ohio Secretary of State on May 28, 1996                                                                             |   | Incorporated herein by  reference to Exhibit 4(b) to AirNet Systems, Inc.’s Registration Statement on  Form S-8 (Registration No. 333-08189) filed on July 16, 1996 (the “1996 Form  S-8”) |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 3.3              |   | Amended Articles of  AirNet Systems, Inc. (as amended through May 28, 1996) [for SEC reporting  compliance purposes only - not filed with the Ohio Secretary of State]                                           |   | Incorporated herein by  reference to Exhibit 4(c) to AirNet Systems, Inc.’s 1996 Form S-8                                                                                                            |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 3.4              |   | Code of Regulations of  AirNet Systems, Inc.                                                                                                                                                                     |   | Incorporated herein by  reference to Exhibit 2.2 to AirNet Systems, Inc.’s 1996 Form 8-A                                                                                                             |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 3.5              |   | Certificate regarding  adoption of amendment to Section 1.10 of the Code of Regulations of AirNet  Systems, Inc. by the shareholders on May 12, 2000                                                             |   | Incorporated herein by  reference to Exhibit 3.1 to AirNet Systems, Inc.’s Form 10-Q for the  quarterly period ended June 30, 2000 (File No. 1-13025)                                                |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 3.6              |   | Code of Regulations of  AirNet Systems, Inc. (reflecting amendments through May 12, 2000) [for SEC  reporting compliance purposes only]                                                                          |   | Incorporated herein by  reference to Exhibit 3.2 to AirNet Systems, Inc.’s Form 10-Q for the  quarterly period ended June 30, 2000 (File No. 1-13025)                                                |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 4.1              |   | Credit Agreement dated September 30, 2002, among AirNet Systems, Inc.,  the Lenders from time to time party thereto and The Huntington National Bank,  as Administrative Agent and Lead Arranger                 |   | Incorporated herein by  reference to Exhibit 4.1 to AirNet Systems, Inc.’s Quarterly Report on Form  10-Q for the quarterly period ended September 30, 2002 (File No. 1-13025)                       |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 10.1*            |   | AirNet Systems, Inc.  Amended and Restated 1996 Incentive Stock Plan (reflects amendments through  September 7, 2001)                                                                                            |   | Incorporated herein by  reference to Exhibit 10 to AirNet Systems, Inc.’s Quarterly Report on Form  10-Q for the quarterly period ended September 30, 2001 (File No. 1-13025)                        |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 10.2             |   | Indemnification  Agreement, dated as of May 15, 1996, among AirNet Systems, Inc. and Eric P.  Roy, Glenn M. Miller, Charles A. Renusch, Guy S. King, Lincoln L. Rutter,  Kendall W. Wright and William R. Sumser |   | Incorporated herein by  reference to Exhibit 10.11 to AirNet’s Amendment No. 2 to Form S-1  Registration Statement (Registration No. 333-03092) filed on May 24, 1996  (“Amendment No. 2”) |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 10.3             |   | Indemnification  Agreement, dated as of May 15, 1996, between Mr. Mercer and AirNet Systems,  Inc.                                                                                                               |   | Incorporated herein by  reference to Exhibit 10.12 to AirNet Systems, Inc.’s Amendment No. 2                                                                                                         |   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |   |
| 10.4*            |   | Employment Agreement,  effective March 1, 2001, between AirNet Systems, Inc. and Joel E. Biggerstaff                                                                                                             |   | Incorporated herein by  reference to Exhibit 10.4 to AirNet Systems, Inc.’s Annual Report on Form  10-K for the fiscal year ended December 31, 2000 (File No. 1-13025)                               |   |

 

46

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| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | **Location**                                                                                                                                                                     |   |
|------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 10.5*            |   | Employment Agreement,  effective March 1, 2001, between AirNet Systems, Inc. and William R. Sumser                                                                                                                                                                                                                                                                                                                                                                               |   | Incorporated herein by  reference to Exhibit 10.5 to AirNet Systems, Inc.’s Annual Report on Form  10-K for the fiscal year ended December 31, 2000 (File No. 1-13025)      |   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 10.6*            |   | Employment Agreement,  effective March 1, 2001, between AirNet Systems, Inc. and Jeffrey B. Harris                                                                                                                                                                                                                                                                                                                                                                               |   | Incorporated herein by  reference to Exhibit 10.6 to AirNet Systems, Inc.’s Annual Report on Form  10-K for the fiscal year ended December 31, 2000 (File No. 1-13025)      |   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 10.7*            |   | AirNet Systems, Inc.  Director Deferred Compensation Plan effective May 27, 1998                                                                                                                                                                                                                                                                                                                                                                                                 |   | Incorporated herein by  reference to Exhibit 10.7 to AirNet Systems, Inc.’s Annual Report on Form  10-K for the fiscal year ended December 31, 1999 (File No. 1-13025)      |   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 10.8*            |   | AirNet Systems, Inc.  Salary for Options Conversion Plan, effective February 6, 2000                                                                                                                                                                                                                                                                                                                                                                                             |   | Incorporated herein by  reference to Exhibit 10.8 to AirNet Systems, Inc.’s Annual Report on Form  10-K for the fiscal year ended December 31, 2000 (File No. 1-13025)      |   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 10.9*            |   | Agreement between  AirNet Systems, Inc. and Gerald G. Mercer, dated July 17, 2001                                                                                                                                                                                                                                                                                                                                                                                                |   | Incorporated herein by  reference to Exhibit 10.9 to AirNet Systems, Inc.’s Quarterly Report on Form  10-Q for the quarterly period ended June 30, 2001 (File No. 1-13025)  |   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 10.10*           |   | Jerry Mercer Transition  Agreement, effective May 26, 2001, between AirNet Systems, Inc. and Gerald G.  Mercer                                                                                                                                                                                                                                                                                                                                                                   |   | Incorporated herein by  reference to Exhibit 10.10 to AirNet Systems, Inc.’s Quarterly Report on Form  10-Q for the quarterly period ended June 30, 2001 (File No. 1-13025) |   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 10.11*           |   | Agreement between  AirNet Systems, Inc. and Guy King, effective February 7, 2003                                                                                                                                                                                                                                                                                                                                                                                                 |   | Filed herewith                                                                                                                                                                   |   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 10.12            |   | Stock Purchase  Agreement, dated as of December 26, 2002, between Gerald G. Mercer and  Gryphon Master Fund, L.P. with AirNet Systems, Inc. as a party for purposes  of the registration rights provisions contained in Section 7 thereof and  Exhibit III attached thereto; and Schedule A to Exhibit 10.1 identifying other  substantially identical Stock Purchase Agreements between Gerald G. Mercer  and other purchasers as identified in such Schedule A to Exhibit 10.1 |   | Incorporated herein by  reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, dated  January 14, 2003 and filed on January 15, 2003 (File No. 1-13025)      |   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 10.13            |   | Stock Purchase  Agreement, dated as of January 9, 2003, between Spring Hill Camps and Bonanza  Master Fund, Ltd. with AirNet Systems, Inc. as a party for purposes of the  registration rights provisions contained in Section 7 thereof and Exhibit III  attached thereto; and Schedule A to Exhibit 10.2 identifying other  substantially identical Stock Purchase Agreements between Spring Hill Camps  and other purchasers as identified in such Schedule A to Exhibit 10.2 |   | Incorporated herein by  reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K, dated  January 14, 2003 and filed on January 15, 2003 (File No. 1-13025)      |   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                             |   |
| 21               |   | Subsidiaries of AirNet  Systems, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | Filed herewith                                                                                                                                                                   |   |

 

47

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| **Exhibit  No.** |   | **Description**                                                                                                                             |   | **Location**   |   |
|------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|--------|
|             |   |                                                                                                                                        |   |           |   |
| 23               |   | Consent of Ernst &  Young LLP                                                                                                           |   | Filed herewith |   |
|             |   |                                                                                                                                        |   |           |   |
| 24               |   | Powers of Attorney                                                                                                                          |   | Filed herewith |   |
|             |   |                                                                                                                                        |   |           |   |
| 99               |   | Certification Pursuant  to Title 18, United States Code, Section 1350 as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002 |   | Filed herewith |   |

 

----

*  Denotes a management contract orcompensatory plan or arrangement required to be filed pursuant to Item 14 ofForm 10K.

 

48

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