**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-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, 2004**                                                                                                                                                                                                                                                                                     |
| ** **                         | ** ** | ** **                                                                                                                                                                                                                                                                                                                           |
| **OR**                             |
|                               |       |                                                                                                                                                                                                                                                                                                                                 |
| **o**                              | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                        |
|                               |       |                                                                                                                                                                                                                                                                                                                                 |
| ** **                         | ** ** | **For the transition period from                        to                        ** |
| ** **                         | ** ** | ** **                                                                                                                                                                                                                                                                                                                           |
| **Commission File Number 1-13025** |
|                                    |            |                                                                                                                                                                                                                                                                                                                                      |  |  |

 

**AirNet Systems, Inc.**

(Exact name of registrant as specified in its charter)

 
| ***Ohio***                                                       | *** *** | ***31-1458309***                     |
|------------------------------------------------------------------|--------------|--------------------------------------|
| (STATE  OR OTHER JURISDICTION  OF INCORPORATION OR ORGANIZATION) |         | (I.R.S. EMPLOYER IDENTIFICATION NO.) |
|                                                             |         |                                 |
| **3939 International Gateway  Columbus, Ohio 43219**             |
| (Address of principal executive offices) (Zip Code)              |
|                                                             |         |                                 |
| **614-237-9777**                                                 |
| (Registrant’s telephone number, including area code)        |

 

Securities registered pursuant to Section 12(b) ofthe Act:

 

| **Title of each class**        | ** ** | **Name of each exchange on which registered** |
|--------------------------------|------------|-----------------------------------------------|
| Common  Shares, $.01 par value |       | New York Stock Exchange                       |

 

Securitiesregistered pursuant to Section 12(g) of the Act:  **None**

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes  ý   No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act ).  Yes  o   No  ý

 

Theaggregate market value of the common shares (the only common equity of theregistrant) held by non-affiliates of the registrant based on the price atwhich the common shares were last sold as of June 30, 2004, the last businessday of the registrant’s most recently completed second fiscal quarter, was$45,080,293.

 

Thenumber of the registrant’s common shares outstanding as of March 28, 2005: **10,118,583.**

 

 

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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,  Related Stockholder Matters and Issuer Purchases of Equity Securities |
| 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                              |
| Item  9A:     | Controls and Procedures                                                                                            |
| Item  9B:     | Other Information                                                                                                  |
|          |                                                                                                               |
| 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:     | Principal Accountant Fees and Services                                                                             |
|          |                                                                                                               |
| PART IV       |                                                                                                               |
| Item  15:     | Exhibits and Financial Statement Schedules                                                                         |
|          |                                                                                                               |
| Signatures    |
|          |                                                                                                               |
| Exhibit Index |

 

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**PART I**

 

**ITEM 1 -BUSINESS**

 

**General**

 

AirNet Systems, Inc. (“AirNet”) is a specialty air carrier fortime-sensitive deliveries, operating between most U.S. cities each workingday.  AirNet is the leading transporterof cancelled checks and related information for the U.S. banking industry.  AirNet also provides specialized,high-priority delivery services to customers, primarily those involved in themedical, critical parts and entertainment industries.  AirNet also provides passenger charterservices through its wholly-owned subsidiary, Jetride, Inc.

 

AirNet operates a fleet of 115 aircraft (including 33 Learjets and 15Cessna Caravan turboprops) that depart from over 120 cities and complete morethan 480 flights per night, primarily Monday through Thursday.   In addition, Jetride, Inc. operates 13Learjets and 2 Challengers that offer private passenger charter services.  To supplement its air transportation network,AirNet uses commercial airlines during daytime and weekend hours when itsaircraft are operating under a limited flight schedule.

 

In addition to regularly scheduled delivery services, AirNet offerson-demand cargo charter delivery services. AirNet provides ground pick-up and delivery services throughout thenation seven days per week, using a combination of company personnel and anetwork of vendors and independent contractors.

 

AirNet’s integrated air and ground network provides dependable,time-critical delivery services to its customers.  Later pick-up and earlier delivery times thanthose offered by other national carriers is one of the primary differentiatingcharacteristics of AirNet’s time-critical delivery network.  AirNet’s flight schedule is designed toprovide delivery times between midnight and 8:00 a.m., providing earlierdelivery times than those generally available through other nationalcarriers.  AirNet uses a number ofproprietary customer service and management information systems to track, sort,dispatch and control the flow of packages throughout AirNet’s deliverysystem.  AirNet provides customer service24 hours per day, seven days a week to handle any inquiries, discrepancies orsupply requests, as well as to provide proof of delivery documentation, all ofwhich are value-added features of AirNet’s service.

 

AirNet Systems, Inc. was incorporated as a C-corporation under the lawsof the State of Ohio on February 15, 1996. AirNet’s principal executive offices are located at3939 International Gateway, Columbus, Ohio 43219, and can be reached at(614) 237-9777.  AirNet’s Internet website address is www.airnet.com(this uniform resource locator (URL) is an inactive textual reference only andis not intended to incorporate AirNet’s web site into this Annual Report onForm 10-K).

 

AirNet makes available free of charge, on or through its Internet website, its annual report on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K, and amendments to those reports filed or furnishedpursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, asamended (the “Exchange Act”), as soon as reasonably practicable after AirNetelectronically files such material with, or furnishes it to, the Securities andExchange Commission (the “SEC”).

 

As further described in “Note 3 – Segment Reporting” of the Notes toConsolidated Financial Statements included in “Item 8 – Financial Statementsand Supplementary Data” of this Annual Report on Form 10-K, AirNet operates twodistinct reportable segments, Delivery Services and Passenger CharterServices.  AirNet’s Delivery Servicessegment provides delivery service of time-critical shipments for Bank customersand other Express customers.  AirNet’sPassenger Charter Services segment provides passenger charter service.  Financial information for AirNet’s reportablesegments is provided in “Note 3 – Segment Reporting” of the Notes toConsolidated Financial Statements and is incorporated herein by reference.

 

*Delivery Services*

 

*Bank services*

 

Bank services, primarily consisting of cancelled check delivery,generated approximately 61%, 69% and 72% of AirNet’s revenues for the fiscalyears ended December 31, 2004, 2003 and 2002, respectively.  AirNet’s time-critical cancelled checkdelivery service allows its banking customers to reduce their float costs andrelated processing fees.  AirNet alsotransports other items, such as proof of deposit transactions and interofficemail, for many of the same bank customers. AirNet has historically priced its Bank services based on the tier ofservice, and by the pound, on a customer-by-customer basis.  The U.S. banking industry, includingcommercial banks and third party processors, represents AirNet’s largestcategory of customers. AirNet’s bank customers represent over 100 of the nation’slargest bank holding companies.

 

*Express services*

 

Express services, which focus on customers with time-critical deliveryneeds, generated approximately 28%, 25% and 24% of AirNet’s revenues for thefiscal years ended December 31, 2004, 2003 and 2002, respectively.  Express

 

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services are primarily targeted at customers involved in the medical,critical parts and entertainment industries. In the medical industry, Express services are offered to customers shippingpackages that require specialized handling, the transportation of which isoften highly regulated by various governmental authorities.  Targeted markets within the medical industryinclude producers and recipients of radioactive pharmaceuticals, diagnosticspecimens, blood, umbilical cord blood, human tissue and organs.

 

Express services are also marketed to customers whose shipment needsare highly time sensitive or time definite, including critical parts suppliersand customers involved in the media and entertainment industries.

 

For those customers requiring time-critical delivery options notavailable on AirNet’s regularly scheduled routes, on-demand cargo charterservices are available 24 hours per day, seven days a week.  On-demand charters may be scheduled inadvance or on an as-needed basis.

 

*Passenger Charter Services*

 

Jetride, Inc., a wholly-owned subsidiary of AirNet which generatedapproximately 11%, 5% and 3% of AirNet’s revenues for the fiscal years endedDecember 31, 2004, 2003 and 2002, respectively, provides private passengercharter services that offer customers a safe, fast, and convenient way totravel.  Jetride’s private passengercharter service is available 24 hours a day, 7 days a week primarily within thecontinental United States and neighboring countries.  Jetride provides charter services arrangedthrough third-party charter brokers and, to a lesser extent, to retailcustomers.  Jetride operates its 13passenger Learjets and 2 passenger Challengers from ten locations across thecountry.  Jetride’s fleet consists ofnine owned aircraft and six aircraft that are managed for other owners.  Jetride’s fleet of Learjets and Challengersare configured to comfortably carry eight to twelve passengers.  All passenger charter pilots are AirlineTransport Pilot rated – the highest Federal Aviation Administration (“FAA”)rating possible.  Jetride, Inc. is certified by the Wyvern Network ofCharter Operators and holds an Aviation Research Group/US Platinum rating, thehighest rating in the industry.  Furtherexpansion of the Jetride fleet in 2005 is projected to be through managedaircraft.

 

*Aviation Services*

 

AirNet operates a fixed base operation from AirNet’s Columbus, Ohiofacility, offering retail aviation fuel sales and related ground supportservices.

 

**Business Strategy**

 

AirNet continues to transition and diversify by pursuing growthopportunities for its Express and Passenger Charter services.  AirNet is focusing on expanding its Expressservices to customers in time-critical markets and time-definite deliverymarkets, such as medical, radioactive pharmaceutical and on-demand cargocharters.

 

AirNet believes that demand for private passenger charter services willcontinue to grow as commercial airlines continue to tighten schedules andrequire long boarding times due to security concerns.  To capitalize on the increased demand, Jetridehas increased the number of owned and managed aircraft.  In the fourth quarter of 2004, Jetrideincreased its managed aircraft fleet by adding two large cabin Challenger jetaircraft to its charter offering.

 

AirNet believes that its Bank services revenue will decline in futureperiods as a result of the continuing evolution of electronic alternatives tothe physical movement of cancelled checks.   The Check 21 Act, which became effective inOctober 2004, requires that all financialinstitutions accept either the physical cancelled check, or an imagereplacement document in lieu of a physical cancelled check.  AirNet believes that this will accelerate thetransition in the banking industry to the electronic clearing of cancelledchecks.

 

AirNet continues to evaluate its operational structure and associatedcosts to more closely align them with the expected volume and revenuechanges.  Given the high fixed costnature of AirNet’s national airline network, it will be difficult to reducecosts in proportion to decreases in bank revenues.  AirNet continues to evaluate its pricing forBank customers and may introduce pricing that contains additional fixed feesthat would be impacted to a lesser degree by decreasing volume.

 

The continuing diversification of AirNet’s business will likely requiresignificant changes in its air transportation network, including a reduction inits current route schedule, additional investment in sales and marketing duringthe transition, and investment in additional service capabilities andtechnologies to serve a more diverse customer group.

 

Fast Forward Solutions

 

Fast Forward Solutions, LLC, a wholly-owned subsidiaryof AirNet, was formed to explore growth opportunities associated with existingand emerging image replacement platforms and technologies. Fast Forward Solutions and NetDeposit, Inc.signed a term sheet in 2003 regarding their intent to finalize an agreementrelated to the joint development and marketing of image replacement productsand services.  Fast Forward Solutions isno longer actively pursuing an agreement with NetDeposit, Inc.  Fast Forward Solutions will continue toexplore opportunities in the image replacement market as they

 

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arise,focusing on image replacement solutions that require both technology and thephysical movement of image replacement documents.

 

**Operations**

 

*Air operations*

 

AirNet’s air operations are headquartered in Columbus, Ohio.  AirNet and Jetride utilize an extensivescreening process to evaluate potential pilots prior to hiring.  New pilots must meet stringent companyqualifications, as well as mandated FAA requirements.  New pilots must satisfactorily complete afive-week training program conducted by AirNet’s flight training staff prior toassignment of pilot duties.  Thistraining program includes flight simulator training prior to any actual flighttime in an aircraft, as well as intensive ground instruction.  Additionally, new pilots gain operatingexperience in a structured setting prior to assignment in order to gain afamiliarity with AirNet’s route system and the unique demands of the flightenvironment.  In addition to FAArequirements, pilots providing Passenger Charter services for Jetride must alsomeet additional in-flight experience requirements specifically related to thetypes of Learjets and Challengers operated by Jetride.

 

AirNet’s central dispatch system ties together all components of theair operation. Departure and arrival times are continuously updated, andweather conditions throughout the nation are monitored. AirNet dispatchersremain in contact with pilots, out-based hub managers, fuelers, maintenancetechnicians and ground delivery personnel to identify and minimize anypotential delays in the delivery process. AirNet also uses commercial airlines, primarily to transport shipmentsduring the daytime and weekend hours when its aircraft are operating under alimited flight schedule.

 

Capacity management is an important factor in achieving profitablegrowth of AirNet’s package delivery services. AirNet’s air transportation network is positioned around a flexiblenational route structure designed to facilitate late pick-up and early deliverytimes, minimize delays and simplify flight scheduling.  AirNet’s flexible route structure allows itto respond to the changing volume needs of its customers or to take advantageof emerging opportunities in its Express services business.  AirNet’s primary hub in Columbus, Ohio, andseveral mini-hubs across the nation, are located primarily in less congestedregional airports. These locations, in conjunction with AirNet’s off-peakdeparture and arrival times, provide easy take-off and landings, convenientloading and unloading and fast refueling and maintenance.

 

AirNet employs approximately 80 aircraft and avionics technicians ineight separate locations across the country performing maintenance on AirNet’sfleet of aircraft.  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.  AirNet’s aircraft maintenance center at itsColumbus hub has received ISO 9001:2000 certification.

 

*Shipment processing*

 

Bank shipments are pre-sorted by bank personnel and packaged inAirNet-supplied bags with three letter city identifier tags to show finaldestination.  Express shipments arepackaged in either AirNet-provided packaging or the customers’ packaging.  Shipments transported on AirNet’s airtransportation network are typically picked up by a courier and transported tothe local airport where an airbill is either scanned using bar code technologyor entered manually.  Information on eachairbill pertaining to the shipper, receiver, airbill number and applicabledeadline is captured and downloaded into AirNet’s computer system, where it isavailable to AirNet’s customer service representatives (“CSRs”).  Upon arrival at AirNet’s Columbus hub or oneof its mini-hubs, the shipment is off-loaded, sorted by destination and reloadedonto an aircraft.  At the destinationcity, the shipment is off-loaded for the final time and delivered by courier tothe receiver.  When delivered,information from the airbill is once again captured and downloaded into AirNet’scomputer system. Delivery information for all shipments is then availableon-line to the customers and AirNet’s CSRs.

 

For banking customers meeting daytime bankingdeadlines and Express customers requiring next-flight-out timing,shipments are typically picked up by a courier and transported via commercialairlines or other integrators to destination cities where couriers accept thepackages and deliver them to their final destinations.

 

*Ground support*

 

AirNet manages its ground delivery services through the combined use ofemployees and a network of independent contractors and vendor couriers.  Independent contractors and vendor couriersperform the majority of ground delivery services, allowing AirNet to bettermatch its ground costs with its volume requirements.  In some situations, employees are used forground delivery services on scheduled routes where volume requirementseconomically justify employing full-time couriers.  Dispatching functions related to grounddelivery services occur at both the Columbus, Ohio hub and on a regional basisin some of the major cities served.

 

*Mercury BusinessServices*

 

OnAugust 11, 2003, AirNet sold the assets of its Mercury Business Servicesdivision to Mercury Business Services, Inc., a Delaware corporation owned by agroup that includes the original owners of the Mercury business.  AirNet had acquired Mercury Business Servicesin August of 1998.

 

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**Regulation**

 

AirNet holds an air carrier operating certificate granted by the FAApursuant to Part 135 of the Federal Aviation Regulations. In addition, Jetrideholds its own air carrier operating certificate granted by the FAA pursuant toPart 135.  These certificates are ofunlimited duration and remain in effect so long as AirNet and Jetride maintainthe required standards of safety and meet the operational requirements of theFederal Aviation Regulations.  The FAA’sregulatory authority relates primarily to operational aspects of airtransportation, including aircraft standards and maintenance, personnel, andground facilities.

 

The U. S. Department of Transportation (“DOT”) and TransportationSecurity Administration (“TSA”) have regulatory authority concerningoperational and security concerns in transportation, respectively, includingsafety, insurance and hazardous materials. AirNet holds various operational certificates issued by these agencies,including party status to DOT E-7060, which permits AirNet to transport highervolumes of time-critical radioactive pharmaceuticals than is allowed by the DOTfor most carriers.  Party status to DOTE-7060 is renewed every two years, with AirNet’s next renewal due August 2006.

 

AirNet is also subject to Food and Drug Administration regulation ofAirNet’s transportation of pharmaceuticals.

 

In addition to federalregulations, AirNet’s operations are subject to various state and localregulations, and in many instances, require permits and licenses from stateauthorities.

 

Other than as described below, AirNet believes that both AirNet andJetride have all permits, approvals and licenses required to conduct theirrespective operations and that they are in compliance with applicableregulatory requirements relating to their operations including all applicablenoise level regulations.  Current noiselevel regulations require that AirNet modify its three Model 25 Learjets.  AirNet can continue limited use of theseaircraft; however, AirNet intends to retire the Learjet 25’s prior to the endof the second quarter of 2005.** **AirNet is working proactively withvarious local governments to minimize noise issues; however, future noisepollution regulations could require the modification or replacement of otherAirNet aircraft.

 

AirNetconducts a portion of its operations under an Indirect Air Carrier StandardSecurity Program (“IACSSP”) approved by the TSA.  The IACSSP permits AirNet to tender shipmentsto commercial airlines.  A significantportion of AirNet’s Express services packages and, to a lesser extent, aportion of its Bank services packages, are transported on commercial airlines.

 

TheTSA recently informed AirNet that the TSA would no longer approve AirNet’sIACSSP based upon the definition of an “indirect air carrier” provided under 49CFR §1540.5.  Section 1540.5 excludesfrom the definition of an “indirect air carrier” any person or entity inpossession of an FAA air carrier operating certificate.  AirNet possesses a Part 135 air carrieroperating certificate issued by the FAA. The TSA has requested that AirNet submit an application for a new IACSSPunder the name of an affiliated company. By letter to the TSA dated February 18, 2005, AirNet has proposed tosubmit an application for a new IACSSP under the name of AirNet Management,Inc., a wholly-owned subsidiary of AirNet. The letter sets forth the steps AirNet intends to follow to transitioncommercial airline shipments to the new IACSSP and requests certain guidancefrom the TSA regarding the transition.

 

Asof the date of this Annual Report on Form 10-K, the TSA had not responded toAirNet’s request for guidance.  In theevent the TSA approves the steps outlined in AirNet’s February 18, 2005 letter,AirNet Management, Inc. will submit an application to the TSA seeking approvalof a new IACSSP.  Upon receipt of suchapproval, AirNet will begin processing its commercial airline shipments underthe new IACSSP.  It is uncertain at thistime whether the TSA will approve the proposed steps for transitioning AirNet’scommercial shipments to a new IACSSP.  Inthe event the TSA does not approve such steps, AirNet may need to considerother modifications to its operating procedures in order to secure TSA approvalof an IACSSP.  AirNet’s current IACSSPapproval expires on August 28, 2005.  IfAirNet is unable to comply with the TSA’s directives with respect to the approvaland operation of a new IACSSP, AirNet may be unable to secure approval of a newIACSSP.  It is also uncertain whether theTSA would attempt to withdraw AirNet’s current IACSSP approval prior to theAugust 28, 2005 expiration date.  Theloss of AirNet’s current IACSSP approval, or AirNet’s failure to secureapproval of a new IACSSP, would have a significant and immediate adverse effecton AirNet’s operations.

 

TheDOT has implemented new regulations regarding the transportation of hazardousmaterials that will go into effect on April 1, 2005.  These new regulations require that certaininformation concerning hazardous materials shipments be maintained by thepilot-in-command of an aircraft and be readily accessible at the airport ofdeparture (including any intervening airport through which the hazardousmaterials are transported) and the intended airport of arrival for the durationof the each flight leg.

 

Asignificant portion of AirNet’s operations are conducted at night at airportswhere it maintains no ground operations. Many of these airports are small and do not have fixed based operatorsthat are open during AirNet’s night time hours of operation.  Consequently, at many airports AirNet doesnot currently have ground personnel or vendors on site that can receive andmaintain the hazardous materials information that is required to be readilyaccessible at the airport of departure. The new regulations will require that AirNet institute new operatingprocedures and make arrangements with

 

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groundvendors and/or fixed based operators to assist AirNet in complying with the newregulations.   AirNet is in the processof implementing these new procedures; however, AirNet anticipates that it willnot be in complete compliance with the new regulations as of April 1, 2005.

 

AirNethas submitted a request for exemption from the new hazardous materialsregulations and has proposed an alternative method of compliance.  The alternative method of compliance would requirethat AirNet transmit the required hazardous materials information to itscontrol center in Columbus, Ohio where it would be maintained and be readilyavailable in the event of an incident involving hazardous materials.

 

Therecan be no assurances the AirNet’s requested exemption will be granted.  In the absence of the approval of analternative method of compliance, AirNet will be required to continueimplementation of the procedures described above for complying with the newregulations.  Compliance with the newregulations will likely significantly increase AirNet’s cost of transportinghazardous materials.  Failure to complywith the new regulations could reduce or otherwise restrict AirNet’s ability totransport hazardous materials, including its ability to transport radioactivepharmaceuticals under its DOT E-7060 permit described above.  AirNet is currently evaluating an additionalsurcharge for transporting hazardous materials that could offset all or a portionof the additional cost of complying with the new regulations.  However, there can be no assurances thatAirNet will implement such a surcharge, or, if implemented, that AirNet’scustomers will accept such surcharge or that such surcharge will fully offsetthe additional costs of complying with the new regulations.

 

**Seasonality**

 

See “Item 7 - Management’s Discussion andAnalysis of Financial Condition and Results of Operations” under the heading “Seasonalityand Variability in Quarterly Results” of this Annual Report on Form 10-K for adiscussion of the seasonal aspects of AirNet’s business, which discussion isincorporated herein by reference.

 

**Competition**

 

The air and ground courier industry is highly competitive.  AirNet’s primary competitor in thetransportation of cancelled checks is the Federal Reserve’s Check RelayNetwork. The actions of the Federal Reserve are regulated by the MonetaryControl Act, which requires the Federal Reserve to price its services at actualcost plus a set percentage private sector adjustment factor. AirNet believesthat the purpose of the Monetary Control Act is to curtail the possibility ofpredatory pricing by the Federal Reserve when it competes with the privatesector. No assurance beyond the remedies of law can be given that the FederalReserve will comply with the Monetary Control Act.

 

In the private sector, there are a large number of smaller, regionalcarriers that transport cancelled checks, none of which AirNet believes has asignificant interstate market share. The two largest private sector air couriers,FedEx and United Parcel Service (“UPS”), both carry cancelled checks where thedeadlines being pursued fit into their existing system.  AirNet does not believe that FedEx or UPSrepresent significant competitors in the time-critical cancelled check marketto date.  AirNet provides customizedservice for its customer base, often with later pick-ups and earlier deliveriesthan the large, national couriers provide.

 

AirNet competes with commercial airlines and numerous other carriers inits Express delivery business and estimates its market share in this industryat less than 1%.  AirNet believes thatthis market represents a significant expansion opportunity for time-criticalshipments requiring later pick-ups or earlier deliveries than are typically providedby major integrators and freight forwarders. AirNet believes that it is in an excellent position to leverage the useof its national air network system, AirNet’s proprietary information technologyand its historically high on-time performance level to compete in this market.

 

In the Passenger Charter business, AirNet competes with otherowner/operators and charter brokers of small business jets.  AirNet believes its nationwide network ofmaintenance and related support facilities provides added flexibility indeploying and servicing the Passenger Charter fleet to meet customer demands.

 

**Environmental matters**

 

In2004, AirNet commenced construction of a new corporate and operational facilityon land leased from the Columbus Regional Airport Authority.  Portions of the leased land, as well asportions of the aircraft ramp, on which AirNet intends to conduct a significantportion of its Columbus operations, contain known pollution conditions.  The appropriate amended post closure plan andno further action letters addressing these sites were obtained by AirNet fromthe Columbus Regional Airport Authority prior to beginning construction.  No additional pollution conditions on theleased land have been noted to date during construction of the facility.

 

AirNet believes that compliance with applicable laws and regulationsgoverning environmental matters has not had, and is not expected to have, amaterial effect on AirNet’s capital expenditures, operations or competitiveposition.

 

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**Employees**

 

As of December 31, 2004, AirNet employed approximately 870 persons,which includes approximately 250 pilots. AirNet’s employees are not represented by any union or covered by anycollective bargaining agreement.  AirNet hasexperienced no work stoppages and believes that its relationship with employeesis good.

 

**ITEM 2 -PROPERTIES**

 

**Operating facilities**

 

AirNet leases its corporate and operational headquarters at 3939International Gateway in Columbus, Ohio (the “Port Columbus Facility”).  The Port Columbus Facility has 80,000 squarefeet and sits on land owned by the Columbus Regional Airport Authority (the “Authority”).  AirNet’s headquarters is currently used foroperations, training, aircraft maintenance, vehicle maintenance and general andadministrative functions.  In addition,AirNet leases additional space at 555 Morrison Road in Gahanna, Ohio, foradministrative support personnel.  The Gahannalease agreement will terminate on May 30, 2005.

 

On January 20, 2004, AirNet entered into a Land Lease with theAuthority to lease approximately 8 acres located within the RickenbackerInternational Airport (“Rickenbacker”). Rickenbacker is located in Franklin and Pickaway Counties, Ohio,southeast of Columbus, Ohio, approximately fifteen miles from AirNet’s currentPort Columbus Facility.  AirNet isconstructing a new corporate and operational headquarters at Rickenbacker (the “RickenbackerFacility”).  Construction and relocationto the Rickenbacker Facility is anticipated to be completed in the secondquarter of 2005.  Upon completion of theRickenbacker Facility, AirNet’s current corporate and operational functionsthat are conducted at the Port Columbus Facility, and the administrativefunctions being conducted at 555 Morrison Road, will be consolidated at the newRickenbacker Facility.

 

OnJanuary 20, 2004, in anticipation of AirNet’s move to its new RickenbackerFacility, AirNet also entered into an agreement to sell its Port ColumbusFacility to the Authority for $3.9 million. Closing of the sale of the Port Columbus Facility to the Authority tookplace on December 15, 2004.  Concurrentlywith the sale, AirNet entered into a new lease agreement with the Authority(the “New Port Columbus Lease”). Pursuant to the New Port Columbus Lease, AirNet will lease the realproperty associated with the Port Columbus Facility and the buildings and allother improvements thereon pending completion of the construction of theRickenbacker Facility.  The term of theNew Port Columbus Lease commenced on December 15, 2004 and will terminateon the earlier to occur of (i) the date AirNet moves into the RickenbackerFacility or (ii) August 31, 2005.  The New Port Columbus Lease willbe rent free until May 15, 2005 and commencing May 16, 2005, the rent will be$30,000 per month.  The New Port Columbus Lease is a net lease under whichAirNet is responsible for all costs of operating the Port ColumbusFacility.   AirNet intends to move itsoperations at the Port Columbus Facility as well as its administrativefunctions to the Rickenbacker Facility during the second quarter of 2005.

 

AirNet also operates at approximately 40 additional locationsthroughout the country. These locations, which are leased from unrelated thirdparties, generally include office space and/or a section of the lessor’s hangaror ramp.

 

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**Fleet**

 

*Cargo aircraft*

 

The following table shows information about AirNet’s cargo aircraftfleet used in its Delivery Services reportable segment as of December 31, 2004:

 
| **Aircraft Type**      | ** ** | **Owned** | ** ** | **Leased** | ** ** | **Payload (1)** | ** ** | **Range (2)** | ** ** | **Speed (3)** | ** ** |
|------------------------|------------|-----------|------------|------------|------------|-----------------|------------|---------------|------------|---------------|------------|
|                   |       |      |       |       |       |            |       |          |       |          |       |
| Learjets, Model 35/35A |       | 30        |       | —     |       | 3,800           |       | 1,700         |       | 440           |       |
| Learjets, Model 25     |       | 3         |       | —     |       | 3,000           |       | 1,000         |       | 440           |       |
| Cessna Caravans        |       | 7         |       | 8          |       | 3,400           |       | 825           |       | 170           |       |
| Piper Navajo           |       | 18        |       | —     |       | 1,500           |       | 800           |       | 170           |       |
| Beech Baron            |       | 40        |       | —     |       | 1,000           |       | 800           |       | 170           |       |
| Cessna 310             |       | 9         |       | —     |       | 900             |       | 800           |       | 170           |       |
| Total                  |       | 107       |       | 8          |       |            |       |          |       |          |       |

 

----

(1)          Maximumpayload in pounds for a one-hour flight plus required fuel reserves.

 

(2)          Maximumrange in nautical miles, assuming zero wind, full fuel and maximum payload.

 

(3)          Maximumspeed in knots, assuming maximum payload

 

The Learjet 35 and 31 are among the fastest and most reliable small jetaircraft available in the world and meet all Stage Three noise requirementscurrently being implemented across the United States.  The Learjet 25 is a smaller jet aircraft withslightly smaller payload and range capabilities.  The Learjet 25 aircraft are currently beingused on a limited basis primarily as spares and will be completely phased outof operations prior to the end of the second quarter 2005.

 

The Cessna Caravan Super Cargomaster aircraft is a turbo-prop aircraft.

 

The Piper Navajo, Beech Baron and Cessna 310 are twin-engine pistonaircraft.

 

*Passenger Charter aircraft*

 

The following table shows information about Jetride’s Passenger Charteraircraft fleet as of December 31, 2004:

 
| **Aircraft Type**     | ** ** | **Owned** | ** ** | **Managed** | ** ** | **Seating (1)** | ** ** | **Range (2)** | ** ** | **Speed (3)** | ** ** |
|-----------------------|------------|-----------|------------|-------------|------------|-----------------|------------|---------------|------------|---------------|------------|
|                  |       |      |       |        |       |            |       |          |       |          |       |
| Learjets, Model 35A   |       | 3         |       | —      |       | 8               |       | 1,700         |       | 440           |       |
| Learjets, Model 60    |       | 6         |       | 3           |       | 8               |       | 2,300         |       | 440           |       |
| Learjets, Model 31A   |       | —    |       | 1           |       | 8               |       | 1,400         |       | 440           |       |
| Challenger, Model 601 |       | —    |       | 1           |       | 12              |       | 4,400         |       | 440           |       |
| Challenger, Model 604 |       | —    |       | 1           |       | 9               |       | 4,400         |       | 440           |       |
| Total                 |       | 9         |       | 6           |       |            |       |          |       |          |       |

 

----

(1)          Maximumnumber of passengers

 

(2)          Maximumrange in nautical miles, assuming zero wind, full fuel and full payload.

 

(3)          Maximumspeed in knots, assuming full payload

 

The Learjet 60 is a midsize business jet with transcontinental rangeand meets all Stage Three noise requirements.

 

The Challenger is a large cabin business jet with transcontinentalrange and meets all Stage Three noise requirements.

 

*Vehicles*

 

AirNet operated a fleet of approximately 65 ground transportationvehicles as of December 31, 2004.   Vehiclesrange in size from passenger cars to full sized vans.  AirNet also rents lightweight trucks forcertain weekend ground routes.  In

 

9

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2001, AirNet entered into a leasing agreement with a third party providerand began replacing owned vehicles with leased vehicles, as replacement becamenecessary.  AirNet leased 41 vehicles asof December 31, 2004.

 

**ITEM 3 -LEGAL PROCEEDINGS**

 

There are no pending legal proceedings involving AirNet other thanroutine litigation incidental to its business. In the opinion of AirNet’smanagement, these proceedings should not, individually or in the aggregate,have a material adverse effect on AirNet’s results of operations or financialcondition.

 

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

 

No matters were submitted to a vote of security holders during thefourth quarter of 2004.

 

**PART II**

 

**ITEM 5 -MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

The common shares of AirNet Systems, Inc. trade on the New York StockExchange under the symbol “ANS”.  Thetable below sets forth the high and low sales prices of the common sharesreported for the periods indicated.

 
| ** **        | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| **Quarter ended** | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| March 31          |       | $        | 4.99       |     | $          | 3.75 |   | $ | 5.35 |   | $ | 2.20 |   |
| June 30           |       | 4.95     |       | 3.80     |       | 4.47 |   | 2.05 |   |
| September 30      |       | 6.20     |       | 3.81     |       | 5.18 |   | 3.80 |   |
| December 31       |       | 4.50     |       | 2.73     |       | 4.16 |   | 3.23 |   |
|                   |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

AirNethas not paid any dividends on its common shares and does not intend to pay anydividends in the foreseeable future. AirNet anticipates using future earnings to finance operations andfuture growth and development.

 

Thepayment of any future dividends on common shares will be determined by theAirNet Board of Directors in light of conditions then existing, includingearnings, financial condition and capital requirements, restrictions infinancing agreements, business conditions and other factors.

 

On March 28, 2005 there were approximately 860 record holders of AirNet’scommon shares.

 

Neither AirNet nor any “affiliated purchaser,” as defined in Rule10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, purchasedany common shares of AirNet during the fourth quarter of the fiscal year endedDecember 31, 2004.  On February 18, 2000,AirNet announced a stock repurchase plan under which up to $3.0 million ofAirNet common shares may be repurchased from time to time.  These repurchases may be made in open markettransactions or through privately negotiated transactions.  As of December 31, 2004, AirNet had theauthority to repurchase approximately $0.6 million of AirNet common sharesunder this stock repurchase plan.

 

10

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**ITEM 6 -SELECTED FINANCIAL DATA**

 

**Statement of Operations Data**(in thousands, exceptper share data)

 
| ** **                                                                                               | ** ** | **Years Ended December 31,** | ** **  |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------|-------------|
| ** **                                                                                               | ** ** | **2004**                          | ** **  | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| **Net Revenues**                                                                                         |       |                              |        |   |   |   |   |   |   |   |   |
| Bank services                                                                                            | ** ** | **$**                             | **106,117** |   | $ | 103,399 |   | $ | 102,626 |   | $ | 106,716 |   | $ | 102,611 |   |
| Express services                                                                                         | ** ** | **$**                             | **49,096**  |   | 36,963 |   | 33,958 |   | 26,252 |   | 26,272 |   |
| Passenger Charter services                                                                               | ** ** | **$**                             | **18,494**  |   | 7,599 |   | 4,316 |   | 737 |   | — |   |
| Aviation services and other                                                                              | ** ** | **$**                             | **1,243**   |   | 1,261 |   | 1,044 |   | 1,499 |   | 751 |   |
| **Total net revenues**                                                                                   | ** ** | **174,950**                       |        | 149,222 |   | 141,944 |   | 135,204 |   | 129,634 | ** ** |
| ** **                                                                                               | ** ** | ** **                        | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Costs and Expenses**                                                                                   |       |                              |        |   |   |   |   |   |   |   |   |
| Operating costs and expenses                                                                             | ** ** | **168,554**                       |        | 142,991 |   | 134,236 |   | 121,313 | (1) | 115,800 |   |
| Impairment charges                                                                                       | ** ** | **47,009**                        | (2)         | — |   | — |   | 1,744 | (3) | — |   |
| **Total costs and expenses**                                                                             | ** ** | **215,563**                       |        | 142,991 |   | 134,236 |   | 123,057 |   | 115,800 |   |
|                                                                                                     |       |                              |        |   |   |   |   |   |   |   |   |
| Income (loss) from operations                                                                            | ** ** | **(40,613**                       | **)**       | 6,231 |   | 7,708 |   | 12,147 |   | 13,834 |   |
|                                                                                                     |       |                              |        |   |   |   |   |   |   |   |   |
| Interest expense                                                                                         | ** ** | **2,468**                         |        | 1,340 |   | 1,649 |   | 1,668 |   | 2,283 |   |
|                                                                                                     |       |                              |        |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations before  income taxes and cumulative effect of accounting change |       | **(43,081**                       | **)**       | 4,891 |   | 6,059 |   | 10,479 |   | 11,551 |   |
|                                                                                                     |       |                              |        |   |   |   |   |   |   |   |   |
| Provision (benefit) for income taxes                                                                     | ** ** | **(8,935**                        | **)**       | 2,103 |   | 2,429 |   | 5,035 |   | 4,690 |   |
|                                                                                                     |       |                              |        |   |   |   |   |   |   |   |   |
| **Income (loss) from continuing operations  before cumulative effect of accounting change**              |       | **(34,146**                       | **)**       | 2,788 |   | 3,630 |   | 5,444 |   | 6,861 |   |
|                                                                                                     |       |                              |        |   |   |   |   |   |   |   |   |
| **Income (loss) from discontinued operations,  net of taxes (Note 4)**                                   |       | **—**                        |        | (8 | ) | (259 | ) | (251 | ) | 394 |   |
| ** **                                                                                               | ** ** | ** **                        |        |   |   |   |   |   |   |   |   |
| Cumulative effect of accounting change, net  of tax benefit (Note 5)                                     |       | **—**                        | ** **  | **—** |   | (1,868 | ) | — |   | — |   |
|                                                                                                     |       |                              |        |   |   |   |   |   |   |   |   |
| **Net income (loss)**                                                                                    | ** ** | **$**                             | **(34,146** | ) | $ | 2,780 |   | $ | 1,503 |   | $ | 5,193 |   | $ | 7,255 |   |
|                                                                                                     |       |                              |        |   |   |   |   |   |   |   |   |
| Income (loss) per common share - basic and  diluted                                                      |       |                              |        |   |   |   |   |   |   |   |   |
| Continuing operations                                                                                    | ** ** | **$**                             | **(3.39**   | **)** | $ | 0.28 |   | $ | 0.36 |   | $ | 0.51 |   | $ | 0.62 |   |
| Discontinued operations                                                                                  | ** ** | **$**                             | **—**  | ** ** | **$** | **—** |   | $ | (0.03 | ) | $ | (0.02 | ) | $ | 0.04 |   |
| Cumulative effect of accounting change                                                                   | ** ** | **$**                             | **—**  |   | $ | — |   | $ | (0.18 | ) | $ | — |   | $ | — |   |
| Net income (loss)                                                                                        | ** ** | **$**                             | **(3.39**   | **)** | $ | 0.28 |   | $ | 0.15 |   | $ | 0.49 |   | $ | 0.66 |   |

 

**Balance Sheet Data**

(in thousands)

 
| Total assets              | ** ** | **$**      | **137,470** |   | $      | 153,273 |   | $      | 153,273 |   | $      | 133,079 |   | $ | 122,533 |   |
|---------------------------|------------|------------|-------------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|---|---------|--------|
| Total debt                | ** ** | **62,245** |        | 37,776 |   | 41,794  |   | 28,235 |    | 22,719 |   |
| Shareholders’ equity | ** ** | **50,466** |        | 84,280 |   | 80,796  |   | 78,946 |    | 78,845 |   |

 

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Note 1             2001includes a $1.0 million non-recurring charge related to the retirementagreement of Gerald G. Mercer (see Note 7 - Related Party Transactions of theNotes to Consolidated Financial Statements included in Item 8 of this AnnualReport on Form 10-K.)

 

Note 2             Represents2004 charge related to the impairment of AirNet’s cargo assets and relatedgoodwill (See Note 2 - Impairment of Property and Equipment and Goodwill of theNotes to Consolidated Financial Statements included in Item 8 of this AnnualReport on Form 10-K.)

 

Note 3             Represents2001 non-recurring charge related to the impairment of Float Control, Inc.’sinvestment in The Check Exchange System Co. partnership

 

Note 4             InAugust 2003, AirNet sold the assets of its Mercury Business Services unit,resulting in discontinued operations.

 

Note 5             SeeNote 2 - Impairment of Property and Equipment and Goodwill of the Notes toConsolidated Financial Statements included in Item 8 of this Annual Report on Form 10-Kfor a discussion of the 2002 charge related to the impairment of goodwill inaccordance with the adoption of SFAS No. 142.

 

11

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

 

**General**

 

AirNet’s Bank services revenues are expected to decline as a result ofthe continuing evolution of electronic alternatives to the physical movement ofcancelled checks and other market forces. This expected decline in Bank services revenues requires that AirNet restructureits existing transportation network which was originally established to serviceits bank customers.  AirNet continues toexpand its Express and Passenger Charter services to offset the expecteddecline in Bank services revenues.  Inaddition, AirNet continues to evaluate and adjust its aircraft mix and fleetsize in response to these changing business conditions as well as review itsground operations for efficiencies and cost reductions.  For example, Jetride increased anddiversified its fleet of owned and managed aircraft in 2004.

 

The following management’s discussion and analysis describes theprincipal factors affecting the results of operations, liquidity and capitalresources, as well as the critical accounting policies of AirNet.  This discussion should be read in conjunctionwith the accompanying audited consolidated financial statements, which includeadditional information about AirNet’s significant accounting policies,practices and the transactions that underlie its financial results.

 

**Results of Operations**

 

***Net Revenues***

* *
| **In ‘000’s  Net Revenues** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** | **$ Increase  (Decrease)  2002 to 2003** | ** ** | **% Increase  (Decrease)  2002 to 2003** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|-----------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| Delivery  Services Net Revenues       |       |     |       |     |       |     |       |                                          |       |                                     |       |                                          |       |                                     |       |
| Bank Services                         |       | $        | 106,117    |     | $          | 103,399  |       | $                                             | 102,626    |                                     | $          | 2,718                                         |       | 3                                        | %          | $ | 773 |   | 1 | % |
| Express Services                      |       | 49,096   |       | 36,963   |       | 33,958   |       | 12,133                                        |       | 33                                       | %          | 3,005                                         |       | 9                                        | %          |
| Total Delivery Services Revenues      |       | $        | 155,213    |     | $          | 140,362  |       | $                                             | 136,584    |                                     | $          | 14,851                                        |       | 11                                       | %          | $ | 3,778 |   | 3 | % |
|                                  |       |     |       |     |       |     |       |                                          |       |                                     |       |                                          |       |                                     |       |
| Passenger Charter Services Revenues   |       | 18,494   |       | 7,599    |       | 4,316    |       | 10,895                                        |       | 143                                      | %          | 3,283                                         |       | 76                                       | %          |
|                                  |       |     |       |     |       |     |       |                                          |       |                                     |       |                                          |       |                                     |       |
| Aviation Services and Other Revenues  |       | 1,243    |       | 1,261    |       | 1,044    |       | (18                                           | )          | (1                                       | )%         | 217                                           |       | 21                                       | %          |
|                                  |       |     |       |     |       |     |       |                                          |       |                                     |       |                                          |       |                                     |       |
| **Total Net Revenues**                |       | $        | 174,950    |     | $          | 149,222  |       | $                                             | 141,944    |                                     | $          | 25,728                                        |       | 17                                       | %          | $ | 7,278 |   | 5 | % |

 

AirNethas experienced overall net revenue growth each of the last three years.  This can be attributed to several factorsincluding increased Express Services and growth in Passenger Charter servicesas well as additional fuel surcharge revenues.

 

AirNetassesses its customers a fuel surcharge which is based on the Oil Price IndexSummary – Columbus, Ohio (OPIS-CMH index). As index rates increase above a set threshold, surcharge rates increase.  The 2004 average annual price on the OPISindex increased approximately 17% from the 2003 average annual price.  The 2003 average annual price increasedapproximately 21% from the 2002 annual price.

 

*BankServices Revenues*

 
| **In ‘000’s  Bank Services Revenues** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** | **$ Increase  (Decrease)  2002 to 2003** | ** ** | **% Increase  (Decrease)  2002 to 2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|-----------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| Bank Weekday                                    |       | $        | 94,994     |     | $          | 94,517   |       | $                                             | 95,327     |                                     | $          | 477                                           |       | 1                                        | %          | $ | (810 | ) | (1 | )% |
| Bank Weekend                                    |       | 7,569    |       | 7,397    |       | 8,545    |       | 172                                           |       | 2                                        | %          | (1,148                                        | )          | (13                                      | )%         |
| Fuel Surcharge                                  |       | 6,058    |       | 3,939    |       | 1,602    |       | 2,119                                         |       | 54                                       | %          | 2,337                                         |       | 146                                      | %          |
| Federal Excise Tax                              |       | (2,504   | )          | (2,454   | )          | (2,848   | )          | (50                                           | )          | (2                                       | )%         | 394                                           |       | 14                                       | %          |
| **Total Net Bank Services Revenues**            |       | $        | 106,117    |     | $          | 103,399  |       | $                                             | 102,626    |                                     | $          | 2,718                                         |       | 3                                        | %          | $ | 773 |   | 1 | % |

 

Bankservices revenues (excluding the impact of the fuel surcharge and federalexcise taxes) increased slightly during 2004 as AirNet continues to focus onadditional services for banks beyond cancelled check transportation, such as proofof deposit and interoffice mail delivery services.  Because the density of cancelled checkshipments is much greater than the typical Express shipment, profit margins onBank shipments are substantially higher than Express shipments after consideringcubic dimensions.  From 2003 to 2004,weekday and weekend shipment volume per flying day increased approximately 1.4%and 5.6%, respectively.  The increase inshipment volume was offset by a decrease in the number of pounds pershipment.  Increased fuel prices during2004 resulted in significantly higher fuel surcharge revenues compared

 

12

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to2003.  AirNet believes that lower checkdelivery volume as a result of the declining use of checks and electronic alternativesto the physical movement of cancelled checks will contribute to a significantreduction in Bank services revenues in future periods.

 

Weekdayand weekend shipment volume decreased approximately 1.3% and 9.8%,respectively, from 2002 to 2003.  Lowercheck delivery volume as a result of historically low interest rates and thedeclining use of checks contributed to the reduction in revenues, as didincreased competitive factors from regional carriers and transportation costreduction initiatives by AirNet’s bank customers.  The decreases in weekly shipment volume wereoffset by increased fuel surcharges in 2003 as compared to 2002.

 

*ExpressServices Revenues*

 
| **In ‘000’s  Express Services Revenues** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** | **$ Increase  (Decrease)  2002 to 2003** | ** ** | **% Increase  (Decrease)  2002 to 2003** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|-----------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| Express Revenues – Non Charter                |       | $        | 34,890     |     | $          | 28,035   |       | $                                             | 25,100     |                                     | $          | 6,855                                         |       | 24                                       | %          | $ | 2,935 |   | 12 | % |
| Express Revenues – Charters                   |       | 13,557   |       | 9,046    |       | 9,534    |       | 4,511                                         |       | 49                                       | %          | (488                                          | )          | (5                                       | )%         |
| Fuel Surcharge                                     |       | 2,142    |       | 1,007    |       | 369      |       | 1,135                                         |       | 113                                      | %          | 638                                           |       | 173                                      | %          |
| Federal Excise Tax                                 |       | (1,493   | )          | (1,125   | )          | (1,045   | )          | (368                                          | )          | (33                                      | )%         | (80                                           | )          | (8                                       | )%         |
| **Total Net Express Services Revenues**            |       | $        | 49,096     |     | $          | 36,963   |       | $                                             | 33,958     |                                     | $          | 12,133                                        |       | 33                                       | %          | $ | 3,005 |   | 9 | % |

 

Expressservices revenues continue to increase as a percentage of total revenues,increasing from 24.8% in 2003 to 28.1% in 2004. This increase includes fuel surcharge revenues of approximately $2.1million for 2004 versus approximately $1.0 million for the prior year.  Point-to-point surface shipments and aircargo charters increased approximately $3.1 million and $4.5 million,respectively, for the year 2004 compared to the year 2003.  Charter revenues have increased primarily dueto a significant increase in the number of scheduled and unscheduled charters,primarily for life sciences customers.

 

Theincrease in revenues from 2002 to 2003 was primarily due to increased shipmentvolume in select Express markets, such as life sciences.  Revenues from medical and related companiesincreased 6.8% in 2003 compared to 2002 and AirNet increased its revenues forservices in the media and entertainment market by 13.1% in 2003 compared to2002.

 

*PassengerCharter Services Revenues*

 
| **In ‘000’s  Passenger Charter Services  Revenues** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** | **Increase  (Decrease)  2002 to 2003** | ** ** | **% Increase  (Decrease)  2002 to 2003** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|------------------------------------------|------------|
| Passenger Charter services revenues                           |       | $        | 17,112     |     | $          | 7,521    |       | $                                      | 4,290      |                                     | $          | 9,591                                  |       | 128                                      | %          | $ | 3,231 |   | 75 | % |
| Management fee revenues                                       |       | 703      |       | 67       |       | 27       |       | 636                                    |       | 949                                      | %          | 40                                     |       | 148                                      | %          |
| Fuel surcharge                                                |       | 664      |       | 0        |       | 0        |       | 664                                    |       | 0                                        |       | 0                                      | %          |                                     |       |
| Federal excise tax                                            |       | 15       |       | 11       |       | (1       | )          | 4                                      |       | 36                                       | %          | 12                                     |       |                                     |       |
| **Total Passenger Charter services revenues**                 |       | $        | 18,494     |     | $          | 7,599    |       | $                                      | 4,316      |                                     | $          | 10,895                                 |       | 143                                      | %          | $ | 3,283 |   | 76 | % |
| Average annual number of owned aircraft                       |       | 8.9      |       | 6.0      |       | 4.9      |       | 2.9                                    |       | 48                                       | %          | 1.1                                    |       | 22                                       | %          |
| Average annual number of managed aircraft                     |       | 4.3      |       | 1.2      |       | 1.0      |       | 3.1                                    |       | 258                                      | %          | 0.2                                    |       | 20                                       | %          |
| Average revenues per aircraft                                 |       | $        | 1,401      |     | $          | 1,055    |       | $                                      | 732        |                                     | $          | 346                                    |       | 33                                       | %          | $ | 323 |   | 44 | % |

 

PassengerCharter services revenues continue to grow as a percentage of total revenues,as AirNet has invested in additional aircraft to support passenger charterdemand.  Passenger Charter servicesrevenues increased from 5.1% of total revenues in 2003 to 10.6% of totalrevenues in 2004.  AirNet’s PassengerCharter services allow customers greater control and flexibility in air travelthan commercial airlines.  AirNetincreased its Passenger Charter fleet from seven aircraft at December 31, 2002to nine at December 31, 2003 and fifteen at December 31, 2004.  AirNet’s Passenger Charter services revenuesinclude revenue from both owned and managed aircraft.  Management fee revenues include a monthly feeand a specific percentage of revenues earned under each managed aircraftagreement.

 

*AviationServices and Other Revenues*

 

Aviationservices revenues primarily relate to AirNet’s fixed base operation andmaintenance services provided in Columbus, Ohio. While these services willcontinue, no significant future growth is expected.  Approximately $0.4 million of other

 

13

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revenuesin 2004 relate to royalty revenue earned from the installation by a third partyof Reduced Vertical Separation Minimum (“RVSM”).  No significant royalty revenue is expected infuture years.

 

***Costs and Expenses***

 
| **In ‘000’s  Operating Costs and Expenses** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** | **$ Increase  (Decrease)  2002 to 2003** | ** ** | **% Increase  (Decrease)  2002 to 2003** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|-----------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| Wages and benefits                                    |       | $        | 24,823     |     | $          | 23,297   |       | $                                             | 22,167     |                                     | $          | 1,526                                         |       | 7                                        | %          | $ | 1,130 |   | 5 | % |
| Aircraft fuel                                         |       | 26,865   |       | 19,227   |       | 17,582   |       | 7,638                                         |       | 40                                       | %          | 1,645                                         |       | 9                                        | %          |
| Aircraft maintenance                                  |       | 15,086   |       | 12,242   |       | 12,305   |       | 2,844                                         |       | 23                                       | %          | (63                                           | )          | (1                                       | )%         |
| Contracted air costs                                  |       | 13,813   |       | 9,929    |       | 9,069    |       | 3,884                                         |       | 39                                       | %          | 860                                           |       | 9                                        | %          |
| Ground courier                                        |       | 30,285   |       | 25,834   |       | 24,554   |       | 4,451                                         |       | 17                                       | %          | 1,280                                         |       | 5                                        | %          |
| Depreciation                                          |       | 19,513   |       | 17,535   |       | 17,699   |       | 1,978                                         |       | 11                                       | %          | (164                                          | )          | (1                                       | )%         |
| Insurance, rent and landing fees                      |       | 10,115   |       | 9,895    |       | 8,443    |       | 220                                           |       | 2                                        | %          | 1,452                                         |       | 17                                       | %          |
| Travel, training and other                            |       | 9,359    |       | 8,003    |       | 8,327    |       | 1,356                                         |       | 17                                       | %          | (324                                          | )          | (4                                       | )%         |
| Selling, general and administrative                   |       | 18,660   |       | 17,032   |       | 14,004   |       | 1,628                                         |       | 10                                       | %          | 3,028                                         |       | 22                                       | %          |
| Net (gain) loss on disposition of assets              |       | 34       |       | (3       | )          | 86       |       | 37                                            |       |                                     |       | (89                                           | )          |                                     |       |
|                                                  |       | 168,553  |       | 142,991  |       | 134,236  |       | 25,562                                        |       | 18                                       | %          | 8,755                                         |       | 7                                        | %          |
| Impairment of assets                                  |       | 42,991   |       | 0        |       | 0        |       | 42,991                                        |       |                                     |       | 0                                             |       |                                     |       |
| Impairment of goodwill                                |       | 4,018    |       | 0        |       | 0        |       | 4,018                                         |       |                                     |       | 0                                             |       |                                     |       |
| Total costs and expenses                              |       | $        | 215,562    |     | $          | 142,991  |       | $                                             | 134,236    |                                     | $          | 72,571                                        |       | 51                                       | %          | $ | 8,755 |   | 7 | % |

 

Asoperating activities for AirNet’s Express and Passenger Charter servicescontinued to increase, total operating expenses increased during 2004 comparedto the prior year.  The increase in theuse of Jetride’s Passenger Charter services from 2003 to 2004 accounted forapproximately $9.4 million, or 37%, of the overall increase in operating costsand expenses before impairment charges. Flight hours for Passenger Charter services increased 142% from 2003 to2004.  In addition, costs and expensesincreased due to increased hours flown, service and support costs associatedwith the increase in the use of Express services and additional aircraft fuel, maintenanceand contracted air costs to support AirNet’s Bank customers.

 

Theincrease in wages and benefits from 2003 to 2004 was substantially due to theincrease in the number of Passenger Charter pilots and support staff.

 

Theincrease from 2002 to 2003 is attributed primarily to the increase in PassengerCharter pilot staff and Express support staff. An increase in pilots to support the Passenger Charter operationaccounted for 45.8% of the increase in wages and benefits from 2002 to 2003.  Additional customer support center staff toservice the increase in Express shipment volume and an increase in healthbenefits costs contributed to a 14.6% increase in wages and benefits from 2002to 2003.

 
| **In ‘000’s  Aircraft Fuel** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** | **$ Increase  (Decrease)  2002 to 2003** | ** ** | **% Increase  (Decrease)  2002 to 2003** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|-----------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| Aircraft Fuel                          |       | $        | 26,865     |     | $          | 19,227   |       | $                                             | 17,582     |                                     | $          | 7,638                                         |       | 40                                       | %          | $ | 1,645 |   | 9 | % |
| Fuel Surcharge Revenues                |       | (8,864   | )          | (4,946   | )          | (1,971   | )          | 3,918                                         |       | 79                                       | %          | 2,975                                         |       | 151                                      | %          |
| Net                                    |       | $        | 18,001     |     | $          | 14,281   |       | $                                             | 15,611     |                                     | $          | 3,720                                         |       | 26                                       | %          | $ | (1,330 | ) | (9 | )% |

 
| **Hours flown**     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** | **Increase  (Decrease)  2002 to 2003** | ** ** | **% Increase  (Decrease)  2002 to 2003** | ** ** |
|---------------------|------------|----------|------------|----------|------------|----------|------------|----------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|------------------------------------------|------------|
| Hours flown - Total |       | 107,344  |       | 103,660  |       | 102,079  |       | 3,684                                  |       | 4                                        | %          | 1,581                                  |       | 2                                        | %          |

 

Aircraftfuel expense increased year-over-year as a result of the increase in the numberof hours flown as well as the increase in fuel prices.  Approximately 32% of total aircraft fuelexpense in 2004 relates to Jetride.  Theincrease in 2004 compared to 2003 and the increase in 2003 compared to 2002 areprimarily due to the increases in hours operated by Jetride and fuel prices.The average price per gallon of aircraft fuel increased approximately 34.4% in2004 compared to 2003 and increased 11.5% in 2003 compared to 2002.  Increased operational efficiencies allowedAirNet to reduce fuel burn per hour in 2004 by 3% compared to 2003.  AirNet continues to maintain its fuelsurcharge program to offset increases in fuel expense.  The amounts billed related to the fuelsurcharge program are classified as revenue.

 

14

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Maintenanceexpense increased $2.8 million, or 23%, primarily due to the expansion of thePassenger Charter fleet, including managed aircraft, and an increase in relatedflight hours for the Passenger Charter fleet and cargo fleet Learjets.

 

Maintenanceexpense remained flat in 2003 compared to 2002 as AirNet began to experiencethe benefits of phasing out the Aerostar aircraft in 2001 and 2002 andreplacing them with the more operating efficient Cessna Caravans.

 

Contractedair expense includes costs associated with shipments transported on commercialairlines and costs to third party air operators for subleased air routes andback-up charter services.  Commercialairline costs increased 21% from 2003 to 2004 primarily due to the relatedincrease in Express shipments.  Commercialairline costs decreased 4% from 2002 to 2003 as AirNet was able to securebetter rates with the commercial carriers it utilizes most often.  Back-up and sublease charter expensesincreased 60% from 2003 to 2004 as AirNet increased its reliance on outsideproviders as a result of increased Express shipment volume, pilot shortagesexperienced early in 2004 and the election to outsource more routes and lanes.

 
| **In ‘000’s****Ground Courier Costs**                                        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** | **Increase  (Decrease)  2002 to 2003** | ** ** | **% Increase  (Decrease)  2002 to 2003** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|------------------------------------------|------------|
| Company courier costs                                                                  |       | $        | 6,091      |     | $          | 8,267    |       | $                                      | 9,678      |                                     | $          | (2,176                                 | )          | (26                                      | )%         | $ | (1,411 | ) | (15 | )% |
| Contracted courier costs                                                               |       | 24,194   |       | 17,567   |       | 14,876   |       | 6,627                                  |       | 38                                       | %          | 2,691                                  |       | 18                                       | %          |
| Total Ground courier costs                                                             |       | $        | 30,285     |     | $          | 25,834   |       | $                                      | 24,554     |                                     | $          | 4,451                                  |       | 17                                       | %          | $ | 1,280 |   | 5 | % |
|                                                                                   |       |     |       |     |       |     |       |                                   |       |                                     |       |                                   |       |                                     |       |
| Percentage of Delivery Services revenue,  net of fuel surcharge and federal excise tax |       | 20       | %          | 19       | %          | 18       | %          |                                   |       |                                     |       |                                   |       |                                     |       |
| Number of bank shipments                                                               |       | 3,235    |       | 3,180    |       | 3,298    |       | 55                                     |       | 2                                        | %          | (118                                   | )          | (4                                       | )%         |
| Number of non-charter express shipments                                                |       | 253      |       | 232      |       | 223      |       | 21                                     |       | 9                                        | %          | 9                                      |       | 4                                        | %          |

 

Groundcourier costs continue to increase as AirNet serves a broader group ofcustomers outside of AirNet’s traditional bank customer.  AirNet’s growing number of Express customersis more costly to serve than the traditional Bank customer due to moreunscheduled pickup and delivery services and more geographically dispersedlocations.  Ground courier costshave risen as Express shipments continue to increase as a proportion of totalshipments.  The growth rate in shipmentstransported either exclusively via point to point surface or commercialairlines, which typically have a substantially higher ground courier cost pershipment, is increasing as AirNet expands the number of Express customers - a trendManagement believes will continue.

 
| **Depreciation expense  In ‘000’s** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** | **$ Increase  (Decrease)  2002 to 2003** | ** ** | **% Increase  (Decrease)  2002 to 2003** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|-----------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| Aircraft                                      |       | $        | 4,031      |     | $          | 2,613    |       | $                                             | 2,079      |                                     | $          | 1,418                                         |       | 54                                       | %          | $ | 534 |   | 26 | % |
| Aircraft Improvements, Engines, Inspections   |       | 14,401   |       | 13,687   |       | 14,093   |       | 714                                           |       | 5                                        | %          | (406                                          | )          | (3                                       | )%         |
| Other                                         |       | 1,081    |       | 1,235    |       | 1,527    |       | (154                                          | )          | (13                                      | )%         | (292                                          | )          | (19                                      | )%         |
| Total Depreciation                            |       | $        | 19,513     |     | $          | 17,535   |       | $                                             | 17,699     |                                     | $          | 1,978                                         |       | 11                                       | %          | $ | (164 | ) | (1 | )% |

 

Aircraftdepreciation increased in 2004 as AirNet has added aircraft and increased hoursflown.  AirNet continually reviews theremaining useful life and expected salvage value of its aircraft in connectionwith its depreciation calculation. Aircraft and engines are depreciated based on the number of hoursflown.  Other depreciation includesdepreciation related to building and leasehold improvements, computer hardwareand software and vehicles.

 
| **Insurance, Rent and Landing  Fees  In ‘000’s** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** | **$ Increase  (Decrease)  2002 to 2003** | ** ** | **% Increase  (Decrease)  2002 to 2003** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|-----------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| Insurance                                                  |       | $        | 4,645      |     | $          | 4,372    |       | $                                             | 3,799      |                                     | $          | 273                                           |       | 6                                        | %          | $ | 573 |   | 15 | % |
| Rent                                                       |       | 3,797    |       | 3,737    |       | 3,135    |       | 60                                            |       | 2                                        | %          | 602                                           |       | 19                                       | %          |
| Ramp, landing and tie down fees                            |       | 1,673    |       | 1,786    |       | 1,509    |       | (113                                          | )          | (6                                       | )%         | 277                                           |       | 18                                       | %          |
| Total insurance, rent and landing fees                     |       | $        | 10,115     |     | $          | 9,895    |       | $                                             | 8,443      |                                     | $          | 220                                           |       | 2                                        | %          | $ | 1,452 |   | 17 | % |

 

AirNethas incurred increased insurance costs primarily as a result of the increase inits Passenger Charter fleet size.

 

Rentexpense increased in 2003 and 2002 mainly due to AirNet leasing additionalaircraft for both its Delivery Services and Passenger Charter servicesbusinesses.

 

15

----

 
| **Travel, Training and Other  In ‘000’s**                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** | **$ Increase  (Decrease)  2002 to 2003** | ** ** | **% Increase  (Decrease)  2002 to 2003** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|-----------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| Travel, training and other                                                     |       | $        | 9,359      |     | $          | 8,003    |       | $                                             | 8,327      |                                     | $          | 1,356                                         |       | 17                                       | %          | $ | (324 | ) | (4 | )% |
| Less: Fees paid to managed aircraft owners                                     |       | 1,542    |       | 321      |       | 309      |       | 1,221                                         |       | 380                                      | %          | 12                                            |       | 4                                        | %          |
| Total travel, training and other, net of  fees paid to managed aircraft owners |       | $        | 7,817      |     | $          | 7,682    |       | $                                             | 8,018      |                                     | $          | 135                                           |       | 2                                        | %          | $ | (336 | ) | (4 | )% |

 

Theincrease in total travel, training and other expenses from 2003 to 2004 isprimarily due to the related increase in fees paid by AirNet to managedaircraft owners as a result of the significant increase in 2004 in the numberand use of managed aircraft by AirNet’s Passenger Charter services.  The fees paid to managed aircraft ownersrepresent the payments made by AirNet under managed aircraft agreements for theuse of the owner’s aircraft.  At December31, 2004, AirNet managed six aircraft compared to three aircraft at December31, 2003.

 
| **Selling, General and  Administrative  Costs  In ‘000’s** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** | **$ Increase  (Decrease)  2002 to 2003** | ** ** | **% Increase  (Decrease)  2002 to 2003** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|-----------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| Total selling, general and administrative  costs                     |       | $        | 18,661     |     | $          | 17,032   |       | $                                             | 14,004     |                                     | $          | 1,629                                         |       | 10                                       | %          | $ | 3,028 |   | 22 | % |
| Less: Severance costs                                                |       | 675      |       | 759      |       | 72       |       | (84                                           | )          | (11                                      | )%         | 687                                           |       | 954                                      | %          |
| Selling, general and administrative, net of  severance               |       | $        | 17,986     |     | $          | 16,273   |       | $                                             | 13,932     |                                     | $          | 1,713                                         |       | 11                                       | %          | $ | 2,341 |   | 17 | % |

 

AirNetincurred severance costs due to changes in its management group in 2004 and2003.  Additionally, commissions relatedto Express services, including commissions for third party air charter brokers,and travel and advertising expense increased approximately $0.8 million in2004.  Information technology expensesincreased to support the technological needs of AirNet’s business.  Professional fees also increased in 2004related to AirNet’s work on compliance with the Sarbanes-Oxley Act.  AirNet continues to expect to incursubstantial costs in 2005 related to ensuring compliance with that Act.

 

AirNetcontinues to work toward identifying additional cost reduction opportunitiesand to create more efficiency in its air transportation network.

 

***Impairment Charges***

 

AirNetrecognizes impairment losses on long-lived assets used in operations inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “*Accounting for the Impairment or Disposal of Long-Lived Assets*”(SFAS No. 144).  AirNet recognizes impairment losses on long-lived assetsused in operations when events or changes in circumstances indicate, inmanagement’s judgment, that the assets might be impaired and the undiscountedcash flows estimated to be generated by those assets are less than the carryingvalue of those assets.  The net carrying value of the assets notrecoverable is reduced to fair market value if lower than carrying value. In determining the fair market value of the assets, AirNet considers markettrends, published market data, and recent transactions involving sales ofsimilar assets.

 

AirNet’slong-lived assets, consisting primarily of cargo aircraft used in its DeliveryServices business and related spare parts, were determined to be impaired atSeptember 30, 2004.  This determination was made as a result of recentindustry trends in the adoption of electronic payment alternatives and evolvingelectronic alternatives to the physical movement of cancelled checks at a morerapid pace than previously anticipated by the industry.  AirNet believesthe effectiveness of the Check 21 Act in October 2004 will contribute to thistrend.  Furthermore, recent market data and other disclosures by theFederal Reserve confirm the accelerating decline in cancelled checkvolume.  AirNet’s cargo airline was originally designed, and continues tooperate, primarily to meet the needs of Bank services customers.  In the third quarter of 2004, AirNetconcluded that its airline capacity will exceed future demand, creating animpairment of the aircraft and related assets. The impairment also reflects the overall decline in the market values ofthe aircraft in its cargo fleet which have not recovered as in previouseconomic cycles.  AirNet determined that the expected future undiscountedcash flows from its assets used in its Delivery Services operations were lessthan the carrying value of those assets and were impaired.  Accordingly, anon-cash impairment charge of $43.0 million was recorded on September 30, 2004,using estimated aircraft fair values.  The aircraft fair values used forthis purpose were based upon published market sources at September 30, 2004,which are also used under AirNet’s Amended Credit Agreement.

 

UnderSFAS No. 142, “*Goodwill and Other Intangible Assets*”,AirNet evaluates its goodwill for impairment annually, or more frequently ifchanges in circumstances indicate impairment may have occurred sooner. AirNet determined that as a result of the impairment of its long-lived assetsused in its Delivery Services operations, the remaining goodwill assigned tothe

 

16

----

 

DeliveryServices operations should be evaluated for potential impairment.  AirNetevaluates the fair value of its goodwill related to its Delivery Servicesoperations based upon a discounted future cash flow analysis.  As a resultof the impairment test, AirNet determined that its goodwill was impaired atSeptember 30, 2004, and, accordingly, a non-cash impairment charge of $4.0million was recorded.

 

In2002, AirNet recorded a $1.9 million non-cash after-tax charge in accordancewith its adoption of SFAS No. 142.  Areview of goodwill associated with the 1998 purchase of Mercury BusinessServices, indicated that the $3.1 million (pre-tax) of remaining goodwillrelated to that acquisition was impaired as of January 1, 2002, and thereforean impairment charge was recorded in 2002. Under the transition provisions of SFAS No. 142, this non-cash chargewas treated as a cumulative effect of accounting change as of January 1, 2002.

 

***Interest Expense***

 
| **In ‘000’s**      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** | **Increase  (Decrease)  2002 to 2003** | ** ** | **% Increase  (Decrease)  2002 to 2003** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|----------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|------------------------------------------|------------|
| Interest Expense             |       | $        | 2,469      |     | $          | 1,340    |       | $                                      | 1,649      |                                     | $          | 1,129                                  |       | 84                                       | %          | $ | (309 | ) | (19 | )% |
| Debt Balances                |       | $        | 62,245     |     | $          | 37,775   |       | $                                      | 41,794     |                                     | $          | 24,470                                 |       | 65                                       | %          | $ | (4,019 | ) | (10 | )% |
| Average Annual Interest Rate |       | 4.0      | %          | 3.5      | %          | 3.9      | %          | 0.5                                    | %          | 14                                       | %          | (0.4                                   | )%         | (10                                      | )%         |

 

Interestexpense increased from 2003 to 2004 as AirNet increased its debt to financeadditional aircraft for its Passenger Charter services business.  Interest expense decreased from 2002 to 2003due to a reduction in debt and lower interest rates.

 

***Income Taxes***

 
| **In ‘000’s**                                                                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004*** | ** ** | **Increase  (Decrease)  2002 to 2003** | ** ** | **% Increase  (Decrease)  2002 to 2003** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------------------------------------|------------|-------------------------------------------|------------|----------------------------------------|------------|------------------------------------------|------------|
| Income (loss) from continuing operations  before income taxes and cumulative effect of accounting change |       | $        | (43,081    | )        | $          | 4,891    |       | $                                      | 6,059      |                                      | $          | (47,972                                | )          |                                     |       | $ | (1,168 | ) | (19 | )% |
| Provision (benefit) for income taxes                                                                     |       | (8,935   | )          | 2,103    |       | 2,429    |       | (11,038                                | )          |                                      |       | (326                                   | )          | (13                                      | )%         |
| Effective income tax rate                                                                                |       | 21.0     | %          | 43.0     | %          | 40.1     | %          | (23.0                                  | )%         |                                      |       | 2.9                                    | %          | 7                                        | %          |
|                                                                                                          |            |          |            |          |            |          |            |                                        |            |                                           |            |                                        |            |                                          |            |  |  |  |  |  |

 

----

** The percentage increase (decrease) from 2003 to 2004 is notmeaningful.*

 

AirNet’seffective tax rates, excluding the effect of discontinued operations andcumulative effect of accounting change, were 21.0% for 2004, 43.0% for 2003, and40.1% for 2002.  The decrease in theeffective tax rate is primarily due to the impact of the impairment charge of$47.0 million and the valuation allowance for certain deferred tax assets.  AirNet reviews its deferred tax assets inaccordance with SFAS No. 109, “*Accounting for IncomeTaxes*”.  As a result of thisreview, at December 31, 2004, AirNet recorded a valuation allowance of $5.7million to offset deferred tax assets associated with AirNet’s net operatingloss carryforwards and alternative minimum tax credit carryforwards as a resultof the uncertainty surrounding AirNet’s ability to realize such assets.

 

***Discontinued Operations***

 

OnAugust 11, 2003, AirNet completed the sale of substantially all of the assetsof its Mercury Business Services unit to Mercury Business Services, Inc., aDelaware corporation owned by a group that includes the original owners of theMercury business.

 

Thesales price of the transaction was approximately $1.1 million.  MercuryBusiness Services, Inc. paid approximately $455,000 of the sales price throughthe issuance of a ninety day promissory note secured by the assets being soldand guaranteed by each of the shareholders of Mercury Business Services,Inc.  Under the terms of the Asset Purchase Agreement, approximately $536,000of the purchase price was paid with AirNet common shares owned by theshareholders of Mercury Business Services, Inc., including 56,000 common sharestendered to AirNet prior to closing at $4.30 per share (the closing price ofthe AirNet common shares on the New York Stock Exchange (“NYSE”) on July 25,2003) and 68,494 common shares tendered to AirNet on the closing date at $4.31per share (the average closing price of the AirNet common shares on the NYSE onAugust 4-6, 2003).  The balance of the sales price was paid in cash.

 

17

----

 

TheMercury Business Services unit had revenues for the year ended December 31,2003, which consisted of the seven months prior to the sale, of $5.9 million,as compared to $8.9 million for the full year of 2002.

 

Pre-taxloss for AirNet’s Mercury Business Services unit for the year ended December31, 2003, which consisted of the seven months prior to the sale, was $24,000,as compared to a $432,000 pre-tax loss for the full year in 2002.

 

***Net Income (Loss) and Earnings (Loss) PerShare***

 

Based onthe factors noted above, AirNet is reporting per share information with therelated dollar amount and percentage changes noted below.

 
| **In ‘000’s**                                                                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004*** | ** ** | **Increase  (Decrease)  2002 to 2003** | ** ** | **% Increase  (Decrease)  2002 to 2003** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------------------------------------|------------|-------------------------------------------|------------|----------------------------------------|------------|------------------------------------------|------------|
| Income (loss) from continuing operations  before income taxes and cumulative effect of accounting change |       | $        | (43,081    | )        | $          | 4,891    |       | $                                      | 6,059      |                                      | $          | (47,972                                | )          |                                     |       | $ | (1,168 | ) | (19 | )% |
| Provision (benefit) for income taxes                                                                     |       | (8,935   | )          | 2,103    |       | 2,429    |       | (11,038                                | )          |                                      |       | (326                                   | )          | (13                                      | )%         |
| Loss from discontinued operations                                                                        |       | 0        |       | (8       | )          | (259     | )          | 8                                      |       |                                      |       | 251                                    |       | 97                                       | %          |
| Cumulative effect of accounting change                                                                   |       | 0        |       | 0        |       | (1,868   | )          | 0                                      |       |                                      |       | 1,868                                  |       | 100                                      | %          |
| Net Income (loss)                                                                                        |       | $        | (34,146    | )        | $          | 2,780    |       | $                                      | 1,503      |                                      | $          | 36,926                                 |       |                                     |       | $ | 1,277 |   | 85 | % |
|                                                                                                     |       |     |       |     |       |     |       |                                   |       |                                      |       |                                   |       |                                     |       |
| Number of common shares outstanding:                                                                     |       |     |       |     |       |     |       |                                   |       |                                      |       |                                   |       |                                     |       |
| Basic                                                                                                    |       | 10,080   |       | 10,088   |       | 10,141   |       | (8                                     | )          |                                      |       | (53                                    | )          | (1                                       | )%         |
| Diluted                                                                                                  |       | 10,099   |       | 10,089   |       | 10,261   |       | 10                                     |       |                                      |       | (172                                   | )          | (2                                       | )%         |
|                                                                                                     |       |     |       |     |       |     |       |                                   |       |                                      |       |                                   |       |                                     |       |
| Income (loss) from continuing operations  before cumulative effect of accounting change:                 |       |     |       |     |       |     |       |                                   |       |                                      |       |                                   |       |                                     |       |
| Basic and diluted                                                                                        |       | $        | (3.39      | )        | $          | 0.28     |       | $                                      | 0.36       |                                      | $          | (3.67                                  | )          |                                     |       | $ | (0.08 | ) | (23 | )% |
|                                                                                                     |       |     |       |     |       |     |       |                                   |       |                                      |       |                                   |       |                                     |       |
| Income (loss) per common share from  discontinued operations                                             |       |     |       |     |       |     |       |                                   |       |                                      |       |                                   |       |                                     |       |
| Basic and diluted                                                                                        |       | $        | (0.00      | )        | $          | (0.00    | )          | $                                      | (0.03      | )                                         | $          | 0.00                                   |       |                                     |       | $ | 0.03 |   | 97 | % |
|                                                                                                     |       |     |       |     |       |     |       |                                   |       |                                      |       |                                   |       |                                     |       |
| Cumulative effect of accounting change per  common share:                                                |       |     |       |     |       |     |       |                                   |       |                                      |       |                                   |       |                                     |       |
| Basic and diluted                                                                                        |       | $        | (0.00      | )        | $          | (0.00    | )          | $                                      | (0.18      | )                                         | $          | 0.00                                   |       |                                     |       | $ | 0.18 |   | 100 | % |
|                                                                                                     |       |     |       |     |       |     |       |                                   |       |                                      |       |                                   |       |                                     |       |
| Net Income (loss) per common share:                                                                      |       |     |       |     |       |     |       |                                   |       |                                      |       |                                   |       |                                     |       |
| Basic and diluted                                                                                        |       | $        | (3.39      | )        | $          | 0.28     |       | $                                      | 0.15       |                                      | $          | (3.67                                  | )          |                                     |       | $ | 0.13 |   | 87 | % |

 

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** The percentage increase (decrease) from 2003 to 2004 is notmeaningful.*

 

**Liquidity and Capital Resources**

 

AirNet has historically met its working capital needs with cash flowsfrom operations and borrowing on its credit facilities.  Cash flows from operations were $20.4 millionfor 2004, $27.8 million for 2003, and $17.7 million for 2002.

 

The following table setsforth AirNet’s contractual obligations, along with the cash payments due eachperiod (in millions):

 
| ** **                             | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **More than 5  years** | ** ** |
| Contractual Obligations:               |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term Debt                         |       | $                          | 62.2       |   | $ | 3.1 |   | $ | 27.4 |   | $ | 11.0 |   | $ | 20.7 |   |
| Operating Leases                       |       | 2.9                        |       | 0.9 |   | 0.6 |   | 0.2 |   | 1.2 |   |
| Other Purchase and Payment Obligations |       | 10.2                       |       | 10.2 |   | 0.0 |   | 0.0 |   | 0.0 |   |
| Total Contractual Cash Obligations     |       | $                          | 75.3       |   | $ | 14.2 |   | $ | 28.0 |   | $ | 11.2 |   | $ | 21.9 |   |

 

AirNet has certain future purchase obligations as to which it hassigned contracts.  AirNet has contractedfor approximately 85% of its Lear 35 aircraft engines to be covered under amanufacturer’s Fleet Management Plan (FMP), under which

 

18

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AirNet prepays certain repair and overhaul costs based on a rate perengine hour.  Based upon projected enginehours in 2005, AirNet estimates the cost of the FMP to be approximately $9.2million.

 

AirNet anticipates that cash flows from operations and borrowingprograms will provide adequate sources of liquidity and capital resources tomeet AirNet’s expected long-term needs for the operation of its current business,including anticipated capital expenditures; however, AirNet may not haveadditional capital to finance its expansion plans or other strategicalternatives.

 

There were no material capital commitments at December 31, 2004, otherthan AirNet’s construction of its new office and hangar facility as describedin “Item 2 – Properties” of this Annual Report on Form 10-K, which is beingfinanced under AirNet’s revolving credit facility.

 

Following is a summary of AirNet’s capital expenditures (in millions)for 2002 through 2004 and expected amounts for 2005:

 
| ** **                                      | ** ** | **2005**    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|----------|------------|
|                                            |       |        |       |     |       |     |       |     |       |
| Aircraft                                        |       | $0          |       | $        | 21.1       |     | $          | 6.7      |       | $ | 12.2 |   |
| Aircraft improvements, engines and  inspections |       | 10.0-13.0   |       | 18.0     |       | 12.8     |       | 15.7     |       |
| Increase in prepaid engine costs                |       | 3.0-4.5     |       | 3.8      |       | 3.7      |       | 2.3      |       |
| Rickenbacker Facility, technology and other     |       | 5.0-10.0    |       | 8.3      |       | 2.0      |       | 0.6      |       |
| Total                                           |       | $18.0-$27.5 |       | $        | 51.2       |     | $          | 25.2     |       | $ | 30.8 |   |

 

Costsof major aircraft inspections, overhauls and engine work are capitalized asincurred and depreciated based on hours flown. The original cost of airframes less a salvage value is depreciated basedon the straight-line method over the estimated useful life of the aircraft.  Aircraft maintenance costs not meeting AirNet’scapitalization requirements are expensed as incurred.  In 2004, the engines of approximately 85% ofAirNet’s Learjet 35 aircraft were covered under a manufacturer’s FleetMaintenance Plan (FMP), in which AirNet prepays certain repair and overhaulcosts.  These prepayments, which totaledapproximately $19.3 million at December 31, 2004 (approximately $12.7 millionat December 31, 2003), are classified in fixed assets on the consolidatedbalance sheet.  Amortization on theseprepaid balances does not begin until major engine overhaul services have beenperformed, at which time the prepaid balances are reclassified into depreciableasset categories and depreciated based on hours flown.  AirNet intends to cover all of its Learjet 35engines under FMP plans over the next several years as major overhauls becomedue on the engines not covered under the FMP plans.

 

In September2002, AirNet entered into a $35 million unsecured revolving credit facility anda five-year $20.0 million unsecured term loan (collectively, the “CreditAgreement”).  The term loan requiresquarterly installments of $1.0 million beginning in December 2002 and continuingthrough September 30, 2007.  As ofDecember 31, 2003, there was $6.5 million available under the creditfacility.  The revolving credit facility under the Credit Agreement was originallyscheduled to expire on September 30, 2005 and the secured term loan was tomature on September 30, 2007.

 

On May 28, 2004, AirNet andits lenders amended the terms and conditions of the Credit Agreement (the “AmendedCredit Agreement”).  The Amended CreditAgreement was further amended by the First Change in Terms Agreement and theSecond Change in Terms Agreement as described below. The Amended CreditAgreement is secured by a first lien on all of the property of AirNet and itssubsidiaries, other than any interest in real estate and certain excluded fixedassets.  AirNet also pledged the stockand interests of its subsidiaries to secure the loans under the Amended CreditAgreement, and each of AirNet’s subsidiaries guaranteed AirNet’s obligationsunder the Amended Credit Agreement.  TheAmended Credit Agreement permits AirNet and its subsidiaries to incur otherindebtedness for the purpose of purchasing or refinancing aircraft and relatedtangible fixed assets, subject to certain annual limitations.  The Amended Credit Agreement containslimitations on operating leases, indebtedness, significant corporate changesincluding mergers and sales of assets, investments in subsidiaries andacquisitions, liens, capital expenditures, transactions with affiliates, salesof accounts receivable, sale and leaseback transactions and other off-balancesheet liabilities, contingent obligations and hedging transactions. The AmendedCredit Agreement also contains certain financial covenants that require AirNetto maintain a minimum consolidated tangible net worth and to not exceed certainfixed charge coverage and leverage ratios specified in the Amended CreditAgreement.

 

The Amended Credit Agreementprovides for a secured revolving credit facility of up to $35.0 million and asecured term loan in the aggregate amount of $14.0 million.  The amount of revolving loans available underthe Amended Credit Agreement is limited to a borrowing base equal to theaggregate of 80% of eligible accounts receivable, plus 50% of eligibleinventory, plus 70% of the market value of certain fixed assets, reduced by theaggregate amount of AirNet’s outstanding letters of credit.  The Amended Credit Agreement bears interest,at AirNet’s option, at (a) a fixed rate equal to LIBOR plus a margin determinedby AirNet’s leverage ratio as defined in the Amended Credit Agreement, or (b) afloating rate based on the greater of the sum of (i) the prime rate establishedby The Huntington National Bank from time to time plus a margin determined byAirNet’s leverage ratio and (ii) the sum of 0.5% plus the federal funds rate ineffect from time to time.  At

 

19

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December 31, 2004, as aresult of the various timing and duration of short-term debt maturities, theinterest rate was between 4.5% and 5.5%.

 

As of December 31, 2004,$19.5 million and $11.0 million were outstanding under the secured revolvingcredit facility and secured term loan, respectively.  In addition, AirNet had $1.7 million inletters of credit outstanding on such date related to insurance programs, whichreduced the amount available under the revolving credit facility.  After giving effect to the Second Change inTerms Agreement discussed below, AirNet had approximately $8.8 millionavailable to borrow on its secured revolving credit facility as of December 31,2004.

 

As a result of the impairmentcharge recorded in September 2004 as described in “Note 2 – Impairment ofProperty and Equipment and Goodwill” of the Notes to Consolidated FinancialStatements included in “Item 8 – Financial Statements and Supplementary Data”of this Annual Report on Form 10-K, AirNet was not in compliance with the fixedcharge coverage ratio and the leverage ratio calculated as of September 30,2004, and AirNet would not have been in compliance with the minimumconsolidated tangible net worth requirement as of December 31, 2004.  On November 12, 2004, AirNet and its lendersunder the Amended Credit Agreement agreed to modify the terms and conditions ofthe Amended Credit Agreement (the “First Change in Terms Agreement”).  The First Change in Terms Agreement modifiedthe fixed charge coverage ratio, the leverage ratio, and the minimumconsolidated tangible net worth financial covenants in such a manner that, on agoing-forward basis, the impairment charge, in and of itself, would not cause adefault of these financial covenants in the future.  At the same time as the First Change of TermsAgreement was entered into, AirNet and its lenders executed a waiver of anydefaults or potential defaults under the Amended Credit Agreement whichoccurred, or may have occurred, as a result of AirNet’s failure to comply withthe foregoing financial covenants due to the impairment charge.

 

On March 24, 2005, AirNet andits lenders entered into a “Second Change in Terms Agreement” that furthermodified the terms and conditions of the Amended Credit Agreement.  In accordance with the Second Change in TermsAgreement, AirNet prepaid in full the remaining $11.0 balance outstanding onits secured term loan.   Upon theprepayment of the term loan, the term loan portion of the Amended CreditAgreement was terminated.  In addition,the revolving credit facility under the Amended Credit Agreement was reducedfrom $35.0 million to $30.0 million.  Inthe event AirNet secures permanent financing on all or a portion of itsRickenbacker Facility, the revolving credit facility will be reduced from $30.0million to $25.0 million.  Under theSecond Change in Terms Agreement, the term of the revolving credit facility wasextended from September 30, 2005 to October 15, 2006. The December 31, 2004Balance Sheet gives effect to the Second Change in Terms Agreement entered intoon March 24, 2005.  The Second Change inTerms Agreement also provided for the release of certain fixed assets that weresecuring the loans under the Amended Credit Facility and modified certain otherfinancial covenants.

 

On March 24, 2005, AirNetentered into a three-year term loan totaling $11.0 million with a fixedinterest rate of 8.12%.  This term loanis secured by seven Cessna Caravans and nine LearJet 35’s from AirNet’s cargoaircraft fleet with a combined net book value as of December 31, 2004 ofapproximately $19.9 million.  Theaircraft securing this loan were released from the collateral securing theloans under Amended Credit Agreement in accordance with the Second Change inTerms Agreement.  The proceeds from thisterm loan were used to prepay in full AirNet’s term loan under the AmendedCredit Facility as described above. The December 31, 2004 Balance Sheetreflects the reclassification of approximately $22.4 million from current tolong term notes payable as a result of the extension of the Amended CreditFacility under the Second Change in Terms Agreement and the financing of thecargo aircraft described above.

 

During the second quarter of2004, Jetride entered into four seven-year term loans totaling $22.5 millionwith fixed interest rates of approximately 6.7%.  In July 2004, Jetride financed two additionalpassenger charter Learjet 60’s for the Passenger Charter fleet at $5.0 millioneach with fixed rates of approximately 6.5%, for a total of $32.5 million infinancing related to AirNet’s Passenger Charter services.  As of December 31, 2004, there was $31.7million outstanding under all six loans. These term loans are secured by aircraft used in the Passenger Charterfleet with a total net book value of $40.0 million at December 31, 2004.  Each of the term loans is guaranteed byAirNet.  AirNet incurred $1.2 million ininterest expense in 2004 related to the financing of the nine Passenger Charteraircraft under all six loans.

 

AirNet is attempting tosecure permanent financing of its Rickenbacker Facility.  AirNet has signed a letter of intent withanother lender to finance $8.5 million of its Rickenbacker Facility, which issubject to credit, appraisal and environmental review acceptable to thelender.  In addition, the potentiallender has asked to review AirNet’s operating results for the fiscal year ended2004 and first quarter 2005.

 

In December 2003, AirNet financed the $5.3 million cost of a Learjet 60for its Passenger Charter services business using its bank credit facility.

 

In January 2002, AirNet entered into operating leases for four CessnaCaravan 208 aircraft, which after an extension entered into in September 2002,terminate in 2006 and 2007.  In January2002, AirNet also entered into operating leases for two Cessna Caravan 208Baircraft, one with a lease term of 3.5 years and one with a lease term of 4.5years.

 

20

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In accordance with accounting principles generally accepted in theUnited States of America, AirNet does not record operating leases in its consolidatedbalance sheet; however, the minimum lease payments related to these leases aredisclosed in “Note 6 – Lease Obligations” of the Notes to ConsolidatedFinancial Statements included in “Item 8 – Financial Statements andSupplementary Data” of this Annual Report on Form 10-K.

 

Under the terms of Gerald G. Mercer’s retirement agreement,AirNet purchased 818,330 common shares from Mr. Mercer at a total cost of $5.0million in July 2001.  This privatelynegotiated transaction was funded through a revolving bank credit facility andAirNet intends to hold these common shares in treasury.  Underthe terms of the retirement agreement, Mr. Mercer also had the option to sellup to $250,000 of AirNet common shares each quarter at the closingmarket prices on the last business day of March, June, September and Decemberof 2002 to AirNet.  Mr. Mercer exercisedhis option and sold 52,410 AirNet common shares to AirNet at a total cost of$249,996 in January 2003.

 

Also under the terms of his retirement agreement, Mr. Mercer retainedhis rights to sell his remaining AirNet common shares to private investors atany time in accordance with applicable laws. On or 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 with respect to the990,000 common shares collectively purchased by these investors from Mr. Merceror Spring Hill Camps.  AirNet has filed aregistration statement with respect to those common shares under the SecuritiesAct of 1933, as amended, for resale by the investors as selling shareholders.

 

In February 2000, AirNet announced a stock repurchase plan allowingAirNet to purchase up to $3.0 million of its common shares.  During 2000, AirNet purchased $2.4 million incommon shares funded by cash flows from operations.  There was no repurchase activity under thisprogram in 2002, 2003 or 2004.  As such,purchases of approximately $0.6 million of AirNet’s common shares may still bemade in the open market or through privately negotiated transactions.  Such future purchases would be consideredbased on availability of funds, current market conditions, the stock price, andrestrictions in AirNet’s financing agreements.

 

**Off-Balance Sheet Arrangements**

 

AirNet had no “off-balance sheet” arrangements as of December 31, 2004,as that term is described by the SEC.

 

**Seasonality and Variability in Quarterly Results**

 

AirNet’s operations historically have been somewhat seasonal relativeto holidays observed by financial institutions. When financial institutions are closed on holidays falling on Mondaythrough Thursday, AirNet’s revenue and net income are adversely affected.AirNet’s fiscal quarter ending December 31 is often the most impacted by bankholidays.

 

Operating results are also affected by the weather.  Winter weather often requires additionalcosts for de-icing, hangar rental and other aircraft services.  AirNet generally experiences highermaintenance costs during its fiscal quarter ending March 31.

 

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**Selected Quarterly Data (unaudited)**

 

The following is a summary of the unaudited quarterly results ofoperations for the quarterly periods ended (in thousands, except per sharedata):

 
| ** **                                                              | ** ** | **Quarters Ended,** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                              | ** ** | **March 31**        | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| **2004**                                                                | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenues                                                            | ** ** | **$**               | **40,471** | ** ** | **$** | **42,140** | ** ** | **$** | **43,937** | ** ** | **$** | **48,402** | ** ** |
| Income (loss) from continuing operations  before income taxes           | ** ** | **555**             | ** ** | **(199** | **)** | **(45,783** | **)** | **2,347** | ** ** |
| Net income (loss)                                                       | ** ** | **316**             | ** ** | **(113** | **)** | **(30,184** | **)** | **(4,164** | **)** |
| Per share – basic and diluted:                                     | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income (loss) from continuing operations                                | ** ** | **$**               | **.03**    | ** ** | **$** | **(.01** | **)** | **$** | **(2.99** | **)** | **$** | **(.41** | **)** |
| Net income (loss) per share                                             | ** ** | **$**               | **.03**    | ** ** | **$** | **(.01** | **)** | **$** | **(2.99** | **)** | **$** | **(.41** | **)** |
| ** **                                                              | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **2003**                                                                | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenues                                                            |       | $                   | 37,076     |   | $ | 36,584 |   | $ | 38,020 |   | $ | 37,542 |   |
| Income from continuing operations before  income taxes                  |       | 522                 |       | 1,123 |   | 1,934 |   | 1,312 |   |
| Income(loss) from discontinued operations,  net of tax—Note 1 |       | (22                 | )          | 39 |   | (25 | ) | — |   |
| Net income                                                              |       | 297                 |       | 724 |   | 1,047 |   | 712 |   |
| Per share – basic and diluted:                                     |       |                |       |   |   |   |   |   |   |
| Income from continuing operations                                       |       | $                   | .03        |   | $ | .07 |   | $ | .11 |   | $ | .07 |   |
| Income (loss) from discontinued operations                              |       | $                   | .00        |   | $ | .00 |   | $ | .00 |   | $ | .00 |   |
| Net income per share                                                    |       | $                   | .03        |   | $ | .07 |   | $ | .10 |   | $ | .07 |   |

 

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Note 1 – In August 2003, AirNet sold the assets of its Mercury BusinessServices unit, resulting in discontinued operations.

 

**Critical Accounting Policies and Estimates**

 

The preparation of financial statements in accordance with accountingprinciples generally accepted in the United States requires management to adoptaccounting policies and make significant judgments and estimates to developamounts reflected and disclosed in the financial statements. In many cases,there are alternative policies or estimation techniques that could be used.AirNet maintains a thorough process to review the application of its accountingpolicies and to evaluate the appropriateness of the estimates; however, evenunder optimal circumstances, estimates routinely require adjustment based onchanging circumstances and the receipt of new or better information.

 

The policies and estimates discussed below include the financialstatement elements that are either the most judgmental or involve the selectionor application of alternative accounting policies, and are material to AirNet’sconsolidated financial statements. Management has discussed the development andselection of these critical accounting policies and estimates with the AuditCommittee of its Board of Directors and with its independent registered publicaccounting firm.

 

*Allowance for Uncollectible Accounts Receivable*

 

Historically, AirNet’s credit losses from bad debts have not fluctuatedmaterially because its credit management processes have been effective. AirNetalso recognizes billing adjustments to revenue and accounts receivable forcertain discounts, money back service guarantees and billing corrections.

 

Estimates for credit losses and billing adjustments are regularlyupdated based on historical experience of bad debts, adjustments processed,current collection trends, and the individual assessment of customers’ creditquality.  Once AirNet considers all thesefactors, a determination is made as to the need for a bad debt allowance.  Allowances for these future adjustmentsaggregated $0.9 million at December 31, 2004 and $0.5 million at December 31,2003.  AirNet considers the sensitivityand subjectivity of these estimates to be moderate, as changes in economicconditions and pricing arrangements can significantly affect the estimates usedto determine the allowances.

 

*MajorAircraft Maintenance*

 

Costs of majoraircraft inspections, overhauls and engine work are capitalized as incurred anddepreciated based on hours flown.  Theoriginal costs of airframes, less an estimated salvage value, are depreciatedbased on the straight-line method over the estimated useful life of theaircraft.  Aircraft maintenance costs notmeeting AirNet’s capitalization requirements are expensed as incurred.  Approximately 85% of AirNet’s Learjet 35aircraft engines are covered under a manufacturer’s Fleet Management Plan(FMP), in which AirNet prepays certain repair and overhaul costs.  These prepayments, which totaled $19.3million and $12.7 million at December 31, 2004 and 2003, respectively, are classified in fixed assets on theconsolidated balance sheet.  Amortizationon these prepaid balances does not begin until major engine overhaul services

 

22

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have been performed, at which time the prepaid balances are reclassifiedinto depreciable asset categories and depreciated based on hoursflown.  AirNet intends to cover all ofits Lear 35 jet engines under FMP plans over the next several years as majoroverhauls become due on the engines not covered under the FMP plans.

 

# ***Property and Equipment***

# *** ***

AirNet’s Delivery Service andPassenger Charter service businesses are capital intensive.  Over 85% of AirNet’s total assets are investedin flight equipment to serve these markets. AirNet capitalizes those costs that meet the definition of capitalassets under accounting standards.

 

The depreciation oramortization of AirNet’s capital assets over their estimated useful lives, andthe determination of any salvage values, requires management to make judgmentsabout future events.  Because AirNetutilizes many of its capital assets over relatively long periods, managementperiodically evaluates whether adjustments to estimated lives or salvage valuesare necessary.  The accuracy of theseestimates affects the amount of depreciation expense recognized in a periodand, ultimately, the gain or loss on the disposal of the asset.

 

# ***Stock-Based Compensation***

 

AirNet accounts for stockoptions under Accounting Principles Board Opinion No. 25, “*Accountingfor Stock Issued to Employees*” (“APB No. 25”), which does notrequire compensation costs related to stock options to be recorded in netincome, as all options granted under AirNet’s stock option plan had an exerciseprice equal to the market value of the underlying common shares at grant date.SFAS No. 148. “*Accounting for Stock-Based Compensation -Transition and Disclosure - an amendment of SFAS No. 123,*” providesguidance on acceptable approaches to the implementation of SFAS No. 123, andrequires more prominent disclosures of pro forma net earnings and earnings pershare determined as if the fair value method of accounting for stock optionshad been applied in measuring compensation cost.

 

On December 16, 2004, theFinancial Accounting Standards Board issued SFAS No. 123 (revised 2004), “*Share-Based Payment”* (SFAS No. 123(R)), which is a revisionof SFAS No. 123, “*Accounting for Stock-BasedCompensation*”.  SFAS No.123(R) supersedes APB No. 25, and amends SFAS No. 95, “*Statement of Cash Flows*.”  Generally, the approach in SFAS No. 123(R) issimilar to the approach described in SFAS No. 123.  However, SFAS No.123(R) requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the income statement based on their fair values.  Pro forma disclosure will no longer be analternative.

 

SFAS No. 123(R) must beadopted no later than the first interim or annual period beginning after June15, 2005.  AirNet expects to adopt SFASNo. 123(R) on July 1, 2005.  The impactof adoption of SFAS No. 123(R) cannot be predicted at this time because it willdepend on levels of share-based payments granted in the future.  However, hadwe adopted SFAS No. 123(R) in prior periods, the impact of that standard wouldhave approximated the impact of SFAS No. 123 as described in the disclosure ofpro forma net income (loss) and net income (loss) per share in “Note 1 –Significant Accounting Policies” of the Notes to Consolidated FinancialStatements included in “Item 8 – Financial Statements and Supplementary Data”of this Annual Report on Form 10-K. AirNet does not anticipate that adoption of SFAS No. 123(R) will have amaterial impact on its results of operations or its financial position. However, SFAS No. 123(R) requires the benefits of tax deductions inexcess of recognized compensation cost to be reported as a financing cash flow,rather than as an operating cash flow. This requirement will reduce netoperating cash flows and increase net financing cash flows in periods after theeffective date.  Stock options arefurther detailed in “Note 1 – Significant Accounting Policies” and “Note 5 –Incentive Stock Plans” of the Notes to Consolidated Financial Statementsincluded in “Item 8 – Financial Statements and Supplementary Data” of thisAnnual Report on Form 10-K.

 

*Self-Insurance Accruals*

 

AirNet is self-insured up to certain limits for costs associated withworkers’ compensation claims and benefits paid under employee health care programs.At December 31, 2004 and 2003, AirNet had total self-insurance accrualsreflected in its consolidated balance sheet of approximately $1.1 million and$1.3 million, respectively.

 

The measurement of these costs requires the consideration of historicalloss experience and judgments about the present and expected levels of cost perclaim.  AirNet accounts for these costsprimarily through measurement of claims outstanding and projected payments.  AirNet believes its recorded obligations forthese expenses are consistently measured on an appropriate basis; however,changes in health costs, loss development factors, accident frequency andseverity, and other factors can materially affect the estimates for theseliabilities.

 

# ***IncentiveCompensation Plans***

# *** ***

AirNet maintains an incentive compensation plan with payouts tied tothe achievement of company wide earnings goals and personal/departmentalgoals.  Incentive compensation iscalculated as a percent of base pay, depending on participation levels, which varyamong management and staff.

 

23

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Costs related to the company wide earnings portion of the plan areaccrued based on actual quarterly results. At December 31, 2004 and 2003, no accrual existed for this portion ofthe plan, as the targets were not met.

 

AirNet accrues forcosts related to the personal/departmental goals portion of the plan based onestimated achievement rates of set goals applied to individuals’ base payrates.  Payouts may be made quarterly orannually, depending on the nature of the goals. At December 31, 2004, no amount was recorded for the personal/departmentgoals portion of the plan compared to $0.6 million recorded at December 31,2003.

 

*Income Taxes*

 

AirNet accountsfor income taxes under the liability method pursuant to SFAS 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.

 

AtDecember 31, 2004, AirNet determined that adjustments were required to AirNet’sdeferred tax accounts associated with net operating loss carryforwards (NOL)and Alternative Minimum Tax Credit carryforwards (AMT).  Accounting principles generally accepted inthe United States of America require AirNet to record a valuation allowanceagainst these deferred tax assets if it is “more likely than not” that AirNetwill not be able to utilize the NOL or AMT to offset future taxes. At December31, 2004, AirNet has recorded a valuation allowance to offset the deferred taxassets associated with the NOL and AMT because of the uncertainty surroundingits ability to realize such assets.

 

*Impairment of Assets and Goodwill*

 

AirNetrecognizes impairment losses on long-lived assets used in operations inaccordance with SFAS No. 144, *“Accounting for theImpairment or Disposal of Long-Lived Assets”* .  AirNet recognizes impairment losses onlong-lived assets used in operations when events or changes in circumstancesindicate, in management’s judgment, that the assets might be impaired and theundiscounted cash flows estimated to be generated by those assets are less thanthe carrying value of those assets.  Thenet carrying value of the assets not recoverable is reduced to fair marketvalue if lower than carrying value.  Indetermining the fair market value of the assets, AirNet considers markettrends, published market data, and recent transactions involving sales ofsimilar assets.

 

AirNet’slong-lived assets used in its cargo operations, consisting primarily ofaircraft, spare parts and related goodwill, were determined to be impaired atSeptember 30, 2004.  This determinationwas made as a result of recent industry trends in the adoption of electronicpayment alternatives and evolving electronic alternatives to the physicalmovement of cancelled checks at a more rapid pace than previously anticipatedby the industry.  AirNet believes thatthe effectiveness of the Check 21 Act in October 2004 will contribute to thistrend.  Furthermore, recent market dataand other disclosures by the Federal Reserve confirm the accelerating declinein cancelled check volume.  AirNet’scargo airline was originally designed, and continues to operate, primarily tomeet the needs of Bank services customers. In the third quarter of 2004, AirNet concluded that its airline capacitywill exceed future demand, creating an impairment of the aircraft and relatedassets. The impairment also reflects the overall decline in the market valuesof the aircraft in its cargo fleet which have not recovered as in previouseconomic cycles.  AirNet determined thatthe expected future undiscounted cash flows from its assets used in itsdelivery services operations were less than the carrying value of those assetsand were impaired.  Accordingly, anon-cash impairment charge of $43.0 million was recorded on September 30, 2004,using estimated aircraft fair values.

 

Under SFAS No. 142, *“Goodwill and Other Intangible Assets”,* AirNet evaluates its goodwill for impairment annually, or more frequently if changes in circumstances indicate impairment may have occurred sooner.  AirNet determined that as a result of the impairment of its long-lived assets used in its delivery services operations, the remaining goodwill assigned to the Delivery Services operations should be evaluated for potential impairment.  AirNet evaluates the fair value of its goodwill related to its Delivery Services operations based upon a discounted future cash flow analysis.  As a result of the impairment test, AirNet determined that its goodwill was impaired at September 30, 2004, and, accordingly, a non-cash impairment charge of $4.0 million was recorded.

 

**Forward-looking statements**

 

The information included or incorporated byreference in this Annual Report on Form 10-K contains various “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended,including those identified by the words “believe,” “anticipate,” “estimate,” “expect,”“intend,” “may,” “plan,” “project” and similar expressions.  These forward-looking statements reflect management’sexpectations and are based upon currently available data; however, actualresults are subject to future events and uncertainties, which could causeactual results to differ from those projected in these statements.  The following factors, in addition to thoseincluded in the disclosure under the heading “Risk Factors” below, could causeactual results to differ materially from those expressed in forward-lookingstatements:

 

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•                  an acceleration in the migration of AirNet’s Bankcustomers to electronic alternatives to the physical movement of cancelledchecks;

 

•                  potential regulatory changes by the FAA, DOT andTSA which could increase the regulation of AirNet’s business, or the FederalReserve, which could change the competitive environment of transportingcanceled checks;

 

•                  disruptions to operations due to adverseweather conditions, air traffic control-related constraints or aircraftaccidents;

 

•                  potential further declines in the value ofaircraft in AirNet’s fleet and any related asset impairment charges;

 

•                  the ability to successfully market thePassenger Charter business in light of global changes in the commercial airlineindustry;

 

•                  potential changes in locally and federallymandated security requirements;

 

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

 

•                  potential cost overruns associated with theconstruction of the new office and hangar facility at Rickenbacker InternationalAirport;

 

•                  changes in check processing and shipment patternsof bank customers;

 

•                  acts of war and terrorist activities;

 

•                  the impact of prolonged weakness in the U. S.economy on 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;

 

•                  the availability and cost of financing requiredfor operations;

 

•                  the impact of unusual items resulting fromongoing evaluations of our business strategies;

 

•      the substantial indebtedness;

 

•                  insufficient capital for future expansion; and

 

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

 

All forward-looking statements are expresslyqualified in their entirety by these cautionary statements.  AirNet assumes no obligation or duty toupdate any of the forward-looking statements included or incorporated by referencein this Annual Report on Form 10-K except to the extent required by law.

 

**Risk Factors**

 

**Competition from other providers of expressair and ground delivery services may adversely affect AirNet’s results ofoperations and financial condition.**

 

AirNet’s Bank services compete primarilyagainst the Federal Reserve’s Check Relay Network, which has significantlygreater financial and other resources than AirNet.  The Federal Reserve is regulated by theMonetary Control Act of 1980, which in general requires that the Federal Reserveprice its services on an actual cost basis plus a set percentage private sectormarket adjustment factor.  Failure by theFederal Reserve to comply with the Monetary Control Act by pricing its servicesbelow the required 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 ishighly competitive.  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.

 

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**The Check 21 Act or similar legislation andelectronic methods of clearing cancelled checks will have a significant adverseeffect on AirNet’s revenues derived from check delivery services.**

 

TheCheck 21 Act, which became effective in October 2004, creates a new negotiableinstrument called a substitute check (also known as an image replacementdocument or “IRD”) that becomes the legal equivalent of the original item.  TheCheck 21 Act effectively removes the requirement of returning an original papercheck to the account holder’s institution and requires that all financialinstitutions accept an IRD in lieu of a cancelled check.   The Check 21 Act and the transition in thebanking industry to electronic methods of clearing cancelled checks willeventually replace the need for expedited air transportation services oforiginal cancelled checks by most of AirNet’s banking customers.  The Check 21 Act and electronic methods ofclearing cancelled checks will have a significant adverse affect on AirNet’srevenues derived from check delivery services. However, it is unclear how quickly IRD’s and electronic methods ofclearing cancelled checks will be implemented on a widespread basis by bankingcustomers and how such implementation would affect their expedited checktransportation needs.

 

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

 

Some analysts have predicted that theincreased use of electronic funds transfers will lead to a “checkless society,”which could also adversely affect the demand for AirNet’s Bank services to thefinancial services industry.  Inaddition, some financial services industry analysts have predicted thedevelopment of various forms of imaging technology that could reduce oreliminate the need for prompt delivery of cancelled checks.  Similarly, technological advances in thenature of “electronic mail” and “telefax” have affected the demand for on-calldelivery services by customers needing express delivery services.  While none of these technological advanceshas had a significant adverse impact on AirNet’s business to date, these orsimilar technologies, or other regulatory or technological changes in the checkclearance and national payment systems, could have an adverse affect on AirNet’sbusiness in the future.

 

**Government regulation significantly affectsAirNet.**

 

AirNet’s delivery operations are subject tovarious federal, state and local regulations that in many instances requirepermits and licenses.  Failure by AirNetto maintain required permits or licenses, or to comply with the applicableregulations, could result in substantial fines or possible revocation of AirNet’sauthority to conduct certain of its operations.

 

AirNet’s flight operations are regulated bythe FAA under Part 135 of the Federal Aviation Regulations.  Among other things, these regulations governpermissible flight and duty time for aviation flight crews.  The FAA has contemplated, from time to time, certainchanges in flight and duty time guidelines which, if adopted, could increaseAirNet’s operating costs.  These changes,if adopted, could also require AirNet and other operators regulated by the FAAto hire additional flight crew personnel. In addition, Congress, from time to time, has considered various means,including excise taxes, to raise revenues directly from the airline industry topay for air traffic control facilities and personnel.  There can be no assurances that Congress willnot change the current federal excise tax rate or enact new excise taxes, whichcould adversely affect AirNet’s business.

 

**Loss of AirNet’s Indirect Air Carrier Standard Security Programapproval could adversely affectAirNet’s business****.**

 

AirNet’sability to transport packages on commercial airlines is dependent upon the TSA’sapproval of AirNet’s Indirect Air Carrier Standard Security Program (“IACSSP”).  The TSA recently informed AirNet that itwould no longer approve an IACSSP for entities such as AirNet that possess anFAA air carrier operating certificate. The TSA has requested that AirNet submit an application for a new IACSSPunder the name of an affiliated company that does not possess an FAA aircarrier operating certificate.  AirNet iscooperating with the TSA to secure approval of a new IACSSP under the name ofan affiliated company.  However, therecan be no assurances that the TSA will approve such new IACSSP.  The TSA could also attempt to withdraw AirNet’scurrent IACSSP approval which expires on August 28, 2005.  The loss of AirNet’s current IACSSP approvalor AirNet’s inability to secure approval of a new IACSSP would have asignificant and immediate adverse effect on AirNet’s business.

 

**Changesin government regulations regarding the transportation of hazardous materialsmay increase AirNet’s costs of transporting such shipments or reduce AirNet’sability to transport such shipments.**

 

TheDOT has implemented new regulations regarding the transportation of hazardousmaterials that will go into effect on April 1, 2005.  The new regulations will require that AirNetinstitute new operating procedures and make arrangements with ground vendorsand/or fixed based operators to assist AirNet in complying with the newregulations.  Compliance with the newregulations will significantly increase AirNet’s cost of transporting hazardousmaterials.  Failure to comply with thenew regulations would reduce or otherwise restrict AirNet’s ability totransport hazardous materials, including its ability to transport radioactivepharmaceuticals under AirNet’s DOT E-7060 permit.  While AirNet is seeking approval of analternative method of compliance which would reduce its compliance costs, there

 

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canbe no assurances the alternative method of compliance will be approved.  AirNet anticipates that it will not be incomplete compliance with the new regulations as of April 1, 2005.  Furthermore, there can be no assurance thatthe DOT will accept AirNet’s operating procedures as being sufficient to meetthe requirement that the hazardous materials information be readily accessibleat the airport of departure.

 

**Reclassification of ground couriers as employees rather than independent contractors could impact AirNet’s operating costs and subject it to back taxes and other liabilities.**

 

AirNet uses the services of independent contractors as couriers to pick up and deliver its packages.  From time to time, federal and state authorities have sought to assert that independent contractors in the transportation industry, including independent contractors providing services similar to those utilized by AirNet, are employees rather than independent contractors. AirNet currently classifies its couriers providing services under an independent contractor agreement as independent contractors rather than as employees.  However, there can be no assurance that federal or state authorities will not challenge this position, or that other laws or regulations, including tax laws or interpretations thereof, will not change. If, as a result of any of the foregoing, AirNet were required to pay withholding taxes and pay for and administer added employee benefits to these couriers, AirNet’s operating costs would increase. Additionally, in the event of any such reclassification, AirNet could be required to pay back-up withholding with respect to amounts previously paid to such individuals and be required to pay penalties or be subject to other liabilities as a result of the incorrect classification of such individuals, such as payment of past due workers compensation and unemployment insurance premiums.

 

**Changes to current transportation securityrequirements or procedures could adversely impact AirNet’s ability toefficiently conduct AirNet’s air and ground operations to meet AirNet’s currentdelivery parameters or significantly increase costs to transact thoseoperations.**

 

Considerable focus has been placed on packagesecurity requirements and procedures at domestic and international airportssince the September 11, 2001 tragedy and related incidents.  The TSA, commercial airlines, fixed based operations (where AirNet transacts asignificant portion of its aircraft loading and unloading operations) andairport authorities are still in the process of reviewing all aspects of theirsecurity requirements.  While manyproposed changes are voluntary, many are being mandated by the TSA, the DOT andthe FAA.

 

During 2002, the TSA implemented screening procedures forover-the-counter cargo tendered to commercial airlines. These screeningprocedures have resulted in additional tender time for packages transported onthe commercial airlines in certain locations and during certain times.  In addition, the TSA continues to review andconsider additional package screening requirements and changes to the vendorscreening procedures, which AirNet may need to perform on packages from itscustomers.  Many commercial airlines are also adding security surcharges toshipments.

 

Changes at fixed base operators and by localairport authorities could potentially limit AirNet’s ramp access to itsaircraft, thereby increasing tender time from customers.  Changes in chain of custody requirementscould also potentially cause AirNet to incur additional costs to staffadditional hours at certain locations. In response to the new security-related procedures being implemented, AirNetadded a security surcharge in 2002 for its Bank and Express servicescustomers.  Although the surcharge isexpected to help offset the increasing costs associated with security issues,AirNet’s current surcharge program may not be sufficient to cover all new costsit may incur as additional transportation safety procedures are developedand/or required.

 

As a company actively engaged in providing aviation services, AirNet issubject to current and future regulations with which it must comply in order tomaintain its ability to provide such services. Various governmental agencies are implementing and expanding policies,procedures, and compliance measures to enhance the safety and security of bothdomestic and international air transportation. This increasing regulatory environment may require AirNet to change itsoperational processes, modify its flight schedules, and incur additional costsof compliance.  The costs associated withregulatory compliance could impact AirNet’s financial results.  AirNet’s inability to comply with current orfuture governmental regulations could limit or restrict AirNet’s ability toprovide specific services, including but not limited to, the transportation ofhazardous materials.

 

**Catastrophic accidents involving AirNet’sPassenger Charter aircraft could result in a significant reduction in AirNet’sbusiness and damage to the Jetride brand.**

 

A catastrophic accident could substantiallyreduce the demand for Jetride’s Passenger Charter services and, therefore,significantly reduce its revenue.  Inaddition, Jetride may not be able to secure liability insurance for itsbusiness or secure such insurance at a reasonable cost.

 

27

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**Environmentalconcerns may arise in connection with AirNet’s construction of a facility onleased land with known pollution conditions.**

 

AirNethas commenced construction of the Rickenbacker Facility on land leased from theColumbus Regional Port Authority in 2004. Portions of the leased land, as well as portions of the aircraft ramp,on which AirNet intends to conduct a significant portion of its Columbusoperations, contain known pollution conditions. The appropriate amended post closure plan and no further action lettersaddressing these sites have been supplied to AirNet by the Columbus RegionalPort Authority prior to beginning construction. AirNet has received theapplicable no further action letters. Identification of additional pollution conditions on the leased land orattached ramp or the inability of the Columbus Regional Port Authority toprovide the approved amended post closure plan could increase costs and have anadverse affect on AirNet’s ability to construct and operate the RickenbackerFacility.

 

**Failure to renew party status to Department of TransportationE-7060 would result in significant loss of Express services revenue.**

 

AirNetmaintains party status to DOT E-7060, which permits AirNet to transport highervolumes of radioactive pharmaceuticals than allowed by most air carriers. AirNet is required to renew its party status every two years.  AlthoughAirNet anticipates it will obtain its DOT E-7060 renewal at its next scheduledrenewal date in August 2006, there can be no assurances that the party statuswill be extended.  Further, there can be no assurance that AirNet can continueto comply with all current DOT E-7060 requirements, or that such requirementswill not change in the future which would negatively affect AirNet’s ability tomaintain such status.

 

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

 

Provisions of AirNet’s amended articles andcode of regulations and of the Ohio Revised Code, together or separately, coulddiscourage potential acquisition proposals, delay or prevent a change incontrol of AirNet and limit the price that certain investors might be willingto pay in the future for the common shares. Among other things, these provisions require certain supermajorityvotes, establish advance notice procedures for shareholder nomination ofcandidates for election as directors and for shareholder proposals to beconsidered at shareholders’ meetings, eliminate cumulative voting in theelection of directors and provide that directors may only be removed fromoffice for cause.

 

AirNet’s amended articles authorize the boardof directors to issue up to 10,000,000 preferred shares without furthershareholder approval, subject to any limitations prescribed by law and therules and regulations of the New York Stock Exchange.  The preferred shares could have dividend,liquidation, conversion and other rights and privileges that are superior orsenior to the common shares.  Issuance ofpreferred shares could result in the dilution of the voting power of the commonshares, adversely affect holders of the common shares in the event ofliquidation of AirNet or delay, defer or prevent a change in control of AirNet.

 

In addition, Section 1701.831 of theOhio Revised Code contains provisions that require shareholder approval of anyproposed “control share acquisition” of any Ohio corporation at any of threevoting power thresholds:  one-fifth,one-third and a majority.  Further,Chapter 1704 of the Ohio Revised Code contains provisions that restrictspecified business combinations and other transactions between an Ohiocorporation and interested shareholders.

 

**AirNet’s substantial indebtedness couldadversely affect AirNet’s financial health and prevent AirNet from fulfillingits obligations.**

 

AirNethas a significant amount of debt.  AirNet’ssubstantial indebtedness could: (1) require AirNet to dedicate a substantialportion of cash flows from operating activities to payments on AirNet’sindebtedness, which would reduce the cash flows available to fund workingcapital, capital expenditures and other general corporate requirements; (2)limit AirNet’s flexibility in planning for, or reacting to, changes in AirNet’sbusiness and the industry in which AirNet operates; and (3) limit AirNet’sability to borrow additional funds. AirNet’s liquidity and its ability to meet its current and long-termfinancial obligations as they become due will be dependent upon AirNet’sfinancial performance, its ability to meet financial covenants in financingagreements and its ability to replace or extend the revolving credit facility.  AirNet’s failure to meet these financialcovenants would have a material adverse effect on AirNet’s financial positionand ability to continue operations.  Asubstantial portion of AirNet’s revolving credit facility is funding theRickenbacker Facility.

 

**AirNet may encounter issues in documentingand testing its internal control over financial reporting for purposes ofcomplying with Section 404 of the Sarbanes-Oxley Act of 2002.**

 

AirNet is in the process of documenting andtesting its internal control over financial reporting in order to satisfy therequirements of Section 404 of the Sarbanes-Oxley Act, which requiresmanagement’s assessment of the effectiveness of AirNet’s internal control overfinancial reporting as of December 31, 2006 and a report by AirNet’sindependent registered public accounting firm addressing management’sassessment and the effectiveness of the internal control over financial

 

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reporting as of that date.  During the course of AirNet’s testing, AirNetmay identify deficiencies and weaknesses, which AirNet may not be able toremediate in time to meet the deadline imposed by the Sarbanes-Oxley Act forcompliance with the requirements for Section 404.  If management is unable to conclude thatAirNet’s internal control over financial reporting is effective at year-end2006 or AirNet’s independent registered public accounting firm is unable togive a favorable report on management’s assessment, this could have a materialadverse effect on AirNet’s reputation, financial condition and market price ofAirNet’s common shares.

 

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

 

**Inflation and Interest Rates**

 

AirNet is exposed to certain market risks from transactions that areentered into during the normal course of business.  AirNet’s primary market risk exposure relatesto interest rate risk.  At December 31,2004, AirNet had a $30.5 million outstanding balance under its Amended CreditAgreement (described above in “Item 7 – Management’s Discussion and Analysis ofFinancial Condition and Results of Operation”) subject to market rate changesin interest.  The Amended CreditAgreement bearsinterest, at AirNet’s option, at (a) a fixed rate equal to LIBOR plus a margindetermined by AirNet’s leverage ratio as defined in the Amended CreditAgreement, or (b) a floating rate based on the greater of the sum of (i) theprime rate established by The Huntington National Bank from time to time plus amargin determined by AirNet’s leverage ratio as defined in the Amended CreditAgreement and (ii) the sum of 0.5% plus the federal funds rate in effect fromtime to time.  Assuming borrowing levelsat December 31, 2004, a one hundred basis point change in interest rates wouldimpact net interest expense by approximately $195,000 per year.

 

Followingthe effectiveness of the Amended Credit Agreement dated May 28, 2004, AirNetpaid off three secured term loans which had been secured by aircraft. One ofthose loans had an interest rate swap agreement associated with it.  This interest rate swap agreement with anotional amount of $3.0 million and a fixed rate of 4.25% plus a margin basedon AirNet’s funded debt ratio remains in place. At December 31, 2004, the aggregate fair value of the interest rate swapwas approximately ($15,000).

 

**FuelSurcharge**

 

AirNetassesses its customers a fuel surcharge which is based on the Oil Price IndexSummary – Columbus, Ohio (OPIS-CMH Index). As index rates increase above a set threshold, surcharge rates increase.  AirNet’s fuel surcharge program helps offsettiming differences between market prices and the OPIS-CMH index used todetermine surcharge rates.

 

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**ITEM 8 -****FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**Report of Independent Registered Public Accounting Firm**

 

 

Shareholders and Board of Directors

AirNet Systems, Inc.

 

 

We have audited the accompanying consolidated balance sheets of AirNetSystems, Inc. as of December 31, 2004 and 2003, and the relatedconsolidated statements of operations, shareholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2004.  Our audits also included the financialstatement schedule listed in the Index at Item 15 (a) 2.  These financial statements and schedule arethe responsibility of the management of AirNet Systems, Inc.  Our responsibility is to express an opinionon these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  We were not engaged to perform an audit ofthe Company’s internal control over financial reporting.  Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position of AirNetSystems, Inc. at December 31, 2004 and 2003, and the consolidated resultsof its operations and its cash flows for each of the three years in the periodended December 31, 2004, in conformity with U.S. generally acceptedaccounting principles.  Also, in ouropinion, the related financial statement schedule, when considered in relationto the basic financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

 

As discussed in Note 2, in 2002 AirNet Systems, Inc. changed its methodof accounting for goodwill in accordance with Statement of Financial AccountingStandards No. 142, *Goodwill and OtherIntangible Assets*.

 

 
| /s/ Ernst & Young LLP                  |   |
|--------------------------------------------|--------|
|                                       |
|                                       |
| Columbus, Ohio                             |
| February 22, 2005                     |
| except for Note 4, as to which the date is |
| March 24, 2005                        |

 

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**AIRNETSYSTEMS, INC.**

 

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                  | ** ** | **December 31,** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| **In thousands, except per share data**                                                                                     | ** ** | **2004**              | ** **  | **2003** | ** ** |
| ** **                                                                                                                  | ** ** | ** **            | ** **  | ** ** | ** ** |
| **ASSETS**                                                                                                                  |       |                  | ** **  |   |   |
| Current  assets:                                                                                                            |       |                  | ** **  |   |   |
| Cash and  cash equivalents                                                                                                  | ** ** | **$**                 | **1,086**   | ** ** | $ | 125 |   |
| Accounts  receivable, less allowances of **$874**  and $515 at December 31, 2004 and 2003, respectively                | ** ** | **24,591**            | ** **  | 18,647 |   |
| Inventory                                                                                                                   | ** ** | **502**               | ** **  | 286 |   |
| Taxes  receivable                                                                                                           | ** ** | **1,137**             | ** **  | 1,401 |   |
| Deferred  income taxes                                                                                                      | ** ** | **187**               | ** **  | — |   |
| Deposits and  prepaids                                                                                                      | ** ** | **2,820**             | ** **  | 3,246 |   |
| Total  current assets                                                                                                       | ** ** | **30,323**            | ** **  | 23,705 |   |
|                                                                                                                        |       |                  | ** **  |   |   |
| Net property  and equipment                                                                                                 | ** ** | **106,816**           | ** **  | 125,102 |   |
|                                                                                                                        |       |                  | ** **  |   |   |
| Other  assets:                                                                                                              |       |                  | ** **  |   |   |
| Goodwill                                                                                                                    | ** ** | **—**            | ** **  | 4,018 |   |
| Other                                                                                                                       | ** ** | **331**               | ** **  | 448 |   |
| **Total  assets**                                                                                                           | ** ** | **$**                 | **137,470** | ** ** | $ | 153,273 |   |
|                                                                                                                        |       |                  | ** **  |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                              |       |                  | ** **  |   |   |
| Current  liabilities:                                                                                                       |       |                  | ** **  |   |   |
| Accounts  payable                                                                                                           | ** ** | **$**                 | **11,311**  | ** ** | $ | 7,442 |   |
| Salaries and  related liabilities                                                                                           | ** ** | **4,496**             | ** **  | 4,955 |   |
| Deferred  revenue                                                                                                           | ** ** | **102**               | ** **  | 184 |   |
| Accrued  expenses                                                                                                           | ** ** | **912**               | ** **  | 887 |   |
| Taxes  payable                                                                                                              | ** ** | **—**            | ** **  | 76 |   |
| Deferred  income taxes                                                                                                      | ** ** | **—**            | ** **  | 4 |   |
| Current  portion of notes payable                                                                                           | ** ** | **3,076**             | ** **  | 5,256 |   |
| Total current  liabilities                                                                                                  | ** ** | **19,897**            | ** **  | 18,804 |   |
|                                                                                                                        |       |                  | ** **  |   |   |
| Other  liabilities                                                                                                          | ** ** | **670**               | ** **  | 1,280 |   |
| Notes  payable, less current portion                                                                                        | ** ** | **59,169**            | ** **  | 32,520 |   |
| Deferred  income taxes                                                                                                      | ** ** | **7,268**             | ** **  | 16,389 |   |
|                                                                                                                        |       |                  | ** **  |   |   |
| Shareholders’  equity:                                                                                                 |       |                  | ** **  |   |   |
| Preferred  shares, $.01 par value; 10,000 shares authorized; and no shares issued and  outstanding                          | ** ** | **—**            | ** **  | — |   |
| Common  shares, $.01 par value; 40,000 shares authorized; **12,763** shares  issued at December 31, 2004 and 2003 | ** ** | **128**               | ** **  | 128 |   |
| Additional  paid-in capital                                                                                                 | ** ** | **76,835**            | ** **  | 77,759 |   |
| Retained  earnings (deficit)                                                                                                | ** ** | **(2,208**            | **)**       | 31,938 |   |
| Accumulated  other comprehensive loss                                                                                       | ** ** | **(13**               | **)**       | (35 | ) |
| Treasury  shares **2,644** and 2,720 shares  held at cost at December 31, 2004 and 2003, respectively                  | ** ** | **(24,276**           | **)**       | (25,510 | ) |
| Total  shareholders’ equity                                                                                            | ** ** | **50,466**            | ** **  | 84,280 |   |
|                                                                                                                        |       |                  | ** **  |   |   |
| **Total  liabilities and shareholders’ equity**                                                                        | ** ** | **$**                 | **137,470** | ** ** | $ | 153,273 |   |

 

See notes to consolidatedfinancial statements

 

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**AIRNETSYSTEMS, INC.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                                                                                                               | ** ** | **Year Ended December 31,** | ** **  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|
| **In thousands, except per share data**                                                                                                                  | ** ** | **2004**                         | ** **  | **2003** | ** ** | **2002** | ** ** |
|                                                                                                                                                     |       |                             | ** **  |   |   |   |   |
| **NET  REVENUES**                                                                                                                                        |       |                             | ** **  |   |   |   |   |
| Air  transportation, net of excise tax of **$3,997**, $3,579, and $3,893 for the years ended December 31,  2004, 2003, and 2002, respectively: |       |                             | ** **  |   |   |   |   |
| Delivery  services:                                                                                                                                      |       |                             | ** **  |   |   |   |   |
| Bank  services                                                                                                                                           | ** ** | **$**                            | **106,117** | ** ** | $ | 103,399 |   | $ | 102,626 |   |
| Express  services                                                                                                                                        | ** ** | **49,096**                       | ** **  | 36,963 |   | 33,958 |   |
| Total  delivery services revenues                                                                                                                        | ** ** | **155,213**                      | ** **  | 140,362 |   | 136,584 |   |
|                                                                                                                                                     |       |                             | ** **  |   |   |   |   |
| Passenger  Charter services                                                                                                                              | ** ** | **18,494**                       | ** **  | 7,599 |   | 4,316 |   |
| Aviation  services and other                                                                                                                             | ** ** | **1,243**                        | ** **  | 1,261 |   | 1,044 |   |
| **Total  net revenues**                                                                                                                                  | ** ** | **174,950**                      | ** **  | 149,222 |   | 141,944 |   |
|                                                                                                                                                     |       |                             | ** **  |   |   |   |   |
| **COSTS  AND EXPENSES**                                                                                                                                  |       |                             | ** **  |   |   |   |   |
| Wages and  benefits                                                                                                                                      | ** ** | **24,823**                       | ** **  | 23,297 |   | 22,167 |   |
| Aircraft  fuel                                                                                                                                           | ** ** | **26,865**                       | ** **  | 19,227 |   | 17,582 |   |
| Aircraft  maintenance                                                                                                                                    | ** ** | **15,086**                       | ** **  | 12,242 |   | 12,305 |   |
| Contracted  air costs                                                                                                                                    | ** ** | **13,813**                       | ** **  | 9,929 |   | 9,069 |   |
| Ground  courier                                                                                                                                          | ** ** | **30,285**                       | ** **  | 25,834 |   | 24,554 |   |
| Depreciation                                                                                                                                             | ** ** | **19,513**                       | ** **  | 17,535 |   | 17,699 |   |
| Insurance,  rent and landing fees                                                                                                                        | ** ** | **10,115**                       | ** **  | 9,895 |   | 8,443 |   |
| Travel,  training and other                                                                                                                              | ** ** | **9,359**                        | ** **  | 8,003 |   | 8,327 |   |
| Selling,  general and administrative                                                                                                                     | ** ** | **18,661**                       | ** **  | 17,032 |   | 14,004 |   |
| Net (gain)  loss on disposition of assets                                                                                                                | ** ** | **34**                           | ** **  | (3 | ) | 86 |   |
| Impairment  of property and equipment                                                                                                                    | ** ** | **42,991**                       | ** **  | — |   | — |   |
| Impairment  of goodwill                                                                                                                                  | ** ** | **4,018**                        | ** **  | — |   | — |   |
| **Total  costs and expenses**                                                                                                                            | ** ** | **215,563**                      | ** **  | 142,991 |   | 134,236 |   |
|                                                                                                                                                     |       |                             | ** **  |   |   |   |   |
| Income  (loss) from operations                                                                                                                           | ** ** | **(40,613**                      | **)**       | 6,231 |   | 7,708 |   |
| Interest  expense                                                                                                                                        | ** ** | **2,468**                        | ** **  | 1,340 |   | 1,649 |   |
| Income  (loss) from continuing operations before income taxes and cumulative effect  of accounting change                                                | ** ** | **(43,081**                      | **)**       | 4,891 |   | 6,059 |   |
| Provision  (benefit) for income taxes                                                                                                                    | ** ** | **(8,935**                       | **)**       | 2,103 |   | 2,429 |   |
|                                                                                                                                                     |       |                             | ** **  |   |   |   |   |
| **Income  (loss) from continuing operations before cumulative effect of accounting  change**                                                             | ** ** | **(34,146**                      | **)**       | 2,788 |   | 3,630 |   |
|                                                                                                                                                     |       |                             | ** **  |   |   |   |   |
| **Loss  from discontinued operations (including gain on sale of $58 in 2003), net of  taxes**                                                            | ** ** | **—**                       | ** **  | (8 | ) | (259 | ) |
|                                                                                                                                                     |       |                             | ** **  |   |   |   |   |
| **Income  (loss) before cumulative effect of accounting change**                                                                                         | ** ** | **(34,146**                      | **)**       | 2,780 |   | 3,371 |   |
|                                                                                                                                                     |       |                             | ** **  |   |   |   |   |
| Cumulative  effect of accounting change, net of $1,194 tax benefit                                                                                       | ** ** | **—**                       | ** **  | — |   | (1,868 | ) |
|                                                                                                                                                     |       |                             | ** **  |   |   |   |   |
| **Net  income (loss)**                                                                                                                                   | ** ** | **$**                            | **(34,146** | **)** | $ | 2,780 |   | $ | 1,503 |   |
|                                                                                                                                                     |       |                             | ** **  |   |   |   |   |
| Income  (Ioss) per common share - basic and diluted                                                                                                      |       |                             | ** **  |   |   |   |   |
| Continuing  operations                                                                                                                                   | ** ** | **$**                            | **(3.39**   | **)** | $ | 0.28 |   | $ | 0.36 |   |
| Discontinued  operations                                                                                                                                 | ** ** | **$**                            | **—**  | ** ** | $ | — |   | $ | (0.03 | ) |
| Cumulative  effect of accounting change                                                                                                                  | ** ** | **$**                            | **—**  | ** ** | $ | — |   | $ | (0.18 | ) |
| Net income  (loss) per share - basic and diluted                                                                                                         | ** ** | **$**                            | **(3.39**   | **)** | $ | 0.28 |   | $ | 0.15 |   |

 

See notes to consolidatedfinancial statements

 

32

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**AIRNETSYSTEMS, INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                      | ** ** | **Year Ended December 31,** | ** **  |
|-------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|
| **In thousands**                                                                                | ** ** | **2004**                         | ** **  | **2003** | ** ** | **2002** | ** ** |
|                                                                                            |       |                             | ** **  |   |   |   |   |
| **OPERATING  ACTIVITIES**                                                                       |       |                             | ** **  |   |   |   |   |
| Net income  (loss)                                                                              | ** ** | **$**                            | **(34,146** | **)** | $ | 2,780 |   | $ | 1,503 |   |
| Adjustments  to reconcile net income (loss) to net cash  provided by operating activities: |       |                             | ** **  |   |   |   |   |
| Cumulative  effect of accounting change                                                         | ** ** | **—**                       | ** **  | — |   | 1,868 |   |
| Depreciation                                                                                    | ** ** | **19,513**                       | ** **  | 17,535 |   | 17,699 |   |
| Impairment  of property and equipment, and goodwill                                             | ** ** | **47,009**                       | ** **  | — |   | — |   |
| Amortization  of intangibles                                                                    | ** ** | **—**                       | ** **  | — |   | 17 |   |
| Deferred  taxes                                                                                 | ** ** | **(14,826**                      | **)**       | 3,533 |   | 588 |   |
| Provision  for losses on accounts receivable                                                    | ** ** | **523**                          | ** **  | 495 |   | 433 |   |
| Loss (gain)  on disposition of assets                                                           | ** ** | **34**                           | ** **  | (89 | ) | 86 |   |
| Cash  provided by (used in) operating assets and liabilities:                                   |       |                             | ** **  |   |   |   |   |
| Accounts  receivable                                                                            | ** ** | **(6,466**                       | **)**       | (1,659 | ) | (2,701 | ) |
| Inventory                                                                                       | ** ** | **(215**                         | **)**       | 337 |   | (222 | ) |
| Deposits and  prepaids                                                                          | ** ** | **425**                          | ** **  | 506 |   | (1,972 | ) |
| Accounts  payable                                                                               | ** ** | **3,343**                        | ** **  | 1,715 |   | (49 | ) |
| Accrued  expenses                                                                               | ** ** | **(123**                         | **)**       | 173 |   | 374 |   |
| Taxes  payable/receivable                                                                       | ** ** | **5,700**                        | ** **  | (528 | ) | 503 |   |
| Salaries and  related liabilities                                                               | ** ** | **(458**                         | **)**       | 480 |   | (264 | ) |
| Other, net                                                                                      | ** ** | **120**                          | ** **  | 1,266 |   | (213 | ) |
| Net assets  of discontinued operations                                                          | ** ** | **—**                       | ** **  | 1,229 |   | 77 |   |
| **Net cash  provided by operating activities**                                                  | ** ** | **20,433**                       | ** **  | 27,773 |   | 17,727 |   |
|                                                                                            |       |                             | ** **  |   |   |   |   |
| **INVESTING  ACTIVITIES**                                                                       |       |                             | ** **  |   |   |   |   |
| Purchases of  property and equipment                                                            | ** ** | **(51,214**                      | **)**       | (25,287 | ) | (30,845 | ) |
| Proceeds  from sales of property and equipment                                                  | ** ** | **6,961**                        | ** **  | 195 |   | 353 |   |
| Proceeds  from sale of business                                                                 | ** ** | **—**                       | ** **  | 565 |   | — |   |
| **Net cash  used in investing activities**                                                      | ** ** | **(44,253**                      | **)**       | (24,527 | ) | (30,492 | ) |
|                                                                                            |       |                             | ** **  |   |   |   |   |
| **FINANCING  ACTIVITIES**                                                                       |       |                             | ** **  |   |   |   |   |
| Proceeds  from Incentive Stock Plan programs                                                    | ** ** | **153**                          | ** **  | 158 |   | 198 |   |
| Net  borrowings (repayments) under revolving credit facilities                                  | ** ** | **700**                          | ** **  | 1,100 |   | (10,449 | ) |
| Borrowings  under term loans                                                                    | ** ** | **32,500**                       | ** **  | 1,500 |   | 25,983 |   |
| Repayments  of term loans                                                                       | ** ** | **(8,730**                       | **)**       | (6,696 | ) | (1,974 | ) |
| Purchase of  treasury shares, net of issuances                                                  | ** ** | **158**                          | ** **  | (237 | ) | 14 |   |
| **Net cash  provided by (used in) financing activities**                                        | ** ** | **24,781**                       | ** **  | (4,175 | ) | 13,772 |   |
|                                                                                            |       |                             | ** **  |   |   |   |   |
| Net increase  (decrease) in cash                                                                | ** ** | **961**                          | ** **  | (929 | ) | 1,007 |   |
| Cash and  cash equivalents at beginning of year                                                 | ** ** | **125**                          | ** **  | 1,054 |   | 47 |   |
|                                                                                            |       |                             | ** **  |   |   |   |   |
| **Cash and  cash equivalents at end of year**                                                   | ** ** | **$**                            | **1,086**   | ** ** | $ | 125 |   | $ | 1,054 |   |

 

See notes to consolidated financial statements

 

33

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**AIRNET SYSTEMS, INC.**

 

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUIT****Y**

 
| ** **                                                          | ** ** | ** **        | ** ** | ** **     | ** ** | ** **  | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** **  | ** ** |
|---------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|-------------|------------|--------------|------------|-------------------|------------|--------------|------------|-------------|------------|
| ** **                                                          | ** ** | **Common Shares** | ** ** | **Additional** | ** ** | ** **  | ** ** | **Other**    | ** ** | ** **        | ** ** | ** **   | ** ** |
| ** **                                                          | ** ** | **Number**        | ** ** | ** **     | ** ** | **Paid-in** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Treasury** | ** ** | ** **  | ** ** |
| **In thousands**                                                    | ** ** | **of Shares**     | ** ** | **Amount**     | ** ** | **Capital** | ** ** | **Earnings** | ** ** | **Loss**          | ** ** | **Shares**   | ** ** | **Total**   | ** ** |
|                                                                |       |              |       |           |       |        |       |         |       |              |       |         |       |        |       |
| Balance December 31,  2001                                     |       | 12,753            |       | 128            |       | $           | 77,440     |         | 27,655     |              | $          | (193         | )          | (26,083     | )          | 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          |       |
|                                                                |       |              |       |           |       |        |       |         |       |              |       |         |       |        |       |
| Balance December 31,  2002                                     |       | 12,753            |       | $              | 128        |        | $          | 77,152       |       | $                 | 29,158     |         | $          | (59         | )          | (25,583 | ) | $ | 80,796 |   |
|                                                                | ** ** | ** **        | ** ** | ** **     | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | ** **   | ** ** | ** **  | ** ** |
| Net income                                                          |       | —            |       | —         |       | —      |       | 2,780        |       | —            |       | —       |       | 2,780       |       |
| Gain on  derivative instruments, net of $16 tax expense             |       | —            |       | —         |       | —      |       | —       |       | 24                |       | —       |       | 24          |       |
| Comprehensive  income                                               |       |              |       |           |       |        |       |         |       |              |       |         |       | 2,804       |       |
|                                                                |       |              |       |           |       |        |       |         |       |              |       |         |       |        |       |
| Issuance of  treasury shares - Associate Stock Purchase Program     |       | —            |       | —         |       | (688        | )          | —       |       | —            |       | 859          |       | 171         |       |
| Sale of  Mercury Business Services                                  |       | —            |       | —         |       | —      |       | —       |       | —            |       | (536         | )          | (536        | )          |
| Repurchase  of treasury shares                                      |       | —            |       | —         |       | —      |       | —       |       | —            |       | (250         | )          | (250        | )          |
|                                                                |       |              |       |           |       |        |       |         |       |              |       |         |       |        |       |
| Tax benefit  from Wright warrants                                   |       | —            |       | —         |       | 1,295       |       | —       |       | —            |       | —       |       | 1,295       |       |
|                                                                |       |              |       |           |       |        |       |         |       |              |       |         |       |        |       |
| Balance December 31,  2003                                     |       | 12,753            |       | $              | 128        |        | $          | 77,759       |       | $                 | 31,938     |         | $          | (35         | )          | $ | (25,510 | ) | $ | 84,280 |   |
|                                                                |       |              |       |           |       |        |       |         |       |              |       |         |       |        |       |
| **Net loss**                                                        | ** ** | **—**        | ** ** | **—**     | ** ** | **—**  | ** ** | **(34,146**  | **)**      | ** **        | ** ** | **—**   | ** ** | **(34,146** | **)**      |
| **Gain on  derivative instruments, net of $19 tax expense**         | ** ** | **—**        | ** ** | **—**     | ** ** | **—**  | ** ** | **—**   | ** ** | **22**            | ** ** | **—**   | ** ** | **22**      | ** ** |
| **Comprehensive  loss**                                             | ** ** | ** **        | ** ** | ** **     | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | ** **   | ** ** | **(34,124** | **)**      |
|                                                                | ** ** | ** **        | ** ** | ** **     | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | ** **   | ** ** | ** **  | ** ** |
| **Issuance  of treasury shares - Associate Stock Purchase Program** | ** ** | **—**        | ** ** | **—**     | ** ** | **(411**    | **)**      | **—**   | ** ** | **—**        | ** ** | **566**      | ** ** | **155**     | ** ** |
| **Stock  option exercises**                                         | ** ** | **—**        | ** ** | **—**     | ** ** | **(513**    | **)**      | **—**   | ** ** | **—**        | ** ** | **668**      | ** ** | **155**     | ** ** |
| ** **                                                          | ** ** | ** **        | ** ** | ** **     |       |        | ** ** | ** **   | ** ** | ** **        | ** ** | ** **   | ** ** | ** **  | ** ** |
| Balance December 31,  2004                                     | ** ** | **12,753**        | ** ** | **$**          | **128**    | ** **  | **$**      | **76,835**   | ** ** | **$**             | **(2,208** | **)**        | **$**      | **(13**     | **)**      | **$** | **(24,276** | **)** | **$** | **50,466** | ** ** |
|                                                                     |            |                   |            |                |            |             |            |              |            |                   |            |              |            |             |            |  |  |  |  |  |  |  |  |  |

 

Seenotes to consolidated financial statements

 

34

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENT****S**

 

**1.****                                      SignificantAccounting Policies**

 

AirNet Systems, Inc. and its subsidiaries (“AirNet”, the “Company”)operate a fully integrated national air transportation network which providesdelivery service for time-critical shipments for customers in the U.S. bankingindustry and other industries requiring the express delivery of packages.  AirNet also offers passenger charter servicesand retail aviation fuel sales and related ground services for customers at itsColumbus, Ohio facility.

 

*Basis of Presentation*

 

The accompanying consolidated financial statements include the accountsof AirNet Systems, Inc. and its subsidiaries. All significant intercompany accounts and transactions have beeneliminated.

 

Preparation of the consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the amountsreported in the consolidated financial statements and accompanying notes.  Actual results could differ from thoseestimates.

 

Certain 2003 and 2002 balances have been reclassified to conform withthe 2004 presentation.

 

*Revenue Recognition*

 

Revenue on Express services and Bank services is recognized when thepackages are delivered to their destination. Revenue related to PassengerCharter services is recognized from both owned and managed aircraft in theperiod in which the charter services are completed.  Revenue on fixed based operations withinAviation services is recognized when the maintenance services are complete orfuel is delivered.

 

AirNet receives advance payments from some customers.  These advances secure space on AirNet’s airtransportation network during the period for which the payment applies.  These prepaid revenues are classified asdeferred revenue and revenue is recognized based on the number of flying dayselapsed.

 

*Cash and Cash Equivalents*

 

Cash and cash equivalents consist of highly liquid investments whichare unrestricted as to withdrawal or use, and which have an original maturityof three months or less.  Cashequivalents are stated at cost, which approximates market value.

 

*Accounts Receivable*

 

AirNet performs periodic credit evaluations of its customers’ financialcondition and generally does not require collateral.  AirNet establishes an allowance for doubtfulaccounts based upon factors surrounding the credit risks of specific customers,historical trends and other information.

 

*Inventory*

 

Inventory is valued at the lower of cost (weighted average method) ormarket.

 

*Property and Equipment*

 

Property and equipment are stated at cost.  Costs of major aircraft inspections,overhauls and engine work are capitalized as incurred and depreciated based onhours flown.  The original costs ofairframes, other flight equipment and other property and equipment (primarilyfurniture and equipment, leasehold improvements, computer related hardware andsoftware and vehicles) are depreciated based on the straight-line method overthe estimated useful lives of the assets as summarized below.  Aircraft maintenance costs not meeting AirNet’scapitalization requirements are expensed as incurred.

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

 

AirNet evaluates the remaining salvage values and depreciable lives ofits property and equipment as conditions dictate. In 2003, AirNet reduced thesalvage values and shortened the depreciable lives for its fleet of Cessna 310and Learjet 25 aircraft as a response to changes in the projected usage for itsfleet.  This change in estimate resultedin approximately $489,000 of additional depreciation expense in 2003 comparedto 2002.

 

35

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The engines of approximately 85% of AirNet’s Learjet 35 aircraftengines are covered under a Fleet Management Plan (FMP), in which AirNetprepays certain repair and overhaul costs. These prepayments, which totaled approximately $19.3 million and $12.7million at December 31, 2004 and 2003, respectively, are classified infixed assets on the consolidated balance sheet. Amortization on these prepaid balances does not begin until major engineoverhaul services have been performed, at which time the prepaid balances arereclassified into depreciable asset categories and depreciated based on hoursflown.

 

Property and equipment consisted of the following at December 31:

 
| ** **                     | ** ** | **2004**        | ** **      | **2003**    | ** ** |
|--------------------------------|------------|-----------------|-----------------|-------------|------------|
|                           |       |            |            |        |       |
| Flight  equipment              | ** ** | **$**           | **114,501,000** |        | $          | 207,469,000 |   |
| Other  property and equipment  | ** ** | **19,377,000**  |            | 17,258,000  |       |
| ** **                     |       | **133,878,000** |            | 224,727,000 |       |
| Less  accumulated depreciation | ** ** | **27,062,000**  |            | 99,625,000  |       |
| Net property  and equipment    | ** ** | **$**           | **106,816,000** |        | $          | 125,102,000 |   |

 

AirNetrecognizes impairment losses on long-lived assets used in operations inaccordance with Statement of Financial Accounting Standards (SFAS) No. 144, *“Accounting for the Impairment or Disposal of Long-Lived Assets”*(SFAS No. 144).  AirNet recognizesimpairment losses on long-lived assets used in operations when events orchanges in circumstances indicate, in management’s judgment, that the assetsmight be impaired and the undiscounted cash flows estimated to be generated bythose assets are less than the carrying value of those assets.  The net carrying value of the assets notrecoverable is reduced to fair market value if lower than carrying value.  In determining the fair market value of theassets, AirNet considers market trends, published market data, and recenttransactions involving sales of similar assets.

 

*Self-Insurance Accruals*

 

AirNet is self-insured up to certain limits for costs associated withworkers’ compensation claims and benefits paid under employee health careprograms. The measurement of these costs requires the consideration ofhistorical loss experience and judgments about the present and expected levelsof cost per claim.  AirNet accounts forthese costs primarily through measurement of claims outstanding and projectedpayments.

 

# ***Incentive Compensation Plans***

# *** ***

AirNetmaintains an incentive compensation plan with payouts tied to the achievementof company wide earnings goals and personal/departmental goals.  Incentive compensation is calculated as apercent of base pay, depending on participation levels, which vary amongmanagement and staff.  AirNet accrues forcosts related to the personal/departmental goals portion of the plan based onestimated achievement rates of set goals applied to individuals’ base payrates.

 

*Income Taxes*

 

AirNet accounts for income taxes under the liability method pursuant toSFAS 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.

 

AtDecember 31, 2004, AirNet determined that adjustments were required toAirNet’s deferred tax accounts associated with net operating loss carryforwards(NOL) and Alternative Minimum Tax Credit carryforwards (AMT).  Accounting principles generally accepted inthe United States of America require AirNet to record a valuation allowanceagainst these deferred tax assets if it is “more likely than not” that AirNetwill not be able to utilize the NOL or AMT to offset future taxes.  At December 31, 2004, AirNet hasrecorded a valuation allowance of $5.7 million to offset the deferred taxassets associated with the NOL and AMT because of the uncertainty surroundingits ability to realize such assets.

 

### *Goodwill*

### * *

AirNet adopted SFAS No. 141, *“Business Combinations”,* and SFASNo. 142, “*Goodwill and Other IntangibleAssets”*, effective January 1, 2002.  SFAS No. 141 requires business combinationscompleted after June 30, 2001, to be accounted for using the purchasemethod of accounting and changes the criteria for recording intangible assetsapart from goodwill.

 

SFAS No. 142 requires that goodwill and indefinite-lived intangibleassets no longer be amortized, but instead be evaluated for impairment on a “reportingunit” 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,

 

36

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discrete financial information is prepared and regularly reviewed bymanagement, in which case such a component business is the reporting unit.

 

The impairment test is conducted by comparing the fair value of thereporting unit, primarily determined by computing the future discounted cashflows expected to be generated by the reporting unit, with its carrying valueand if the carrying value exceeds the fair value, goodwill may potentially beimpaired.  If there is potentialimpairment, the fair value of the reporting unit is allocated to its assets andliabilities in a manner similar to a purchase price allocation in order todetermine the implied fair value of the reporting unit goodwill.  This implied fair value is then compared withthe carrying amount of the reporting unit goodwill, and if the implied fairvalue is less, an impairment loss is recognized.

 

*Financial Instruments*

 

The fair value of AirNet’s financial instruments approximated theircarrying value at December 31, 2004 and 2003.

 

*Derivatives*

 

AirNet has been party to various interest rate swap agreements withbanks as a hedge against the interest rate risk associated with borrowing atvariable rates.  These swap agreementsare accounted for as cash flow hedges. The objective of the hedge is to eliminate the variability of cash flowsin the interest rate payments on the variable rate debt.

 

In February 2002, AirNet entered into a five-year interest rateswap agreement with a bank relative to a $3.0 million term loan.  Following the effectiveness of the Amended Credit Agreement dated May28, 2004, and as discussed in Note 4, AirNet paid off three secured term loanswhich had been secured by aircraft.  Thisinterest rate swap agreement with a notional amount of $3.0 million and a fixedrate of 4.25% plus a margin based on AirNet’s funded debt ratio remains inplace.  At December 31, 2004, theaggregate fair value of the interest rate swap was approximately ($15,000).

 

AirNet accounts for it swap agreements under SFAS No. 133, *“Accounting for Derivative Instruments and Hedging Activities”*,and its amendments, SFAS Nos. 137 and 138. The statements require AirNet to recognize all derivatives on thebalance sheet at fair value.  Derivativesthat are not hedges are adjusted to fair value through income.  If the derivative is a hedge, depending onthe nature of the hedge, changes in the fair value of the derivative are eitheroffset against the change in fair value of assets, liabilities, or firmcommitments through earnings or recognized in other comprehensive income untilthe hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value isimmediately recognized in earnings.  In2004, AirNet recognized comprehensive income of approximately $30,000, net oftax, related to the swaps, compared to $24,000 of comprehensive income, net oftax, in 2003.  At December 31, 2004and 2003, the aggregate fair value of the interest rate swaps was approximately($15,000) and ($65,000), respectively, and is recorded in other liabilities onthe consolidated balance sheets.  Theineffective portion of the change in fair value is immaterial for all yearspresented.

 

*Stock-Based Compensation*

 

At December 31, 2004, AirNet had two stock-based employeecompensation plans, which are described more fully in Note 5.  AirNet has accounted for the plans under therecognition and measurement principles of 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 plans have anexercise price equal to the market value of the underlying common shares on thedate of grant.  Pro forma informationregarding net income and earnings per share is required by SFAS No. 148, *“Accounting forStock-Based Compensation – Transition and Disclosure”*(SFAS No. 148), and has beendetermined as if AirNet had accounted for its employee stock options under thefair value method of SFAS No. 123, *“Accounting for Stock-Based Compensation”*(SFAS No. 123).

 

On December 16, 2004,the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised2004), “*Share-Based Payment”*(SFAS No. 123(R)),which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB Opinion No. 25, *“Accounting for Stock Issued to Employees”*,and amends SFAS No. 95, *“Statement of Cash Flows*.*”* Generally, theapproach in SFAS No. 123(R) is similar to the approach described in SFAS No.123.  However, SFAS No. 123(R) requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized as expense in the income statement based on theirfair values.  Pro forma disclosure will nolonger be an alternative.

 

SFAS No. 123(R) must beadopted no later than the first interim or annual period beginning after June 15,2005.  AirNet expects to adopt SFAS No.123(R) on July 1, 2005.  SFAS No.123(R) permits companies to adopt its requirements using one of two methods:

 

1.               A“modified prospective” method in which compensation cost is recognizedbeginning with the effective date (a) based on the requirements of SFAS No.123(R) for all share-based payments granted after the effective date and (b)based on the requirements of SFAS No. 123 for all awards granted to employeesprior to the effective date of SFAS No. 123(R) that remain unvested on theeffective date.

 

37

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2.               A“modified retrospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restatefinancial statements based on the amounts previously recognized under SFAS No.123 for purposes of pro forma disclosures either (a) all prior periodspresented or (b) prior interim periods of the year of adoption.

 

AirNet plans to adopt SFASNo. 123(R) using the modified prospective method.  The impact of adoption of SFAS No. 123(R)cannot be predicted at this time because it will depend on levels ofshare-based payments granted in the future. However, had we adopted SFAS No.123(R) in prior periods, the impact of that standard would have approximatedthe impact of SFAS No. 123 as described in the disclosure of pro forma netincome (loss) and net income (loss) per share below.  AirNet does not anticipate that adoption ofSFAS No. 123(R) will have a material impact on its results of operations or itsfinancial position.  However, SFAS No. 123(R) also requires that thebenefits of tax deductions in excess of recognized compensation cost bereported as a financing cash flow, rather than as an operating cash flow. This requirement will reduce net operating cash flows and increase netfinancing cash flows in periods after the effective date.  While AirNetcannot estimate what those amounts will be in the future (because they dependon, among other things, when employees exercise stock options), the amount ofoperating cash flows recognized in prior periods for such excess tax deductionswere not material.

 

AirNet adopted thefair-value-based method of accounting for share-based payments effective January 1,2003 using the “modified prospective method” described in SFAS No. 148.  Currently, AirNet uses the Black-Scholesoption pricing model to estimate the value of stock options granted toemployees for purposes of computing the pro forma disclosures required by SFASNo. 123.

 

The fair value of these options was estimated at the date of grantusing the Black-Scholes option pricing model with the following weightedaverage assumptions for the years ended December 31:

 
| ** **                                                                 | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk free  interest rate                                                   | ** ** | **4.83** | **%**      | 4.00     | %          | 4.75     | %          |
| Volatility  factor of expected market price of AirNet’s common shares | ** ** | **48.8** | **%**      | 65.4     | %          | 55.3     | %          |
| Weighted  average expected life of options (years)                         | ** ** | **4.59** | ** ** | 4.81     |       | 5.30     |       |

 

The weighted average fair value of options granted was$2.15, $2.37 and $4.21 in the years ended December 31, 2004, 2003 and2002, respectively.

 

The following table illustrates the effect on netincome (loss) and net income (loss) per share if AirNet had applied the fairvalue recognition provisions of SFAS No. 123 to stock-based employeecompensation.

 
| ** **                                                                                                                                         | ** ** | **Year Ended December 31** | ** **      |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|-----------------|
| ** **                                                                                                                                         | ** ** | **2004**                        | ** **      | **2003** | ** ** | **2002** | ** ** |
|                                                                                                                                               |       |                            |            |   |   |   |   |
| Net income  (loss), as reported                                                                                                                    | ** ** | **$**                           | **(34,146,000** | **)** | $ | 2,780,000 |   | $ | 1,503,000 |   |
|                                                                                                                                               | ** ** | ** **                      | ** **      |   |   |   |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects | ** ** | **(185,000**                    | **)**           | (132,000 | ) | (398,000 | ) |
|                                                                                                                                               | ** ** | ** **                      | ** **      |   |   |   |   |
| Pro forma  net income (loss)                                                                                                                       | ** ** | **$**                           | **(34,331,000** | **)** | $ | 2,648,000 |   | $ | 1,105,000 |   |
|                                                                                                                                               |       |                            | ** **      |   |   |   |   |
| Net income  (loss) per common share – basic and diluted:                                                                                      |       |                            | ** **      |   |   |   |   |
| As reported                                                                                                                                        | ** ** | **$**                           | **(3.39**       | **)** | $ | .28 |   | $ | .15 |   |
| Pro forma                                                                                                                                          | ** ** | **$**                           | **(3.41**       | **)** | $ | .26 |   | $ | .11 |   |

 

*Supplemental Cash Flow Data*

 

Cash paid for interest was $2,414,000, $1,584,000, and $1,433,000 forthe years ended December 31, 2004, 2003, and 2002, respectively.  At December 31, 2004, AirNet capitalizedapproximately $0.1 million in interest related to the construction of its newRickenbacker office and hangar facility. AirNet paid $208,000, $459,000, and $1,216,000 and received $62,000,$1,332,000, and $51,000 for the years ended December 31, 2004, 2003, and2002, respectively, related to income taxes.

 

38

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**2.****                                      Impairmentof Property and Equipment and Goodwill**

 

AirNetrecognizes impairment losses on long-lived assets used in operations inaccordance with SFAS No. 144 “*Accounting for theImpairment or Disposal of Long-Lived Assets”* (SFAS No. 144).  AirNet recognizes impairment losses onlong-lived assets used in operations when events or changes in circumstancesindicate, in management’s judgment, that the assets might be impaired and theundiscounted cash flows estimated to be generated by those assets are less thanthe carrying value of those assets.  Thenet carrying value of the assets not recoverable is reduced to fair marketvalue if lower than carrying value.  Indetermining the fair market value of the assets, AirNet considers markettrends, published market data, and recent transactions involving sales ofsimilar assets.

 

AirNet’slong-lived assets used in its cargo operations, consisting primarily ofaircraft, spare parts and related goodwill, were determined to be impaired at September 30,2004.  This determination was made as aresult of recent industry trends in the adoption of electronic paymentalternatives and evolving electronic alternatives to the physical movement ofcancelled checks at a more rapid pace than previously anticipated by the industry.  AirNet believes that the effectiveness of theCheck 21 Act in October 2004 will contribute to this trend.  Furthermore, recent market data and otherdisclosures by the Federal Reserve confirm the accelerating decline incancelled check volume.  AirNet’s cargoairline was originally designed, and continues to operate, primarily to meetthe needs of Bank Services customers.  Inthe third quarter of 2004, AirNet concluded that its airline capacity willexceed future demand, creating an impairment of the aircraft and relatedassets. The impairment also reflects the overall decline in the market valuesof the aircraft in its cargo fleet which have not recovered as in previouseconomic cycles.  AirNet determined that theexpected future undiscounted cash flows from its assets used in its Delivery Servicesoperations were less than the carrying value of those assets and wereimpaired.  Accordingly, a non-cashimpairment charge of $43.0 million was recorded on September 30, 2004,using estimated aircraft fair values.

 

Under SFAS No. 142, *“Goodwill and Other Intangible Assets”,* AirNet evaluates its goodwill for impairment annually, or more frequently if changes in circumstances indicate impairment may have occurred sooner.  AirNet determined that as a result of the impairment of its long-lived assets used in its Delivery Services operations, the remaining goodwill assigned to the Delivery Services operations should be evaluated for potential impairment.  AirNet evaluates the fair value of its goodwill related to its Delivery Services operations based upon a discounted future cash flow analysis.  As a result of the impairment test, AirNet determined that its goodwill was impaired at September 30, 2004, and, accordingly, a non-cash impairment charge of $4.0 million was recorded.

 

Followingis a progression of goodwill for the years ended December 31:

 
| ** **                   | ** ** | **2004**       | ** **    | **2003** | ** ** |
|------------------------------|------------|----------------|---------------|----------|------------|
|                         | ** ** | ** **     |          |     |       |
| Balance at January 1,   | ** ** | **$**          | **4,018,000** |     | $          | 4,018,000 |   |
| Goodwill  acquired           | ** ** | **—**     |          | —   |       |
| Impairment  loss             | ** ** | **(4,018,000** | **)**         | —   |       |
| Balance at December 31, | ** ** | **$**          | **0**         |     | $          | 4,018,000 |   |

 

AirNet adopted SFAS No. 142 as of January 1, 2002.  AirNet performed the transitional goodwillimpairment test using the two-step process prescribed in SFAS No. 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. AirNet performed the first of the required transitional goodwillimpairment tests in the second quarter of 2002. AirNet performed the second ofthe required transitional goodwill impairment tests in the fourth quarter of2002.  Under SFAS No. 142, an impairmentcharge resulting from the transitional impairment tests was reflected as thecumulative effect of a change in accounting principle in the first quarter of2002.  Based on the results of itstransitional goodwill impairment test, AirNet recognized an impairment loss,net of tax, of $1,868,000, for goodwill related to the Mercury BusinessServices unit as a cumulative effect of a change in accounting principle in thefirst quarter of 2002.

 

**3.****                                      SegmentReporting**

 

AirNetoperates a fully integrated national air transportation network and hasdetermined that its reportable segments are based on AirNet’s methods ofinternal reporting and management structure. The Company’s reportable segments are Delivery Services, which providesdelivery service of time-critical shipments for Bank customers and otherExpress customers, and Passenger Charter Services.  AirNet evaluates segment performance based onseveral factors, of which the primary financial measure is contributionmargin.  Contribution margin representsthe net revenues of the reporting segment less costs and expenses directlyassociated with the reporting segments. The most significant difference between contribution margin and income(loss) from operations is selling, general and administrative expenses that arenot directly associated with a reporting segment.  The accounting policies used for segmentreporting are the same as those described in the summary of SignificantAccounting Policies used for consolidated reporting.  There were no material

 

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amountsof revenues or transfers between reportable segments.  Financial information for the fiscal yearended December 31 by business segment follows:

 
| ** **                      | ** ** | **2004**       | ** **      | **2003**   | ** ** | **2002**    | ** ** |
|---------------------------------|------------|----------------|-----------------|------------|------------|-------------|------------|
| **Net  Revenues**               |       |           |            |       |       |        |       |
| Delivery  Services              | ** ** | **$**          | **155,213,000** |       | $          | 140,362,000 |       | $ | 136,584,000 |   |
| Passenger  Charter Services     | ** ** | **18,494,000** |            | 7,599,000  |       | 4,316,000   |       |
| ** **                      |       | **$**          | **173,707,000** |       | $          | 147,961,000 |       | $ | 140,900,000 |   |
|                            |       |           |            |       |       |        |       |
| **Contribution  Margin (Loss)** |       |           |            |       |       |        |       |
| Delivery  Services              | ** ** | **$**          | **(32,838,000** | **)**(1)   | $          | 14,814,000  |       | $ | 15,322,000 |   |
| Passenger  Charter Services     | ** ** | **2,858,000**  |            | 1,260,000  |       | 205,000     |       |
| ** **                      |       | **$**          | **(29,980,000** | **)**      | $          | 16,074,000  |       | $ | 15,527,000 |   |
|                            |       |           |            |       |       |        |       |
| **Depreciation  expense**       |       |           |            |       |       |        |       |
| Delivery  Services              | ** ** | **$**          | **16,565,000**  |       | $          | 15,752,000  |       | $ | 15,779,000 |   |
| Passenger  Charter Services     | ** ** | **1,887,000**  |            | 548,000    |       | 393,000     |       |
| ** **                      |       | **$**          | **18,452,000**  |       | $          | 16,300,000  |       | $ | 16,172,000 |   |
|                            |       |           |            |       |       |        |       |
| **Total  Assets**               |       |           |            |       |       |        |       |
| Delivery  Services              | ** ** | **$**          | **78,690,000**  |       | $          | 118,588,000 |       | $ | 116,388,000 |   |
| Passenger  Charter Services     | ** ** | **44,120,000** |            | 20,332,000 |       | 14,238,000  |       |
| ** **                      |       | **$**          | **122,810,000** |       | $          | 138,920,000 |       | $ | 130,626,000 |   |
|                            |       |           |            |       |       |        |       |
| **Capital  Expenditures**       |       |           |            |       |       |        |       |
| Delivery  Services              | ** ** | **$**          | **18,736,000**  |       | $          | 17,079,000  |       | $ | 20,559,000 |   |
| Passenger  Charter Services     | ** ** | **25,754,000** |            | 7,029,000  |       | 9,223,000   |       |
| ** **                      |       | **$**          | **44,490,000**  |       | $          | 24,108,000  |       | $ | 29,782,000 |   |

 

----

*(1) Included in Delivery Services for 2004 are a $43.0 million assetimpairment charge and a $4.0 million goodwill impairment charge recorded in thethird quarter 2004.*

 

Areconciliation of reportable segment net revenues to consolidated revenuesfollows:

 
| ** **                       | ** ** | **2004**      | ** **      | **2003**  | ** ** | **2002**    | ** ** |
|----------------------------------|------------|---------------|-----------------|-----------|------------|-------------|------------|
| Reportable  segment net revenues | ** ** | **$**         | **173,707,000** |      | $          | 147,961,000 |       | $ | 140,900,000 |   |
| Aviation  services and other     | ** ** | **1,243,000** |            | 1,261,000 |       | 1,044,000   |       |
| Consolidated  total net revenues | ** ** | **$**         | **174,950,000** |      | $          | 149,222,000 |       | $ | 141,944,000 |   |

 

Areconciliation of reportable segment contribution margin (loss) to consolidatedincome (loss) from operations follows:

 
| ** **                                                                                 | ** ** | **2004**        | ** **      | **2003**    | ** ** | **2002**    | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------|-----------------|-------------|------------|-------------|------------|
| Reportable  segment contribution margin (loss)                                             | ** ** | **$**           | **(29,980,000** | **)**       | $          | 16,074,000  |       | $ | 15,527,000 |   |
| Total  selling, general and administrative costs                                           | ** ** | **(18,860,000** | **)**           | (17,032,000 | )          | (14,004,000 | )          |
| Direct selling  and administrative expenses included in segment contribution margin (loss) | ** ** | **8,227,000**   | ** **      | 7,189,000   |       | 6,185,000   |       |
| Income  (loss) from operations                                                             | ** ** | **$**           | **(40,613,000** | **)**       | $          | 6,231,000   |       | $ | 7,708,000 |   |

 

Areconciliation of reportable segment depreciation expense to consolidateddepreciation expense follows:

 
| ** **                               | ** ** | **2004**      | ** **     | **2003**  | ** ** | **2002**   | ** ** |
|------------------------------------------|------------|---------------|----------------|-----------|------------|------------|------------|
| Reportable  segment depreciation         | ** ** | **$**         | **18,452,000** |      | $          | 16,300,000 |       | $ | 16,172,000 |   |
| Corporate  depreciation                  | ** ** | **1,061,000** |           | 1,235,000 |       | 1,527,000  |       |
| Consolidated  total depreciation expense | ** ** | **$**         | **19,513,000** |      | $          | 17,535,000 |       | $ | 17,699,000 |   |

 

40

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Areconciliation of reportable segment assets to consolidated total assetsfollows:

 
| ** **                 | ** ** | **2004**       | ** **      | **2003**   | ** ** | **2002**    | ** ** |
|----------------------------|------------|----------------|-----------------|------------|------------|-------------|------------|
| Reportable  segment assets | ** ** | **$**          | **122,810,000** |       | $          | 138,920,000 |       | $ | 130,626,000 |   |
| Corporate  assets          | ** ** | **14,660,000** |            | 14,353,000 |       | 16,698,000  |       |
| Consolidated  total assets | ** ** | **$**          | **137,470,000** |       | $          | 153,273,000 |       | $ | 147,324,000 |   |

 

**4.****                                      NotesPayable**

 

AirNet had borrowings as follows at December 31:

 
| ** **                          | ** ** | **2004**       | ** **     | **2003**   | ** ** |
|-------------------------------------|------------|----------------|----------------|------------|------------|
| Term notes                          | ** ** | **$**          | **42,745,000** |       | $          | 18,976,000 |   |
| Revolving  credit facility          | ** ** | **19,500,000** |           | 18,800,000 |       |
| ** **                          |       | **62,245,000** |           | 37,776,000 |       |
| Current  portion of notes payable   | ** ** | **3,076,000**  |           | 5,256,000  |       |
| Long-term  portion of notes payable | ** ** | **$**          | **59,169,000** |       | $          | 32,520,000 |   |

 

*Term Notes and Revolving Credit Facility*

 

In September 2002,AirNet entered into a $35 million unsecured revolving credit facility and afive-year $20.0 million unsecured term loan (collectively, the “CreditAgreement”).  The term loan requiresquarterly installments of $1.0 million beginning in December 2002 and continuingthrough September 30, 2007. As of December 31, 2003, there was $6.5 million available under thecredit facility.  The revolving credit facility under the Credit Agreement was originallyscheduled to expire on September 30, 2005 and the secured term loan was tomature on September 30, 2007.

 

On May 28, 2004, AirNet andits lenders amended the terms and conditions of the Credit Agreement (the “AmendedCredit Agreement”). The Amended Credit Agreement was further amended by theFirst Change in Terms Agreement and the Second Change in Terms Agreement asdescribed below.  The Amended CreditAgreement is secured by a first lien on all of the property of AirNet and itssubsidiaries, other than any interest in real estate and certain excluded fixedassets.  AirNet also pledged the stockand interests of its subsidiaries to secure the loans under the Amended CreditAgreement, and each of AirNet’s subsidiaries guaranteed AirNet’s obligationsunder the Amended Credit Agreement.  TheAmended Credit Agreement permits AirNet and its subsidiaries to incur otherindebtedness for the purpose of purchasing or refinancing aircraft and relatedtangible fixed assets, subject to certain annual limitations.  The Amended Credit Agreement containslimitations on operating leases, indebtedness, significant corporate changesincluding mergers and sales of assets, investments in subsidiaries andacquisitions, liens, capital expenditures, transactions with affiliates, salesof accounts receivable, sale and leaseback transactions and other off-balancesheet liabilities, contingent obligations and hedging transactions. The AmendedCredit Agreement also contains certain financial covenants that require AirNetto maintain a minimum consolidated tangible net worth and to not exceed certainfixed charge coverage and leverage ratios specified in the Amended CreditAgreement.

 

The Amended Credit Agreementprovides for a secured revolving credit facility of up to $35.0 million and asecured term loan in the aggregate amount of $14.0 million.  The amount of revolving loans available underthe Amended Credit Agreement is limited to a borrowing base equal to theaggregate of 80% of eligible accounts receivable, plus 50% of eligibleinventory, plus 70% of the market value of certain fixed assets, reduced by theaggregate amount of AirNet’s outstanding letters of credit.  The Amended Credit Agreement bears interest,at AirNet’s option, at (a) a fixed rate equal to LIBOR plus a margin determinedby AirNet’s leverage ratio as defined in the Amended Credit Agreement, or (b) afloating rate based on the greater of the sum of (i) the prime rate establishedby The Huntington National Bank from time to time plus a margin determined byAirNet’s leverage ratio and (ii) the sum of 0.5% plus the federal funds rate ineffect from time to time.  At December 31,2004, as a result of the various timing and duration of short-term debtmaturities, the interest rate was between 4.5% and 5.5%.

 

As of December 31, 2004,$19.5 million and $11.0 million were outstanding under the secured revolvingcredit facility and secured term loan, respectively.  In addition, AirNet had $1.7 million inletters of credit outstanding on such date related to insurance programs, whichreduced the amount available under the revolving credit facility.  After giving effect to the Second Change inTerms Agreement discussed below, AirNet had approximately $8.8 millionavailable to borrow on its secured revolving credit facility as of December 31,2004.

 

As a result of the impairmentcharge recorded in September 2004 as described in Note 2, AirNet was notin compliance with the fixed charge coverage ratio and the leverage ratiocalculated as of September 30, 2004, and AirNet would not have been incompliance with the minimum consolidated tangible net worth requirement as of December 31,2004.  On November 12, 2004, AirNetand its lenders under the Amended Credit Agreement agreed to modify the termsand conditions of the Amended Credit Agreement (the “First Change in TermsAgreement”).  The First Change in TermsAgreement modified the fixed charge coverage ratio, the leverage ratio, and theminimum consolidated tangible net worth

 

41

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financial covenants in such amanner that, on a going-forward basis, the impairment charge, in and of itself,would not cause a default of these financial covenants in the future.  At the same time as the First Change of TermsAgreement was entered into, AirNet and its lenders executed a waiver of anydefaults or potential defaults under the Amended Credit Agreement whichoccurred, or may have occurred, as a result of AirNet’s failure to comply withthe foregoing financial covenants due to the impairment charge.

 

On March 24, 2005,AirNet and its lenders entered into a “Second Change in Terms Agreement” thatfurther modified the terms and conditions of the Amended Credit Agreement.  In accordance with the Second Change in TermsAgreement, AirNet prepaid in full the remaining $11.0 balance outstanding onits secured term loan.  Upon theprepayment of the term loan, the term loan portion of the Amended CreditAgreement was terminated.  In addition,the revolving credit facility under the Amended Credit Agreement was reducedfrom $35.0 million to $30.0 million.  Inthe event AirNet secures permanent financing on all or a portion of itsRickenbacker Facility, the revolving credit facility will be reduced from $30.0million to $25.0 million.  Under theSecond Change in Term Agreement, the term of the revolving credit facility wasextended from September 30, 2005 to October 15, 2006.  The December 31, 2004 Balance Sheet gives effectto the Second Change in Terms Agreement entered into on March 24, 2005.  The Second Change in Terms Agreement alsoprovided for the release of certain fixed assets that were securing the loansunder the Amended Credit Facility and modified certain other financialcovenants.

 

*Other Term Notes*

 

On March 24, 2005,AirNet entered into a three-year term loan totaling $11.0 million with a fixedinterest rate of 8.12%.  This term loanis secured by seven Cessna Caravans and nine LearJet 35’s from AirNet’s cargoaircraft fleet with a combined net book value as of December 31, 2004 ofapproximately $19.9 million.  Theaircraft securing this loan were released from the collateral securing theloans under Amended Credit Agreement in accordance with the Second Change inTerms Agreement.  The proceeds from thisterm loan were used to prepay in full AirNet’s term loan under the AmendedCredit Facility as described above.  TheDecember 31, 2004 Balance Sheet reflects the reclassification of approximately $22.4million from current to long term notes payable as a result of the extension ofthe Amended Credit Facility under the Second Change in Terms Agreement and thefinancing of the cargo aircraft described above.

 

During thesecond quarter of 2004, Jetride entered into four seven-year term loanstotaling $22.5 million with fixed interest rates of approximately 6.7%.  In July 2004, Jetride financed two additionalpassenger charter Learjet 60’s for the Passenger Charter fleet at $5.0 millioneach with fixed rates of approximately 6.5% for a total of $32.5 million infinancing related to AirNet’s Passenger Charter services.  As of December 31, 2004, there was $31.7million outstanding under all six loans. These term loans are secured by aircraft used in the Passenger Charterfleet with a net book value of $40.0 million at December 31, 2004.  Each of the term loans is guaranteed byAirNet.  AirNet incurred $1.2 million ininterest expense in 2004 related to the financing of the nine Passenger Charteraircraft under all six loans.

 

Aggregate future maturities of long-term debt as of December 31,2004 are as follows:

 
| 2005       |   | $          | 3,076,000  |   |
|------------|--------|------------|------------|--------|
| 2006       |   | 23,352,000 |       |
| 2007       |   | 4,144,000  |       |
| 2008       |   | 8,543,000  |       |
| 2009       |   | 2,472,000  |       |
| Thereafter |   | 20,658,000 |       |
|       |   | $          | 62,245,000 |   |

 

AirNet also maintains standby letters of credit totaling $1,700,000with a bank related to its insurance policy agreements.

 

**5.****                                      IncentiveStock Plans**

 

On June 4, 2004, the shareholders of AirNet Systems, Inc. approvedthe AirNet Systems, Inc. 2004 Stock Incentive Plan (the “2004 Plan”), foremployees of AirNet and its subsidiaries and non-employee directors ofAirNet.  The 2004 Plan authorizes thegranting of incentive and non-qualified stock options, restricted stock, stockappreciation rights, and performance shares to be paid in common shares andperformance units to be paid in cash (collectively, “2004 Plan Awards”).  In addition, the 2004 Plan provides for thegranting of options to purchase common shares of AirNet Systems, Inc. at up toa 15% discount through payroll deductions by employees of AirNet and itssubsidiaries (the “2004 Stock Purchase Program”).  The maximum number of common shares availablefor issuance under the 2004 Plan is 1,000,000. The 2004 Plan is administered by the Compensation Committee of the Boardof Directors, which determines the terms and conditions applicable to the 2004Plan Awards, other than options automatically granted to non-employee directorsin accordance with the terms of the 2004 Plan. The Compensation Committee also has the authority to establishadministrative rules and regulations regarding the term of each offering underthe 2004 Stock Purchase Plan.  No 2004Plan Awards have been granted.  In 2004, 17,153common shares were issued under the 2004 Stock Purchase Program to AirNetemployees.

 

In 1996, AirNet Systems, Inc. adopted the AirNet Systems, Inc. 1996Incentive Stock Plan (as amended and restated, the “1996 Plan”).  The 1996 Plan authorizes the granting ofincentive and non-qualified stock options, restricted stock and performanceawards (collectively, “1996 Plan Awards”). In addition, the 1996 Plan provides for the granting of options topurchase common shares of AirNet Systems, Inc. at up to a 15% discount throughpayroll deductions by employees of AirNet and its subsidiaries (the “1996 StockPurchase Program”).  The 1996 Plan alsoprovides for the grant of non-qualified stock options to non-employeedirectors.  The maximum number of commonshares available for issuance under the 1996 Plan is 1,650,000.  The 1996 Plan is administered by theCompensation Committee of the Board of Directors, which determines the termsand conditions applicable to the 1996 Plan Awards, other than options automaticallygranted to non-employee directors in accordance with the terms of the 1996Plan.  The exercise price of each optionhas been equal to the

 

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fair 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.  Subsequent to the adoptionof the 2004 Plan, no additional 1996 Plan Awards will be made under the 1996Plan.

 

A summary of AirNet’s option activity and related information follows(in thousands, except remaining contractual life and price per share data) forthe years ended December 31:

 
| ** **                            | ** ** | **2004**           | ** ** | **2003**                               | ** ** | **2002**           | ** ** |
|---------------------------------------|------------|--------------------|------------|----------------------------------------|------------|--------------------|------------|
| ** **                            | ** ** | **Common  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Common  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Common  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                                  |       |               |       |                                   |       |               |       |   |   |   |   |   |   |
| Outstanding  at beginning of period   |       | 1,014              |       | $                                      | 8.52       |               | 1,045      |   | $ | 9.55 |   | 1,029 |   | $ | 10.05 |   |
| Granted                               |       | 206                |       | 4.11                                   |       | 132                |       | 4.32 |   | 102 |   | 7.78 |   |
| Exercised                             |       | (41                | )          | 3.79                                   |       | —             |       | — |   | (3 | ) | 5.24 |   |
| Cancelled                             |       | (171               | )          | 7.56                                   |       | (163               | )          | 11.90 |   | (83 | ) | 13.33 |   |
| Outstanding  at end of period         |       | 1,008              |       | 7.99                                   |       | 1,014              |       | 8.52 |   | 1,045 |   | 9.58 |   |
|                                  |       |               |       |                                   |       |               |       |   |   |   |   |   |   |
| Options  exercisable at end of period |       | 747                |       | $                                      | 9.20       |               | 787        |   | $ | 9.50 |   | 790 |   | $ | 10.63 |   |

 

The following summarizes information about options outstanding (inthousands, except remaining contractual life and price per share data) as of December 31,2004:

 
| **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  $5.00              |       | 414                    |       | 7.9                                                       |       | $                                      | 4.12       |                    | 175        |   | $ | 4.06 |   |
| $5.01-$10.00                  |       | 383                    |       | 4.5                                                       |       | 8.40                                   |       | 361                     |       | 8.41 |   |
| $10.01-$15.00                 |       | 168                    |       | 1.6                                                       |       | 14.16                                  |       | 168                     |       | 14.16 |   |
| $15.01-$20.00                 |       | 43                     |       | 3.6                                                       |       | 17.44                                  |       | 43                      |       | 17.44 |   |
| $20.01-$25.00                 |       | 1                      |       | 3.4                                                       |       | 22.00                                  |       | 1                       |       | 22.00 |   |
|                          |       | 1,009                  |       | 5.4                                                       |       | $                                      | 7.99       |                    | 748        |   | $ | 9.20 |   |

 

AirNet’s stock purchase program, which is part of the 1996 Plan and the2004 Plan, allows eligible employees the opportunity to acquire common sharesof AirNet at up to a 15% discount through payroll deductions.  AirNet issued 35,914, 39,597, and 26,552common shares respectively during 2004, 2003, and 2002 from treasury sharesunder the stock purchase program.

 

**6.****                                      LeaseObligations**

 

AirNet leases facility space and courier vehicles at various locationsthroughout the United States.  Inaddition, in 2002, AirNet entered into operating leases for four Cessna Caravan208 aircraft each with a lease term of three years and two Cessna Caravan 208Baircraft, one with a lease term of 3.5 years and one with a lease term of 4.5years.  The three-year lease terms weresubsequently extended an additional year. AirNet incurred lease expense of $3,439,000, $4,131,000, and $3,747,000for the years ended December 31, 2004, 2003 and 2002, respectively.  As of December 31, 2004, future minimumlease payments by year and in the aggregate under non-cancelable operatingleases with initial or remaining terms exceeding one year are as follows:  2005 - $912,000; 2006 - $384,000; 2007 -$104,000; 2008 - $78,000; 2009 - $78,000.

 

Concurrentlywith the sale of AirNet’s Port Columbus Facility in December 2004, AirNetentered into the New Port Columbus Lease. Pursuant to the New Port Columbus Lease, AirNet will lease the realproperty associated with the Port Columbus Facility and the buildings and allother improvements thereon pending completion of the construction of AirNet’snew office and hangar facility at Rickenbacker. The term of the New Port Columbus Lease commenced on December 15,2004 and

 

43

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willterminate on the earlier to occur of (i) the date AirNet moves into theRickenbacker Facility or (ii) August 31, 2005.  The New Port ColumbusLease will be rent free until May 15, 2005 and commencing May 16, 2005, therent will be $30,000 per month.  The New Port Columbus Lease is a netlease under which AirNet is responsible for all costs of operating the PortColumbus Facility.  This transaction is aminor sale-leaseback, as the present value of the rental payments is less than10% of the property’s fair value; therefore, AirNet recorded a gain on the saleof $0.3 million in 2004.  AirNet intendsto move its operations at the Port Columbus Facility as well as itsadministrative functions to the Rickenbacker Facility during the second quarterof 2005.

 

**7.****                                      RelatedParty Transactions**

 

During 2001, the Board of Directors approved a retirement agreementwith Gerald G. Mercer, Founder and former Chairman, of AirNet Systems,Inc.  As contemplated by the retirementagreement, Mr. Mercer retired as Chairman and a Director effective August 3,2001.  Under the terms of the retirementagreement, Mr. Mercer had the option to sell up to $250,000 of AirNet Systems,Inc. common shares each quarter of 2002 to AirNet based on then current marketprices.  Mr. Mercer exercised his optionand, effective January 2, 2003, sold 52,410 AirNet Systems, Inc. commonshares to AirNet at a total cost of $249,996.

 

Also under the terms of his retirement agreement, Mr. Mercer retainedhis rights to sell his remaining AirNet common shares to private investors atany time in accordance with the applicable laws.  On or about December 26, 2002, Mr.Mercer sold an aggregate of 733,200 common shares to seven separate investorsin privately negotiated transactions.  OnDecember 24, 2002, he made a gift of 256,800 common shares to Spring HillCamps, which sold those common shares to three separate investors, one of whichalso purchased common shares from Mr. Mercer, in privately negotiatedtransactions.  In connection with and asa condition to the investors’ consummating those transactions, AirNet grantedregistration rights with respect to the 990,000 common shares collectivelypurchased by these investors from Mr. Mercer or Spring Hill Camps andregistered the common shares in 2003.

 

**8.****                                      RetirementPlan**

 

AirNet has a 401(k) retirement savings plan.  All associates who have completed a minimumof one month of service may contribute up to 60% of their eligible annualearnings to the 401(k) retirement savings plan. AirNet may elect, at its discretion, to make matching and profit-sharingcontributions.  AirNet’s contributionexpense related to the 401(k) retirement savings plan totaled $626,000, $519,000, and $481,000 for theyears ended December 31, 2004, 2003, and 2002, respectively.

 

**9.****                                      IncomeTaxes**

 

Income taxes are summarized as follows for the years ended December 31:

 
| ** **       | ** ** | **2004**       | ** **     | **2003**  | ** ** | **2002**   | ** ** |
|------------------|------------|----------------|----------------|-----------|------------|------------|------------|
| Current:         |       |           |           |      |       |       |       |
| Federal          | ** ** | **$**          | **—**     |      | $          | (1,227,000 | )          | $ | 1,751,000 |   |
| State and  local | ** ** | **195,000**    |           | 295,000   |       | 431,000    |       |
| ** **       |       | **195,000**    |           | (932,000  | )          | 2,182,000  |       |
| Deferred:        |       |           |           |      |       |       |       |
| Federal          | ** ** | **(8,518,000** | **)**          | 2,978,000 |       | 341,000    |       |
| State and local  | ** ** | **(612,000**   | **)**          | 57,000    |       | (94,000    | )          |
| ** **       |       | **(9,130,000** | **)**          | 3,035,000 |       | 247,000    |       |
| ** **       |       | **$**          | **(8,935,000** | **)**     | $          | 2,103,000  |       | $ | 2,429,000 |   |

 

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Significant components of AirNet’s deferred tax liabilities and assetsare as follows at December 31:

 
| ** **                                     | ** ** | **2004**       | ** **     | **2003**    | ** ** |
|------------------------------------------------|------------|----------------|----------------|-------------|------------|
| Long-term  deferred tax asset:                 |       |           | ** **     |        |       |
| Alternative  minimum tax credit carryforwards  | ** ** | **$**          | **3,100,000**  | ** **  | $          | 3,621,000 |   |
| Net  operating loss carryforward               | ** ** | **2,600,000**  | ** **     | —      |       |
| Other                                          | ** ** | **175,000**    | ** **     | 188,000     |       |
| Valuation  Allowance                           | ** ** | **(5,700,000** | **)**          | —      |       |
| Long-term  deferred tax liabilities:           | ** ** | ** **     | ** **     |        |       |
| Property and  equipment                        | ** ** | **(6,767,000** | **)**          | (19,968,000 | )          |
| Other                                          | ** ** | **(676,000**   | **)**          | (230,000    | )          |
| Net  long-term deferred tax liabilities        | ** ** | **$**          | **(7,268,000** | **)**       | $          | (16,389,000 | ) |
|                                           |       |           | ** **     |        |       |
| Current  deferred tax assets:                  |       |           | ** **     |        |       |
| Workers’ compensation  reserves           | ** ** | **$**          | **405,000**    | ** **  | $          | 494,000 |   |
| Allowance  for bad debt reserves               | ** ** | **345,000**    | ** **     | 204,000     |       |
| Other                                          | ** ** | **257,000**    | ** **     | 153,000     |       |
| Total  current deferred tax assets             | ** ** | **1,007,000**  | ** **     | 851,000     |       |
|                                           |       |           | ** **     |        |       |
| Current  deferred tax liabilities:             |       |           | ** **     |        |       |
| Prepaid  expenses                              | ** ** | **(795,000**   | **)**          | (828,000    | )          |
| Other                                          | ** ** | **(25,000**    | **)**          | (27,000     | )          |
| Total  current deferred tax liabilities        | ** ** | **(820,000**   | **)**          | (855,000    | )          |
| Net current  deferred tax assets (liabilities) | ** ** | **$**          | **187,000**    | ** **  | $          | (4,000 | ) |

 

Differencesarising between the provision (benefit) for income taxes and the amountcomputed by applying the statutory federal income tax rate to income beforeincome taxes are as follows for the years ended December 31:

 
| ** **                                                         | ** ** | **2004**       | ** **      | **2003**  | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------|------------|----------------|-----------------|-----------|------------|----------|------------|
| Tax expense  (benefit) at federal statutory rate on pre-tax income | ** ** | **$**          | **(14,648,000** | **)**     | **34.0**   | **%**    | $          | 1,663,000 |   | 34.0 | % | $ | 2,069,000 |   | 34.0 | % |
| Add:                                                               |       |           |            |      | ** ** |     |       |   |   |   |   |   |   |
| State taxes,  net of federal benefit                               | ** ** | **(1,733,000** | **)**           | **4.0**   | ** ** | 311,000  |       | 6.4 |   | 220,000 |   | 3.6 |   |
| Non-deductible  permanent differences                              | ** ** | **1,746,000**  | ** **      | **(4.0**  | **)**      | 129,000  |       | 2.6 |   | 140,000 |   | 2.5 |   |
| Change in  Valuation Allowance                                     | ** ** | **5,700,000**  | ** **      | **(13.0** | **)**      | —   |       | 0.0 |   | — |   | 0.0 |   |
| Total taxes                                                        | ** ** | **$**          | **(8,935,000**  | **)**     | **21.0**   | **%**    | $          | 2,103,000 |   | 43.0 | % | $ | 2,429,000 |   | 40.1 | % |

 

Inconnection with the 1996 repurchase and cancellation of the Donald WrightWarrant, AirNet recognized a related tax benefit estimated to be $7.0 millionbased upon management’s judgment and estimation of the portion of the DonaldWright Warrant which would be deductible for income tax purposes.  This tax benefit was recognized as additionalpaid-in capital on AirNet’s consolidated balance sheet and has had no effect onAirNet’s consolidated statement of operations. During the third quarter 2003, this matter was partially resolved andAirNet has realized tax deductions related to this transaction in excess ofmanagement’s original estimates resulting in additional tax benefits.  The additional tax benefits associated withthe deductible portion of the Donald Wright Warrant have exceeded the originalestimate by $1.3 million.  The additionaltax benefits, as was the initial estimated tax benefit associated with theDonald Wright Warrant, have been recorded as an increase to additional paid-incapital.

 

**10.  Discontinued Operations**

 

On August 11, 2003, AirNet Systems, Inc.completed the sale of substantially all of the assets of its Mercury BusinessServices unit to Mercury Business Services, Inc., a Delaware corporation ownedby a group that includes the original owners of the Mercury business.

 

AirNet sold the assets, primarily the accounts receivable, personalproperty and intellectual property, with a carrying amount at the time of saleof approximately $1.0 million, for approximately $1.1 million.

 

AirNet received approximately $455,000 of thepurchase price in a ninety day promissory note secured by the assets being soldand guaranteed by each of the shareholders of Mercury Business Services, Inc.Under terms of the Asset Purchase Agreement, approximately $536,000 of thepurchase price was paid with AirNet Systems, Inc. common shares owned by theshareholders of Mercury Business Services, Inc., including 56,000 common sharestendered to AirNet Systems, Inc.,

 

45

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prior to the closing at $4.30 per common share(the closing price of the AirNet Systems, Inc., common shares on NYSE on July 25,2003) and 68,494 common shares tendered to AirNet Systems, Inc., on the closingdate at $4.31 per common share (the average closing price of the AirNetSystems, Inc., common shares on NYSE on August 4-6, 2003). The balance ofthe purchase price was paid in cash.

 

AirNethas reported these operations as discontinued operations.

 

TheMercury Business Services unit had revenues for the year ended December 31,2003, which consisted of the seven months prior to the sale, of $5.9 million ascompared to $8.9 million for the full year in 2002.

 

Pre-taxloss for AirNet’s Mercury Business Services unit for the year ended December 31,2003, which consisted of the seven months prior to the sale, was $13,000, ascompared to a $432,000 pre-tax loss for the full year 2002.

 

**11.****                               NetIncome (Loss) Per Share**

 

The following table sets forth the computation of basic and diluted netincome (loss) per share for the years ended December 31:

 
| ** **                                                                                | ** ** | **2004**       | ** **      | **2003**   | ** ** | **2002**   | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------|-----------------|------------|------------|------------|------------|
|                                                                                      |       |           |            |       |       |       |       |
| Numerator:                                                                                |       |           |            |       |       |       |       |
| Income  (loss) before discontinued operations and cumulative effect of accounting  change | ** ** | **$**          | **(34,146,000** | **)**      | $          | 2,788,000  |       | $ | 3,630,000 |   |
| Loss from  discontinued operations, net of tax                                            | ** ** | **—**     |            | (8,000     | )          | (259,000   | )          |
|                                                                                      | ** ** | ** **     |            |       |       |       |       |
| Cumulative  effect of accounting change, net of tax                                       | ** ** | **—**     |            | —     |       | (1,868,000 | )          |
| Net income  (loss)                                                                        | ** ** | **$**          | **(34,146,000** | **)**      | $          | 2,780,000  |       | $ | 1,503,000 |   |
|                                                                                      |       |           |            |       |       |       |       |
| Denominator:                                                                              |       |           |            |       |       |       |       |
| Basic -  weighted average shares outstanding                                              | ** ** | **10,080,000** |            | 10,088,000 |       | 10,141,000 |       |
|                                                                                      |       |           |            |       |       |       |       |
| Diluted                                                                                   |       |           |            |       |       |       |       |
| Options -  associates, officers and directors                                             | ** ** | **19,000**     |            | 1,000      |       | 120,000    |       |
| Adjusted  weighted average shares outstanding                                             | ** ** | **10,099,000** |            | 10,089,000 |       | 10,261,000 |       |
|                                                                                      |       |           |            |       |       |       |       |
| Net income  (loss) per share – basic and diluted:                                    |       |           |            |       |       |       |       |
| Income  (loss) from continuing operations before cumulative effect of accounting  change  | ** ** | **$**          | **(3.39**       | **)**      | $          | .28        |       | $ | .36 |   |
| Loss from  discontinued operations, net of tax                                            | ** ** | **—**     |            | —     |       | (.03       | )          |
| Cumulative  effect of accounting change, net of tax                                       | ** ** | **—**     |            | —     |       | (.18       | )          |
| Net income  (loss)                                                                        | ** ** | **$**          | **(3.39**       | **)**      | $          | .28        |       | $ | .15 |   |

 

For the yearsended December 31, 2004, 2003, and 2002, options covering 686,000,981,000, and 697,000 common shares, respectively, were excluded from thediluted weighted average shares outstanding calculation, as their exerciseprices exceeded the average fair market value of the underlying common sharesfor the year.

 

**12.****                               Litigationand Contingencies**

 

AirNet is subjectto claims and lawsuits in the ordinary course of its business.  In the opinion of management, the outcomes 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 AirNet’s financial position orthe results of future operations.

 

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**Selected Quarterly Financial Information**

 

The quarterly financial data required to be disclosed in this Item 8 isincorporated herein by reference from the table captioned “Selected QuarterlyData (Unaudited)” in “Item 7- Management’s Discussion and Analysis of FinancialCondition and Results of Operation” of this Annual Report on Form 10-K.

 

**ITEM 9.********CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

 

No response required.

 

**ITEM 9A.********CONTROLSAND PROCEDURES.**

 

**Evaluation of Disclosure Controls and Procedures**

 

With the participation of the Chairman of the Board, Chief Executive Officer and President (the principal executive officer) and the Chief Financial Officer, Treasurer and Secretary  (the principal financial officer) of AirNet Systems, Inc. (“AirNet”), AirNet’s management has evaluated the effectiveness of AirNet’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the fiscal year covered by this Annual Report on Form 10-K.  Based on that evaluation, AirNet’s Chairman of the Board, Chief Executive Officer and President and AirNet’s Chief Financial Officer, Treasurer and Secretary have concluded that:

 

•                          information required to be disclosed by AirNet in this Annual Report on Form 10-K and the other reports that AirNet files or submits under the Exchange Act would be accumulated and communicated to AirNet’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure;

 

•                          information required to be disclosed by AirNet in this Annual Report on Form 10-K and the other reports that AirNet files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and

 

•                          AirNet’s disclosure controls and procedures are effective as of the end of the fiscal year covered by this Annual Report on Form 10-K to ensure that material information relating to AirNet and its consolidated subsidiaries is made known to them, particularly during the period for which the periodic reports of AirNet, including this Annual Report on Form 10-K, are being prepared.

 

**Changes in Internal Control over Financial Reporting**

 

Therewere no changes in AirNet’s internal control over financial reporting (asdefined in Rule 13a-15(f) under the Exchange Act) that occurred during AirNet’sfiscal quarter ended December 31, 2004, that have materially affected, orare reasonably likely to materially affect, AirNet’s internal control overfinancial reporting.

 

**ITEM 9B.****                                           ****OTHER INFORMATION**

 

**Changes in Compensation of Directors**

 

Directorsof AirNet who are not officers or employees of AirNet (“Non-Employee Directors”)are paid fees for their services as members of the Board of Directors and asmembers of Board committees.  Thequarterly fee paid in 2004 and to be paid in 2005 for serving as a Non-EmployeeDirector was and remains $6,000.  The feefor attending each meeting of the full Board of Directors in person was $2,000in 2004 and continues to be the same amount in 2005.  The fee for attending telephonic meetings ofthe full Board was $2,000 in 2004.  At ameeting held on December 22, 2004, the Non-Employee Directors discussed,and on March 9, 2005, the Board of Directors affirmed that, effective forthe telephonic meetings of the full Board held after January 1, 2005, thefee would be $1,000 for each meeting attended.

 

Thefee for Audit Committee members was $2,000 per meeting attended in 2004, withthe Chair of the Audit Committee receiving an additional $1,000 per meetingattended.  The fee for CompensationCommittee members and Nominating and Corporate Governance Committee members was$1,000 per meeting attended in 2004, with the Chair of each of those Committeesreceiving an additional $2,000 for each meeting of the Committee attended.  At a meeting held on December 22, 2004,the Non-Employee Directors discussed, and on March 9, 2005, the Board ofDirectors affirmed that

 

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thefees for attending in person Committee meetings held after January 1, 2005would remain the same as they had been in 2004; however, the fees for attendingtelephonic meetings of each Committee held after January 1, 2005 would beone-half (50%) of the amount of the fees for attending a meeting of theparticular Committee in person.

 

Asthe lead director of AirNet, James E. Riddle received an additionalquarterly fee of $6,000 for service in that capacity in 2004 and continues toreceive that quarterly fee in 2005.

 

TheNon-Employee Directors meet without management present in connection with eachof the regularly scheduled meetings of the full Board and receive no meetingfees for attending such meetings.  To theextent the Non-Employee Directors determine to meet by telephone or in personother than in connection with a regularly scheduled Board meeting, they willreceive $2,000 per meeting attended in person or $1,000 per telephonemeeting.  AirNet’s Non-Employee Directorsare reimbursed for out-of-pocket expenses incurred in connection with theirservice as directors, including travel expenses.

 

Asan officer and employee of AirNet, Joel E. Biggerstaff receives noadditional compensation for serving as a director of AirNet.

 

Underthe terms of the AirNet Systems, Inc. 2004 Stock Incentive Plan (the “2004 Plan”),which was approved by the shareholders of AirNet on June 4, 2004, on thefirst business day of each fiscal year of AirNet, each individual who is thenserving as a Non-Employee Director and has served for at least one fullone-year term as a Non-Employee director, is to be automatically granted anoption to purchase 4,000 AirNet common shares with an exercise price equal tothe fair market value of the underlying common shares on the grant date.  However, each of the individuals serving as aNon-Employee Director of AirNet on January 3, 2005 (the first business dayof the fiscal year ending December 31, 2005) — Russell M. Gertmenian,David P. Lauer, Bruce D. Parker and James E. Riddle — determined not to acceptthe option to purchase 4,000 AirNet common shares which would have beenautomatically granted to him on that date.

 

**Changes in Compensation of Executive Officers**

 

On December 16, 2004, the Compensation Committeedetermined to increase the annual base salary of Gary W. Qualmann, theChief Financial Officer, Treasurer and Secretary of AirNet, from $190,000 to$215,000.  This increase was effective January 1,2005.

 

On December 16, 2004, the Compensation Committeedetermined to modify the annual base salary and other compensation arrangementsof Robert L. Austin, the Senior Vice President, Jetride Services ofAirNet.  Mr. Austin’s annual basesalary was increased from $185,000 to $200,000. These modifications were effective January 1, 2005.

 

**Adoption of 2005 Incentive Compensation Plan**

 

On February 2, 2005, theBoard of Directors of AirNet, upon the recommendation of the CompensationCommittee, adopted the 2005 Incentive Compensation Plan (the “IncentivePlan”).  The Compensation Committee andthe Board of Directors subsequently approved clarifications and modificationsto the Incentive Plan on March 8, 2005 and March 29, 2005.

 

The purpose of the IncentivePlan is to promote the following goals of AirNet for the fiscal year ending onDecember 31, 2005 (“Fiscal 2005”) by providing incentive compensation tocertain employees of AirNet and its subsidiaries:

 

**•****     **Exceeding budgeted pre-tax income;

 

**•****     **Reducing fixed costs;

 

**•****     **Creating and executing contingency plans for changes in AirNet’s Bankbusiness;

 

**•****     **Refining AirNet’s business plan for its Express and Jetride businessesto more quickly and profitably diversify AirNet;

 

**•****     **Developing AirNet’s leadership team; and

 

**•****     **Meeting high priority deadlines related to compliance with theSarbanes-Oxley Act of 2002 and other key projects.

 

Participants in the IncentivePlan include AirNet's executive officers, including Joel E. Biggerstaff(Chairman of the Board, Chief Executive Officer and President), Gary W.Qualmann (Chief Financial Officer, Treasurer and Secretary), Larry M.Glasscock, Jr. (Senior Vice President, Express Services), Jeffery B. Harris(Senior Vice President, Bank Services), Robert L. Austin (Senior VicePresident, Jetride Services), Craig A. Leach (Vice President, InformationSystems) and Wynn D. Peterson (Vice President, Strategic Planning and Analysis)and certain department managers and department directors.  At the start of Fiscal 2005, there were 45participants in the Incentive Plan.

 

Payments under the IncentivePlan are based on a combination of AirNet’s pre-tax income for Fiscal 2005,operating performance of AirNet’s various business components, and theachievement of personal goals assigned to each participant. The CompensationCommittee approves personal goals for each of the executive officers andreviews the personal goals established by senior management for otherparticipants. The personal goals approved by the Compensation Committee foreach of the executive officers relate to specific business objectives relatedto general business operations (e.g., regulatory compliance, expensereductions, etc.) and each business component (e.g., execution of specificcontracts with customers and vendors, cost reductions, service improvements,etc.).

 

No incentive compensationwill be paid under the Incentive Plan unless AirNet achieves a designatedthreshold level of pre-tax income for Fiscal 2005.  Once the designated threshold level is achieved,incentive compensation payments will increase at predetermined pre-tax incomelevels until the maximum compensation payout of $1.9 million is reached atapproximately 200% of Fiscal 2004 pre-tax income, determined without regard tothe Fiscal 2004 impairment charges related to property and equipment andgoodwill.

 

Once the overall amount ofincentive compensation is determined based upon AirNet’s pre-tax income,incentive compensation will be allocated to Bank, Express, Jetride andcorporate based upon pre-established targets. Incentive compensation will then be allocated to the participants mostclosely involved in managing each of those business areas based upon eachparticipant’s base salary.  Finally,participants must achieve their pre-established personal goals to achieve theirmaximum incentive compensation payment.

 

The maximum percentage ofannual base salary that each of the executive officers may receive as incentivecompensation under the Incentive Plan is as follows: Joel E. Biggerstaff, 100%;Gary W. Qualmann, Larry M. Glasscock, Jr., Jeffrey B. Harris, and Robert L.Austin, 75%; and Craig A. Leach and Wynn D. Peterson, 50%.

 

Except for payments to executiveofficers, payments under the Incentive Plan will be paid in quarterly paymentscommencing with the second quarter of Fiscal 2005 based upon AirNet’s year todate financial performance.  Payments ofincentive compensation to the executive officers will be made in the firstquarter of Fiscal 2006 based upon AirNet’s performance for Fiscal 2005.  In order to receive payment, a participantmust be actively employed by AirNet or one of its subsidiaries at the time paymentis made.  New employees who qualify forthe Incentive Plan will be eligible to participate on the first day of thecalendar quarter following their date of hire.

 

The Compensation Committeemay amend, modify or terminate the Incentive Plan at any time.

 

48

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**Modification of Financing Arrangements**

 

On March 24, 2005, AirNet and its lenders entered into a “Second Changein Terms Agreement” that further modified the terms and conditions of theAmended Credit Agreement.  In accordancewith the Second Change in Terms Agreement, AirNet prepaid in full the remaining$11.0 balance outstanding on its secured term loan.   Upon the prepayment of the term loan, theterm loan portion of the Amended Credit Agreement was terminated.  In addition, the revolving credit facilityunder the Amended Credit Agreement was reduced from $35.0 million to $30.0million.  In the event AirNet securespermanent financing on all or a portion of its Rickenbacker Facility, therevolving credit facility will be reduced from $30.0 million to $25.0 million.  Under the Second Change in Terms Agreement,the term of the revolving credit facility was extended from September 30, 2005to October 15, 2006. The December 31, 2004 Balance Sheet gives effect to theSecond Change in Terms Agreement entered into on March 24, 2005.  The Second Change in Terms Agreement alsoprovided for the release of certain fixed assets that were securing the loansunder the Amended Credit Facility and modified certain other financialcovenants.  On March 24, 2005, inconnection with Second Change in Terms Agreement, The Huntington National Bankand JPMorgan Chase Bank, N.A., successor by merger to Bank One, N.A., purchasedthe interest of Fifth Third Bank in the secured revolving credit facilityportion of the Amended Credit Agreement (respectively, the “HNB AssignmentAgreement” and “Chase Assignment Agreement”).

 

The Second Change in Terms Agreement, the HNBAssignment Agreement and the Chase Assignment Agreement are filed in thisAnnual Report on Form 10-K as Exhibit 4.39, Exhibit 4.40, and Exhibit 4.41,respectively, and the descriptions herein are qualified in their entirety byreference to the full terms and conditions thereof, which terms and conditionsare incorporated herein by reference in their entirety.

 

On March 24, 2005, AirNet entered into a three-year term loan totaling$11.0 million with a fixed interest rate of 8.12%.  This term loan is secured by seven CessnaCaravans and nine LearJet 35’s from AirNet’s cargo aircraft fleet with acombined net book value as of December 31, 2004 of approximately $19.9million.  The aircraft securing this loanwere released from the collateral securing the loans under Amended CreditAgreement in accordance with the Second Change in Terms Agreement.  The proceeds from this term loan were used toprepay in full AirNet’s term loan under the Amended Credit Facility asdescribed above.  The December 31, 2004Balance Sheet reflects the reclassification of approximately $22.4 million fromcurrent to long-term notes payable as a result of the extension of the AmendedCredit Facility under the Second Change in Terms Agreement and the financing ofthe cargo aircraft described above.  TheLoan and Security Agreement and related Business Purpose Promissary Note datedMarch 24, 2005 is filed in this Annual Report on Form 10-K as Exhibit 4.44 and4.45, respectively and the description herein is qualified in its entirety byreference to the full terms and conditions thereof, which terms andconditions are incorporated herein by reference in their entirety.

 

**Engagement of Brown Gibbons Lang & Company**

 

On January 5, 2005, upon the approval of the Board of Directors ofAirNet, AirNet engaged Brown Gibbons Lang & Company (“BGL”) to serve asAirNet's exclusive financial advisor and investment banker to review, developand evaluate various strategic alternatives to enhance shareholder value.  BGL's analysis will address, among otherthings, capitalization, growth and value realization transaction alternativesthat may be available to AirNet.  Such alternativesmay include one or more of the following: potential acquisitions ordivestitures, a sale of AirNet or one or more of its business units, theraising of additional capital or the refinancing or restructuring of theAirNet's existing capital structure.  BGLhas not been engaged to analyze, or advise AirNet with respect to, anyparticular transaction.

 

**2005 Annual Meeting ofShareholders**

 

To date, AirNet has not set adate for its 2005 Annual Meeting of Shareholders.  Accordingly, the information required by PartIII (Items 10, 11, 12, 13 and 14) of Form 10-K has been provided as part of thisAnnual Report on Form 10-K.

 

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**PART III**

 

**ITEM 10****- DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT**

 

**Directors of AirNet**

 

The name, age, principal occupation for the past fiveyears and selected biographical information for each of the directors of AirNetare set forth below.  All information isprovided as of March 28, 2005.  Eachdirector serves for a term of one year and until his successor is duly electedand qualified.

 
| ***Joel E. Biggerstaff*** | ***Director since 2000*** |
|---------------------------|---------------------------|

 

Mr. Biggerstaff, age 48, has served as AirNet’sChairman of the Board since August 2001, Chief Executive Officer since April 2000and President since August 1999.  Healso served as AirNet’s Chief Operating Officer from August 1999 to February 2004.  Prior to joining AirNet, Mr. Biggerstaffserved as President of the Southern Region of Corporate Express DeliverySystems, 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, includingRegional Vice President and General Manager, with Ryder System, Inc., a companyproviding transportation and supply-chain management solutions.  Mr. Biggerstaff’s term as a directorexpires in 2005.

 
| ***Russell M. Gertmenian*** | ***Director since 1996*** |
|-----------------------------|---------------------------|

 

Mr. Gertmenian, age 57, has been a partner withVorys, Sater, Seymour and Pease LLP since 1979 and currently serves as Vice — Chairof that firm’s Executive Committee. Vorys, Sater, Seymour and Pease LLPrendered legal services to AirNet during the 2004 fiscal year and continues todo so.  Mr. Gertmenian also servesas a director of Abercrombie & Fitch Co. Mr. Gertmenian’s term as a director expires in 2005.

 
| ***David P. Lauer*** | ***Director since 1999*** |
|----------------------|---------------------------|

 

Mr. Lauer, age 62, served as the President and ChiefOperating Officer of Bank One, Columbus, NA from June 1997 until hisretirement in January 2001.  Hisprimary responsibility with Bank One was to lead the commercial lendingpractice in central Ohio.  Prior to that,Mr. Lauer, a Certified Public Accountant since 1968, was the Managing Partnerof the Columbus, Ohio office of Deloitte & Touche LLP from January 1989until he retired in June 1997. Mr. Lauer is also a director of Wendy’s International, Inc.,Huntington Bancshares Incorporated, R. G. Barry Corporation and DiamondHill Investment Group, Inc. Mr. Lauer’s term as a director expires in 2005.

 
| ***Bruce D. Parker*** | ***Director since 2002*** |
|-----------------------|---------------------------|

 

Mr. Parker, age 57, is the Founder and President ofIT Management Group, LLC, a specialty consulting group that advises and managesinformation technology organizations for corporations in Europe and the UnitedStates.  Mr. Parker served as ExecutiveVice President of Sapient Corporation, a business and technology consultingfirm, from December 1999 until his retirement in July 2002.  From December 1997 to December 1999,Mr. Parker served as Senior Vice President and Chief Information Officer atUnited Airlines, Inc.  From September 1994to December 1997, Mr. Parker was Senior Vice President - ManagementInformation Systems and Chief Information Officer at Ryder System, Inc.  Mr. Parker is also a director of SapientCorporation.  Mr. Parker’s term as adirector expires in 2005.

 
| ***James E. Riddle*** | ***Director since 2000*** |
|-----------------------|---------------------------|

 

Mr. Riddle, age 63, has been in the growth managementand consulting business since July 1999, most recently as Managing Partnerof GrowthCircle Ventures, LLP, a management consulting firm, since August 2001,and as Vice Chairman of Enterasys Systems, Inc., an enterprise networkprovider, from August 2000 to April 2001.  Previously, Mr. Riddle served from 1997to 1999 as President and Chief Operating Officer of Norrell Services, Inc., anoutsourcing information technology and staffing services company.  Prior to joining Norrell, for four years, Mr.Riddle served Ryder System, Inc. in several capacities, primarily in marketingand sales, including as President of Ryder International.  Mr. Riddle served Xerox Corporation for 26years in a variety of senior management positions, including Vice President ofMarketing and Vice President of Field Operations for the United Statesoperations and Vice President of Marketing and Sales for the European operations.  Mr. Riddle is also a director of DankaBusiness Systems PLC.  Mr. Riddle’sterm as a director expires in 2005.

 

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Thereare no family relationships among any of the directors and executive officersof AirNet.

 

**Director Independence**

 

The Board of Directors of AirNet (the “Board”) hasestablished categorical standards to assist it in making its determination ofdirector independence.  The Board definesan “independent director” to be a director who:

 

•                                           is not and has not been within the last threeyears an employee of, and whose immediate family members are not and have notbeen within the last three years an executive officer of, AirNet or any ofAirNet’s subsidiaries;

 

•                                           has not received, and whose immediate familymembers have not received other than for service as a non-executive officeremployee, during any 12-month period within the last three years, more than$100,000 in direct compensation from AirNet or any of AirNet’s subsidiaries,other than director and committee fees and pension or other forms of deferredcompensation for prior service (provided such compensation is not contingent inany way on continued service);

 

•                                           is not and whose immediate family members arenot a current partner of a firm that is AirNet’s internal or external auditor;

 

•                                           is not a current employee of a firm that isAirNet’s internal or external auditor;

 

•                                           whose immediate family members are not acurrent employee of a firm that is AirNet’s internal or external auditor and participatesin the firm’s audit, assurance or tax compliance (but not tax planning)practice;

 

•                                           has not been, and whose immediate familymembers have not been, within the last three years (but is no longer) a partneror employee of a firm that is AirNet’s internal or external auditor andpersonally worked on AirNet’s audit within that time;

 

•                                           is not and has not been within the last threeyears employed, and whose immediate family members are not and have not beenwithin the last three years employed, as an executive officer of anothercompany where any of AirNet’s present executive officers at the same timeserves or served on that other company’s compensation committee;

 

•                                           is not a current employee, and whose immediatefamily members are not a current executive officer, of a company that has madepayments to, or received payments from, AirNet or any of AirNet’s subsidiariesfor property or services in an amount which, in any of the last three fiscalyears, exceeds the greater of $1 million, or 2% of such other company’sconsolidated gross revenues; and

 

•                                           has no other material relationship with AirNetor any of AirNet’s subsidiaries (either directly or as a partner, shareholderor officer of an organization that has a relationship with AirNet or any ofAirNet’s subsidiaries).

 

The Board has determined thateach of David P. Lauer, Bruce D. Parker and James E. Riddle is independentunder these categorical standards and has no relationship with AirNet (eitherdirectly or indirectly), other than serving as a director of AirNet and holdingcommon shares of AirNet.  Joel E.Biggerstaff and Russell M. Gertmenian do not qualify as independent directorsunder the foregoing categorical standards.

 

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**Executive Officers of AirNet**

 

The following table identifies the executive officersof AirNet as of March 28, 2005.  Theexecutive officers serve at the pleasure of the Board and in the case of JoelE. Biggerstaff and Jeffery B. Harris pursuant to employment agreements.

 
| **Name**                | ** ** | **Age** | ** ** | **Positions**                                                 |
|-------------------------|------------|---------|------------|---------------------------------------------------------------|
|                    |       |    |       |                                                          |
| Joel E. Biggerstaff     |       | 48      |       | Chairman of the Board, Chief Executive  Officer and President |
| Gary W. Qualmann        |       | 53      |       | Chief Financial Officer, Treasurer and  Secretary             |
| Larry M. Glasscock, Jr. |       | 48      |       | Senior Vice President, Express Services                       |
| Jeffery B. Harris       |       | 45      |       | Senior Vice President, Bank Services                          |
| Robert L. Austin        |       | 49      |       | Senior Vice President, Jetride Services                       |
| Craig A. Leach          |       | 48      |       | Vice President, Information Systems                           |
| Wynn D. Peterson        |       | 41      |       | Vice President, Strategic Planning and  Analysis              |

 

***Joel E. Biggerstaff*** has served as AirNet’s Chairman of the Boardsince August 2001, Chief Executive Officer since April 2000, andPresident since August 1999.  Healso served as AirNet’s Chief Operating Officer from August 1999 to February 2004.  He has also served as a director of AirNetsince May 2000.  Prior to joining AirNet,Mr. Biggerstaff served as President of the Southern Region of CorporateExpress Delivery Systems, a national expedited distribution service, from February 1998through July 1999.  From September 1996through February 1998, Mr. Biggerstaff provided transportationconsulting services and prior to September 1996, he held variouspositions, including Regional Vice President and General Manager, with RyderSystems, Inc., a company providing transportation and supply-chain managementsolutions.

 

***Gary W. Qualmann*** has served AirNet as the Chief FinancialOfficer, Treasurer and Secretary since September 2, 2003.  Prior to joining AirNet, from February 2002through August 2003, Mr. Qualmann served as Chief Financial Officerand Treasurer of Metatec, Inc., a manufacturer and distributor of electronicmedia which filed a voluntary petition for reorganization under Chapter 11of the United States Bankruptcy Code on October 17, 2003.  Mr. Qualmann provided financialconsulting services to Metatec from October 2001 through February 2002.  From March 1996 until June 2001,Mr. Qualmann was Chief Financial Officer, Treasurer and Secretary ofMindLeaders.com, Inc., an e-learning company based in Columbus, Ohio.  From May 1988 until July 1995,Mr. Qualmann served as Executive Vice President and Chief FinancialOfficer of Red Roof Inns, Inc., a lodging company based in Hilliard, Ohio.

 

***Larry M. Glasscock, Jr.*** joined AirNet as Senior Vice President,Express Services in February 2003. From February 2002 through February 2003, Mr. Glasscockserved as Senior Vice President of Evercom Systems, Inc., a national providerof telecom services.  From April 2001through February 2002, Mr. Glasscock served as Executive Vice Presidentof NextJet Technologies, a software and technology solutions organization.  Mr. Glasscock served as Chief ExecutiveOfficer of Expedited Delivery Systems, Inc., a time-definite trucking concern,from August 1999 to September 2000 and as its President and ChiefOperating Officer from January 1998 through August 1999.

 

***Jeffery B. Harris*** has served AirNet as Senior Vice President,Bank Services since May 2000. Mr. Harris joined AirNet in June 1996 as the relationshipmanager for Banking Sales and was appointed Vice President, Sales in thebanking division in October 1997.

 

***Robert L. Austin*** has served AirNet as Senior Vice President,Jetride Services since February 2005. From 2003 to 2005, Mr. Austin served AirNet as Vice President ofJetride Private Charter.  Mr. Austinjoined AirNet in February 1988 as the Aircraft Sales and AcquisitionDirector and was appointed Manager of the Jetride Private Charter division in January 2001.

 

***Craig A. Leach*** has served AirNet as Vice President,Information Systems since January 2000. Mr. Leach established AirNet’s Information Systems Department in1985 and was named Director of Information Systems in 1996.

 

***Wynn D. Peterson*** has served AirNet as Vice President,Strategic Planning and Analysis since January 2005.  Mr. Peterson has served as an officer ofAirNet since February 2000 when he was named Vice President of CorporateDevelopment.  Mr. Peterson joinedAirNet in 1997 as Manager of Corporate Development.  Prior to joining AirNet, Mr. Petersonmanaged equity and fixed income portfolios from 1993 until 1997 at DesertMutual, a pension and benefits company in Salt Lake City, Utah.  From 1988 until 1993, Mr. Peterson heldvarious management positions in Finance, Corporate Development and StrategicPlanning at AMR Corporation, the parent company of American Airlines, Inc., inDallas, Texas.

 

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**Composition of Committees of Board of Directors**

 

The Board has three standing committees — theAudit Committee, the Compensation Committee and the Nominating and CorporateGovernance Committee.

 

***Audit Committee***

 

The Audit Committee consists of David P. Lauer(Chair), Bruce D. Parker and James E. Riddle. The Board has determined that each member of the Audit Committeequalifies as an independent director under the applicable sections of the NewYork Stock Exchange Listed Company Manual (the “NYSE Rules”) and underRule 10A-3 under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”).  The Board has also determined thatDavid P. Lauer qualifies as an “audit committee financial expert” for purposesof Item 401(h) of SEC Regulation S-K, by virtue of his experiencedescribed above under “**Directors of AirNet**.”  In addition to the qualification of Mr. Laueras an “audit committee financial expert,” the Board strongly believes that eachmember of the Audit Committee is highly qualified to discharge his duties onbehalf of AirNet and its subsidiaries and satisfies the financial literacyrequirement of the applicable NYSE Rules.

 

David P. Lauer currently serves on the auditcommittee of five public companies, including AirNet.  AirNet’s Board has determined that suchsimultaneous service will not impair Mr. Lauer’s ability to effectivelyserve on AirNet’s Audit Committee.

 

***CompensationCommittee***

 

The Compensation Committee is comprised of James E.Riddle (Chair), David P. Lauer and Bruce D. Parker.  The Board has determined that each member ofthe Compensation Committee qualifies as an independent director under theapplicable NYSE Rules, an outside director for purposes of Section 162(m)of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”),and a non-employee director for purposes of Rule 16b-3 under the Exchange Act.

 

***Nominating andCorporate Governance Committee***

 

The Nominating and Corporate Governance Committee iscomprised of Bruce D. Parker (Chair), David P. Lauer and James E. Riddle.  The Board has determined that each member ofthe Nominating and Corporate Governance Committee qualifies as an independentdirector under the applicable NYSE Rules.

 

**Section 16(a) Beneficial Ownership Reporting Compliance**

 

Ownership of and transactions in AirNet’s commonshares by executive officers, directors and persons who beneficially own morethan 10% of the common shares are required to be reported to the SEC pursuantto Section 16(a) of the Exchange Act. Based solely on a review of copies of the reports furnished to AirNetand written representations that no other reports were required, AirNetbelieves that during the 2004 fiscal year, all filing requirements werecomplied with, except that each of Robert L. Austin, Denise D. Brown, Joel E.Biggerstaff, Larry M. Glasscock, Jr., Jeffery B. Harris, Craig A. Leach, WynnD. Peterson, Gary W. Qualmann and Michael Snyder, filed late one report,covering one transaction — the grant of an option.  In addition, during the 2003 fiscal year, Mr.Qualmann filed late one report, covering one transaction – the grant of anoption.

 

**Corporate Governance Documents**

 

AirNet’s Board has adopted charters for each of theAudit Committee, the Compensation Committee and the Nominating and CorporateGovernance Committee as well as Corporate Governance Guidelines as contemplatedby the applicable NYSE Rules.

 

In accordance with the requirements of Section 303A.10of the NYSE Rules, the AirNet Board has adopted a Code of Business Conduct andEthics covering the directors, officers and employees (team members) of AirNet,including AirNet’s Chairman of the Board, Chief Executive Officer and President(the principal executive officer), AirNet’s Chief Financial Officer, Treasurerand Secretary (the principal financial officer) and AirNet’s Controller andPrincipal Accounting Officer. AirNet intends to disclose the following underthe “Corporate Governance” link on the “Investor Relations” page of its websitelocated at www.airnet.com within four business days following their occurrenceas required by the applicable rules of the SEC and the requirements of Section 303A.10of the NYSE Rules:  (A) the date andnature of any amendment to a provision of its Code of Business Conduct andEthics that (i) applies to AirNet’s principal executive officer, principalfinancial officer, principal accounting officer or controller, or personsperforming similar functions, (ii) relates to any element of the “code ofethics” definition enumerated in Item 406(b) of SEC Regulation S-K, and (iii)is not a technical, administrative or other non-substantive amendment; and (B)a description of any waiver (including the nature of the waiver, the name ofthe person to whom the waiver was granted and the date of the waiver),including an implicit waiver, from a provision of the

 

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Codeof Business Conduct and Ethics granted to AirNet’s principal executive officer,principal financial officer, principal accounting officer or controller, orpersons performing similar functions, that relates to one or more of the itemsset forth in Item 406(b) of SEC Regulation S-K.

 

The text of each of the Audit Committee Charter, theCompensation Committee Charter, the Nominating and Corporate GovernanceCommittee Charter, the Corporate Governance Guidelines and the Code of BusinessConduct and Ethics is posted under the “Corporate Governance” link on the “InvestorRelations” page of AirNet’s website located at www.airnet.com . Interestedpersons may also obtain copies of the Audit Committee Charter, the CompensationCommittee Charter, the Nominating and Corporate Governance Committee Charter,the Corporate Governance Guidelines and the Code of Business Conduct andEthics, without charge, by writing to the Chief Financial Officer, Treasurerand Secretary of AirNet at AirNet Systems, Inc., 3939 International Gateway,Columbus, Ohio 43219, Attention: Gary W. Qualmann.

 

**Communications with the Board**

 

In accordance with AirNet’s Corporate GovernanceGuidelines and applicable NYSE Rules, the non-management directors of AirNetmeet (without management present) at regularly scheduled executive sessions atleast twice per year and at such other times as the directors deem necessary orappropriate.  James E. Riddle has beenchosen as the lead director and presides at all executive sessions of thenon-management directors of AirNet.  Inaddition, at least once a year, the independent directors of AirNet meet inexecutive session.  Mr. Riddle alsopresides at those meetings.

 

The Board believes it is important for shareholdersto have a process to send communications to the Board and its individualmembers.  Accordingly, shareholders whowish to communicate with the Board or a particular director may do so bysending a letter to such individual or individuals, in care of AirNet, toAirNet’s executive offices at 3939 International Gateway, Columbus, Ohio43219.  The mailing envelope must containa clear notation indicating that the enclosed letter is a “Shareholder – BoardCommunication” or “Shareholder – Director Communication,” as appropriate.  All such letters must identify the author asa shareholder and clearly state whether the intended recipients are all membersof the Board or certain specified individual directors.  Copies of all such letters will be circulatedto the appropriate director or directors. In addition, shareholders may contact the directors through theMysafeworkplace.com Hotline.  TheMysafeworkplace.com Hotline can be reached at 800-461-9330 or via e-mail atwww.mysafeworkplace.com.  All shareholdercommunications through the Mysafeworkplace.com Hotline will be forwarded to theappropriate director or directors.  Thereis no screening process in respect of shareholder communications.

 

**ITEM 11****– EXECUTIVE COMPENSATION**

 

**Executive Compensation Tables**

 

The following information is provided with respect toAirNet’s Chief Executive Officer and each of AirNet’s four other most highlycompensated executive officers serving as an executive officer at December 31,2004.

 

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***Summary Compensation Table***

 

The following table shows,for the last three fiscal years, the cash compensation and other benefits paidor provided by AirNet to its Chief Executive Officer and the other namedindividuals.

 

**SUMMARYCOMPENSATION TABLE**

 
| ** **                      | ** ** | ** **      | ** ** | ** **               | ** ** | ** **                    | ** ** | **Long-Term**    | ** ** | ** **           | ** ** |
|---------------------------------|------------|-----------------|------------|--------------------------|------------|-------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                      | ** ** | ** **      | ** ** | ** **               | ** ** | ** **                    | ** ** | **Compensation** | ** ** | ** **           | ** ** |
| ** **                      | ** ** | ** **      | ** ** | ** **               | ** ** | ** **                    | ** ** | **Awards**       | ** ** | ** **           | ** ** |
| **Name and Principal Position** | ** ** | ** **      | ** ** | **Annual  Compensation** | ** ** | **Common Shares  Underlying** | ** ** | **All Other**    | ** ** |
| **during 2004**                 | ** ** | **Fiscal Year** | ** ** | **Salary ($)**           | ** ** | **Bonus ($)**                 | ** ** | **Options (#)**  | ** ** | **Compensation ($)** | ** ** |
| ** **                      | ** ** | ** **      | ** ** | ** **               | ** ** | ** **                    | ** ** | ** **       | ** ** | ** **           | ** ** |
| Joel E.  Biggerstaff            |       | 2004            |       | $                        | 325,000    |                          | $          | 0                |       | 40,000               |       | $ | 6,358 | (1) |
| Chairman of  the Board,         |       | 2003            |       | $                        | 325,000    |                          | $          | 45,500           |       | 8,500                |       | $ | 8,462 |   |
| Chief  Executive Officer        |       | 2002            |       | $                        | 321,154    |                          | $          | 0                |       | 20,000               |       | $ | 8,060 |   |
| and  President                  |       |            |       |                     |       |                          |       |             |       |                 |       |
|                            |       |            |       |                     |       |                          |       |             |       |                 |       |
| Jeffery B.  Harris              |       | 2004            |       | $                        | 230,000    |                          | $          | 0                |       | 20,000               |       | $ | 4,197 | (1) |
| Senior Vice  President,         |       | 2003            |       | $                        | 230,000    |                          | $          | 25,000           |       | 5,000                |       | $ | 5,162 |   |
| Bank  Services                  |       | 2002            |       | $                        | 230,000    |                          | $          | 0                |       | 8,000                |       | $ | 6,145 |   |
|                            |       |            |       |                     |       |                          |       |             |       |                 |       |
| Gary W.  Qualmann               |       | 2004            |       | $                        | 190,000    |                          | $          | 0                |       | 20,000               |       | $ | 6,154 | (1) |
| Chief  Financial Officer,       |       | 2003            |       | $                        | 58,462     |                          | $          | 25,000           |       | 20,000               |       | $ | 0 |   |
| Secretary  and Treasurer(2)     |       | 2002            |       | $                        | 0          |                          | $          | 0                |       | 0                    |       | $ | 0 |   |
|                            |       |            |       |                     |       |                          |       |             |       |                 |       |
| Kendall W.  Wright              |       | 2004            |       | $                        | 210,000    |                          | $          | 0                |       | 0                    |       | $ | 254,075 | (1) |
| Vice  President, Airline        |       | 2003            |       | $                        | 210,000    |                          | $          | 7,000            |       | 3,000                |       | $ | 7,252 |   |
| Development                     |       | 2002            |       | $                        | 210,000    |                          | $          | 0                |       | 5,900                |       | $ | 10,518 |   |
|                            |       |            |       |                     |       |                          |       |             |       |                 |       |
| Larry M.  Glasscock, Jr.        |       | 2004            |       | $                        | 215,000    |                          | $          | 0                |       | 20,000               |       | $ | 6,500 | (1) |
| Senior Vice  President,         |       | 2003            |       | $                        | 190,192    |                          | $          | 30,000           |       | 20,000               |       | $ | 0 |   |
| Express  Services (3)           |       | 2002            |       | $                        | 0          |                          | $          | 0                |       | 0                    |       | $ | 0 |   |

 

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***(1)***          “AllOther Compensation” for the 2004 fiscal year includes:  (a) employer matching contributions in theamounts of  $3,990, $2,550, $3,954,$4,895, and $6,500 allocated to their accounts under the AirNet Systems, Inc.Retirement Savings Plan on behalf of Messrs. Biggerstaff, Harris, Qualmann,Wright and Glasscock, respectively; (b) reimbursements in the amounts of$2,368, $1,647, $2,200, $4,179, and $0 related to life insurance premiumpayments made by Messrs. Biggerstaff, Harris, Qualmann, Wright and Glasscock,respectively; and (c) for Mr. Wright, the amount of $245,000 which has beenaccrued and is to be paid in accordance with the terms of Mr. Wright’semployment separation agreement (discussed below under “Employment Contractsand Termination of Employment and Change-in-Control Arrangements”) as a resultof the termination of his employment with AirNet.  The AirNet Systems, Inc. Retirement SavingsPlan is a qualified, broad-based defined contribution plan under which amountsare paid out the named individuals only upon retirement, termination ofemployment, disability or death.

 

***(2)***          Mr.Qualmann became an executive officer of AirNet on September 2, 2003.

 

***(3)***          Mr.Wright ceased to be an executive officer and employee of AirNet effective December 31,2004.

 

***(4)***          Mr.Glasscock became an executive officer of AirNet on February 17, 2004.

*** ***

***Grantsof Options***

*** ***

The following tablesummarizes information concerning options granted to the named individualsduring the 2004 fiscal year.  AirNet hasnever granted stock appreciation rights.

 

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**OPTIONGRANTS IN LAST FISCAL YEAR**

 
| ** **               | ** ** | **Number of  Common  Shares  Underlying  Options** | ** ** | **% of  Total  Options  Granted to  Employees in** | ** ** | **Exercise  Price** | ** ** | **Expiration** | ** ** | **Potential Realizable  Value at Assumed  Annual Rates of Share  Price Appreciation  for Option Term (2) ($)** | ** ** |
|--------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|---------------------|------------|----------------|------------|----------------------------------------------------------------------------------------------------------------|------------|
| **Name**                 | ** ** | **Granted (#) (1)**                                | ** ** | **Fiscal Year**                                    | ** ** | **($/Share)**       | ** ** | **Date**       | ** ** | **5% ($)**                                                                                                     | ** ** | **10%** | ** ** |
|                     |       |                                               |       |                                               |       |                |       |           |       |                                                                                                           |       |   |   |
| Joel E.  Biggerstaff     |       | 40,000                                             |       | 19.4                                               | %          | $                   | 4.13       |           | 2/17/14    |                                                                                                           | $          | 103,893 |   | $ | 263,286 |   |
| Jeffery B.  Harris       |       | 20,000                                             |       | 9.7                                                | %          | $                   | 4.13       |           | 2/17/14    |                                                                                                           | $          | 51,947 |   | $ | 131,643 |   |
| Gary W.  Qualmann        |       | 20,000                                             |       | 9.7                                                | %          | $                   | 4.13       |           | 2/17/14    |                                                                                                           | $          | 51,947 |   | $ | 131,643 |   |
| Kendall W.  Wright       |       | —                                             |       | —                                             |       | —              |       | —         |       | —                                                                                                         |       | — |   |
| Larry M.  Glasscock, Jr. |       | 20,000                                             |       | 9.7                                                | %          | $                   | 4.13       |           | 2/17/14    |                                                                                                           | $          | 51,947 |   | $ | 131,643 |   |

 

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(1)                      Each option was granted on February 17,2004 under the AirNet Systems, Inc. Amended and Restated 1996 Incentive StockPlan (the “1996 Plan”).  Each optionvested as to 20% of the common shares on each of the grant date and the firstanniversary of the grant date and will vest as to 20% of the common shares oneach of the second, third and fourth anniversaries of the grant date.  At the discretion of the CompensationCommittee, the options may have stock-for-stock exercise and tax withholdingfeatures.  If AirNet merges with anotherentity and AirNet is not the survivor in the merger, or if all or substantiallyall of AirNet’s assets or stock is acquired by another entity, each optionwhich has not expired, been cancelled or been exercised prior to the effectivedate of such event, will immediately vest and become exercisable in full.  If the employment of the option holder isterminated by reason of death or total disability, the vested portion of theoption may be exercised for a period of 12 months, subject to its statedterm.  If the employment of the optionholder is terminated for any other reason, the vested portion of the option maybe exercised for a period of three months, subject to its stated term.

 

(2)                      The dollar amounts reflected in this table arethe result of calculations at the 5% and 10% annual appreciation rates set bythe SEC for illustrative purposes, and assume the options are held until theirrespective expiration dates.  Thesedollar amounts are not intended to forecast future performance or possible futureappreciation in the price of AirNet’s common shares.  Shareholders are, therefore, cautionedagainst drawing any conclusions from the appreciation data shown, aside fromthe fact that the option holders will only realize value from the option grantsshown if the price of AirNet’s common shares appreciates, which benefits allshareholders commensurately.

 

***Option Exercises and Holdings***

 

Thefollowing table summarizes information concerning unexercised options held asof December 31, 2004 by each of the named individuals.  None of these individuals exercised optionsduring the 2004 fiscal year.

 
| ** **               | ** ** | **Number of  Common  Shares  Underlying  Options** | ** ** | **Value**        | ** ** | **Number of Common Shares  Underlying Unexercised  Options  at Fiscal Year-End (#)** | ** ** | **Value of Unexercised  In-the-Money Options  at Fiscal Year-End ($) (1)** | ** ** |
|--------------------------|------------|----------------------------------------------------|------------|------------------|------------|--------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **Name**                 | ** ** | **Exercised (#)**                                  | ** ** | **Realized ($)** | ** ** | **Exercisable**                                                                      | ** ** | **Unexercisable**                                                          | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
|                     |       |                                               |       |             |       |                                                                                 |       |                                                                       |       |   |   |   |   |
| Joel E.  Biggerstaff     |       | —                                             |       | N/A              |       | 160,850                                                                              |       | 53,820                                                                     |       | — |   | — |   |
| Jeffery B.  Harris       |       | —                                             |       | N/A              |       | 52,410                                                                               |       | 25,720                                                                     |       | — |   | — |   |
| Gary W.  Qualmann        |       | —                                             |       | N/A              |       | 12,000                                                                               |       | 28,000                                                                     |       | — |   | — |   |
| Kendall W.  Wright (2)   |       | —                                             |       | N/A              |       | 30,260                                                                               |       | 0                                                                          |       | — |   | — |   |
| Larry M.  Glasscock, Jr. |       | —                                             |       | N/A              |       | 12,000                                                                               |       | 28,000                                                                     |       | — |   | — |   |

 

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(1)                      “Value of Unexercised In-the-Money Options atFiscal Year-End” is calculated on the basis of the number of common sharessubject to each option, multiplied by the excess of the fair market value ofAirNet’s common shares on December 31, 2004 ($3.49), over the exerciseprice of the option.  None of the optionsheld by the named individuals were in-the-money on December 31, 2004.

 

(2)                      Following the termination of Mr. Wright’semployment effective December 31, 2004, his vested options (covering anaggregate of 30,260 common shares) held as of December 31, 2004 willremain exercisable until March 31, 2005. The unvested options (covering an aggregate of 6,640 common shares) heldby Mr. Wright on December 31, 2004 were forfeited in accordance with theirrespective terms.

 

**Employment Contracts and Termination of Employment and Change-in-ControlArrangements**

 

Each of Joel E.Biggerstaff, Chairman of the Board, Chief Executive Officer and President, andJeffery B. Harris, Senior Vice President, Bank Services, is party to anemployment agreement with AirNet, effective as of March 1, 2001. Eachemployment agreement provided for an initial employment period ending December 31,2001, which has been and will be automatically renewed for successive one-yearperiods unless either party gives notice to the other of non-renewal at least90 days prior to the end of the relevant employment term. Messrs. Biggerstaffand Harris were entitled to receive initial annual base salaries of $300,000and $230,000, respectively, which may be adjusted upward or downward on anannual basis by the Compensation Committee based on its review of eachindividual’s performance.  Mr.Biggerstaff’s annual base salary for the 2004 fiscal year was $325,000 and willremain at that amount for the 2005 fiscal year. Mr. Harris’ base salary was $230,000 for the 2004 fiscal year and willremain at that amount for the 2005 fiscal year. Each individual is entitled to participate in any bonus plan whichAirNet may establish and in the incentive stock plans of AirNet (i.e., the 1996Plan and the AirNet Systems, Inc. 2004 Stock Incentive Plan ( the “2004Plan”)), in each case at levels determined by the Compensation Committee.  Each individual is also entitled to receiveall health and life insurance coverages, sick leave and disability programs,tax-qualified retirement plan contributions, paid holidays and vacations,perquisites and other fringe benefits provided by AirNet to its activelyemployed senior executives.

 

If the named individual’s employment isterminated by AirNet without “cause” (as defined in his employment agreement)or by the executive officer for “good reason” (as defined in his employmentagreement), he will be entitled to have his base salary and fringe benefits(other than under the 1996 Plan and the 2004 Plan) continued at the level then ineffect for a period of 24 months (in the case of Mr. Biggerstaff) or 12 months(in the case of Mr. Harris, with group medical insurance continuing for 18months). These periods are extended to 36 months and 18 months, respectively,if the termination occurs on or after a “change in control” (as defined in eachemployment agreement). Each individual would also be entitled to receive asingle lump sum payment equal to the pro-rata portion (based on days employedduring the fiscal year in which employment terminated) of any non-discretionarybonus payable based on employment throughout the fiscal year; become fullyvested in all employee benefit programs (other than the Retirement SavingsPlan, in which his interest would vest according to the Retirement SavingsPlan’s terms); receive a lump sum payment equal to his non-vested interest inthe Retirement Savings Plan to the extent forfeited upon termination ofemployment; and be paid his reasonable, out-of-pocket fees and expenses inconnection with outplacement services, in an amount not to exceed $15,000. Eachemployment agreement also provides for the continuation of salary and bonus(reduced by amounts payable under the terms of any disability benefit plan ofAirNet) following a disability until the individual’s employment is terminatedas a result of the disability; and for the continuation of fringe benefits(other than under the 1996 Plan and the 2004 Plan) for a period of 24 months(in the case of Mr. Biggerstaff) or 12 months (in the case of Mr. Harris, withgroup medical insurance continuing for 18 months) following termination of hisemployment due to the disability.

 

Each employment agreement containsconfidentiality and noncompetition provisions which prevent the namedindividual from disclosing confidential information about AirNet and fromcompeting with AirNet during his employment therewith and for an additional twoyears (in the case of Mr. Biggerstaff) or one year (in the case of Mr. Harris)thereafter.

 

On January 14, 2005, AirNetentered into an employment separation agreement and release of claims withKendall W. Wright, who had served as Vice President of Airline Development ofAirNet.  Under the terms of the WrightAgreement, Mr. Wright’s employment with AirNet was terminated effective December 31,2004 (the “Separation Date”) and all further compensation, remuneration,bonuses and eligibility of Mr. Wright under AirNet’s benefit plans terminatedon the Separation Date.  Following theSeparation Date, Mr. Wright has agreed to provide consulting services forAirNet on such matters as both parties agree upon.  Those future consulting services will bereasonably limited so as not to interfere or conflict with any otherresponsibilities Mr. Wright may have. Each hour of actual consulting service will be compensated at a rate of$100.  AirNet has agreed to offer aminimum of 100 hours of consulting service to Mr. Wright within the first twocalendar quarters of 2005.

 

Following theSeparation Date, AirNet will pay to Mr. Wright, as severance benefits, anamount equal to his last annual base salary (i.e., $210,000) over the 12-monthperiod from the Separation Date to December 31, 2005, in 24 equalsemi-monthly installments, less withholdings. AirNet will also directly pay reasonable outplacement fees, up

 

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to a maximum of $10,000, for outplacement services provided to Wrightduring calendar year 2005.  AirNet alsomade a lump sum payment to Mr. Wright of $6,397, representing an amount equalto Mr. Wright’s cost of continuing the medical insurance coverage for Mr.Wright and his eligible dependents under COBRA for the 12-month periodfollowing the Separation Date, less an amount equal to the premium Mr. Wrightwould have paid for such insurance had he continued employment for that12-month period.  All vested options heldby Mr. Wright as of the Separation Date (covering 30,260 common shares) willremain exercisable by Mr. Wright until March 31, 2005 in accordance withtheir respective terms.  All unvestedoptions held by Mr. Wright as of the Separation Date (covering 6,640 commonshares) were forfeited in accordance with their respective terms.

 

**2005 Incentive Compensation Plan**

 

On February 2,2005, the Board of Directors of AirNet, upon the recommendation of theCompensation Committee, adopted the 2005 Incentive Compensation Plan (the “IncentivePlan”).  The Compensation Committee andthe Board of Directors subsequently approved clarifications and modificationsto the Incentive Plan on March 8, 2005 and March 29, 2005.

 

The purpose ofthe Incentive Plan is to promote the following goals of AirNet for the fiscalyear ending on December 31, 2005 (“Fiscal 2005”) by providing incentivecompensation to certain employees of AirNet and its subsidiaries:

 

•**     **Exceedingbudgeted pre-tax income;

 

•**     **Reducingfixed costs;

 

•**     **Creatingand executing contingency plans for changes in AirNet’s Bank business;

 

•**     **Refining AirNet’s business planfor its Express and Jetride businesses to more quickly and profitably diversifyAirNet;

 

•**     **DevelopingAirNet’s leadership team; and

 

•**     **Meetinghigh priority deadlines related to compliance with the Sarbanes-Oxley Act of2002 and other key projects.

 

Participantsin the Incentive Plan include AirNet’s executive officers, including Joel E.Biggerstaff (Chairman of the Board, Chief Executive Officer and President),Gary W. Qualmann (Chief Financial Officer, Treasurer and Secretary), Larry M.Glasscock, Jr. (Senior Vice President, Express Services), Jeffery B. Harris(Senior Vice President, Bank Services), Robert L. Austin (Senior VicePresident, Jetride Services), Craig A. Leach (Vice President, InformationSystems) and Wynn D. Peterson (Vice President, Strategic Planning and Analysis)and certain department managers and department directors.  At the start of Fiscal 2005, there were 45participants in the Incentive Plan.

 

Payments underthe Incentive Plan are based on a combination of AirNet’s pre-tax income forFiscal 2005, operating performance of AirNet’s various business components, andthe achievement of personal goals assigned to each participant. TheCompensation Committee approves personal goals for executive officers andreviews the personal goals for other participants.  The personal goals approved by the CompensationCommittee for each of the executive officers relate to specific businessobjectives related to general business operations (e.g., regulatory compliance,expense reductions, etc.) and each business component (e.g., execution ofspecific contracts with customers and vendors, cost reductions, service improvements,etc.).

 

No incentivecompensation will be paid under the Incentive Plan unless AirNet achieves adesignated threshold level of pre-tax income for Fiscal 2005.  Once the designated threshold level isachieved, incentive compensation payments will increase at predeterminedpre-tax income levels until the maximum compensation payout of $1.9 million isreached at approximately 200% of Fiscal 2004 pre-tax income, determined withoutregard to the Fiscal 2004 impairment charges related to property and equipmentand goodwill.

 

Once theoverall amount of incentive compensation is determined based upon AirNet’spre-tax income, incentive compensation will be allocated to Bank, Express,Jetride and corporate based upon pre-established targets.  Incentive compensation will then be allocatedto the participants most closely involved in managing each of those businessareas based upon each participant’s base salary.  Finally, participants must achieve theirpre-established personal goals to achieve their maximum incentive compensationpayment.

 

The maximumpercentage of annual base salary that each of AirNet’s executive officers mayreceive as incentive compensation under the Incentive Plan is as follows: JoelE. Biggerstaff, 100%; Gary W. Qualmann, Larry M. Glasscock, Jr., Jeffrey B.Harris, and Robert L. Austin, 75%; and Craig A. Leach and Wynn D. Peterson,50%.

 

Except forpayments to the executive officers, payments under the Incentive Plan will bepaid in quarterly payments commencing with the second quarter of Fiscal 2005based upon AirNet’s year to date financial performance.  Payments of incentive compensation to executiveofficers will be made in the first quarter of Fiscal 2006 based upon AirNet’sperformance for Fiscal 2005.  In order toreceive payment, a participant must be actively employed by AirNet or one ofits subsidiaries at the time payment is made. New employees who qualify for the Incentive Plan will be eligible toparticipate on the first day of the calendar quarter following their date ofhire.

 

TheCompensation Committee may amend, modify or terminate the Incentive Plan at anytime.

 

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**Stock Purchase Program**

 

All employees ofAirNet and its subsidiaries, including the executive officers of AirNet, aregiven the opportunity to purchase common shares of AirNet through a stockpurchase program. The stock purchase program was offered under the 1996 Planthrough the offering period which ended June 30, 2004 and has been offeredunder the 2004 Plan since July 1, 2004. Pursuant to this payroll deduction program, which is intended to qualifyas an “employee stock purchase plan” within the meaning of Section 423under the Internal Revenue Code, employees are able to purchase common sharesof AirNet during offering periods of such duration (not exceeding 12 months) asthe Compensation Committee determines. The price at which common shares may be purchased will be the pricedetermined by the Compensation Committee prior to the start of an offeringperiod and may not be less than the lesser of 85% of the fair market value ofthe common shares on the first business day of each offering period and 85% ofthe fair market value of the common shares on the last business day of eachoffering period.  Under the stockpurchase program as offered through the date of this Annual Report on Form10-K, there have been four offering periods of three months each per calendaryear and the purchase price has been equal to the lesser of 85% of the fairmarket value of the common shares on the first business day of each offeringperiod and 85% of the fair market value of the common shares on the lastbusiness day of each offering period. While it is contemplated that there will continue to be four offeringperiods of three months each calendar year under the stock purchase program andthat the purchase price will be determined in the same manner as it has been,the Compensation Committee has the discretion to determine otherwise.

 

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**Compensation of Directors**

 

Directorsof AirNet who are not officers or employees of AirNet (“Non-EmployeeDirectors”) are paid fees for their services as members of the Board ofDirectors and as members of Board committees. The quarterly fee paid in 2004 and to be paid in 2005 for serving as aNon-Employee Director was and remains $6,000. The fee for attending each meeting of the full Board of Directors inperson was $2,000 in 2004 and continues to be the same amount in 2005.  The fee for attending telephonic meetings ofthe full Board was $2,000 in 2004.  At ameeting held on December 22, 2004, the Non-Employee Directors discussed,and on March 9, 2005, the Board of Directors affirmed that, effective forthe telephonic meetings of the full Board held after January 1, 2005, thefee would be $1,000 for each meeting attended.

 

Thefee for Audit Committee members was $2,000 per meeting attended in 2004, withthe Chair of the Audit Committee receiving an additional $1,000 per meetingattended.  The fee for CompensationCommittee members and Nominating and Corporate Governance Committee members was$1,000 per meeting attended in 2004, with the Chair of each of those Committeesreceiving an additional $2,000 for each meeting of the Committee attended.  At a meeting held on December 22, 2004,the Non-Employee Directors discussed, and on March 9, 2005, the Board ofDirectors affirmed that the fees for attending in person Committee meetingsheld after January 1, 2005 would remain the same as they had been in 2004;however, the fees for attending telephonic meetings of each Committee heldafter January 1, 2005 would be one-half (50%) of the amount of the feesfor attending a meeting of the particular Committee in person.

 

Asthe lead director of AirNet, James E. Riddle received an additionalquarterly fee of $6,000 for service in that capacity in 2004 and continues toreceive that quarterly fee in 2005.

 

TheNon-Employee Directors meet without management present in connection with eachof the regularly scheduled meetings of the full Board and receive no meetingfees for attending such meetings.  To theextent the Non-Employee Directors determine to meet by telephone or in personother than in connection with a regularly scheduled Board meeting, they willreceive $2,000 per meeting attended in person and $1,000 per telephonicmeeting.  AirNet’s Non-Employee Directorsare reimbursed for out-of-pocket expenses incurred in connection with theirservice as directors, including travel expenses.

 

Asan officer and employee of AirNet, Joel E. Biggerstaff receives noadditional compensation for serving as a director of AirNet.

 

EffectiveMay 27, 1998, AirNet established the AirNet Systems, Inc. Director DeferredCompensation Plan (the “Director Deferred Plan”).  Voluntary participation in the DirectorDeferred Plan enables a Non-Employee Director of AirNet to defer all or a partof his director’s fees, including federal income tax thereon.  Such deferred fees may be credited to(1) a cash account where the funds will earn interest at the rateprescribed in the Director Deferred Plan or (2) a stock account where thefunds will be converted into a common share equivalent (determined by dividingthe amount to be allocated to the Non-Employee Director’s stock account by thefair market value of AirNet’s common shares when the credit to the stockaccount is made).  In his deferralelection, a Non-Employee Director will elect whether distribution of the amountin his account(s) under the Director Deferred Plan is to be made in a singlelump sum payment or in equal annual installments payable over a period of notmore than ten years.  Distributions willcommence within 30 days of the earlier of (a) the date specified by aNon-Employee Director at the time a deferral election is made or (b) thedate the Non-Employee Director ceases to so serve.  Cash accounts will be distributed in the formof cash and stock accounts will be distributed in the form of common shares orcash, as selected by AirNet.

 

Non-EmployeeDirectors have been automatically granted options to purchase AirNet commonshares in accordance with the terms of the 1996 Plan.  On March 7, 1997, each individual thenserving as a Non-Employee Director was automatically granted an immediatelyexercisable option to purchase 2,000 AirNet common shares with an exerciseprice equal to the fair market value of the common shares on the grantdate.  On August 19, 1998, eachindividual then serving as a Non-Employee Director was automatically granted anoption to purchase 20,000 AirNet common shares with an exercise price equal tothe fair market value of the common shares on the grant date.  Each option granted on August 19, 1998became exercisable with respect to 20% of the common shares on each of thegrant date and the first, second, third and fourth anniversaries of the grantdate.

 

Pursuantto the 1996 Plan, each individual newly-elected or appointed as a Non-EmployeeDirector from August 19, 1998 until June 4, 2004 was automaticallygranted an option to purchase 20,000 AirNet common shares effective on the dateof his election or appointment to the Board. In addition, on the first business day of each of the 2002, 2003 and2004 fiscal years of AirNet, each individual who was then serving as aNon-Employee Director and had served for at least one full one-year term as aNon-Employee Director, was automatically granted an option to purchase 4,000AirNet common shares.  All of theseoptions were granted with an exercise price per share equal to the fair marketvalue of the common shares on the grant date. In addition, all of these options have vested and are to vest and becomeexercisable with respect to 20% of the common shares on each of the grant dateand the first, second, third and fourth anniversaries of the grant date.

 

Eachoption granted to a Non-Employee Director under the 1996 Plan since August 18,1999, will become fully exercisable if the Non-Employee Director retires fromservice as an AirNet director, becomes totally disabled or dies or if AirNetmerges

 

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withanother entity and AirNet is not the survivor in the merger, or if all orsubstantially all of AirNet’s assets or stock is acquired by another entity.

 

Eachoption granted to a Non-Employee Director under the 1996 Plan has a ten-yearterm.  If a Non-Employee Director ceasesto be a member of the Board, his vested options may be exercised for a periodof three months (12 months in the case of a Non-Employee Director who becomesdisabled or dies) after the date his service ends, subject in each case to thestated terms of the options.  However, aNon-Employee Director who ceases to be a director after having been convictedof, or pled guilty or nolo contendere to, a felony immediately forfeits hisoptions.

 

Following the approval of the 2004 Plan by theshareholders of AirNet at the 2004 Annual Meeting of Shareholders held on June 4,2004, no further option grants have been or will be made to the Non-EmployeeDirectors under the 1996 Plan.

 

Under the 2004Plan, each individual newly-elected or appointed as a Non-Employee Directorafter June 4, 2004 is to be granted an option to purchase 20,000 AirNetcommon shares effective on the date of his election or appointment to theBoard.  In addition, on the firstbusiness day of each fiscal year of AirNet, each individual who is then servingas a Non-Employee Director and has served for at least one full one-year termas a Non-Employee Director, is to be automatically granted an option topurchase 4,000 AirNet common shares. However, each of the individuals serving as a Non-Employee Director on January 3,2005 (the first business day of the 2005 fiscal year of AirNet), determined notto accept the option to purchase 4,000 AirNet common shares which would havebeen automatically granted to him on that date.

 

Anyoptions automatically granted in the future to Non-Employee Directors under the2004 Plan will vest and become exercisable as to 20% of the common shares oneach of the grant date and the first, second, third and fourth anniversaries ofthe grant date and will have an exercise price per share equal to the fairmarket value of the underlying common shares on the grant date.  Each such option will become fully exercisableif the Non-Employee Director retires from service as an AirNet director afterhaving served at least one full one-year term, becomes totally disabled or diesor if AirNet undergoes a merger or consolidation or reclassification of thecommon shares or the exchange of the common shares for the securities ofanother entity (other than a subsidiary of AirNet) that has acquired AirNet’sassets or which is in control of an entity that has acquired AirNet’s assets.

 

Eachoption automatically granted in the future to a Non-Employee Director under the2004 Plan will have a ten-year term.  Ifa Non-Employee Director ceases to be a member of the Board, his vested optionsmay be exercised for a period of three months (24 months in the case of aNon-Employee Director who becomes disabled, dies or retires) after the date hisservice ends, subject in each case to the stated terms of the options.  However, if a Non-Employee Director’s serviceas a director is terminated for cause, he will immediately forfeit his options.

 

**ITEM 12****– SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.**

 

**Equity Compensation Plan Information**

 

AirNet has three equity compensation plans underwhich common shares may be issued to eligible officers, directors or employeesof AirNet and its subsidiaries in exchange for consideration in the form ofgoods or services:  the 1996 Plan, the2004 Plan and the Director Deferred Plan. The 1996 Plan and the 2004 Plan have been approved by the shareholdersof AirNet, while the Director Deferred Plan has not.

 

The following table shows, as of December 31,2004: (a) the number of common shares issuable upon exercise of outstandingoptions granted under the 1996 Plan and outstanding rights to purchase grantedpursuant to the stock purchase program portion of the 2004 Plan; (b) theweighted average exercise price of outstanding options granted under the 1996Plan; and (c) the number of common shares remaining available for futureissuance under the 1996 Plan and the 2004 Plan, excluding common shares issuableupon exercise of outstanding options and rights to purchase.   The following table also shows comparableinformation, as of December 31, 2004, for the Director Deferred Plan.  As of December 31, 2004, no options orother awards had been granted under the 2004 Plan other than in connection withthe stock purchase program portion of the 2004 Plan.

 

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| **Plan Category**                                       | ** ** | **Number of common  shares to be issued  upon exercise of  outstanding  options, warrants  and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of common shares  remaining available for  future issuance under  equity compensation plans  (excluding common shares  reflected in column (a))** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **(a)**                                                                                                 | ** ** | **(b)**                                                                            | ** ** | **(c)**                                                                                                                                                    | ** ** |
| Equity compensation  plans approved by shareholders     |       | 1,016,700                                                                                               | (1)        | $                                                                                  | 7.99       |                                                                                                                                                       | 982,847    | (3) |
|                                                    |       |                                                                                                    |       |                                                                               |       |                                                                                                                                                       |       |
| Equity  compensation plans not approved by shareholders |       | —                                                                                                  | (4)        | n/a                                                                                | (5)        | —                                                                                                                                                     | (6)        |
|                                                    |       |                                                                                                    |       |                                                                               |       |                                                                                                                                                       |       |
| Total                                                   |       | 1,016,700                                                                                               |       | $                                                                                  | 7.99       |                                                                                                                                                       | 982,847    |   |

 

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(1)          Includes 1,008,000 common shares issuable uponthe exercise of options granted under the 1996 Plan and 8,700 common sharessubject to outstanding rights to purchase granted pursuant to the stockpurchase program portion of the 2004 Plan.

 

(2)          Represents the weighted-average exercise priceof outstanding options granted under the 2004 Plan.  Rights to purchase common shares under thestock purchase program portion of the 2004 Plan are priced based on the lesserof 85% of the fair market value of AirNet’s common shares on the first businessday of the offering period or 85% of the fair market value of AirNet’s commonshares on the last business day of the offering period.  All of the 8,700 rights to purchase commonshares outstanding as of December 31, 2004 under the stock purchaseprogram portion of the 2004 Plan were exercised on January 12, 2005 at aprice of $2.97 per share.

 

(3)          No further grants may be made under the 1996Plan.  Of the 982,847 common sharesremaining available for issuance under the 2004 Plan as of December 31,2004, 132,847 common shares are reserved for issuance under the stock purchaseprogram portion of the 2004 Plan.

 

(4)          Reflects the common share equivalents attributable to Non-EmployeeDirectors’ stock accounts under the Director Deferred Plan.  As of December 31, 2004, none of theNon-Employee Directors were participating in the Director Deferred Plan.

 

(5)          Please see the description of the DirectorDeferred Plan included in “ITEM 11 – EXECUTIVE COMPENSATION” of this Annual Report on Form 10-K under thecaption “Compensation of Directors”,****whichdescription is incorporated herein by this reference.

 

(6)          The number of common share equivalentsattributable to participants’ accounts under the Director Deferred Plan willdepend upon the number of Non-Employee Directors electing to defer their fees,the amount deferred by each Non-Employee Director and whether the deferred feesare allocated to a stock account or a cash account under the Director DeferredPlan.  The Director Deferred Plan doesnot specify a limit as to the number of common shares which may be issuedthereunder.

 

**SecurityOwnership of Certain Beneficial Owners and Management**

 

Thefollowing table furnishes information regarding the number and percentage ofoutstanding common shares of AirNet beneficially owned by (i) each currentdirector of AirNet; (ii) each individual named in the Summary CompensationTable; (iii) all current directors and executive officers of AirNet as a group;and (iv) each person known by AirNet to own beneficially more than fivepercent of the outstanding common shares of AirNet, in each case as of March 28,2005 (except as otherwise noted). The address of each of the current executiveofficers and directors is c/o AirNet, 3939 International Gateway, Columbus,Ohio 43219.

 

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| ** **                                                                                   | ** ** | **Amount and Nature of Beneficial  Ownership (1)** | ** ** | ** **                                                                                                                                  | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Name of Beneficial Owner**                                                                 | ** ** | **Common  Shares  Presently Held**                 | ** ** | **Common Shares Which Can  Be Acquired Upon Exercise  of Options Currently  Exercisable or Which Will  Become  Exercisable Within 60 Days** | ** ** | **Total** | ** ** | **Percent of  Class (2)** | ** ** |
| ** **                                                                                   | ** ** | ** **                                         | ** ** | ** **                                                                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Joel E.  Biggerstaff (3)                                                                     |       | 20,000                                             | (4)        | 183,270                                                                                                                                     |       | 203,270 |   | 2.0 | % |
| Russell M.  Gertmenian                                                                       |       | 5,000                                              | (5)        | 40,400                                                                                                                                      |       | 45,400 |   |   | (6) |
| David P.  Lauer                                                                              |       | 2,000                                              |       | 34,400                                                                                                                                      |       | 36,400 |   |   | (6) |
| Bruce D.  Parker                                                                             |       | 0                                                  |       | 13,600                                                                                                                                      |       | 13,600 |   |   | (6) |
| James E.  Riddle                                                                             |       | 5,000                                              |       | 30,400                                                                                                                                      |       | 35,400 |   |   | (6) |
| Larry M.  Glasscock, Jr. (3)                                                                 |       | 14,000                                             |       | 20,000                                                                                                                                      |       | 34,000 |   |   | (6) |
| Jeffery B.  Harris (3)                                                                       |       | 2,497                                              |       | 62,530                                                                                                                                      |       | 65,027 |   |   | (6) |
| Gary W.  Qualmann (3)                                                                        |       | 3,000                                              |       | 16,000                                                                                                                                      |       | 19,000 |   |   | (6) |
| Kendall W.  Wright (3)                                                                       |       | 0                                                  |       | 30,260                                                                                                                                      |       | 30,260 |   |   | (6) |
|                                                                                         |       |                                               |       |                                                                                                                                        |       |   |   |   |   |
| All current  directors and  executive officers as a  group (11 individuals) (7)              |       | 64,659                                             |       | 475,350                                                                                                                                     |       | 540,009 |   | 5.4 | % |
| Heartland  Advisors, Inc.  William J. Nasgovitz  789 North Water Street  Milwaukee, WI 53202 |       | 1,420,400                                          | (8)        | —                                                                                                                                      |       | 1,420,400 | (8) | 14.0 | % |
| Royce &  Associates, LLC  1414 Avenue of the Americas  New York, NY 10019                |       | 1,177,100                                          | (9)        | —                                                                                                                                      |       | 1,177,100 | (9) | 11.6 | % |
| Dimensional  Fund Advisors Inc.  1299 Ocean Avenue, 11th Floor  Santa Monica, CA 90401       |       | 858,600                                            | (10)       | —                                                                                                                                      |       | 858,600 | (10) | 8.5 | % |
| Phillip  Goldstein 60 Heritage Drive Pleasantville, NY 10570                                 |       | 839,500                                            | (11)       | —                                                                                                                                      |       | 839,500 | (11) | 8.3 | % |
| FMR Corp.  Edward C. Johnson 3d  Abigail P. Johnson  82 Devonshire Street  Boston, MA 02109  |       | 684,200                                            | (12)       | —                                                                                                                                      |       | 684,200 | (12) | 6.8 | % |

 

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(1)                      Unless otherwise indicated, the beneficialowner has sole voting and dispositive power as to all common shares reflectedin the table.

 

(2)                      The percent of class is based upon the sum of(i) 10,118,583 common sharesoutstanding on March 28, 2005 and (ii) the number of common shares as towhich the named person has the right to acquire beneficial ownership upon theexercise of options which are currently exercisable or which will becomeexercisable within 60 days of March 31, 2005.

 

(3)                      Individual named in the Summary CompensationTable.

 

(4)                      Of these 20,000 common shares, 5,000 commonshares are held by Mr. Biggerstaff’s minor children in accounts establishedunder the Uniform Gifts to Minors Act.

 

63

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(5)                      Of these 5,000 common shares, 2,100 commonshares are held of record by Mr. Gertmenian’s wife who has sole voting anddispositive power as to the 2,100 common shares.

 

***(6)***                      Representsownership of less than 1% of the outstanding common shares.

*** ***

***(7)***                      Includes thefive directors identified in the table; Messrs. Glasscock, Harris, andQualmann; and Robert L. Austin, Senior Vice President, Jetride Services; CraigA. Leach, Vice President, Information Systems; and Wynn D. Peterson, VicePresident, Strategic Planning and Analysis.

*** ***

(8)                      Based on information contained in a Schedule 13Gamendment filed with the SEC on January 13, 2005, Heartland Advisors,Inc., a registered investment adviser (“HAI”), and William J. Nasgovitz,President and principal shareholder of HAI, may be deemed to have beneficiallyowned 1,420,400 common shares as of December 31, 2004, with shared votingpower as to 1,330,400 common shares and shared dispositive power as to1,420,400 common shares.  The HeartlandValue Fund, a series of the Heartland Group, Inc., a registered investmentcompany, owns 1,000,000 of the common shares reported (or 9.9% of theoutstanding common shares).  Theremaining common shares reported are owned by various other accounts managed byHAI on a discretionary basis.  HAI may bedeemed to beneficially own the common shares by virtue of its investmentdiscretion and voting authority granted by certain clients, which may berevoked at any time.  Mr. Nasgovitzmay be deemed to beneficially own the common shares as a result of hisownership interest in HAI.  HAI and Mr.Nasgovitz specifically disclaim beneficial ownership of the common sharesreported and do not admit that they constitute a group.

 

(9)                      Based on information contained in a Schedule 13Gamendment filed with the SEC on January 20, 2005, Royce & Associates,LLC, a registered investment adviser, may be deemed to have beneficially owned1,177,100 common shares as of December 31, 2004, with sole voting anddispositive power as to all of those common shares.

 

(10)                Based on information contained in a Schedule 13Gamendment filed with the SEC on February 9, 2005, Dimensional FundAdvisors Inc., a registered investment adviser (“Dimensional”), may be deemedto have beneficially owned 858,600 common shares as of December 31, 2004,all of which common shares were held in portfolios of four registeredinvestment companies to which Dimensional furnishes investment advice and ofother commingled group trusts and separate accounts for which Dimensionalserves as investment manager.  The commonshares are owned by these investment companies, trusts and accounts.  In its role as investment adviser andinvestment manager, Dimensional possesses both sole voting and sole dispositivepower as to the common shares held in the portfolios of these investmentcompanies, trusts and accounts. Dimensional disclaims beneficial ownership of the reported commonshares.

 

(11)                Based on information contained in a Schedule 13Damendment filed with the SEC on March 1, 2005, Phillip Goldstein may bedeemed to have beneficially owned 839,500 common shares as of March 1,2005, with sole voting power as to 336,900 common shares, shared voting poweras to 25,000 common shares and sole dispositive power as to 839,500 commonshares.  Mr. Goldstein, a self-employedinvestment advisor, filed a joint 13D amendment with Andrew Dakos as members ofa group.  Mr. Dakos may be deemed to havebeneficially owned 191,900 common shares (or 1.9% of the outstanding commonshares) as of March 1, 2005, with sole voting and dispositive power as tothe 191,900 common shares.

 

(12)                Based on information contained in a Schedule 13Gamendment filed with the SEC on February 14, 2005, each of FMR Corp.,Edward C. Johnson 3d and Abigail P. Johnson may be deemed to havebeneficially owned 684,200 common shares as of December 31, 2004, withsole dispositive power as to those common shares.  Fidelity Management & Research Company,82 Devonshire Street, Boston, MA 02109 (“Fidelity”), a wholly-owned subsidiaryof FMR Corp. and a registered investment adviser, was the beneficial owner of684,200 common shares (or 6.8% of the outstanding common shares) as a result ofacting as investment adviser to various registered investment companies.  The ownership of one investment company,Fidelity Low Priced Stock Fund (the “Fund”), 82 Devonshire Street, Boston, MA02109, amounted to 684,200 common shares (or 6.8% of the outstanding commonshares).  Edward C. Johnson 3d, Chairmanof FMR Corp., FMR Corp., through its control of Fidelity, and the Fund each hassole power to dispose of the 684,200 common shares owned by the Fund.  Fidelity carries out the voting of the commonshares under written guidelines established by the Fund’s Boards of Trustees,and neither FMR Corp. nor Edward C. Johnson 3d has the sole power to vote ordirect the voting of the common shares owned by the Fund.  Members of the Edward C. Johnson 3d familyare the predominant owners of Class B shares of common stock of FMR Corp.,representing approximately 49% of the voting power of FMR Corp.  Mr. Johnson 3d owns 12.0% and Abigail P.Johnson owns 24.5% of the aggregate outstanding voting stock of FMR Corp.  Abigail P. Johnson is a director of FMR Corp.  The Johnson family group and all other ClassB shareholders have entered into a shareholders’ voting agreement under whichall Class B shares will be voted in accordance with the majority vote of ClassB shares.  Accordingly, through theirownership of voting common stock and the execution of the shareholders’ votingagreement, members of the Johnson family may be deemed, under the InvestmentCompany Act of 1940, to form a controlling group with respect to FMR Corp.

 

64

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**ITEM 13****– CERTAIN RELATIONSHIIPS ANDRELATED TRANSACTIONS**

 

Russell M. Gertmenian, a director of AirNet, is apartner with Vorys, Sater, Seymour and Pease LLP and currently serves as Vice –Chair of that firm’s Executive Committee. Vorys, Sater, Seymour and Pease LLP rendered legal services to AirNetduring the 2004 fiscal year and continues to do so.

 

**ITEM 14****– PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

**Pre-Approval of Services Performed by IndependentRegistered Public Accounting Firm**

 

Under applicable SEC rules, the Audit Committee is topre-approve the audit and non-audit services performed by the independentregistered public accounting firm employed by AirNet in order to ensure thatthey do not impair that firm’s independence from AirNet.  The SEC’s rules specify the types ofnon-audit services that an independent registered public accounting firm maynot provide to its client and establish the Audit Committee’s responsibilityfor administration of the engagement of the independent registered publicaccounting firm.

 

Consistent with the SEC’s rules, the charter of theAudit Committee requires that the Audit Committee review and pre-approve allaudit services and permitted non-audit services provided by the independentregistered public accounting firm employed by AirNet or any of itssubsidiaries.  The Audit Committee maydelegate pre-approval authority to one or more members of the Audit Committeeand if it does, the decision of that member or members must be presented to thefull Audit Committee at its next scheduled meeting.

 

All requests or applications for services to be providedby the independent registered public accounting firm must be submitted to theAudit Committee by both the independent registered public accounting firm andthe Chief Financial Officer, and must include a joint statement as to whether,in their view, the request or application is consistent with the SEC’s rulesgoverning the independence of the independent registered public accountingfirm.

 

**Fees of Independent Registered Public Accounting Firm**

 

The independent registered public accounting firm ofErnst & Young LLP (“E&Y”) was employed by AirNet during each of the2004 and 2003 fiscal years.  Theaggregate fees billed to AirNet and its subsidiaries by E&Y forprofessional services rendered in each of the 2004 fiscal year and the 2003fiscal year were as follows:

 
| ** **          | ** ** | **2004  Fiscal Year** | ** ** | **2003  Fiscal Year** | ** ** |
|---------------------|------------|-----------------------|------------|-----------------------|------------|
| Audit Fees          |       | $                     | 236,985    |                  | $          | 191,485 |   |
| Audit-Related  Fees |       | $                     | 17,400     |                  | $          | 10,500 |   |
| Tax Fees            |       | $                     | 12,925     |                  | $          | 42,890 |   |
| All Other  Fees     |       | $                     | 0          |                  | $          | 0 |   |
|                |       |                  |       |                  |       |
| Total               |       | $                     | 267,310    |                  | $          | 244,875 |   |

 

Inthe above table, in accordance with the applicable SEC rules, “audit fees”include fees for professional services rendered by E&Y in connection withthe audit of AirNet’s annual consolidated financial statements and reviews ofthe consolidated financial statements included in AirNet’s Quarterly Reports onForm 10-Q.  In addition, the “audit fees”for the 2004 fiscal year include fees for services rendered by E&Y inconnection with filings made by AirNet with the SEC.  “Audit-related fees” include fees forservices rendered in connection with the audit of AirNet’s Retirement SavingsPlan and the related Annual Report on Form 11-K filing, and internalcontrol reviews.  “Tax fees” include feesfor tax planning, research and compliance services.

 

Allof the services rendered by E&Y to AirNet and its subsidiaries during eachof the 2004 fiscal year and the 2003 fiscal year had been pre-approved by theAudit Committee.

 

65

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**PARTIV**

** **

**ITEM 15****– EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

(a)                                  Documentsfiled as a part of this Annual Report on Form 10-K:

 

1.               The followingconsolidated financial statements are included in “Item 8 - FinancialStatements and Supplementary Data” of this Annual Report on Form 10-K:

 
|   | Report  of Independent Registered Public Accounting Firm                                                         |   |
|--------|------------------------------------------------------------------------------------------------------------------|--------|
|   | Consolidated Balance Sheets as of December 31, 2004 and 2003                                                |   |
|   | Consolidated  Statements of Operations for the years ended December 31, 2004, 2003 and  2002                |   |
|   | Consolidated  Statements of Cash Flows for the years ended December 31, 2004, 2003 and  2002                |   |
|   | Consolidated  Statements of Shareholders’ Equity for the years ended December 31,  2004, 2003 and 2002 |   |
|   | Notes to  Consolidated Financial Statements                                                                      |   |

 

2.               Schedule II -Valuation and Qualifying Accounts is included below:

 
| **COL A**                                                                                       | ** ** | **COL B**                        | ** ** | **COL C  Additions**                | ** ** | **COL D**                       | ** ** | **COL E**           | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|---------------------|------------|
| **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,  2004: Deducted from asset accounts; Allowance for doubtful accounts |       | $                                | 515,046    |                                | $          | 522,570                         |       | $                   | 0          |   | $ | 163,172 |   | $ | 874,444 |   |
|                                                                                            |       |                             |       |                                |       |                            |       |                |       |   |   |
| Year end December 31,  2003: Deducted from asset accounts; Allowance for doubtful accounts |       | $                                | 864,888    |                                | $          | 328,459                         |       | $                   | 0          |   | $ | 678,301 |   | $ | 515,046 |   |
|                                                                                            |       |                             |       |                                |       |                            |       |                |       |   |   |
| Year end December 31,  2002: Deducted from asset accounts; Allowance for doubtful accounts |       | $                                | 660,647    |                                | $          | 432,290                         |       | $                   | 0          |   | $ | 228,049 |   | $ | 864,888 |   |
|                                                                                                 |            |                                  |            |                                     |            |                                 |            |                     |            |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Uncollectible accounts written off, net of recoveries

 

Schedules not listed above have been omittedbecause they are not required or the information required to be set forththerein is included in the consolidated financial statements or notes thereto.

 

66

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3.                                       Exhibits

 

The following exhibits are included orincorporated by reference in this Annual Report on Form 10-K:

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **Location**                                                                                                                                                                                                                         |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | ** **                                                                                                                                                                                                                           |
| 2.1         |       | Asset Purchase Agreement, dated July 11, 2003, by and among  AirNet Systems, Inc., AirNet Management, Inc., Mercury Business Services,  Inc., Andrew R. Cooke, Peter G. Salisbury and Christopher F.  Valente. [Pursuant to Item 601(b)(2) of SEC Regulation S-K, certain schedules  and exhibits to this Asset Purchase Agreement have not been filed with this  exhibit. The schedules contain various items relating to the assets being  sold and the representations and warranties of the parties to the Asset  Purchase Agreement. AirNet Systems, Inc. has agreed to furnish supplementally  any omitted schedule or exhibit to the SEC upon request.]  |       | Incorporated herein by reference from Exhibit 2.1 to AirNet Systems,  Inc.’s Current Report on Form 8-K, dated and filed on July 15, 2003  (File No. 1-13025)                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                                                                                                                                                                                                                                 |
| 3.1              |       | Amended Articles of AirNet Systems, Inc. as filed with the Ohio  Secretary of State on April 29, 1996                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | Incorporated herein by reference from 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 from  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 from  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 from  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 from  Exhibit 3.1 to AirNet Systems, Inc.’s Form 10-Q for the quarterly period  ended June 30, 2000 (File No. 1-13025) (the “June 30, 2000 Form  10-Q”)                    |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                                                                                                                                                                                                                                 |
| 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 from  Exhibit 3.2 to AirNet Systems, Inc.’s June 30, 2000 Form 10-Q                                                                                                                       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                                                                                                                                                                                                                                 |
| 4.1              |       | Amended and Restated Credit Agreement,  dated as of May 28, 2004, among AirNet Systems, Inc., the lenders from time  to time party thereto and The Huntington National Bank, as LC Issuer, as  Swingline Lender and as Administrative Agent                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | Incorporated herein by reference from  Exhibit 4.1 to AirNet Systems, Inc.’s Current Report on Form 8-K dated June 21,  2004 and filed on June 22, 2004 (File No. 1-13025) (the “June 2004  Form 8-K”) |

 

67

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| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                   | ** ** | **Location**                                                                       |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                        | ** ** | ** **                                                                         |
| 4.2              |       | Continuing Security Agreement, dated as of  May 28, 2004, between AirNet Systems, Inc. and The Huntington National Bank,  as lender and as agent                                  |       | Incorporated herein by reference from  Exhibit 4.2 to the June 2004 Form 8-K  |
|             |       |                                                                                                                                                                              |       |                                                                               |
| 4.3              |       | Continuing Security Agreement, dated as of  May 28, 2004, between Float Control, Inc. and The Huntington National Bank,  as lender and as agent                                   |       | Incorporated herein by reference from  Exhibit 4.3 to the June 2004 Form 8-K  |
|             |       |                                                                                                                                                                              |       |                                                                               |
| 4.4              |       | Continuing Security Agreement, dated as of  May 28, 2004, between AirNet Management, Inc. and The Huntington National  Bank, as lender and as agent                               |       | Incorporated herein by reference from  Exhibit 4.4 to the June 2004 Form 8-K  |
|             |       |                                                                                                                                                                              |       |                                                                               |
| 4.5              |       | Continuing Security Agreement, dated as of  May 28, 2004, between Jetride, Inc. and The Huntington National Bank, as  lender and as agent                                         |       | Incorporated herein by reference from  Exhibit 4.5 to the June 2004 Form 8-K  |
|             |       |                                                                                                                                                                              |       |                                                                               |
| 4.6              |       | Continuing Security Agreement, dated as of  May 28, 2004, between timexpress.com, Inc. and The Huntington National Bank,  as lender and as agent                                  |       | Incorporated herein by reference from  Exhibit 4.6 to the June 2004 Form 8-K  |
|             |       |                                                                                                                                                                              |       |                                                                               |
| 4.7              |       | Continuing Security Agreement, dated as of  May 28, 2004, between Fast Forward Solutions, LLC and The Huntington National  Bank, as lender and as agent                           |       | Incorporated herein by reference from  Exhibit 4.7 to the June 2004 Form 8-K  |
|             |       |                                                                                                                                                                              |       |                                                                               |
| 4.8              |       | Stock Pledge Agreement, dated as of May 28,  2004, between AirNet Systems, Inc. in favor of The Huntington National Bank,  as agent                                               |       | Incorporated herein by reference from  Exhibit 4.8 to the June 2004 Form 8-K  |
|             |       |                                                                                                                                                                              |       |                                                                               |
| 4.9              |       | Security Agreement Pledge and Assignment of  Membership Interest, dated as of May 28, 2004, between AirNet Systems, Inc.  and The Huntington National Bank, as agent              |       | Incorporated herein by reference from  Exhibit 4.9 to the June 2004 Form 8-K  |
|             |       |                                                                                                                                                                              |       |                                                                               |
| 4.10             |       | Mortgage, Security Agreement and  Assignment, dated as of May 28, 2004, between AirNet Systems, Inc. and The  Huntington National Bank, as agent                                  |       | Incorporated herein by reference from  Exhibit 4.10 to the June 2004 Form 8-K |
|             |       |                                                                                                                                                                              |       |                                                                               |
| 4.11             |       | Replacement Subsidiary Guaranty, dated as  of May 28, 2004, by AirNet Management, Inc., Float Control, Inc. and Jetride,  Inc. in favor of The Huntington National Bank, as agent |       | Incorporated herein by reference from  Exhibit 4.11 to the June 2004 Form 8-K |
|             |       |                                                                                                                                                                              |       |                                                                               |
| 4.12             |       | Subsidiary Guaranty, dated as of May 28,  2004, by timexpress.com, Inc. in favor of The Huntington National Bank, as  agent                                                       |       | Incorporated herein by reference from  Exhibit 4.12 to the June 2004 Form 8-K |
|             |       |                                                                                                                                                                              |       |                                                                               |
| 4.13             |       | Subsidiary Guaranty, dated as of May 28,  2004, by Fast Forward Solutions, LLC in favor of The Huntington National  Bank, as agent                                                |       | Incorporated herein by reference from  Exhibit 4.13 to the June 2004 Form 8-K |

 

68

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| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                           | ** ** | **Location**                                                                                                                                                                                                                                     |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                                                                                                | ** ** | ** **                                                                                                                                                                                                                                       |
| 4.14             |       | Waiver Letter, dated as of November 12,  2004, by and among AirNet Systems, Inc., The Huntington National Bank, as  agent for and on behalf of the lenders from time to time party thereto, Bank  One, N.A., Fifth Third Bank and The Huntington National Bank as a lender and  the LC Issuer        |       | Incorporated herein by reference from  Exhibit 4.24 to AirNet Systems, Inc.’s Quarterly Report on Form 10-Q for the  quarterly period ended September 30, 2004 (File No. 1-13025) (the “September 30,  2004 Form 10-Q”) |
|             |       |                                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                             |
| 4.15             |       | Change in Terms Agreement, dated as of November 12,  2004, by and between AirNet Systems, Inc. and The Huntington National Bank,  in its capacity as administrative agent for and on behalf of the Lenders from  time to time party to the Amended and Restated Credit Agreement dated May 28,  2004 |       | Incorporated herein by reference from  Exhibit 4.25 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q                                                                                                                             |
|             |       |                                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                             |
| 4.16             |       | Loan and Security Agreement (aircraft)  [Loan Number: 1000119495], dated as of June 15, 2004, between Banc One  Leasing Corporation and Jetride, Inc.                                                                                                                                                |       | Incorporated herein by reference from  Exhibit 4.1 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                             |
| 4.17             |       | Business Purpose Promissory Note (fixed  rate//principal and interest) [Loan Number: 1000119495], issued on June 15,  2004, by Jetride, Inc. in favor of Banc One Leasing Corporation in the amount  of $7,500,000                                                                                   |       | Incorporated herein by reference from  Exhibit 4.2 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                             |
| 4.18             |       | Corporate Guaranty [Loan Number:  1000119495], dated as of June 15, 2004, from AirNet Systems, Inc. in  favor of Banc One Leasing Corporation                                                                                                                                                        |       | Incorporated herein by reference from  Exhibit 4.3 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                             |
| 4.19             |       | Loan and Security Agreement (aircraft)  [Loan Number: 1000119641], dated as of June 30, 2004, between Banc One  Leasing Corporation and Jetride, Inc.                                                                                                                                                |       | Incorporated herein by reference from  Exhibit 4.4 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                             |
| 4.20             |       | Business Purpose Promissory Note (fixed  rate//principal and interest) [Loan Number: 1000119641], issued on June 30,  2004, by Jetride, Inc. in favor of Banc One Leasing Corporation in the amount  of $5,000,000                                                                                   |       | Incorporated herein by reference from  Exhibit 4.5 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                             |
| 4.21             |       | Corporate Guaranty [Loan Number:  1000119641], dated as of June 30, 2004, from AirNet Systems, Inc. in  favor of Banc One Leasing Corporation                                                                                                                                                        |       | Incorporated herein by reference from  Exhibit 4.6 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                             |
| 4.22             |       | Acknowledgment of Borrower [Loan Number:  1000119641], dated as of June 30, 2004, by Jetride, Inc. in favor of  Banc One Leasing Corporation acknowledging sale and assignment by Banc One  Leasing Corporation to First Union Commercial Corporation of “Loan Documents”                  |       | Incorporated herein by reference from  Exhibit 4.7 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                             |
| 4.23             |       | Loan and Security Agreement (aircraft)  [Loan Number: 1000119649], dated as of June 29, 2004, between Banc One  Leasing Corporation and Jetride, Inc.                                                                                                                                                |       | Incorporated herein by reference from  Exhibit 4.8 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q                                                                                                                              |

 

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| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                          | ** ** | **Location**                                                                                                         |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                                                                               | ** ** | ** **                                                                                                           |
| 4.24             |       | Business Purpose Promissory Note (fixed  rate//principal and interest) [Loan Number: 1000119649], issued on June 29,  2004, by Jetride, Inc. in favor of Banc One Leasing Corporation in the amount  of $5,000,000                                                                  |       | Incorporated herein by reference from  Exhibit 4.9 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q  |
|             |       |                                                                                                                                                                                                                                                                                     |       |                                                                                                                 |
| 4.25             |       | Corporate Guaranty [Loan Number: 1000119649],  dated as of June 29, 2004, from AirNet Systems, Inc. in favor of Banc  One Leasing Corporation                                                                                                                                       |       | Incorporated herein by reference from  Exhibit 4.10 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|             |       |                                                                                                                                                                                                                                                                                     |       |                                                                                                                 |
| 4.26             |       | Acknowledgment of Borrower [Loan Number:  1000119649], dated as of June 29, 2004, by Jetride, Inc. in favor of  Banc One Leasing Corporation acknowledging sale and assignment by Banc One  Leasing Corporation to PNC Leasing, LLC of “Loan Documents”                   |       | Incorporated herein by reference from Exhibit  4.11 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|             |       |                                                                                                                                                                                                                                                                                     |       |                                                                                                                 |
| 4.27             |       | Loan and Security Agreement (aircraft)  [Loan Number: 1000119650], dated as of June 30, 2004, between Banc One  Leasing Corporation and Jetride, Inc.                                                                                                                               |       | Incorporated herein by reference from  Exhibit 4.12 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|             |       |                                                                                                                                                                                                                                                                                     |       |                                                                                                                 |
| 4.28             |       | Business Purpose Promissory Note (fixed  rate//principal and interest) [Loan Number: 1000119650], issued on June 30,  2004, by Jetride, Inc. in favor of Banc One Leasing Corporation in the amount  of $5,000,000                                                                  |       | Incorporated herein by reference from  Exhibit 4.13 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|             |       |                                                                                                                                                                                                                                                                                     |       |                                                                                                                 |
| 4.29             |       | Corporate Guaranty [Loan Number:  1000119650], dated as of June 30, 2004, from AirNet Systems, Inc. in  favor of Banc One Leasing Corporation                                                                                                                                       |       | Incorporated herein by reference from  Exhibit 4.14 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|             |       |                                                                                                                                                                                                                                                                                     |       |                                                                                                                 |
| 4.30             |       | Acknowledgment of Borrower [Loan Number:  1000119650], dated as of June 30, 2004, by Jetride, Inc. in favor of  Banc One Leasing Corporation acknowledging sale and assignment by Banc One  Leasing Corporation to First Union Commercial Corporation of “Loan Documents” |       | Incorporated herein by reference from  Exhibit 4.15 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|             |       |                                                                                                                                                                                                                                                                                     |       |                                                                                                                 |
| 4.31             |       | Loan and Security Agreement (aircraft)  [Loan Number: 1000119771], dated as of July 12, 2004, between Banc One  Leasing Corporation and Jetride, Inc.                                                                                                                               |       | Incorporated herein by reference from  Exhibit 4.16 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|             |       |                                                                                                                                                                                                                                                                                     |       |                                                                                                                 |
| 4.32             |       | Business Purpose Promissory Note (fixed  rate//principal and interest) [Loan Number: 1000119771], issued on July 12,  2004, by Jetride, Inc. in favor of Banc One Leasing Corporation in the amount  of $5,000,000                                                                  |       | Incorporated herein by reference from  Exhibit 4.17 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|             |       |                                                                                                                                                                                                                                                                                     |       |                                                                                                                 |
| 4.33             |       | Corporate Guaranty [Loan Number:  1000119771], dated as of July 12, 2004, from AirNet Systems, Inc. in  favor of Banc One Leasing Corporation                                                                                                                                       |       | Incorporated herein by reference from  Exhibit 4.18 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |

 

70

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| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                               | ** ** | **Location**                                                                                                         |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                                                                                                    | ** ** | ** **                                                                                                           |
| 4.34             |       | Acknowledgment of Borrower [Loan Number:  1000119771], dated as of July 12, 2004, by Jetride, Inc. in favor of  Banc One Leasing Corporation acknowledging sale and assignment by Banc One  Leasing Corporation to First Union Commercial Corporation of “Loan Documents”                      |       | Incorporated herein by reference from  Exhibit 4.19 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|             |       |                                                                                                                                                                                                                                                                                                          |       |                                                                                                                 |
| 4.35             |       | Loan and Security Agreement (aircraft)  [Loan Number: 1000119774], dated as of July 12, 2004, between Banc One  Leasing Corporation and Jetride, Inc.                                                                                                                                                    |       | Incorporated herein by reference from  Exhibit 4.20 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|             |       |                                                                                                                                                                                                                                                                                                          |       |                                                                                                                 |
| 4.36             |       | Business Purpose Promissory Note (fixed  rate//principal and interest) [Loan Number: 1000119774], issued on July 12,  2004, by Jetride, Inc. in favor of Banc One Leasing Corporation in the amount  of $5,000,000                                                                                       |       | Incorporated herein by reference from  Exhibit 4.21 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|             |       |                                                                                                                                                                                                                                                                                                          |       |                                                                                                                 |
| 4.37             |       | Corporate Guaranty [Loan Number:  1000119774], dated as of July 12, 2004, from AirNet Systems, Inc. in  favor of Banc One Leasing Corporation                                                                                                                                                            |       | Incorporated herein by reference from  Exhibit 4.22 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|             |       |                                                                                                                                                                                                                                                                                                          |       |                                                                                                                 |
| 4.38             |       | Acknowledgment of Borrower [Loan Number:  1000119774], dated as of July 12, 2004, by Jetride, Inc. in favor of  Banc One Leasing Corporation acknowledging sale and assignment by Banc One  Leasing Corporation to PNC Leasing, LLC of “Loan Documents”                                        |       | Incorporated herein by reference from  Exhibit 4.23 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|             |       |                                                                                                                                                                                                                                                                                                          |       |                                                                                                                 |
| 4.39             |       | Second Change in Terms Agreement, dated as  of March 24, 2005, by and between AirNet Systems, Inc. and The  Huntington National Bank, in its capacity as administrative agent for and on  behalf of the Lenders from time to time party to the Amended and Restated  Credit Agreement dated May 28, 2004 |       | Filed herewith                                                                                                       |
|             |       |                                                                                                                                                                                                                                                                                                          |       |                                                                                                                 |
| 4.40             |       | Assignment Agreement, dated as of March 24, 2005, between Fifth  Third Bank, as Assignor, and The Huntington National Bank, as Assignee, in respect  of rights and obligations under the Amended and Restated Credit  Agreement dated May 28, 2004, as  amended                                          |       | Filed herewith                                                                                                       |
|             |       |                                                                                                                                                                                                                                                                                                          |       |                                                                                                                 |
| 4.41             |       | Assignment Agreement, dated as of March 24, 2005, between Fifth  Third Bank, as Assignor, and JPMorgan Chase Bank, N.A. as Assignee, successor  by merger to Bank One, N.A., in respect of rights and obligations under the  Amended and Restated Credit Agreement dated May 28, 2004, as amended        |       | Filed herewith                                                                                                       |

 

71

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| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                  | ** ** | **Location**                                                                                                                                                                                                                                       |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                       | ** ** | ** **                                                                                                                                                                                                                                         |
| 4.42             |       | Replacement Revolving Loan Note, issued on March 24,  2005, by AirNet Systems, Inc. in favor of The Huntington National Bank in the  amount of $18,750,000                                                                  |       | Filed herewith                                                                                                                                                                                                                                     |
|             |       |                                                                                                                                                                                                                             |       |                                                                                                                                                                                                                                               |
| 4.43             |       | Replacement Revolving Loan Note, issued on March 24,  2005, by AirNet Systems, Inc. in favor of Bank One, N.A. in the amount of  $11,250,000                                                                                |       | Filed herewith                                                                                                                                                                                                                                     |
|             |       |                                                                                                                                                                                                                             |       |                                                                                                                                                                                                                                               |
| 4.44             |       | Loan and Security Agreement (aircraft)  [Loan Number: 1000122039], dated as of March 24, 2005, between Chase  Equipment Leasing Inc. and AirNet Systems, Inc.                                                               |       | Filed herewith                                                                                                                                                                                                                                     |
|             |       |                                                                                                                                                                                                                             |       |                                                                                                                                                                                                                                               |
| 4.45             |       | Business Purpose Promissory Note (fixed  rate//principal and interest) [Loan Number: 1000122039], issued on March 24,  2005, by AirNet Systems, Inc. in favor of Chase Equipment Leasing Inc. in the  amount of $11,000,000 |       | Filed herewith                                                                                                                                                                                                                                     |
|             |       |                                                                                                                                                                                                                             |       |                                                                                                                                                                                                                                               |
| 4.46             |       | Agreement to furnish instruments defining  rights of holders of long-term debt                                                                                                                                                   |       | Filed herewith                                                                                                                                                                                                                                     |
|             |       |                                                                                                                                                                                                                             |       |                                                                                                                                                                                                                                               |
| 10.1*            |       | AirNet Systems, Inc. Amended and Restated  1996 Incentive Stock Plan (reflects amendments through February 17, 2004)                                                                                                        |       | Incorporated herein by reference from  Exhibit 10.1 to AirNet Systems, Inc.’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2003 (File No. 1-13025) (the “2003 Form  10-K”)                               |
|             |       |                                                                                                                                                                                                                             |       |                                                                                                                                                                                                                                               |
| 10.2             |       | Indemnification Agreement, dated as of May  15, 1996, by and 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 from  Exhibit 10.11 to AirNet’s Amendment No. 2 to AirNet Systems Inc.’s Form S-1  Registration Statement (Registration No. 333-03092) filed on May 24, 1996  (“Amendment No. 2 to Form S-1”) |
|             |       |                                                                                                                                                                                                                             |       |                                                                                                                                                                                                                                               |
| 10.3             |       | Indemnification Agreement, dated as of May  15, 1996, between Gerald G. Mercer and AirNet Systems, Inc.                                                                                                                          |       | Incorporated herein by reference from  Exhibit 10.12 to AirNet Systems, Inc.’s Amendment No. 2 to Form S-1                                                                                                                                    |
|             |       |                                                                                                                                                                                                                             |       |                                                                                                                                                                                                                                               |
| 10.4*            |       | Employment Agreement, effective March 1,  2001, between AirNet Systems, Inc. and Joel E. Biggerstaff                                                                                                                        |       | Incorporated herein by reference from  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) (the “2000 Form  10-K”)                               |

 

72

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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 from  Exhibit 10.5 to AirNet Systems, Inc.’s 2000 Form 10-K                                                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                                                                                                            |
|  10.6*      |       | Employment Agreement, effective March 1,  2001, between AirNet Systems, Inc. and Jeffrey B. Harris                                                                                                                                                                                                                                                                                                                                                                                              |       | Incorporated herein by reference from  Exhibit 10.6 to AirNet Systems, Inc.’s 2000 Form 10-K                                                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                                                                                                            |
|  10.7*      |       | AirNet Systems, Inc. Director Deferred  Compensation Plan (reflects amendments through March 17, 2004)                                                                                                                                                                                                                                                                                                                                                                                          |       | Incorporated herein by reference from  Exhibit 10.7 to AirNet Systems, Inc.’s 2003 Form 10-K                                                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                                                                                                            |
|  10.8*      |       | AirNet Systems, Inc. Salary for Options  Conversion Plan, effective February 6, 2000                                                                                                                                                                                                                                                                                                                                                                                                            |       | Incorporated herein by reference from  Exhibit 10.8 to AirNet Systems, Inc.’s 2000 Form 10-K                                                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                                                                                                            |
|  10.9*      |       | Agreement, made as of July 17, 2001,  between AirNet Systems, Inc. and Gerald G. Mercer                                                                                                                                                                                                                                                                                                                                                                                                         |       | Incorporated herein by reference from  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) (the “June 30,  2001 Form 10-Q”)          |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                                                                                                            |
| 10.10*           |       | Jerry Mercer Transition Agreement,  effective May 26, 2001, between AirNet Systems, Inc. and Gerald G. Mercer                                                                                                                                                                                                                                                                                                                                                                                        |       | Incorporated herein by reference from  Exhibit 10.10 to AirNet Systems, Inc.’s June 30, 2001 Form 10-Q                                                                                                                                |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                                                                                                            |
| 10.11*           |       | Agreement between AirNet Systems, Inc. and  Guy King, effective February 7, 2003                                                                                                                                                                                                                                                                                                                                                                                                                |       | Incorporated herein by reference from  Exhibit 10.11 to AirNet Systems, Inc.’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2002 (File No. 1-13025)                                                             |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                                                                                                            |
| 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 from  Exhibit 10.1 to AirNet Systems, Inc.’s Current Report on Form 8-K, dated January 14,  2003 and filed on January 15, 2003 (File No. 1-13025) (the “January 2003  Form 8-K”) |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                                                                                                            |
| 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 from  Exhibit 10.2 to AirNet Systems, Inc.’s January 2003 From 8-K                                                                                                                                   |

 

73

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| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                             | ** ** | **Location**                                                                                                                                                                                                                                 |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                  | ** ** | ** **                                                                                                                                                                                                                                   |
| 10.14            |       | Land Lease at Rickenbacker International Airport, dated as of January 20,  2004, between Columbus Regional Airport Authority and AirNet Systems, Inc.                                                                  |       | Incorporated herein by reference from Exhibit 10.1 to AirNet Systems,  Inc.’s Current Report on Form 8-K, dated February 20, 2004 and filed on February 24,  2004 (File No. 1-13025) (the “February 2004 8-K”) |
|             |       |                                                                                                                                                                                                                        |       |                                                                                                                                                                                                                                         |
| 10.15            |       | Leasehold Improvements Purchase Agreement, dated January 20,  2004, between Columbus Regional Airport Authority and AirNet Systems, Inc.                                                                               |       | Incorporated herein by reference from Exhibit 10.2 to AirNet Systems,  Inc.’s February 2004 Form 8-K                                                                                                                               |
|             |       |                                                                                                                                                                                                                        |       |                                                                                                                                                                                                                                         |
| 10.16            |       | Rickenbacker International Airport Operating Agreement, dated January 20,  2004, between Columbus Regional Airport Authority and AirNet Systems, Inc.                                                                  |       | Incorporated herein by reference from Exhibit 10.3 to AirNet Systems,  Inc.’s February 2004 Form 8-K                                                                                                                               |
|             |       |                                                                                                                                                                                                                        |       |                                                                                                                                                                                                                                         |
| 10.17            |       | Non-Exclusive License Agreement to Conduct an Aeronautical Business at  Rickenbacker International Airport, dated as of January 20, 2004,  between Columbus Regional Airport Authority and AirNet Systems, Inc.        |       | Incorporated herein by reference from Exhibit 10.4 to AirNet Systems,  Inc.’s February 2004 Form 8-K                                                                                                                               |
|             |       |                                                                                                                                                                                                                        |       |                                                                                                                                                                                                                                         |
| 10.18            |       | Rickenbacker International Airport Non-Public Self-Fueling Permit for  AirNet Systems, Inc., executed by Columbus Regional Airport Authority on January 20,  2004 and by AirNet Systems, Inc. on January 15, 2004 |       | Incorporated herein by reference from Exhibit 10.5 to AirNet Systems,  Inc.’s February 2004 Form 8-K                                                                                                                               |
|             |       |                                                                                                                                                                                                                        |       |                                                                                                                                                                                                                                         |
| 10.19            |       | Rickenbacker International Airport Commingling Fuel Agreement, dated January 20,  2004, between Columbus Regional Airport Authority and AirNet Systems, Inc.                                                           |       | Incorporated herein by reference from Exhibit 10.6 to AirNet Systems,  Inc.’s February 2004 Form 8-K                                                                                                                               |
|             |       |                                                                                                                                                                                                                        |       |                                                                                                                                                                                                                                         |
| 10.20            |       | Non-Exclusive Access Easement granted by Columbus Regional Airport  Authority in favor of AirNet Systems, Inc., executed on January 20, 2004                                                                           |       | Incorporated herein by reference from Exhibit 10.7 to AirNet Systems,  Inc.’s February 2004 Form 8-K                                                                                                                               |
|             |       |                                                                                                                                                                                                                        |       |                                                                                                                                                                                                                                         |
| 10.21            |       | No-Build Easement granted by Columbus Regional Airport Authority in  favor of AirNet Systems, Inc., executed on January 20, 2004                                                                                       |       | Incorporated herein by reference from Exhibit 10.8 to AirNet Systems,  Inc.’s February 2004 Form 8-K                                                                                                                               |
|             |       |                                                                                                                                                                                                                        |       |                                                                                                                                                                                                                                         |
| 10.22            |       | Lease Termination Agreement, entered into to be effective as of December 15,  2004, between Columbus Regional Airport Authority and AirNet Systems, Inc.                                                               |       | Incorporated herein by reference from  Exhibit 10.1 to AirNet Systems, Inc.’s Current Report on Form 8-K dated and  filed December 21, 2004 (File No. 1-13025) (the “December 2004 Form  8-K”)                      |
|             |       |                                                                                                                                                                                                                        |       |                                                                                                                                                                                                                                         |
| 10.23            |       | Lease, entered into as of December 15, 2004, between Columbus  Regional Airport Authority and AirNet Systems, Inc.                                                                                                     |       | Incorporated herein by reference from Exhibit 10.2 to AirNet Systems,  Inc.’s December 2004 Form 8-K                                                                                                                               |
|             |       |                                                                                                                                                                                                                        |       |                                                                                                                                                                                                                                         |
| 10.24            |       | Amendment No.1 to Land Lease, entered into to be effective as of April 5,  2004, between Columbus Regional Airport Authority and AirNet Systems, Inc.                                                                  |       | Incorporated herein by reference from Exhibit 10.3 to AirNet Systems,  Inc.’s December 2004 Form 8-K                                                                                                                               |
|             |       |                                                                                                                                                                                                                        |       |                                                                                                                                                                                                                                         |
| 10.25            |       | AirNet Systems, Inc. 2004 Stock Incentive Plan (reflects amendments  through June 4, 2004)                                                                                                                             |       | Incorporated herein by reference from Exhibit 10.1 to AirNet Systems,  Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30,  2004 (File No. 1-13025)                                                       |

 

74

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| **Exhibit  No.** | ** ** | **Description**                                                                                                                                   | ** ** | **Location**                                                                                                                                                             |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                        | ** ** | ** **                                                                                                                                                               |
| 10.26            |       | Summary of Compensation for Directors of AirNet Systems, Inc.                                                                                     |       | Filed herewith                                                                                                                                                           |
|             |       |                                                                                                                                              |       |                                                                                                                                                                     |
| 10.27            |       | Summary of AirNet Systems, Inc. 2005 Incentive Compensation Plan                                                                                  |       | Filed herewith                                                                                                                                                           |
|             |       |                                                                                                                                              |       |                                                                                                                                                                     |
| 10.28            |       | Employment Separation Agreement and Release of Claims, dated December 21,  2004, between AirNet Systems, Inc. and Michael J. Snyder          |       | Incorporated herein by reference from  Exhibit 10.1 to AirNet Systems, Inc.’s Current Report on Form 8-K dated and  filed December 28, 2004 (File No. 1-13025) |
|             |       |                                                                                                                                              |       |                                                                                                                                                                     |
| 10.29            |       | Employment Separation Agreement and Release of Claims, entered into on  January 14, 2005, between AirNet Systems, Inc. and Kendall W. Wright |       | Incorporated herein by reference from  Exhibit 10.1 to AirNet Systems, Inc.’s Current Report on Form 8-K dated and  filed January 20, 2005 (File No. 1-13025)  |
|             |       |                                                                                                                                              |       |                                                                                                                                                                     |
|   14        |       | Code of Business Conduct and Ethics                                                                                                               |       | Incorporated herein by reference from  Exhibit 14 to AirNet Systems, Inc.’s 2003 Form 10-K                                                                          |
|             |       |                                                                                                                                              |       |                                                                                                                                                                     |
|   21        |       | Subsidiaries of AirNet Systems, Inc.                                                                                                              |       | Filed herewith                                                                                                                                                           |
|             |       |                                                                                                                                              |       |                                                                                                                                                                     |
|   23        |       | Consent of Ernst & Young LLP                                                                                                                  |       | Filed herewith                                                                                                                                                           |
|             |       |                                                                                                                                              |       |                                                                                                                                                                     |
|   24        |       | Powers of Attorney                                                                                                                                |       | Filed herewith                                                                                                                                                           |
|             |       |                                                                                                                                              |       |                                                                                                                                                                     |
|  31.1       |       | Rule 13a-14(a)/15d-14(a) Certification  (Principal Executive Officer)                                                                        |       | Filed herewith                                                                                                                                                           |
|             |       |                                                                                                                                              |       |                                                                                                                                                                     |
|  31.2       |       | Rule 13a-14(a)/15d-14(a) Certification  (Principal Financial Officer)                                                                   |       | Filed herewith                                                                                                                                                           |
|             |       |                                                                                                                                              |       |                                                                                                                                                                     |
|   32        |       | Section 1350 Certification (Principal Executive Officer and  Principal Financial Officer)                                                    |       | Filed herewith                                                                                                                                                           |

 

----

* Denotes a management contract or compensatory plan or arrangementrequired to be filed pursuant to Item 15 of Form 10-K.

 

75

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SIGNATURES

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this Report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

AIRNET SYSTEMS, INC.

 
| Dated: March 31, 2005 | 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 31, 2005 |
| Joel E. Biggerstaff     |                                  | and President (Principal Executive Officer)       |       |                |
|                    |                                  |                                              |       |                |
| /s/ Gary W. Qualmann    |                                  | Chief Financial Officer, Treasurer and  Secretary |       | March 31, 2005 |
| Gary W. Qualmann        |                                  | (Principal Financial Officer)                     |       |                |
|                    |                                  |                                              |       |                |
| /s/ Denise D. Brown     |                                  | Controller and Principal Accounting Officer       |       | March 31, 2005 |
| Denise D. Brown         |                                  |                                              |       |                |
|                    |                                  |                                              |       |                |
| *Russell M. Gertmenian  |                                  | Director                                          |       | March 31, 2005 |
| Russell M. Gertmenian   |                                  |                                              |       |                |
|                    |                                  |                                              |       |                |
| *David P. Lauer         |                                  | Director                                          |       | March 31, 2005 |
| David P. Lauer          |                                  |                                              |       |                |
|                    |                                  |                                              |       |                |
| *Bruce D. Parker        |                                  | Director                                          |       | March 31, 2005 |
| Bruce D. Parker         |                                  |                                              |       |                |
|                    |                                  |                                              |       |                |
| *James E. Riddle        |                                  | Director                                          |       | March 31, 2005 |
| James E. Riddle         |                                  |                                              |       |                |
|                    |                                  |                                              |       |                |
|                    |                                  |                                              |       |                |
| *By                     | /s/ Joel E. Biggerstaff               |                                              |       |                |   |
|                    | Joel E. Biggerstaff, Attorney-in-Fact |                                              |       |                |   |

 

76

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INDEX TO EXHIBITS 

 
| **Exhibit   No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **Location**                                                                                                                                                                                                                         |
|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | ** **                                                                                                                                                                                                                           |
| 2.1               |       | Asset Purchase Agreement, dated July 11,  2003, by and among AirNet Systems, Inc., AirNet Management, Inc., Mercury  Business Services, Inc., Andrew R. Cooke, Peter G. Salisbury and  Christopher F. Valente. [Pursuant to Item 601(b)(2) of SEC Regulation  S-K, certain schedules and exhibits to this Asset Purchase Agreement have not  been filed with this exhibit. The schedules contain various items relating to  the assets being sold and the representations and warranties of the parties  to the Asset Purchase Agreement. AirNet Systems, Inc. has agreed to furnish  supplementally any omitted schedule or exhibit to the SEC upon request.] |       | Incorporated herein by reference from  Exhibit 2.1 to AirNet Systems, Inc.’s Current Report on Form 8-K, dated and  filed on July 15, 2003 (File No. 1-13025)                                                         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                 |
| 3.1               |       | Amended Articles of AirNet Systems, Inc. as  filed with the Ohio Secretary of State on April 29, 1996                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | Incorporated herein by reference from  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 from  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 from  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 from  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 from  Exhibit 3.1 to AirNet Systems, Inc.’s Form 10-Q for the quarterly period  ended June 30, 2000 (File No. 1-13025) (the “June 30, 2000 Form  10-Q”)                    |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                 |
| 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 from  Exhibit 3.2 to AirNet Systems, Inc.’s June 30, 2000 Form 10-Q                                                                                                                       |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                 |
| 4.1               |       | Amended and Restated Credit Agreement,  dated as of May 28, 2004, among AirNet Systems, Inc., the lenders from time  to time party thereto and The Huntington National Bank, as LC Issuer, as  Swingline Lender and as Administrative Agent                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | Incorporated herein by reference from Exhibit  4.1 to AirNet Systems, Inc.’s Current Report on Form 8-K dated June 21,  2004 and filed on June 22, 2004 (File No. 1-13025) (the “June 2004  Form 8-K”) |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                 |
| 4.2               |       | Continuing Security Agreement, dated as of  May 28, 2004, between AirNet Systems, Inc. and The Huntington National Bank,  as lender and as agent                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | Incorporated herein by reference from  Exhibit 4.2 to the June 2004 Form 8-K                                                                                                                                                    |

 

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| 4.3    |   | Continuing Security Agreement, dated as of  May 28, 2004, between Float Control, Inc. and The Huntington National Bank,  as lender and as agent                                                                                                                                                           |   | Incorporated herein by reference from  Exhibit 4.3 to the June 2004 Form 8-K                                                                                                                                                                |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                             |
| 4.4    |   | Continuing Security Agreement, dated as of  May 28, 2004, between AirNet Management, Inc. and The Huntington National  Bank, as lender and as agent                                                                                                                                                       |   | Incorporated herein by reference from  Exhibit 4.4 to the June 2004 Form 8-K                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                             |
| 4.5    |   | Continuing Security Agreement, dated as of  May 28, 2004, between Jetride, Inc. and The Huntington National Bank, as  lender and as agent                                                                                                                                                                 |   | Incorporated herein by reference from  Exhibit 4.5 to the June 2004 Form 8-K                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                             |
| 4.6    |   | Continuing Security Agreement, dated as of  May 28, 2004, between timexpress.com, Inc. and The Huntington National Bank,  as lender and as agent                                                                                                                                                          |   | Incorporated herein by reference from  Exhibit 4.6 to the June 2004 Form 8-K                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                             |
| 4.7    |   | Continuing Security Agreement, dated as of  May 28, 2004, between Fast Forward Solutions, LLC and The Huntington National  Bank, as lender and as agent                                                                                                                                                   |   | Incorporated herein by reference from  Exhibit 4.7 to the June 2004 Form 8-K                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                             |
| 4.8    |   | Stock Pledge Agreement, dated as of May 28,  2004, between AirNet Systems, Inc. in favor of The Huntington National Bank,  as agent                                                                                                                                                                       |   | Incorporated herein by reference from  Exhibit 4.8 to the June 2004 Form 8-K                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                             |
| 4.9    |   | Security Agreement Pledge and Assignment of  Membership Interest, dated as of May 28, 2004, between AirNet Systems, Inc.  and The Huntington National Bank, as agent                                                                                                                                      |   | Incorporated herein by reference from  Exhibit 4.9 to the June 2004 Form 8-K                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                             |
| 4.10   |   | Mortgage, Security Agreement and  Assignment, dated as of May 28, 2004, between AirNet Systems, Inc. and The  Huntington National Bank, as agent                                                                                                                                                          |   | Incorporated herein by reference from  Exhibit 4.10 to the June 2004 Form 8-K                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                             |
| 4.11   |   | Replacement Subsidiary Guaranty, dated as  of May 28, 2004, by AirNet Management, Inc., Float Control, Inc. and Jetride,  Inc. in favor of The Huntington National Bank, as agent                                                                                                                         |   | Incorporated herein by reference from  Exhibit 4.11 to the June 2004 Form 8-K                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                             |
| 4.12   |   | Subsidiary Guaranty, dated as of May 28,  2004, by timexpress.com, Inc. in favor of The Huntington National Bank, as  agent                                                                                                                                                                               |   | Incorporated herein by reference from  Exhibit 4.12 to the June 2004 Form 8-K                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                             |
| 4.13   |   | Subsidiary Guaranty, dated as of May 28,  2004, by Fast Forward Solutions, LLC in favor of The Huntington National  Bank, as agent                                                                                                                                                                        |   | Incorporated herein by reference from  Exhibit 4.13 to the June 2004 Form 8-K                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                             |
| 4.14   |   | Waiver Letter, dated as of November 12,  2004, by and among AirNet Systems, Inc., The Huntington National Bank, as  agent for and on behalf of the lenders from time to time party thereto, Bank  One, N.A., Fifth Third Bank and The Huntington National Bank as a lender and  the LC Issuer        |   | Incorporated herein by reference from  Exhibit 4.24 to AirNet Systems, Inc.’s Quarterly Report on Form 10-Q for the  quarterly period ended September 30, 2004 (File No. 1-13025) (the “September 30,  2004 Form 10-Q”) |
|   |   |                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                             |
| 4.15   |   | Change in Terms Agreement, dated as of November 12,  2004, by and between AirNet Systems, Inc. and The Huntington National Bank,  in its capacity as administrative agent for and on behalf of the Lenders from  time to time party to the Amended and Restated Credit Agreement dated May 28,  2004 |   | Incorporated herein by reference from  Exhibit 4.25 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q                                                                                                                             |

 

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| 4.16   |   | Loan and Security Agreement (aircraft)  [Loan Number: 1000119495], dated as of June 15, 2004, between Banc One  Leasing Corporation and Jetride, Inc.                                                                                                                               |   | Incorporated herein by reference from  Exhibit 4.1 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q  |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.17   |   | Business Purpose Promissory Note (fixed  rate//principal and interest) [Loan Number: 1000119495], issued on June 15,  2004, by Jetride, inc. in favor of Banc One Leasing Corporation in the amount  of $7,500,000                                                                  |   | Incorporated herein by reference from  Exhibit 4.2 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q  |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.18   |   | Corporate Guaranty [Loan Number:  1000119495], dated as of June 15, 2004, from AirNet Systems, Inc. in  favor of Banc One Leasing Corporation                                                                                                                                       |   | Incorporated herein by reference from  Exhibit 4.3 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q  |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.19   |   | Loan and Security Agreement (aircraft)  [Loan Number: 1000119641], dated as of June 30, 2004, between Banc One  Leasing Corporation and Jetride, Inc.                                                                                                                               |   | Incorporated herein by reference from  Exhibit 4.4 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q  |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.20   |   | Business Purpose Promissory Note (fixed  rate//principal and interest) [Loan Number: 1000119641], issued on June 30,  2004, by Jetride, inc. in favor of Banc One Leasing Corporation in the amount  of $5,000,000                                                                  |   | Incorporated herein by reference from  Exhibit 4.5 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q  |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.21   |   | Corporate Guaranty [Loan Number:  1000119641], dated as of June 30, 2004, from AirNet Systems, Inc. in  favor of Banc One Leasing Corporation                                                                                                                                       |   | Incorporated herein by reference from  Exhibit 4.6 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q  |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.22   |   | Acknowledgment of Borrower [Loan Number:  1000119641], dated as of June 30, 2004, by Jetride, Inc. in favor of  Banc One Leasing Corporation acknowledging sale and assignment by Banc One  Leasing Corporation to First Union Commercial Corporation of “Loan Documents” |   | Incorporated herein by reference from  Exhibit 4.7 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q  |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.23   |   | Loan and Security Agreement (aircraft)  [Loan Number: 1000119649], dated as of June 29, 2004, between Banc One  Leasing Corporation and Jetride, Inc.                                                                                                                               |   | Incorporated herein by reference from  Exhibit 4.8 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q  |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.24   |   | Business Purpose Promissory Note (fixed  rate//principal and interest) [Loan Number: 1000119649], issued on June 29,  2004, by Jetride, Inc. in favor of Banc One Leasing Corporation in the amount  of $5,000,000                                                                  |   | Incorporated herein by reference from  Exhibit 4.9 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q  |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.25   |   | Corporate Guaranty [Loan Number:  1000119649], dated as of June 29, 2004, from AirNet Systems, Inc. in  favor of Banc One Leasing Corporation                                                                                                                                       |   | Incorporated herein by reference from  Exhibit 4.10 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.26   |   | Acknowledgment of Borrower [Loan Number:  1000119649], dated as of June 29, 2004, by Jetride, Inc. in favor of  Banc One Leasing Corporation acknowledging sale and assignment by Banc One  Leasing Corporation to PNC Leasing, LLC of “Loan Documents”                   |   | Incorporated herein by reference from  Exhibit 4.11 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.27   |   | Loan and Security Agreement (aircraft)  [Loan Number: 1000119650], dated as of June 30, 2004, between Banc One  Leasing Corporation and Jetride, Inc.                                                                                                                               |   | Incorporated herein by reference from  Exhibit 4.12 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |

 

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| 4.28   |   | Business Purpose Promissory Note (fixed  rate//principal and interest) [Loan Number: 1000119650], issued on June 30,  2004, by Jetride, Inc. in favor of Banc One Leasing Corporation in the amount  of $5,000,000                                                                  |   | Incorporated herein by reference from  Exhibit 4.13 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.29   |   | Corporate Guaranty [Loan Number:  1000119650], dated as of June 30, 2004, from AirNet Systems, Inc. in  favor of Banc One Leasing Corporation                                                                                                                                       |   | Incorporated herein by reference from  Exhibit 4.14 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.30   |   | Acknowledgment of Borrower [Loan Number:  1000119650], dated as of June 30, 2004, by Jetride, Inc. in favor of  Banc One Leasing Corporation acknowledging sale and assignment by Banc One  Leasing Corporation to First Union Commercial Corporation of “Loan Documents” |   | Incorporated herein by reference from  Exhibit 4.15 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.31   |   | Loan and Security Agreement (aircraft)  [Loan Number: 1000119771], dated as of July 12, 2004, between Banc One  Leasing Corporation and Jetride, Inc.                                                                                                                               |   | Incorporated herein by reference from  Exhibit 4.16 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.32   |   | Business Purpose Promissory Note (fixed  rate//principal and interest) [Loan Number: 1000119771], issued on July 12,  2004, by Jetride, Inc. in favor of Banc One Leasing Corporation in the amount  of $5,000,000                                                                  |   | Incorporated herein by reference from  Exhibit 4.17 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.33   |   | Corporate Guaranty [Loan Number:  1000119771], dated as of July 12, 2004, from AirNet Systems, Inc. in  favor of Banc One Leasing Corporation                                                                                                                                       |   | Incorporated herein by reference from  Exhibit 4.18 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.34   |   | Acknowledgment of Borrower [Loan Number: 1000119771],  dated as of July 12, 2004, by Jetride, Inc. in favor of Banc One Leasing  Corporation acknowledging sale and assignment by Banc One Leasing Corporation  to First Union Commercial Corporation of “Loan Documents” |   | Incorporated herein by reference from  Exhibit 4.19 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.35   |   | Loan and Security Agreement (aircraft)  [Loan Number: 1000119774], dated as of July 12, 2004, between Banc One  Leasing Corporation and Jetride, Inc.                                                                                                                               |   | Incorporated herein by reference from  Exhibit 4.20 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.36   |   | Business Purpose Promissory Note (fixed  rate//principal and interest) [Loan Number: 1000119774], issued on July 12,  2004, by Jetride, Inc. in favor of Banc One Leasing Corporation in the amount  of $5,000,000                                                                  |   | Incorporated herein by reference from  Exhibit 4.21 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.37   |   | Corporate Guaranty [Loan Number:  1000119774], dated as of July 12, 2004, from AirNet Systems, Inc. in  favor of Banc One Leasing Corporation                                                                                                                                       |   | Incorporated herein by reference from  Exhibit 4.22 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |
|   |   |                                                                                                                                                                                                                                                                                     |   |                                                                                                                 |
| 4.38   |   | Acknowledgment of Borrower [Loan Number:  1000119774], dated as of July 12, 2004, by Jetride, Inc. in favor of  Banc One Leasing Corporation acknowledging sale and assignment by Banc One  Leasing Corporation to PNC Leasing, LLC of “Loan Documents”                   |   | Incorporated herein by reference from  Exhibit 4.23 to AirNet Systems, Inc.’s September 30, 2004 Form 10-Q |

 

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| 4.39   |   | Second Change in Terms Agreement, dated as  of March 24, 2005, by and between AirNet Systems, Inc. and The  Huntington National Bank, in its capacity as administrative agent for and on  behalf of the Lenders from time to time party to the Amended and Restated  Credit Agreement dated May 28, 2004 |   | Filed herewith |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|
|   |   |                                                                                                                                                                                                                                                                                                          |   |           |
| 4.40   |   | Assignment Agreement, dated as of March 24, 2005, between Fifth  Third Bank, as Assignor, and The Huntington National Bank, as Assignee, in respect  of rights and obligations under the Amended and Restated Credit  Agreement dated May 28, 2004, as  amended                                          |   | Filed herewith |
|   |   |                                                                                                                                                                                                                                                                                                          |   |           |
| 4.41   |   | Assignment Agreement, dated as of March 24, 2005, between Fifth  Third Bank, as Assignor, and JPMorgan Chase Bank, N.A., as Assignee,  successor by merger to Bank One, N.A., in respect of rights and obligations  under the Amended and Restated Credit Agreement dated May 28, 2004 as amended        |   | Filed herewith |
|   |   |                                                                                                                                                                                                                                                                                                          |   |           |
| 4.42   |   | Replacement Revolving Loan Note, issued on March 24,  2005, by AirNet Systems, Inc. in favor of The Huntington National Bank in the  amount of $18,750,000                                                                                                                                               |   | Filed herewith |
|   |   |                                                                                                                                                                                                                                                                                                          |   |           |
| 4.43   |   | Replacement Revolving Loan Note, issued on March 24,  2005, by AirNet Systems, Inc. in favor of Bank One, N.A. in the amount of  $11,250,000                                                                                                                                                             |   | Filed herewith |
|   |   |                                                                                                                                                                                                                                                                                                          |   |           |
| 4.44   |   | Loan and Security Agreement (aircraft)  [Loan Number: 1000122039], dated as of March 24, 2005, between Chase  Equipment Leasing, Inc. and AirNet Systems, Inc.                                                                                                                                           |   | Filed herewith |
|   |   |                                                                                                                                                                                                                                                                                                          |   |           |
| 4.45   |   | Business Purpose Promissory Note (fixed  rate//principal and interest) [Loan Number: 1000122039], issued on March 24,  2005, by AirNet Systems, Inc. in favor of Chase Equipment Leasing, Inc. in  the amount of $11,000,000                                                                             |   | Filed herewith |

 

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| 4.46   |   | Agreement to furnish instruments defining  rights of holders of long-term debt                                                                                                                                          |   | Filed herewith                                                                                                                                                                                                                                     |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                                                                                                               |
| 10.1*  |   | AirNet Systems, Inc. Amended and Restated  1996 Incentive Stock Plan (reflects amendments through February 17,  2004)                                                                                              |   | Incorporated herein by reference from  Exhibit 10.1 to AirNet Systems, Inc.’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2003 (File No. 1-13025) (the “2003 Form  10-K”)                               |
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                                                                                                               |
| 10.2   |   | Indemnification Agreement, dated as of May  15, 1996, by and 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 from  Exhibit 10.11 to AirNet’s Amendment No. 2 to AirNet Systems Inc.’s Form S-1  Registration Statement (Registration No. 333-03092) filed on May 24, 1996  (“Amendment No. 2 to Form S-1”) |
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                                                                                                               |
| 10.3   |   | Indemnification Agreement, dated as of May  15, 1996, between Gerald G. Mercer and AirNet Systems, Inc.                                                                                                                 |   | Incorporated herein by reference from  Exhibit 10.12 to AirNet Systems, Inc.’s Amendment No. 2 to Form S-1                                                                                                                                    |
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                                                                                                               |
| 10.4*  |   | Employment Agreement, effective March 1,  2001, between AirNet Systems, Inc. and Joel E. Biggerstaff                                                                                                               |   | Incorporated herein by reference from  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) (the “2000 Form  10-K”)                               |
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                                                                                                               |
| 10.5*  |   | Employment Agreement, effective March 1,  2001, between AirNet Systems, Inc. and William R. Sumser                                                                                                                 |   | Incorporated herein by reference from  Exhibit 10.5 to AirNet Systems, Inc.’s 2000 Form 10-K                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                                                                                                               |
| 10.6*  |   | Employment Agreement, effective March 1,  2001, between AirNet Systems, Inc. and Jeffrey B. Harris                                                                                                                 |   | Incorporated herein by reference from  Exhibit 10.6 to AirNet Systems, Inc.’s 2000 Form 10-K                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                                                                                                               |
| 10.7*  |   | AirNet Systems, Inc. Director Deferred  Compensation Plan (reflects amendments through March 17, 2004)                                                                                                             |   | Incorporated herein by reference from  Exhibit 10.7 to AirNet Systems, Inc.’s 2003 Form 10-K                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                                                                                                               |
| 10.8*  |   | AirNet Systems, Inc. Salary for Options  Conversion Plan, effective February 6, 2000                                                                                                                               |   | Incorporated herein by reference from  Exhibit 10.8 to AirNet Systems, Inc.’s 2000 Form 10-K                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                                                                                                               |
| 10.9*  |   | Agreement, made as of July 17, 2001,  between AirNet Systems, Inc. and Gerald G. Mercer                                                                                                                            |   | Incorporated herein by reference from  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) (the “June 30,  2001 Form 10-Q”)             |
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                                                                                                               |
| 10.10* |   | Jerry Mercer Transition Agreement,  effective May 26, 2001, between AirNet Systems, Inc. and Gerald G. Mercer                                                                                                           |   | Incorporated herein by reference from  Exhibit 10.10 to AirNet Systems, Inc.’s June 30, 2001 Form 10-Q                                                                                                                                   |
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                                                                                                               |
| 10.11* |   | Agreement between AirNet Systems, Inc. and  Guy King, effective February 7, 2003                                                                                                                                   |   | Incorporated herein by reference from  Exhibit 10.11 to AirNet Systems, Inc.’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2002 (File No. 1-13025)                                                                |

 

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| 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 from  Exhibit 10.1 to AirNet Systems, Inc.’s Current Report on Form 8-K, dated January 14,  2003 and filed on January 15, 2003 (File No. 1-13025) (the “January 2003  Form 8-K”) |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                            |
| 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 from  Exhibit 10.2 to AirNet Systems, Inc.’s January 2003 From 8-K                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                            |
| 10.14  |   | Land Lease at Rickenbacker International  Airport, dated as of January 20, 2004, between Columbus Regional Airport  Authority and AirNet Systems, Inc.                                                                                                                                                                                                                                                                                                                                          |   | Incorporated herein by reference from  Exhibit 10.1 to AirNet Systems, Inc.’s Current Report on Form 8-K, dated February 20,  2004 and filed on February 24, 2004 (File No. 1-13025) (the “February 2004  8-K”)   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                            |
| 10.15  |   | Leasehold Improvements Purchase Agreement,  dated January 20, 2004, between Columbus Regional Airport Authority and  AirNet Systems, Inc.                                                                                                                                                                                                                                                                                                                                                       |   | Incorporated herein by reference from  Exhibit 10.2 to AirNet Systems, Inc.’s February 2004 Form 8-K                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                            |
| 10.16  |   | Rickenbacker International Airport  Operating Agreement, dated January 20, 2004, between Columbus Regional  Airport Authority and AirNet Systems, Inc.                                                                                                                                                                                                                                                                                                                                          |   | Incorporated herein by reference from  Exhibit 10.3 to AirNet Systems, Inc.’s February 2004 Form 8-K                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                            |
| 10.17  |   | Non-Exclusive License Agreement to Conduct  an Aeronautical Business at Rickenbacker International Airport, dated as of January 20,  2004, between Columbus Regional Airport Authority and AirNet Systems, Inc.                                                                                                                                                                                                                                                                                 |   | Incorporated herein by reference from  Exhibit 10.4 to AirNet Systems, Inc.’s February 2004 Form 8-K                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                            |
| 10.18  |   | Rickenbacker International Airport  Non-Public Self-Fueling Permit for AirNet Systems, Inc., executed by Columbus  Regional Airport Authority on January 20, 2004 and by AirNet Systems,  Inc. on January 15, 2004                                                                                                                                                                                                                                                                         |   | Incorporated herein by reference from  Exhibit 10.5 to AirNet Systems, Inc.’s February 2004 Form 8-K                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                            |
| 10.19  |   | Rickenbacker International Airport  Commingling Fuel Agreement, dated January 20, 2004, between Columbus  Regional Airport Authority and AirNet Systems, Inc.                                                                                                                                                                                                                                                                                                                                   |   | Incorporated herein by reference from  Exhibit 10.6 to AirNet Systems, Inc.’s February 2004 Form 8-K                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                            |
| 10.20  |   | Non-Exclusive Access Easement granted by  Columbus Regional Airport Authority in favor of AirNet Systems, Inc.,  executed on January 20, 2004                                                                                                                                                                                                                                                                                                                                                   |   | Incorporated herein by reference from  Exhibit 10.7 to AirNet Systems, Inc.’s February 2004 Form 8-K                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                            |
| 10.21  |   | No-Build Easement granted by Columbus  Regional Airport Authority in favor of AirNet Systems, Inc., executed on January 20,  2004                                                                                                                                                                                                                                                                                                                                                               |   | Incorporated herein by reference from  Exhibit 10.8 to AirNet Systems, Inc.’s February 2004 Form 8-K                                                                                                                                  |

 

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| 10.22  |   | Lease Termination Agreement, entered into  to be effective as of December 15, 2004, between Columbus Regional  Airport Authority and AirNet Systems, Inc. |   | Incorporated herein by reference from  Exhibit 10.1 to AirNet Systems, Inc.’s Current Report on Form 8-K dated and  filed December 21, 2004 (File No. 1-13025) (the “December 2004 Form  8-K”) |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                           |   |                                                                                                                                                                                                                    |
| 10.23  |   | Lease, entered into as of December 15,  2004, between Columbus Regional Airport Authority and AirNet Systems, Inc.                                        |   | Incorporated herein by reference from  Exhibit 10.2 to AirNet Systems, Inc.’s December 2004 Form 8-K                                                                                                          |
|   |   |                                                                                                                                                           |   |                                                                                                                                                                                                                    |
| 10.24  |   | Amendment No.1 to Land Lease, entered into  to be effective as of April 5, 2004, between Columbus Regional Airport  Authority and AirNet Systems, Inc.    |   | Incorporated herein by reference from  Exhibit 10.3 to AirNet Systems, Inc.’s December 2004 Form 8-K                                                                                                          |
|   |   |                                                                                                                                                           |   |                                                                                                                                                                                                                    |
| 10.25  |   | AirNet Systems, Inc. 2004 Stock Incentive  Plan (reflects amendments through June 4, 2004)                                                                |   | Incorporated herein by reference from  Exhibit 10.1 to AirNet Systems, Inc.’s Quarterly Report on Form 10-Q for the  quarterly period ended June 30, 2004 (File No. 1-13025)                                  |
|   |   |                                                                                                                                                           |   |                                                                                                                                                                                                                    |
| 10.26  |   | Summary of Compensation for Directors of  AirNet Systems, Inc.                                                                                                 |   | Filed herewith                                                                                                                                                                                                          |
|   |   |                                                                                                                                                           |   |                                                                                                                                                                                                                    |
| 10.27  |   | Summary of AirNet Systems, Inc. 2005  Incentive Compensation Plan                                                                                              |   | Filed herewith                                                                                                                                                                                                          |
|   |   |                                                                                                                                                           |   |                                                                                                                                                                                                                    |
| 10.28  |   | Employment Separation Agreement and Release  of Claims, dated December 21, 2004, between AirNet Systems, Inc. and  Michael J. Snyder                      |   | Incorporated herein by reference from  Exhibit 10.1 to AirNet Systems, Inc.’s Current Report on Form 8-K dated and  filed December 28, 2004 (File No. 1-13025)                                                |
|   |   |                                                                                                                                                           |   |                                                                                                                                                                                                                    |
| 10.29  |   | Employment Separation Agreement and Release  of Claims, entered into on January 14, 2005, between AirNet Systems,  Inc. and Kendall W. Wright             |   | Incorporated herein by reference from  Exhibit 10.1 to AirNet Systems, Inc.’s Current Report on Form 8-K dated and  filed January 20, 2005 (File No. 1-13025)                                                 |
|   |   |                                                                                                                                                           |   |                                                                                                                                                                                                                    |
| 14     |   | Code of Business Conduct and Ethics                                                                                                                            |   | Incorporated herein by reference from  Exhibit 14 to AirNet Systems, Inc.’s 2003 Form 10-K                                                                                                                         |
|   |   |                                                                                                                                                           |   |                                                                                                                                                                                                                    |
| 21     |   | Subsidiaries of AirNet Systems, Inc.                                                                                                                           |   | Filed herewith                                                                                                                                                                                                          |
|   |   |                                                                                                                                                           |   |                                                                                                                                                                                                                    |
| 23     |   | Consent of Ernst & Young LLP                                                                                                                               |   | Filed herewith                                                                                                                                                                                                          |
|   |   |                                                                                                                                                           |   |                                                                                                                                                                                                                    |
| 24     |   | Powers of Attorney                                                                                                                                             |   | Filed herewith                                                                                                                                                                                                          |
|   |   |                                                                                                                                                           |   |                                                                                                                                                                                                                    |
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification  (Principal Executive Officer)                                                                                          |   | Filed herewith                                                                                                                                                                                                          |
|   |   |                                                                                                                                                           |   |                                                                                                                                                                                                                    |
| 31.2   |   | Rule 13a-14(a)/15d-14(a) Certification  (Principal Financial Officer)                                                                                          |   | Filed herewith                                                                                                                                                                                                          |
|   |   |                                                                                                                                                           |   |                                                                                                                                                                                                                    |
| 32     |   | Section 1350 Certification (Principal Executive Officer and  Principal Financial Officer)                                                                 |   | Filed herewith                                                                                                                                                                                                          |

 

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