**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-K**

 
| **ý** | **ANNUAL REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                     |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                          |
|       | **FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003**                                                                                                                                                                                                                                                               |
|       |                                                                                                                                                                                                                                                                                                          |
| **OR**     |
|       |                                                                                                                                                                                                                                                                                                          |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                 |
|       |                                                                                                                                                                                                                                                                                                          |
|       | **For the transition period  from                      to                      ** |

 

**CommissionFile 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) of the Act:      |
|                                                             |
| **Title of  each class**                                         |   | **Name of  each exchange on which registered** |
| Common Shares, $.01 par value                                    |   | New York Stock Exchange                        |

 

Securities registered pursuantto Section 12(g) of the Act:  **None**

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý    No  o

 

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

 

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

 

The aggregate market value ofthe common shares (the only common equity of the registrant) held bynon-affiliates of the registrant based on the price at which the common shareswere last sold as of June 30, 2003, of the last business day of theregistrant’s most recently completed second fiscal quarter was $41,034,512.

 

The number of shares of theregistrant’s common stock outstanding as of March 29, 2004: 10,063,167.

 

Document Incorporated byReference:

 

Portions of the registrant’sdefinitive Proxy Statement for its Annual Meeting of Shareholders to be held onJune 4, 2004, are incorporated by reference into Part III of this Annual Reporton Form 10-K.

 

 

----

 

**INDEX**

 
| PART I    |
|-----------|
|      | Item  1: | Business |
|      | Item 2: | Properties |
|      | Item 3: | Legal Proceedings |
|      | Item 4: | Submission of Matters to a Vote of Security  Holders |
|      | Supplemental Item:  Executive Officers of the Registrant |
|      |   |   |
| 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 |
|      |   |   |
| 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,  Financial Statement Schedules, and Reports on Form 8-K |
|      |   |
|      | Signatures |
|      |   |
|      | Exhibit  Index |

 

2

----

 

**PART I**

 

**ITEM1 - BUSINESS**

 

**General**

 

AirNet Systems, Inc. is aspecialty air carrier for time-sensitive deliveries, operating between mostU.S. cities and delivering over 20,000 time-critical shipments each working day.  AirNet is the leading transporter ofcancelled checks and related information for the U.S. banking industry, meetingmore than 2,500 daily deadlines.  AirNetalso provides specialized, high-priority delivery services to customers,primarily those involved in the medical, critical parts and entertainmentindustries.  AirNet also providespassenger charter services through its wholly-owned subsidiary, Jetride, Inc.

 

AirNet operates a fleet ofapproximately 120 aircraft (including 33 Learjets and 15 Cessna Caravanturboprops) that depart from over 100 cities and complete more than 420 flightsper night, primarily Monday through Thursday.  In addition, Jetride, Inc. operates nine Learjets that offer privatepassenger charter services.  Tosupplement its air transportation network, AirNet uses commercial airlinesduring daytime and weekend hours when its aircraft are operating under alimited flight schedule.  Approximately70% of AirNet’s shipments are carried on AirNet’s own air transportationnetwork.

 

In addition to regularlyscheduled cargo services, AirNet offers on-demand cargo charter deliveryservices 24 hours per day, seven days a week. AirNet provides ground pick-up and delivery services throughout thenation seven days per week, using a combination of company personnel and anetwork of approximately 450 vendors and independent contractors.

 

AirNet’s integrated air andground network provides dependable, time-critical delivery services to itscustomers.  Later pick-up and earlierdelivery times than those offered by other national carriers is one of theprimary differentiating characteristics of AirNet’s time-critical deliverynetwork.  AirNet’s flight schedule isdesigned to provide delivery times between midnight and 8:00 a.m., providingearlier delivery times than those 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 customerservice 24 hours per day, seven days a week to handle any inquiries,discrepancies or supply requests, as well as to provide proof of deliverydocumentation, all of which are value-added features of AirNet’s service.

 

AirNet Systems, Inc. wasincorporated as a C-corporation under the laws of the State of Ohio onFebruary 15, 1996.  AirNet’sprincipal executive offices are located at 3939 International Gateway,Columbus, Ohio 43219, and can be reached at (614) 237-9777.  AirNet’s Internet web site address is www.airnet.com (this uniform resourcelocator (URL) is an inactive textual reference only and is not intended toincorporate AirNet’s website into this Annual Report on Form 10-K).

 

AirNet makes available free ofcharge on or through its website, its annual report on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K, and amendments to thosereports filed or furnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonablypracticable after AirNet electronically files such material with, or furnishesit to, the Securities and Exchange Commission (the “SEC”).

 

*Delivery Services*

 

*Bank services*

Bank services,which generate approximately 69% of AirNet’s revenues, primarily consist ofcancelled check delivery.  AirNet’stime-critical cancelled check delivery service allows its banking customers toreduce their float costs and related processing fees.  AirNet also transports items, such as proof of delivery reportsand interoffice mail, for many of the same bank customers.  AirNet has historically priced its Bankservices based on the tier of service, and by the pound, on acustomer-by-customer basis.  The U.S.banking industry, including commercial banks, savings banks and Federal Reservebanks, represents AirNet’s largest category of customers. AirNet’s bankcustomers represent over 100 of the nation’s largest bank holding companies.

 

*Express services*

Expressservices, which generate approximately 25% of AirNet’s revenues, focus oncustomers with time-critical delivery needs. Express services are primarily targeted at customers involved in themedical, critical parts and entertainment industries.  In the medical industry, Express services are offered tocustomers shipping packages that require specialized handling, thetransportation of which is often highly regulated by varying governmentalauthorities.  Targeted markets withinthe medical industry include producers and recipients of radioactive pharmaceuticals,diagnostic specimens, blood, umbilical cord blood, human tissue and organs.

 

Expressservices are also marketed to customers whose shipment needs are highly timesensitive or time definite, including just-in-time manufacturers, criticalparts suppliers and customers involved in the media and entertainmentindustries.

 

3

----

 

For thosecustomers requiring time-critical delivery options not available on AirNet’sregularly scheduled routes, on-demand cargo charter services are available 24hours per day, seven days a week. On-demand charters may be scheduled in advance or on an as-needed basis.

 

*Passenger Charter Services*

Jetride, Inc., a wholly-ownedsubsidiary of AirNet, provides private passenger charter services that offercustomers a safe, fast, and convenient way to travel.  Jetride’s private passenger charter service is available 24 hoursa day, 7 days a week primarily within the continental United States andneighboring countries.   Jetride providescharter services arranged through third-party charter brokers and, to a lesserextent, to retail customers.  Jetrideoperates its nine passenger Learjets from various locations across the country.  All passenger Learjets have been configuredto comfortably carry seven or eight passengers.  All passenger charter pilots are Airline Transport Pilot rated –the highest FederalAviation Administration (“FAA”) rating possible.  Jetride, Inc. is certified by both the Wyvern Networkof Charter Operators and the Aviation Research Group/US, industry leaders inaviation rating.  Jetride anticipates adding additionalLearjets to its passenger fleet during 2004 as it continues to expand itspassenger charter services.

 

*Aviation Services*

AirNet operates a fixed base operationfrom AirNet’s Columbus, Ohio facility, offering retail aviation fuel sales andrelated ground support services.

 

**Business Strategy**

 

AirNet believes that its Bankservices revenue will decline in future periods as a result of the continuingevolution of electronic alternatives to the physical movement of cancelledchecks.   In October 2003, the Check 21 Act was signed into law.  When it becomes effective in October of2004, the Check 21 Act will require thatall financial institutions accept either the physical cancelled check, or animage replacement document in lieu of a physical cancelled check.  AirNet believes that this may accelerate thetransition in the banking industry to the electronic clearing of cancelledchecks.

 

In response to these changes inthe banking industry, AirNet has been pursuing a multi-year strategy totransition and diversify AirNet by pursuing growth opportunities for itsExpress and Passenger Charter services. During this transition period, AirNet continues to respond to thechanging needs of its bank customers. AirNet intends to focus on expanding its Express services to customersin time-critical markets, and time-definite delivery markets, such as medical,radioactive pharmaceutical, on-demand cargo charters and those that benefitmost from just-in-time inventories. AirNet’s air transportation network offers customers in these industriescompetitive advantages through delivery speed, customer service, and custodyand control throughout the delivery service. AirNet believes its flexible and reliable air transportation network anddemonstrated expertise in providing time-critical deliveries to the bankingindustry for over 29 years positions it to provide these services to theExpress market.

 

AirNet is also adapting to changesin the banking industry by reconfiguring its operational structure andassociated costs to align with the expected volume and revenue changes.  AirNet continues to refine its pricing modelfor bank customers by introducing pricing models that contain both fixed feeand volume-based components.

 

AirNet continues to invest inadditional aircraft to expand its passenger charter operations.  AirNet believes that demand for privatecharter services will continue to grow as commercial airlines continue totighten schedules and require longer boarding times due to security concerns.

 

The diversification of AirNet’sbusiness will likely require significant changes in its air transportationnetwork, a greater investment in sales and marketing during the transition, andinvestment in additional service capabilities and technologies to serve a morediverse customer group.

 

Fast Forward Solutions

 

Fast Forward Solutions,LLC, a wholly-owned subsidiary of AirNet, was formed to explore growthopportunities associated with existing and emerging image replacement platformsand technologies. Fast Forward Solutions and NetDeposit, Inc., adeveloper of electronic check processing technologies, have signed a term sheetregarding their intent to finalize an agreement to provide a standard imagereplacement document check processing solution to the banking industry.  While negotiations with NetDeposit, Inc. arecontinuing as of March 30, 2004, no agreement had been entered into betweenFast Forward Solutions and NetDeposit, Inc. and there can be no assurances thatsuch an agreement will be finalized.

 

4

----

 

**Operations**

 

*Air operations*

AirNet’s air operations areheadquartered in Columbus, Ohio.  AirNetutilizes an extensive screening process to evaluate potential pilots prior tohiring. These pilots meet stringent company qualifications, as well as allrequired FAA requirements.  All newpilots must satisfactorily complete a five-week training program conducted byAirNet’s flight training staff prior to assignment of pilot duties.  This training program includes flightsimulator training prior to any actual flight time in an aircraft, as well asintensive ground instruction.  Additionally, new pilots gain operating experience in a structured settingprior to assignment in order to gain a familiarity with AirNet’s route systemand the unique demands of the flight environment.  In additionto FAA requirements, pilots providing Passenger Charter services for Jetride,Inc. must also meet additional in-flight experience requirements specificallyrelated to the types of Learjets operated by Jetride.

 

AirNet’s central dispatchsystem ties together all components of the air operation. Departure and arrivaltimes are continuously updated, and weather conditions throughout the nationare constantly monitored. AirNet dispatchers remain in constant contact withpilots, out-based hub managers, fuelers, maintenance technicians and grounddelivery personnel to identify and minimize any potential delays in thedelivery process.  AirNet also usescommercial airlines, primarily to transport shipments during the daytime andweekend hours when its aircraft are operating under a limited flight schedule.

 

Capacity management is animportant factor in achieving profitable growth of AirNet’s package deliveryservices.  AirNet’s air transportationnetwork is positioned around a flexible national route structure designed tofacilitate late pick-up and early delivery times, minimize delays and simplifyflight scheduling.  AirNet’s flexibleroute structure allows it to respond to the changing volume needs of itscustomers or to take advantage of emerging opportunities in its Expressservices business.  AirNet’s primary hubin Columbus, Ohio, and several mini-hubs across the nation, are locatedprimarily in less congested regional airports. These locations, in conjunctionwith AirNet’s off-peak departure and arrival times, provide easy take-off andlandings, convenient loading and unloading, and fast refueling and maintenance.

 

AirNet employs approximately 80aircraft and avionics technicians in eight separate locations across thecountry performing all levels of maintenance on AirNet’s fleet ofaircraft.  AirNet has an in-house engineshop at the Columbus facility where some of the piston engines are overhauledon-site, thereby reducing aircraft downtime and controlling costs.  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 recently received ISO 9001:2000 certification.

 

*Shipment processing*

Bank shipments are pre-sortedby bank personnel and packaged in AirNet-supplied bags color-coded to easilyidentify the final destination.  Expressshipments are packaged in either AirNet-provided packaging or the customers’packaging.  Shipments transported onAirNet’s air transportation network are typically picked up by a courier andtransported to the local airport where the airbill is either scanned using barcode technology or entered manually. Information on each airbill pertaining to the shipper, receiver, airbillnumber and applicable deadline is captured and downloaded into AirNet’scomputer system, where it is available to AirNet’s customer servicerepresentatives (“CSRs”).  Upon arrivalat AirNet’s Columbus hub or one of its mini-hubs, the shipment is off-loaded,sorted by destination and reloaded onto an aircraft.  At the destination city, the shipment is off-loaded for the finaltime and delivered by courier to the receiver. When delivered, information from the airbill is once again captured anddownloaded into AirNet’s computer system. Delivery information for allshipments is then available on-line to the customers and AirNet’s CSRs.

 

Forbanking customers meeting daytime banking deadlines and Expresscustomers requiring next-flight-out timing, shipments are typically picked upby a courier and transported via commercial airlines or other integrators todestination cities where couriers accept the packages and deliver them to theirfinal destinations.

 

*Ground support*

AirNet manages its grounddelivery services through the combined use of employees and a network ofapproximately 450 independent contractors and vendor couriers.  Independent contractors and vendors performthe majority of ground delivery services, allowing AirNet to better match itsground costs with its volume requirements. In some situations, employees are used for ground delivery services onscheduled routes where volume requirements economically justify employingfull-time couriers.  Dispatchingfunctions related to ground delivery services occur at both the Columbus, Ohiohub and on a regional basis in some of the major cities served.

 

*Mercury Business Services*

On August 11, 2003,AirNet sold the assets of its Mercury Business Services division to MercuryBusiness Services, Inc., a Delaware corporation owned by a group that includesthe original owners of the Mercury business. AirNet had acquired Mercury Business Services in August of 1998.

 

5

----

 

**Regulation**

 

AirNet holds an air carriercertificate granted by the FAA pursuant to Part 135 of the Federal Aviation Regulations.In addition, Jetride, Inc. holds its own air carrier certificate granted by theFAA pursuant to Part 135.  Thesecertificates are of unlimited duration and remain in effect so long as AirNetand Jetride maintain their standards of safety and meet the operationalrequirements of the Federal Aviation Regulations.  The FAA’s regulatory authority relates primarily to operationalaspects of air transportation, including aircraft standards and maintenance,personnel, and ground facilities.

 

TheU. S. Department of Transportation (“DOT”) and Transportation SecurityAdministration (“TSA”) have regulatory authority concerning operational andsecurity concerns in transportation, respectively, including safety, insuranceand hazardous materials.  AirNet holdsvarious operational certificates issued by these agencies, including partystatus to DOT E-7060, which permits AirNet to transport higher volumes oftime-critical radioactive pharmaceuticals than is allowed by the DOT for mostcarriers.  Party status to DOT E-7060 isrenewed every two years, with AirNet’s renewal due November 2004.

 

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

 

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

 

AirNetbelieves that both AirNet and Jetride have all permits, approvals and licensesrequired to conduct their respective operations and that they are  in compliance with applicable regulatoryrequirements relating to their operations including allapplicable noise level regulations. Current noise level regulations require that AirNet modify its 3 Model25 Learjets prior to the end of 2004. AirNet intends to retire the Learjet 25’sprior to the end of 2004.  AirNet isworking proactively with various local governments to minimize noise issues;however, future noise pollution regulations could require the modification orreplacement of other AirNet aircraft.

 

**Seasonality**

 

See“Item 7:  Management’s Discussion andAnalysis of Financial Condition and Results of Operations” under the heading“Seasonality and Variability in Quarterly Results” of this Annual Report onForm 10-K for a discussion of the seasonal aspects of AirNet’s business.

 

**Competition**

 

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

 

In the private sector, thereare a large number of smaller, regional carriers that transport cancelledchecks, none of which AirNet believes have significant interstate market share.The two largest private sector air couriers, FedEx and United Parcel Service(“UPS”), both carry cancelled checks where the deadlines being pursued fit intotheir existing system.  AirNet does notbelieve that FedEx or UPS represent significant competitors in thetime-critical cancelled check market to date. AirNet provides customized service for its customer base, often withlater pick-ups and earlier deliveries than the large, national couriersprovide.

 

AirNet competes with commercialairlines and numerous other carriers in its Express delivery business.  AirNet estimates its market share in thisindustry at less than 1%.  AirNetbelieves that this market represents a significant expansion opportunity forultra time-critical shipments requiring later pick-ups or earlier deliveriesthan are typically provided by major integrators and freight forwarders.  AirNet believes that it is in an excellentposition to leverage the use of its national air network system, AirNet’sproprietary information technology and its historically high on-timeperformance level to compete in this market.

 

In the passenger charterbusiness, AirNet competes with other owner/operators and charter brokers ofsmall business jets.  AirNet believesits nationwide network of maintenance and related support facilities providesadded flexibility in deploying and servicing the passenger charter aircraftfleet to meet customer demands.

 

**Environmental matters**

 

AirNet intends to commence construction of anew corporate and operational headquarters on land leased from the ColumbusRegional 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 

 

6

----

 

appropriate amended post closure plan and nofurther action letters addressing these sites are to be supplied to AirNet bythe Columbus Regional Port Authority prior to beginning construction.  AirNet has received the applicable nofurther action letters.  Identificationof additional pollution conditions on the leased land or attached ramp or theinability of the Columbus Regional Port Authority to provide the approvedamended post closure plan could increase costs and have an adverse affect onAirNet’s ability to construct the Rickenbacker facility.

 

AirNet believes that compliancewith applicable laws and regulations governing environmental matters have nothad, and are not expected to have, a material effect on AirNet’s capitalexpenditures, operations or competitive position.

 

**Employees**

 

As of December 31, 2003, AirNetemployed 895 persons, which includes approximately 225 pilots.  AirNet’s employees are not represented byany union or covered by any collective bargaining agreement.  AirNet has experienced no work stoppages andbelieves that its relationship with employees is good.

 

**ITEM2 - PROPERTIES**

 

**Operating facilities**

 

AirNet owns its corporate andoperational headquarters at 3939 International Gateway in Columbus, Ohio (the“Port Columbus Facility”).  The PortColumbus Facility has 80,000 square feet and sits on land owned by the ColumbusRegional Airport Authority (the “Authority”). AirNet has a 25-year land lease with the Authority, which expires onDecember 31, 2009 and contains a 20-year renewal option.  AirNet’s headquarters is currently used foroperations, training, aircraft maintenance, vehicle maintenance and general andadministrative functions.

 

AirNet leases additional spaceat 555 Morrison Avenue in Gahanna, Ohio. The space is used for administrative support personnel.

 

On January 20, 2004, AirNet enteredinto a Land Lease with the Authority to lease approximately 8 acres locatedwithin the Rickenbacker International Airport (“Rickenbacker”).  Rickenbacker is located in Franklin andPickaway Counties, Ohio, southeast of Columbus, Ohio, approximately fifteenmiles from its current Port Columbus Facility. AirNet intends to construct a new corporate and operational headquartersat the Rickenbacker site (the “Rickenbacker Facility”).  Construction of the Rickenbacker Facility isanticipated to be completed in the summer 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 Avenue, will be consolidated at thenew Rickenbacker Facility.

 

In anticipation of the AirNet’smove to its new Rickenbacker Facility, on January 20, 2004, AirNet entered intoan agreement to sell its Port Columbus Facility to the Authority for$3,850,000.  AirNet has retained theright to continue to occupy the Port Columbus Facility until construction andrelocation to the new Rickenbacker Facility is complete.

 

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

 

**Fleet**

 

*Cargo aircraft*

 

The following table showsinformation about AirNet’s cargo aircraft fleet as of December 31, 2003:

 
| **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        |   | 8         |   | 7          |   | 3,400            |   | 825           |   | 170           |   |
| Piper Navajo           |   | 18        |   |       |   | 1,500            |   | 800           |   | 170           |   |
| Beech Baron            |   | 40        |   |       |   | 1,000            |   | 800           |   | 170           |   |
| Cessna 310             |   | 16        |   |       |   | 900              |   | 800           |   | 170           |   |
| Total                  |   | 115       |   | 7          |   |             |   |          |   |          |   |

 

7

----

 

----

(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

 

An inventory of spare enginesand parts is maintained for each aircraft type.

 

TheLearjet 35 is among the fastest, most reliable and most fuel-efficient smalljet aircraft available in the world and meets all Stage Three noiserequirements currently being implemented across the country.  The Learjet 25 is a smaller jet aircraftwith slightly smaller payload and range capabilities.  The Learjet 25 is not Stage Three compliant and will be phasedout of scheduled operations in 2004.

 

TheCessna Caravan Super Cargomaster aircraft is a turbo-prop aircraft.

 

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

 

*Passenger charter aircraft*

 

The following table showsinformation about AirNet’s passenger charter aircraft fleet as of December 31,2003:

 
| **Aircraft Type**      |   | **Owned** |   | **Leased or  Managed** |   | **Seating  (1)** |   | **Range (2)** |   | **Speed (3)** |   |
|------------------------|--------|-----------|--------|------------------------|--------|------------------|--------|---------------|--------|---------------|--------|
|                   |   |      |   |                   |   |             |   |          |   |          |   |
| Learjets, Model 35A(4) |   | 4         |   | 1                      |   | 8                |   | 1,700         |   | 440           |   |
| Learjets, Model 60 (4) |   | 2         |   | 2                      |   | 8                |   | 2,300         |   | 440           |   |
| Total                  |   | 6         |   | 3                      |   |             |   |          |   |          |   |

 

----

(1)          Maximumnumber of passengers

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

(3)          Maximumspeed in knots, assuming full payload

(4)          Includesone model 35A and one model 60 aircraft operated under a management agreement

 

An inventory of parts ismaintained for each type of Learjet.

 

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

 

*Vehicles*

 

AirNet operates a fleet ofapproximately 90 ground transportation vehicles.   Vehicles range in size from passenger cars to full sizedvans.  AirNet also rents lightweighttrucks for certain weekend ground routes. In 2001, AirNet entered into a leasing agreement with a third partyprovider and began replacing owned vehicles with leased vehicles, asreplacement became necessary.  AirNetleased 62 vehicles as of December 31, 2003.

 

**ITEM3 - LEGAL PROCEEDINGS**

 

There are no pending legalproceedings involving AirNet other than routine litigation incidental to itsbusiness. In the opinion of AirNet’s management, these proceedings should not,individually or in the aggregate, have a material adverse effect on AirNet’sresults of operations or financial condition.

 

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

 

No matters were submitted to avote of security holders during the fourth quarter of 2003.

 

8

----

 

**Executive Officers of the Registrant**

 

The following table identifiesthe executive officers of AirNet as of March 29, 2004.  The executive officers serve at the pleasureof the Board of Directors and in the case of Messrs. Biggerstaff and Harrispursuant to employment agreements.

 
| **Name**                 |   | **Age** |   | **Positions**                                                  |
|--------------------------|--------|---------|--------|----------------------------------------------------------------|
|                     |   |    |   |                                                           |
| Joel E.  Biggerstaff     |   | 47      |   | Chairman of  the Board, Chief Executive Officer, and President |
| Gary W.  Qualmann        |   | 52      |   | Chief  Financial Officer, Treasurer and Secretary              |
| Larry M.  Glasscock, Jr. |   | 47      |   | Senior Vice  President, Express Services                       |
| Jeffery B.  Harris       |   | 44      |   | Senior Vice  President, Bank Services                          |
| Craig A.  Leach          |   | 47      |   | Vice  President, Information Systems                           |
| Stephen K.  Lister       |   | 44      |   | Vice  President, Aviation Services                             |
| Wynn D.  Peterson        |   | 40      |   | Vice  President, Corporate Development                         |
| Michael J.  Snyder       |   | 48      |   | Vice  President, Airline Operations                            |
| Kendall W.  Wright       |   | 56      |   | Vice  President, Operations                                    |

 

Joel E. Biggerstaff has servedas AirNet’s Chairman of the Board since August 2001, Chief Executive Officersince April 2000, and  President sinceAugust 1999.  He also served as AirNet’sChief Operating Officer from August 1999 to February 2004.  He has also served as director of AirNetsince May 2000.  Prior to joiningAirNet, Mr. Biggerstaff served as President of the Southern Region of CorporateExpress Delivery Systems, a national expedited distribution service, fromFebruary 1998 through July 1999.  FromSeptember 1996 through February 1998, Mr. Biggerstaff provided transportationconsulting services and prior to September 1996, he held various positions,including regional vice president and general manager, with Ryder Systems,Inc., a company providing transportation and supply-chain management solutions.

 

Gary W. Qualmann has servedAirNet as the Chief Financial Officer, Treasurer and Secretary since September1, 2003.  Prior to joining AirNet, Mr.Qualmann served as chief financial officer and treasurer of Metatec,Inc., amanufacturer and distributor of electronic media which filed a voluntarypetition for reorganization under Chapter 11 of the United States BankruptcyCode on October 17, 2003, from February 2002 through August 2003. Mr. Qualmannprovided financial consulting services to the Metatec from October, 2001through February 2002. From March 1996 until June 2001, Mr. Qualmann was chieffinancial officer, treasurer, secretary and director of MindLeaders.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 financial officer ofRed Roof Inns, Inc., a lodging company based in Hilliard, Ohio.

 

Larry M. Glasscock, Jr. joined AirNet asSenior Vice President - Express Services in February, 2003.  From February 2002 through February 2003,Mr. Glasscock served as senior vice president of Evercom Systems, Inc. anational provider of telecom services. From April 2001 through February 2002, Mr. Glasscock served as executivevice president of NextJet Technologies, a software and technology solutionsorganization.  Mr. Glasscock served aschief executive officer of Expedited Delivery Systems, Inc., a time-definitetrucking concern from August 1999 to September 2000 and as its president andchief operating officer from January 1998 through August 1999.

 

Jeffery B. Harris has servedAirNet as Senior Vice President, Bank Services since May 2000.  Mr. Harris joined AirNet in June 1996 as therelationship manager for Banking Sales and was appointed vice president, Salesin the banking division in October 1997.

 

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

 

Stephen K. Lister was appointedVice President, Aviation services January 2004.  Prior to that Mr. Lister was vice president, Airline Operationssince February 2001.  Mr. Lister hasserved AirNet in a variety of capacities since 1982.

 

Wynn D. Petersoncurrently serves as Vice President, Strategic Planning and Analysis.  Mr. Peterson has served as an officer of thecompany since February, 2000 when he was named Vice President of CorporateDevelopment.  Mr. Peterson joined AirNetin 1997 as manager of Corporate Development. Prior to joining AirNet, Mr. Peterson managed equity and fixed incomeportfolios from 1993 until 1997 at Desert Mutual 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.

 

Michael J. Snyder has served asVice President of Airline Operations since February 2004.  Prior to joining AirNet, Mr. Snyderconsulted on various aviation and logistics projects since November 2001.  From May through November 2001 he served aspresident and chief executive officer of Polar Air Cargo, a global express airfreight company.  From June 2000 throughMay 2001, Mr. Snyder was president and chief executive officer of TrafficStation,a leading traffic technology service.  From June 1999 through May 2000, Mr. Snyderserved as senior vice president of Operations and Marketing at Smartship andfrom April 1998 though November 1999 served as president of the Western andMidwestern regions of 

 

9

----

 

Corporate Express Delivery Systems.  From October 1996 though April 1998, Mr.Snyder served as a vice president at FedEx Corporation, where he had also heldvarious other position with increasing responsibility since 1981.

 

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

 

**PART II**

**ITEM 5 - MARKET FOR REGISTRANT’S COMMONEQUITY****, AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIES**

 

The common shares of AirNetSystems, Inc. trade on the New York Stock Exchange under the symbol “ANS”.  The table below sets forth the high and lowsales prices of the common shares reported for the periods indicated.

 
|              |   | **2003** |   | **2002** |   |
|-------------------|--------|----------|--------|----------|--------|
| **Quarter ended** |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
| March 31          |   | $        | 5.35   |     | $      | 2.20 |   | $ | 11.05 |   | $ | 7.50 |   |
| June 30           |   | 4.47     |   | 2.05     |   | 10.45 |   | 7.50 |   |
| September 30      |   | 5.18     |   | 3.80     |   | 8.92 |   | 4.38 |   |
| December 31       |   | 4.16     |   | 3.23     |   | 6.13 |   | 4.05 |   |
|                   |        |          |        |          |        |  |  |  |  |  |  |  |  |

 

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

 

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 29, 2004, there wereapproximately 2,000 holders of AirNet common shares, based upon the number ofholders of record and the number of individual participants in certain securityposition listings.

 

AirNet did not purchase anycommon shares during the fourth quarter of the fiscal year.  On February 18, 2000, AirNet announced astock repurchase plan under which up to $3.0 million of AirNet common sharesmay be repurchased from time to time. These repurchases may be made in open market transactions or throughprivately negotiated transactions.  Asof December 31, 2003, AirNet had the authority to still repurchaseapproximately $0.6 million of AirNet common shares under this stock repurchaseplan.

 

10

----

 

**ITEM 6 - SELECTED FINANCIAL DATA**

 

**Statement of Operations Data**

(in thousands, except per share data)

 
|                                                                                 |   | **Years  Ended December 31,** |        |
|--------------------------------------------------------------------------------------|--------|-------------------------------|-------------|
|                                                                                 |   | **2003**                      |        | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| **Net Revenues**                                                                     |   |                          |        |   |   |   |   |   |   |   |   |
| Bank services                                                                        |   | **$**                         | **103,399** |   | $ | 102,626 |   | $ | 106,716 |   | $ | 102,611 |   | $ | 99,020 |   |
| Express services                                                                     |   | **36,963**                    |        | 33,958 |   | 26,252 |   | 26,272 |   | 21,768 |   |
| Passenger charter services                                                           |   | **7,599**                     |        | 4,316 |   | 737 |   | — |   | — |   |
| Aviation services                                                                    |   | **1,261**                     |        | 1,044 |   | 1,499 |   | 751 |   | 975 |   |
| **Total net revenues**                                                               |   | **149,222**                   |        | 141,944 |   | 135,204 |   | 129,634 |   | 121,763 |   |
|                                                                                 |   |                          | ** **  |   | ** ** |   | ** ** |   | ** ** |   |   |
| **Total costs and expenses**                                                         |   | **142,991**                   |        | 134,236 |   | 121,313 | (1) | 115,800 |   | 108,667 |   |
|                                                                                 |   |                          |        |   |   |   |   |   |   |   |   |
| Income from operations                                                               |   | **6,231**                     |        | 7,708 |   | 13,891 |   | 13,834 |   | 13,096 |   |
|                                                                                 |   |                          |        |   |   |   |   |   |   |   |   |
| Impairment on investment (Note 2)                                                    |   | **—**                    |        | — |   | 1,744 |   | — |   | — |   |
| Interest expense                                                                     |   | **1,340**                     |        | 1,649 |   | 1,668 |   | 2,283 |   | 2,477 |   |
|                                                                                 |   |                          |        |   |   |   |   |   |   |   |   |
| Income from continuing operations before income taxes                                |   | **4,891**                     |        | 6,059 |   | 10,479 |   | 11,551 |   | 10,619 |   |
|                                                                                 |   |                          |        |   |   |   |   |   |   |   |   |
| Income tax expense, net                                                              |   | **2,103**                     |        | 2,429 |   | 5,035 |   | 4,690 |   | 4,322 |   |
|                                                                                 |   |                          |        |   |   |   |   |   |   |   |   |
| **Income from continuing operations before cumulative  effect of accounting change** |   | **2,788**                     |        | 3,630 |   | 5,444 |   | 6,861 |   | 6,297 |   |
|                                                                                 |   |                          |        |   |   |   |   |   |   |   |   |
| **Income (Loss) from discontinued operations, net of  taxes (Note 3)**               |   | **(8**                        | **)**       | (259 | ) | (251 | ) | 394 |   | (25 | ) |
|                                                                                 |   |                          |        |   |   |   |   |   |   |   |   |
| Cumulative effect of accounting change, net of tax (Note 4)                          |   | **—**                    |        | (1,868 | ) | — |   | — |   | (2,488 | ) |
|                                                                                 |   |                          |        |   |   |   |   |   |   |   |   |
| **Net income**                                                                       |   | **$**                         | **2,780**   |   | $ | 1,503 |   | $ | 5,193 |   | $ | 7,255 |   | $ | 3,784 |   |
|                                                                                 |   |                          |        |   |   |   |   |   |   |   |   |
| Income per common share - basic and diluted                                          |   |                          |        |   |   |   |   |   |   |   |   |
| Continuing operations                                                                |   | **$**                         | **0.28**    |   | $ | 0.36 |   | $ | 0.51 |   | $ | 0.62 |   | $ | 0.55 |   |
| Discontinued operations                                                              |   | **$**                         | **—**  |   | $ | (0.03 | ) | $ | (0.02 | ) | $ | 0.04 |   | $ | (0.00 | ) |
| Cumulative effect of accounting change                                               |   | **$**                         | **—**  |   | $ | (0.18 | ) | $ | — |   | $ | — |   | $ | (0.22 | ) |
| Net income                                                                           |   | **$**                         | **0.28**    |   | $ | 0.15 |   | $ | 0.49 |   | $ | 0.66 |   | $ | 0.33 |   |

 

**BalanceSheet Data**

(in thousands)

 
| Total assets              |   | **$**      | **153,273** |   | $      | 147,324 |   | $      | 133,079 |   | $      | 122,533 |   | $ | 127,281 |   |
|---------------------------|--------|------------|-------------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|---|---------|--------|
| Total debt                |   | **37,776** |        | 41,794 |   | 28,235  |   | 22,719 |    | 33,948 |   |
| Shareholders’ equity |   | **84,280** |        | 80,796 |   | 78,946  |   | 78,845 |    | 73,751 |   |

 

----

**Note 1****            **2001 includes a$1.0 million non-recurring charge related to the retirement agreement of GeraldG. Mercer (see Note 6 to the Consolidated Financial Statements included in Item8 of this Annual Report on Form 10-K.)

 

**Note 2****            **Represents 2001non-recurring charge related to the impairment of Float Control, Inc.’sinvestment in The Check Exchange System Co. partnership (see Note 1 of theNotes to the Consolidated Financial Statements included in Item 8 of thisAnnual Report on Form 10-K.)

 

**Note 3****            **In August 2003,AirNet sold the assets of its Mercury Business Services unit, resulting indiscontinued operations.

 

**Note 4****            **See Notes 1 and 2of the Notes to the Consolidated Financial Statements included in Item 8 fordiscussion of the 2002 charge related to the impairment of goodwill in accordancewith the adoption of SFAS No. 142.  In1998, the American Institute of Certified Public Accountants issued Statementof Position (SOP)  No. 98-5, Reportingon the Costs of Start-Up Activities, which requires that costs related tostart-up activities be expensed as incurred. Prior to July 1, 1998, AirNet Systems, Inc. capitalized start-up costsassociated with its premium products line of business.  Effective July 1, 1998, AirNet ceasedcapitalizing such costs and began amortizing the previously capitalized costsover five years.  The Company adoptedthe provisions of the SOP in its consolidated financial statements as ofJanuary 1, 1999 which resulted in the write-off of unamortized start-up costsat that time.

 

11

----

 

**ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSISOF****FINANCIAL CONDITION AND RESULTS OF OPERATION**

 

**General**

 

AirNet’s Bank revenues continueto decline as a result of the continuing evolution of electronic alternativesto the physical movement of cancelled checks and other market forces.   The decline in Bank services requires thatAirNet restructure its existing transportation network which was originallyestablished to service its bank customers. AirNet is taking steps to expand its Express and Passenger Charterservices businesses to offset the expected decline in Bank servicesrevenue.  In addition, AirNet isevaluating and adjusting its aircraft mix and fleet size in response to thesechanging business conditions.  AirNetintroduced the Caravan and eliminated the Aerostar from its fleet in recentyears and, barring new route requirements, intends to eliminate additionalpiston aircraft and its Learjet 25’s in 2004. AirNet is reviewing its ground operations for efficiencies and costreductions and will continue this review throughout 2004.  The security surcharge and modified fuelsurcharge will continue in 2004. Changes in AirNet’s regional sales and operational structure, increasedmarketing efforts and adaptation of its fleet to changing market conditions areall critical to achieving AirNet’s goals.

 

The following management’sdiscussion and analysis describes the principal factors affecting the resultsof operations, liquidity and capital resources, as well as the criticalaccounting policies of AirNet. This discussion should be read in conjunctionwith the accompanying audited financial statements, which include additionalinformation about AirNet’s significant accounting policies, practices and thetransactions that underlie its financial results.

 

**Results of Operations**

 

***NetRevenues***

* *
| **In ‘000’s  Net Revenues** |   | **2003** |    | **2002** |   | **2001** |   | **$ Increase  (Decrease)  2002 to 2003** |    | **% Increase  (Decrease)  2002 to 2003** |   | **$ Increase  (Decrease)  2001 to 2002** |   | **% Increase  (Decrease)  2001 to 2002** |   |
|---------------------------------------|--------|----------|---------|----------|--------|----------|--------|------------------------------------------|---------|------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|
| **Delivery Services Net Revenues**    |   |     |    |     |   |     |   |                                     |    |                                     |   |                                     |   |                                     |   |
| Bank Services                         |   | $        | 103,399 |     | $      | 102,626  |   | $                                        | 106,716 |                                     | $      | 773                                      |   | 1                                        | %      | $ | (4,090 | ) | -4 | % |
| Express Services                      |   | 36,963   |    | 33,958   |   | 26,252   |   | 3,005                                    |    | 9                                        | %      | 7,706                                    |   | 29                                       | %      |
| Total Delivery Services Revenues      |   | $        | 140,362 |     | $      | 136,584  |   | $                                        | 132,968 |                                     | $      | 3,778                                    |   | 3                                        | %      | 3,616 |   | 3 | % |
|                                  |   |     |    |     |   |     |   |                                     |    |                                     |   |                                     |   |                                     |   |
| Passenger Charter Services Revenues   |   | 7,599    |    | 4,316    |   | 737      |   | 3,283                                    |    | 76                                       | %      | 3,579                                    |   | 486                                      | %      |
|                                  |   |     |    |     |   |     |   |                                     |    |                                     |   |                                     |   |                                     |   |
| Aviation Services Revenues            |   | 1,261    |    | 1,044    |   | 1,499    |   | 217                                      |    | 21                                       | %      | (455                                     | )      | -30                                      | %      |
|                                  |   |     |    |     |   |     |   |                                     |    |                                     |   |                                     |   |                                     |   |
| Total Revenues                        |   | $        | 149,222 |     | $      | 141,944  |   | $                                        | 135,204 |                                     | $      | 7,278                                    |   | 5                                        | %      | $ | 6,740 |   | 5 | % |

 

AirNet has experienced overall net revenuegrowth each of the last three years. This can be attributed to several factors including increased Expressshipment volume, growth in Passenger Charter services, the implementation of asecurity surcharge program in August 2002 and, increased revenues from the fuelsurcharge program resulting from increased fuel prices and changes to thesurcharge program implemented in 2002.

 

AirNet assesses its customers a fuel surchargewhich is based on the Oil Price Index Summary – Columbus, Ohio (OPIS-CMHindex).  As index rates increase above aset threshold, surcharge rates increase. In August 2002, AirNet modified its fuel surcharge program for its bankcustomers to help offset timing differences between market prices and theOPIS-CHM index used to determine surcharge rates.  In 2001 and through January 2002, AirNet’s Express customers paida 4% temporary fuel surcharge on most revenues under a separate program.  In February 2002, AirNet rescinded this 4%temporary surcharge on Express services revenues and implemented the programdescribed above based on the OPIS – CMH index.

 

12

----

 

*Bank Services Revenues*

 
| **In ‘000’s  Bank Services Revenues** |   | **2003** |    | **2002** |   | **2001** |   | **$ Increase  (Decrease)  2002 to 2003** |    | **% Increase  (Decrease)  2002 to 2003** |   | **$ Increase  (Decrease)  2001 to 2002** |   | **% Increase  (Decrease)  2001 to 2002** |   |
|-------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|------------------------------------------|---------|------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|
| Bank Revenues                                   |   | $        | 101,914 |     | $      | 103,872  |   | $                                        | 107,646 |                                     | $      | (1,958                                   | )      | -2                                       | %      | $ | (3,774 | ) | -4 | % |
| Fuel Surcharge                                  |   | 3,939    |    | 1,602    |   | 1,939    |   | 2,337                                    |    | 146                                      | %      | (337                                     | )      | -17                                      | %      |
| Federal Excise Tax                              |   | (2,454   | )       | (2,848   | )      | (2,869   | )      | 394                                      |    | -14                                      | %      | 21                                       |   | -1                                       | %      |
| **Total Net Bank Revenues**                     |   | $        | 103,399 |     | $      | 102,626  |   | $                                        | 106,716 |                                     | $      | 733                                      |   | 1                                        | %      | $ | (4,090 | ) | -4 | % |

 

Consistent with AirNet’s expectations, Bankrevenues (excluding the impact of fuel surcharge and federal excise taxes)continue to decline year over year. This decline slowed as AirNet continues to focus on additional servicesfor banks beyond cancelled check transportation, such as proof of deposit andinteroffice mail delivery services. From 2002 to 2003 weekday shipment volume decreased 1.3% per flying dayand weekend shipment volume per flying day was down by 9.8%.  The decrease in weekly shipment volume wasoffset by increased fuel surcharges in 2003 as compared to 2002.  Lower check delivery volume as a result ofhistorically low interest rates and the declining use of checks, contributed tothe reduction in revenues, as did increased competitive factors from regionalcarriers and transportation cost reduction initiatives by AirNet’s Bankcustomers.  AirNet believes that thisdecline will continue as the Check 21 Act becomes effective in October 2004;however, at this time AirNet is unable to predict the ultimate impact of thisAct on future years.

 

Weekday shipment volume decreased 4.8% from2001 to 2002.  A portion of the relativelost volume was attributed to additional volume in 2001 that was transportedduring the days immediately following the September 11, 2001 tragedy, duringwhich AirNet transported checks for several of its bank customers who relied onAirNet for services their normal or secondary vendors could not provide at thetime.  The decrease in weekday volumewas partially offset by a 17.0% increase in weekend shipment volume, rateincreases implemented in January 2002 averaging approximately 2.2% and theimplementation of the security surcharge program related to Bank customers inSeptember 2002.

 

*Express Services Revenues*

 
| **In ‘000’s  Express Services Revenues** |   | **2003** |   | **2002** |   | **2001** |   | **$ Increase  (Decrease)  2002 to 2003** |   | **% Increase  (Decrease)  2002 to 2003** |   | **$ Increase  (Decrease)  2001 to 2002** |   | **% Increase  (Decrease)  2001 to 2002** |   |
|----------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|
| Express Revenues - Non  Charter               |   | $        | 28,035 |     | $      | 25,100   |   | $                                        | 19,635 |                                     | $      | 2,935                                    |   | 12                                       | %      | $ | 5,465 |   | 28 | % |
| Express Revenues - Charters                        |   | 9,046    |   | 9,534    |   | 6,431    |   | (488                                     | )      | -5                                       | %      | 3,103                                    |   | 48                                       | %      |
| Fuel Surcharge                                     |   | 1,007    |   | 369      |   | 954      |   | 638                                      |   | 173                                      | %      | (585                                     | )      | -61                                      | %      |
| Federal Excise Tax                                 |   | (1,125   | )      | (1,045   | )      | (767     | )      | (80                                      | )      | -8                                       | %      | (278                                     | )      | -36                                      | %      |
| Total Net Express Revenues                         |   | $        | 36,963 |     | $      | 33,958   |   | $                                        | 26,253 |                                     | $      | 3,005                                    |   | 9                                        | %      | $ | 7,705 |   | 29 | % |

 

AirNet’s Express services  a variety of markets with its time-criticalshipping solutions through a combination of AirNet’s scheduled air and groundsystem, commercial airlines and dedicated charter services.  The 2003 increase in Express revenues isprimarily the result of AirNet’s efforts to diversify its revenue base andcontinue its penetration of the medical market.  Revenues from medical and related companies increased 6.8% in2003 as AirNet continues to expand its services for transportation ofradiopharmaceutical drugs, diagnostic specimens, umbilical cord blood forcryogenic storage and human blood and tissue. AirNet also increased itsrevenues for services in the media and entertainment market by 13.1% in 2003compared to 2002; a market  wherecustomers demand a reliable and secure transportation system for thedistribution of film screenings and tape distribution. While AirNet experienceda 5% decrease in revenues from dedicated charters from 2002 to 2003, thedecrease was offset by growth in the scheduled nightly volume of non-chartershipments, approximately 70% of which are transported via the AirNet airtransportation network.

 

The increase in revenues from 2001 to 2002 wasprimarily due to increased shipment volume due to increased market penetrationin select markets such as medical, as well as a 5% rate increase to mostcustomers in February 2002 and an increase in security surcharge in August2002.

 

13

----

 

*Passenger Charter Services Revenues*

* *
| **In ‘000’s  Passenger Charter Revenues** |   | **2003** |   | **2002** |   | **2001** |   | **Increase  (Decrease) 2002 to 2003** |   | **% Increase  (Decrease) 2002 to 2003** |   | **Increase  (Decrease) 2001 to 2002** |   | **% Increase  (Decrease) 2001 to 2002** |   |
|-----------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|---------------------------------------|--------|-----------------------------------------|--------|---------------------------------------|--------|-----------------------------------------|--------|
| Passenger Charter services revenues                 |   | $        | 7,599  |     | $      | 4,316    |   | $                                     | 737    |                                    | $      | 3,283                                 |   | 76                                      | %      | $ | 3,579 |   | 486 | % |
| Average annual number of jets                       |   | 7.2      |   | 5.9      |   | 2.0      |   | 1.3                                   |   | 22                                      | %      | 3.9                                   |   | 195                                     | %      |
| Average revenues per jet                            |   | $        | 1,055  |     | $      | 732      |   | $                                     | 368    |                                    | $      | 324                                   |   | 44                                      | %      | $ | 363 |   | 99 | % |

 

Passenger Charter services revenues have shownthe largest percentage growth for AirNet in recent years.  As AirNet commits additional investment inthis area, it expects revenue growth to continue as it widens the distributionof its Passenger Charter aircraft in the United States.  AirNet’s Passenger Charter services allowcustomers greater control and flexibility in air travel than commercialairlines. AirNet has increased its Passenger Charter fleet from three aircraftat December 31, 2001 to seven at December 31, 2002 and nine at December 31,2003.  AirNet’s Passenger Charter fleetincludes owned aircraft as well as leased and managed aircraft.  AirNet will continue to invest in thePassenger Charter business with the anticipated addition of four aircraft in2004, all of which are expected to be midsized Learjet 60 aircraft.

 

*Aviation Services Revenues*

 

These revenues primarily relate to theAirNet’s fixed base operation and maintenance services provided in Columbus,Ohio. While these services will continue, no significant future growth isexpected.

 

***Operating Expensesand Income from Continuing Operations***

 
| **In ‘000’s  Operating Costs and Expenses** |   | **2003** |    | **2002** |   | **2001** |   | **$ Increase  (Decrease)  2002 to 2003** |    | **% Increase  (Decrease)  2002 to 2003** |   | **$ Increase  (Decrease)  2001 to 2002** |   | **% Increase  (Decrease)  2001 to 2002** |   |
|-------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|------------------------------------------|---------|------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|
| Wages and benefits                                    |   | $        | 25,755  |     | $      | 24,182   |   | $                                        | 19,715  |                                     | $      | 1,573                                    |   | 7                                        | %      | $ | 4,467 |   | 23 | % |
| Aircraft fuel                                         |   | 19,227   |    | 17,582   |   | 15,486   |   | 1,645                                    |    | 9                                        | %      | 2,096                                    |   | 14                                       | %      |
| Aircraft maintenance                                  |   | 12,242   |    | 12,305   |   | 10,961   |   | (63                                      | )       | -1                                       | %      | 1,344                                    |   | 12                                       | %      |
| Contracted air costs                                  |   | 9,929    |    | 9,069    |   | 10,941   |   | 860                                      |    | 9                                        | %      | (1,872                                   | )      | -17                                      | %      |
| Ground courier                                        |   | 25,698   |    | 24,292   |   | 23,171   |   | 1,406                                    |    | 6                                        | %      | 1,121                                    |   | 5                                        | %      |
| Depreciation                                          |   | 17,535   |    | 17,699   |   | 14,668   |   | (164                                     | )       | -1                                       | %      | 3,031                                    |   | 21                                       | %      |
| Insurance, rent and landing fees                      |   | 9,054    |    | 7,352    |   | 5,540    |   | 1,702                                    |    | 23                                       | %      | 1,812                                    |   | 33                                       | %      |
| Travel, training and other                            |   | 7,597    |    | 8,325    |   | 7,079    |   | (728                                     | )       | -9                                       | %      | 1,246                                    |   | 18                                       | %      |
| Total operating costs and expenses                    |   | $        | 127,037 |     | $      | 120,806  |   | $                                        | 107,561 |                                     | 6,231  |                                     | 5      | %                                        | 13,245 |   | 12 | % |
|                                                       |        |          |         |          |        |          |        |                                          |         |                                          |        |                                          |        |                                          |        |  |  |  |  |  |

 

The increase in Passenger Charter servicesfrom 2002 to 2003 accounted for $2.2 million, or 34%, of the overall increasein operating expenses. The remainder of the increase is primarily due to  increased hours flown and service andsupport costs associated with the increase in Express shipment volumes.  Flight hours for the cargo fleet increased10% from 2001 to 2002, but remained flat from 2002 to 2003.

 

An increase in pilots to support the PassengerCharter operation accounted for 32.9% of the increase in wages and benefitsfrom 2002 to 2003.  Additional customersupport center staff to service the increase in Express shipment volume and anincrease in health benefits costs resulted in a 10.5% increase in wages and benefits.  The increase from 2001 to 2002 is alsoattributed primarily to the increase in Passenger Charter pilot staff andExpress support staff.

 
| **In ‘000’s  Aircraft Fuel** |   | **2003** |   | **2002** |   | **2001** |   | **$ Increase  (Decrease)  2002 to 2003** |   | **% Increase  (Decrease)  2002 to 2003** |   | **$ Increase  (Decrease)  2001 to 2002** |   | **% Increase  (Decrease)  2001 to 2002** |   |
|----------------------------------------|--------|----------|--------|----------|--------|----------|--------|------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|
| **Aircraft Fuel**                      |   | $        | 19,227 |     | $      | 17,582   |   | $                                        | 15,486 |                                     | $      | 1,645                                    |   | 9                                        | %      | $ | 2,096 |   | 14 | % |
| **Fuel Surcharge Revenues**            |   | (4,946   | )      | (1,971   | )      | (1,947   | )      | 2,975                                    |   | 151                                      | %      | 24                                       |   | 1                                        | %      |
| **Net**                                |   | $        | 14,281 |     | $      | 15,611   |   | $                                        | 13,539 |                                     | $      | (1,330                                   | )      | -9                                       | %      | $ | 2,072 |   | 15 | % |

 

14

----

 

 
| **Hours flown**               |   | **2003** |   | **2002** |   | **2001** |   | **Increase  (Decrease)  2002 to 2003** |   | **% Increase  (Decrease)  2002 to 2003** |   | **Increase  (Decrease)  2001to 2002** |   | **% Increase  (Decrease)  2001 to 2002** |   |
|-------------------------------|--------|----------|--------|----------|--------|----------|--------|----------------------------------------|--------|------------------------------------------|--------|---------------------------------------|--------|------------------------------------------|--------|
| **Hours flown  - Total** |   | 103,660  |   | 102,079  |   | 92,116   |   | 1,581                                  |   | 1.5                                      | %      | 9,963                                 |   | 11                                       | %      |

 

Aircraft fuel expense has increased year overyear as a result of the increase in the number of hours flown as well as theincrease in fuel prices.  The averageprice per gallon of aircraft fuel has increased 11.5% in 2003 compared to 2002and decreased 1.5% in 2002 compared to 2001. Increased operational efficiencies allowed AirNet to reduce fuel burnper hour in 2003 by 7% compared to 2002 and 2001.  AirNet continues to maintain its fuel surcharge program to offsetthese increases in fuel expense.  Theamounts related to the fuel surcharge program are classified as revenue.

 

While overall hours flown from 2002 to 2003increased only slightly (1.5%), maintenance expense remained flat as AirNetbegan to experience the benefits of phasing out the Aerostar aircraft in 2001and 2002 and replacing them with the more operating efficient CessnaCaravans.  The increase in maintenanceexpense from 2001 to 2002 was directly related to the increase in flight hours.

 

Contracted air expense includes costsassociated with shipments transported on the commercial airlines and costs tothird party air operators for subleased air routes and back-up charterservices.  Commercial airline costsdecreased 4% from 2002 to 2003 and 10% from 2001 to 2002 as AirNet was able tosecure better rates with the commercial carriers it utilizes most often.  Back-up and sublease charter expensesdecreased 26% from 2001 to 2002 as AirNet decreased its reliance on outsideproviders as a result of adding aircraft and pilots.  However, the expense increased 31% from 2002 to 2003 as AirNet,once again, began to experience pilot shortages and elected to outsource moreroutes.

 
| **In  ‘000’s****Ground  Courier Costs** |   | **2003** |   | **2002** |   | **2001** |   | **Increase  (Decrease)  2002 to 2003** |   | **% Increase  (Decrease)  2002 to 2003** |   | **Increase  (Decrease)  2001 to 2002** |   | **% Increase  (Decrease)  2001 to 2002** |   |
|---------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------------------------------------|--------|------------------------------------------|--------|----------------------------------------|--------|------------------------------------------|--------|
| **Company  courier costs**                        |   | $        | 8,131  |     | $      | 9,416    |   | $                                      | 10,883 |                                     | $      | (1,285                                 | )      | -14                                      | %      | $ | (1,467 | ) | -13 | % |
| **Contracted  courier costs**                     |   | 17,567   |   | 14,876   |   | 12,288   |   | 2,691                                  |   | 18                                       | %      | 2,588                                  |   | 21                                       | %      |
| **Total  Ground courier costs**                   |   | $        | 25,698 |     | $      | 24,292   |   | $                                      | 23,171 |                                     | $      | 1,407                                  |   | 6                                        | %      | $ | 1,121 |   | 5 | % |
|                                              |   |     |   |     |   |     |   |                                   |   |                                     |   |                                   |   |                                     |   |
| **Number of  bank shipments**                     |   | 3,180    |   | 3,298    |   | 3,352    |   | (118                                   | )      | -4                                       | %      | (54                                    | )      | -2                                       | %      |
| **Number of  non-charter express shipments**      |   | 232      |   | 223      |   | 187      |   | 9                                      |   | 4                                        | %      | 36                                     |   | 19                                       | %      |
| **Number of  charter express shipments**          |   | 5        |   | 6        |   | 5        |   | (1                                     | )      | -17                                      | %      | 1                                      |   | 20                                       | %      |

 

The increase in ground costs can be primarilyattributed to the increase in Express services shipment volume.  AirNet continues to shift its groundservices from employees to contracted vendors and independent contractors tobetter align its costs with the more variable Express shipment volumes.  Historically, ground courier cost pershipment levels were lower as most Bank deliveries were scheduled ortransportation services were from airport to airport with limited groundservices.  The Express services businessrequires expanded delivery services, generally in a more unscheduledenvironment with greater fluctuations in day to day shipment volumes.

 
| **Depreciation expense  In ‘000’s** |   | **2003** |   | **2002** |   | **2001** |   | **$ Increase  (Decrease)  2002 to 2003** |   | **% Increase  (Decrease)  2002 to 2003** |   | **$****Increase  (Decrease)  2001 to 2002** |   | **% Increase  (Decrease)  2001 to 2002** |   |
|-----------------------------------------------|--------|----------|--------|----------|--------|----------|--------|------------------------------------------|--------|------------------------------------------|--------|---------------------------------------------|--------|------------------------------------------|--------|
| Aircraft                                      |   | $        | 2,613  |     | $      | 2,079    |   | $                                        | 1,303  |                                     | $      | 534                                         |   | 26                                       | %      | $ | 776 |   | 60 | % |
| Aircraft Improvements, Engines, Inspections   |   | 13,687   |   | 14,093   |   | 11,688   |   | (406                                     | )      | -3                                       | %      | 2,405                                       |   | 21                                       | %      |
| Other                                         |   | 1,235    |   | 1,527    |   | 1,677    |   | (292                                     | )      | -19                                      | %      | (150                                        | )      | -9                                       | %      |
| Total Depreciation                            |   | $        | 17,535 |     | $      | 17,699   |   | $                                        | 14,668 |                                     | $      | (164                                        | )      | -1                                       | %      | $ | 3,031 |   | 21 | % |

 

Aircraft depreciation has increasedsignificantly in 2002 and 2003 compared to 2001 as AirNet has addedaircraft  and accelerated deprecationrelated to its Cessna 310’s and Lear 25’s. AirNet continually reviews the remaining useful life and expectedsalvage value of its aircraft in connection with its depreciationcalculation.  Aircraft and engines aredepreciated based on the number of hours flown.  Increased depreciation in 2002 over 2001 is also related to theincreased hours flown.  Otherdepreciation includes depreciation related to building and leaseholdimprovements, computer hardware and software and vehicles.

 

15

----

 
| **Insurance, Rent and Landing Fees  In ‘000’s** |   | **2003** |   | **2002** |   | **2001** |   | **$ Increase  (Decrease)  2002 to 2003** |   | **% Increase  (Decrease)  2002 to 2003** |   | **$ Increase  (Decrease)  2001 to 2002** |   | **% Increase  (Decrease)  2001 to 2002** |   |
|-----------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|
| Insurance                                                 |   | $        | 3,964  |     | $      | 3,382    |   | $                                        | 2,732  |                                     | $      | 582                                      |   | 17                                       | %      | $ | 650 |   | 24 | % |
| Rent                                                      |   | 3,305    |   | 2,468    |   | 1,341    |   | 837                                      |   | 34                                       | %      | 1,127                                    |   | 84                                       | %      |
| Ramp, landing and tie down fees                           |   | 1,785    |   | 1,502    |   | 1,467    |   | 283                                      |   | 19                                       | %      | 35                                       |   | 2                                        | %      |
| Total insurance, rent and landing fees                    |   | $        | 9,054  |     | $      | 7,352    |   | $                                        | 5,540  |                                     | $      | 1,702                                    |   | 23                                       | %      | $ | 1,812 |   | 33 | % |

 

With the firming of the aviation insurancemarket after the September 11, 2001 tragedy, AirNet has continued to incurincreased insurance costs related to operating the air transportation network.In addition, increases in its fleet size and value have increased the cost ofinsurance coverage. AirNet expects that the insurance market will remain firmin the near future.

 

Rent expense increased in 2003 and 2002 mainlydue to AirNet leasing additional aircraft for both its delivery services andits Passenger Charter services businesses.

 
| **Selling, General and Administrative  Costs In ‘000’s** |   | **2003** |   | **2002** |   | **2001** |   | **$ Increase  (Decrease)  2002 to 2003** |   | **% Increase  (Decrease)  2002 to 2003** |   | **$ Increase  (Decrease)  2001 to 2002** |   | **% Increase  (Decrease)  2001 to 2002** |   |
|--------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|
| Total selling, general and administrative  costs                   |   | $        | 15,954 |     | $      | 13,430   |   | $                                        | 13,751 |                                     | $      | 2,525                                    |   | 19                                       | %      | $ | (321 | ) | -2 | % |
| Less:   Severance costs                                       |   | 759      |   | 72       |   | 975      |   | 687                                      |   | 954                                      | %      | (903                                     | )      | -93                                      | %      |
| Selling, general and administrative, net of  severance             |   | $        | 15,195 |     | $      | 13,358   |   | $                                        | 12,776 |                                     | $      | 1,837                                    |   | 14                                       | %      | $ | 582 |   | 5 | % |

 

AirNet has incurred substantial severancecosts due to changes in its management group in 2003 and 2001.  Selling, General and Administrative Costsalso increased as a result of several other factors.   AirNet self insures its employee group medical coverage.  Claims have increased significantly yearover year with the largest increase in 2003 primarily due to increasedprescription drug costs, several high dollar claims, and rising medical costsin general.  AirNet annually reviews itsmedical insurance costs and continues to work to reduce these costs.  Professional fees increased substantially in2002 and 2003 related to the expansion of the Passenger Charter business aswell as lobbying efforts related to Bank services.  AirNet expects to incur substantial costs in 2004 and 2005related to ensuring compliance with the Sarbanes-Oxley Act.

 

AirNet continues to work toward identifyingadditional cost reduction opportunities and to create more efficiency in itsair transportation network.

 

***ImpairmentCharges***

 

In 2003, AirNet tested its remaining goodwillfor impairment in accordance with the requirements of Statement of FinancialAccounting Standards (SFAS) No. 142, and found there was no impairment and,therefore, no charge against goodwill was made during 2003.

 

In 2002, AirNet recorded a $1.9 million, or$0.18 per diluted share, non-cash after-tax charge in accordance with itsadoption of SFAS No. 142.  A review ofgoodwill associated with the 1998 purchase of Mercury Business Services,indicated that the $3.1 million (pre-tax) of remaining goodwill related to thisacquisition was impaired as of January 1, 2002, and therefore an impairmentcharge was recorded in 2002.  Under thetransition provisions of SFAS No. 142, this non-cash charge was treated as acumulative effect of accounting change as of January 1, 2002.

 

In 2001, AirNet recorded a non-recurring $1.7million impairment charge on its investment in the Check Exchange Systems Co.(“CHEXS”).  Float Control, Inc., awholly owned subsidiary of AirNet holds a 19% interest in CHEXS.  Float Control accounts for its investment inCHEXS under the equity method of accounting. During 2001, CHEXS received notice that one of its customers, whoaccounted for a significant portion of CHEXS’ revenue, would not renew itscontract with CHEXS beyond August 2001. As a result, the $1.7 million impairment charge on investment wasrecorded in the second quarter of 2001. This charge included approximately $0.3 million of goodwill.

 

16

----

 

***InterestExpense***

 
| **In ‘000’s**      |   | **2003** |   | **2002** |   | **2001** |   | **Increase  (Decrease)  2002 to 2003** |   | **% Increase  (Decrease)  2002 to 2003** |   | **Increase  (Decrease)  2001 to 2002** |   | **% Increase  (Decrease)  2001 to 2002** |   |
|------------------------------|--------|----------|--------|----------|--------|----------|--------|----------------------------------------|--------|------------------------------------------|--------|----------------------------------------|--------|------------------------------------------|--------|
| Interest Expense             |   | $        | 1,340  |     | $      | 1,649    |   | $                                      | 1,668  |                                     | $      | (309                                   | )      | -19                                      | %      | $ | (19 | ) | -1 | % |
| Average Debt Balances        |   | $        | 37,775 |     | $      | 41,794   |   | $                                      | 28,238 |                                     | $      | (4,019                                 | )      | -10                                      | %      | $ | 13,559 |   | 48 | % |
| Average Annual Interest Rate |   | 3.5      | %      | 3.9      | %      | 5.9      | %      | -0.4                                   | %      | -10                                      | %      | -10                                    | %      | -34                                      | %      |

 

Interest expense decreased from 2002 to 2003due to a reduction in debt and lower interest rates.  Interest expense remained flat from 2001 to 2002 as an increasein debt was offset by significantly lower interest rates.  AirNet plans on investing in its PassengerCharter services business and expects to begin construction of a new corporateand operational headquarters in 2004. These investments are expected to be financed through debt, which isexpected to increase interest costs in 2004.

 

***IncomeTaxes***

 
| **In ‘000’s**                                                                           |   | **2003** |   | **2002** |   | **2001** |   | **Increase  (Decrease)  2002 to 2003** |   | **% Increase  (Decrease)  2002 to 2003** |   | **Increase  (Decrease)  2001 to 2002** |   | **% Increase  (Decrease)  2001 to 2002** |   |
|---------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------------------------------------|--------|------------------------------------------|--------|----------------------------------------|--------|------------------------------------------|--------|
| Income from continuing operations before  income taxes and cumulative effect of accounting change |   | $        | 4,891  |     | $      | 6,059    |   | $                                      | 10,480 |                                     | $      | (1,168                                 | )      | -19                                      | %      | $ | (4,421 | ) | -42 | % |
| Provision for income taxes                                                                        |   | 2,103    |   | 2,429    |   | 5,035    |   | (326                                   | )      | -13                                      | %      | (2,606                                 | )      | -52                                      | %      |
| Effective income tax rate                                                                         |   | 43.0     | %      | 40.1     | %      | 48.0     | %      | 2.9                                    | %      | 7                                        | %      | -8.0                                   | %      | -17                                      | %      |
|                                                                                                   |        |          |        |          |        |          |        |                                        |        |                                          |        |                                        |        |                                          |        |  |  |  |  |  |

 

AirNet’s effective tax rates, excluding theeffect of discontinued operations and cumulative effect of accounting change,were 43.0% for 2003, 40.1% for 2002, and 48.0% for 2001.  The increase in the effective tax rate isprimarily due to the impact of permanent differences (expenses which are notdeductible for tax purposes) and state franchise taxes based on equity.

 

***DiscontinuedOperations***

 

On August 11, 2003,AirNet completed the sale of substantially all of the assets of its MercuryBusiness Services unit to Mercury Business Services, Inc., a Delawarecorporation owned by a group that includes the original owners of the Mercurybusiness.

 

The sales price ofthe transaction was approximately $1.1 million.  Mercury BusinessServices, Inc. paid approximately $455,000 of the sales price through theissuance of a ninety day promissory note secured by the assets being sold andguaranteed by each of the shareholders of Mercury Business Services, Inc. Under the terms of the Asset Purchase Agreement, approximately $536,000 of thepurchase price was paid with AirNet common shares owned by the shareholders ofMercury Business Services, Inc., including 56,000 common shares tendered toAirNet prior to closing at $4.30 per share (the closing price of the AirNetshares on the NYSE on July 25, 2003) and 68,494 common shares tendered toAirNet on the closing date at $4.31 per share (the average closing price of theAirNet shares on the NYSE on August 4-6, 2003).  The balance of the salesprice was paid in cash.

 

The MercuryBusiness Services unit had revenues for the year ended December 31, 2003, whichconsisted of the seven months prior to the sale, of $5,939,000, as compared to$8,940,000 and $8,572,000 for the full years of 2002 and 2001, respectively.

 

Pre-tax loss forAirNet’s Mercury Business Services unit for the year ended December 31, 2003,which consisted of the seven months prior to the sale, was $24,000, as comparedto a $432,000 pre-tax loss for the full year in 2002 and a pre-tax loss of$483,000 in 2001.

 

17

----

 

***Net Income and Earnings Per Share***

 

Based on factorsnoted above, AirNet is reporting per share information with the related dollaramount and percentage changes noted below.

 
| **In ‘000’s**                                                          |   | **2003** |   | **2002** |   | **2001** |   | **Increase  (Decrease)  2002 to 2003** |   | **% Increase  (Decrease)  2002 to  2003** |   | **Increase  (Decrease)  2001 to 2002** |   | **% Increase  (Decrease)  2001 to 2002** |   |
|----------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------------------------------------|--------|-------------------------------------------|--------|----------------------------------------|--------|------------------------------------------|--------|
| Income from continuing operations before  cumulative effect of accounting change |   | $        | 4,891  |     | $      | 6,059    |   | $                                      | 10,480 |                                      | $      | (1,168                                 | )      | -19                                      | %      | $ | (4,421 | ) | -42 | % |
| Provision for income taxes                                                       |   | 2,103    |   | 2,429    |   | 5,035    |   | (326                                   | )      | -13                                       | %      | (2,606                                 | )      | -52                                      | %      |
| Income (loss) from discontinued operations                                       |   | (8       | )      | (259     | )      | (251     | )      | 251                                    |   | 97                                        | %      | (8                                     | )      | -3                                       | %      |
| Cumulative effect of accounting change                                           |   | 0        |   | (1,868   | )      | 0        |   | 1,868                                  |   | 100                                       | %      | (1,868                                 | )      | 0                                        | %      |
| Net Income                                                                       |   | $        | 2,780  |     | $      | 1,503    |   | $                                      | 5,194  |                                      | $      | 1,277                                  |   | 85                                       | %      | $ | (3,691 | ) | -71 | % |
|                                                                             |   |     |   |     |   |     |   |                                   |   |                                      |   |                                   |   |                                     |   |
| Number of common shares outstanding:                                             |   |     |   |     |   |     |   |                                   |   |                                      |   |                                   |   |                                     |   |
| Basic                                                                            |   | 10,088   |   | 10,141   |   | 10,576   |   | (53                                    | )      | -1                                        | %      | (435                                   | )      | -4                                       | %      |
| Diluted                                                                          |   | 10,089   |   | 10,261   |   | 10,636   |   | (172                                   | )      | -2                                        | %      | (375                                   | )      | -4                                       | %      |
|                                                                             |   |     |   |     |   |     |   |                                   |   |                                      |   |                                   |   |                                     |   |
| Income from continuing operations before  cumulative effect of accounting change |   |     |   |     |   |     |   |                                   |   |                                      |   |                                   |   |                                     |   |
| Basic and diluted                                                                |   | $        | 0.28   |     | $      | 0.36     |   | $                                      | 0.51   |                                      | $      | (0.08                                  | )      | -23                                      | %      | $ | (0.15 | ) | -30 | % |
|                                                                             |   |     |   |     |   |     |   |                                   |   |                                      |   |                                   |   |                                     |   |
| Income (loss) per common share from  discontinued operations:                    |   |     |   |     |   |     |   |                                   |   |                                      |   |                                   |   |                                     |   |
| Basic and diluted                                                                |   | $        | (0.00  | )        | $      | (0.03    | )      | $                                      | (0.02  | )                                         | $      | 0.03                                   |   | 97                                       | %      | $ | (0.01 | ) | 5 | % |
|                                                                             |   |     |   |     |   |     |   |                                   |   |                                      |   |                                   |   |                                     |   |
| Cumulative effect of accounting change per  common share::                       |   |     |   |     |   |     |   |                                   |   |                                      |   |                                   |   |                                     |   |
| Basic and diluted                                                                |   | $        | (0.00  | )        | $      | (0.18    | )      | $                                      | (0.00  | )                                         | $      | 0.18                                   |   | 100                                      | %      | $ | (0.18 | ) | 100 | % |
|                                                                             |   |     |   |     |   |     |   |                                   |   |                                      |   |                                   |   |                                     |   |
| Net Income per common share:                                                     |   |     |   |     |   |     |   |                                   |   |                                      |   |                                   |   |                                     |   |
| Basic and diluted                                                                |   | $        | 0.28   |     | $      | 0.15     |   | $                                      | 0.49   |                                      | $      | 0.13                                   |   | 87                                       | %      | $ | (0.34 | ) | -70 | % |
|                                                                                  |        |          |        |          |        |          |        |                                        |        |                                           |        |                                        |        |                                          |        |  |  |  |  |  |  |

 

**Liquidity and Capital Resources**

 

AirNet has historically met itsworking capital needs with cash flows from operations and borrowing on itscredit facilities.  Cash flows fromoperations were $27.8 million for 2003, $17.7 million for 2002, and $25.9million for 2001.

 

Thefollowing table sets forth AirNet’s contractual obligations, along with thecash payments due each period (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                         |   | $                           | 37.8   |   | $ | 5.3 |   | $ | 29.3 |   | $ | 3.2 |   | $ | 0.0 |   |
| Operating Leases                       |   | 2.1                         |   | 0.9 |   | 1.0 |   | 0.1 |   | 0.1 |   |
| Other Purchase and Payment Obligations |   | 9.0                         |   | 7.7 |   | 1.3 |   | 0.0 |   | 0.0 |   |
| Total Contractual Cash Obligations     |   | $                           | 48.9   |   | $ | 13.9 |   | $ | 31.6 |   | $ | 3.3 |   | $ | 0.1 |   |

 

AirNet has certain futurepurchase obligations as to which it has signed contracts.  AirNet has contracted for 27 of its 33 Lear35 aircraft to be covered under a manufacturer’s Fleet Management Plan (FMP),under which AirNet prepays certain repair and overhaul costs based on a rateper engine hour.  Based upon projectedengine hours in 2004, AirNet estimates the cost of the FMP to be approximately$7,000,000.

 

AirNet anticipates that cashflow from operations and borrowing programs will provide adequate sources ofliquidity and capital resources to meet AirNet’s expected long-term needs forthe operation of its business, including anticipated capital expenditures.  There were no material capital commitments at December 31, 2003.

 

Underthe terms of Gerald G. Mercer’s retirement agreement, AirNet purchased 818,330common shares from Mr. Mercer at a total cost of $5.0 million in July2001.  This privately negotiatedtransaction was funded through a revolving bank credit 

 

18

----

 

facilityand AirNet intends to hold these common shares in treasury.  Under the terms of the retirement agreement, Mr. Merceralso had the option to sell up to $250,000 of AirNet common shares each quarter at the closing market priceson the last business day of March, June, September and December of 2002 toAirNet.  Mr. Mercer exercised his optionand sold 52,410 AirNet common shares to AirNet at a total cost of $249,996 inJanuary 2003.

 

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

 

In February 2000, AirNetannounced a stock repurchase program allowing AirNet to purchase up to $3.0million of its common shares.  During2000, AirNet purchased $2.4 million in common shares funded by cash flows fromoperations.  There was no repurchaseactivity under this program in 2001, 2002 or 2003.  As such, purchases of approximately $0.6 million of AirNet’scommon shares may still be made in the open market or through privatelynegotiated transactions.  Such futurepurchases would be considered based on availability of funds, current marketconditions and the stock price.

 

Followingis a summary of AirNet’s capital expenditures (in millions) for 2001 through2003 and expected amounts for 2004:

 
|                                            |   | **2004**    |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------|--------|-------------|--------|----------|--------|----------|--------|----------|--------|
|                                            |   |        |   |     |   |     |   |     |   |
| Aircraft                                        |   | $27.0-$20.0 |   | $        | 6.7    |     | $      | 12.2     |   | $ | 13.2 |   |
| Aircraft improvements, engines and  inspections |   | $20.0-$15.0 |   | 12.8     |   | 15.7     |   | 12.5     |   |
| Increase in prepaid engine costs                |   | $ 4.0-$1.5  |   | 3.7      |   | 2.3      |   | 1.3      |   |
| Technology, Rickenbacker facility and other     |   | $12.0-$5.0  |   | 2.0      |   | 0.6      |   | 0.4      |   |
| Total                                           |   | $63.0-$41.5 |   | $        | 25.2   |     | $      | 30.8     |   | $ | 27.4 |   |

 

Costs of major aircraftinspections, overhauls and engine work are capitalized as incurred anddepreciated based on hours flown.  Theoriginal cost of airframes less a salvage value is  depreciated based on the straight-line method over the estimateduseful life of the aircraft.  Aircraftmaintenance costs not meeting AirNet’s capitalization requirements are expensedas incurred.  In 2003, the engines ofapproximately 27 (24 in 2002, and 20 in 2001) of AirNet’s Learjet 35 aircraftwere covered under Fleet Maintenance Plan (FMP), in which AirNet prepayscertain repair and overhaul costs. These prepayments, which totaled approximately $12.7 million at December31, 2003 (approximately $7.0 million and $4.7 million at December 31, 2002 and2001, respectively), are classified in fixed assets on the consolidated balancesheet.  Amortization on these prepaidbalances does not begin until services have been performed, at which time theprepaid balances are reclassified into depreciable asset categories anddepreciated based on hours flown. AirNet intends to cover all of its Lear 35 jet engines under FMP plansover the next several years as major overhauls on the non-covered enginesbecome due.

 

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

 

InDecember 2003, AirNet financed the $5,300,000 cost of a Learjet 60 for itsPassenger Charter services business using its bank credit facility.

 

InJanuary 2002, AirNet entered into operating leases for four Cessna Caravan 208aircraft each with a lease term of three years.  In September 2002 the lease terms were extended an additionalyear.  In January 2002 AirNet alsoentered into operating leases for two Cessna Caravan 208B aircraft, one with alease term of 3.5 years and one with a lease term of 4.5 years.

 

AirNet determined that theseoperating leases would provide economic benefits favorable to ownership withrespect to market values, liquidity and after-tax cash flows. In accordancewith accounting principles generally accepted in the United States, AirNet doesnot record operating leases in its consolidated balance sheet; however, theminimum lease payments

 

19

----

 

related to these leases aredisclosed in Note 5 of the Notes to Consolidated Financial Statements to theaccompanying audited financial statements.

 

InSeptember 2002, AirNet entered into a $35 million unsecured revolving credit facility and a five-year $20.0million unsecured term loan.  The termloan requires quarterly installments of $1.0 million.  The agreement bears interest at AirNet’s option of a fixed ratebased upon LIBOR plus a margin determined by its leverage ratio as defined inthe agreement, or a floating rate based on the greater of the prime rate andthe sum of .5% plus the federal funds rate in effect from time to time.  The new agreement requires the maintenanceof certain minimum tangible net worth and cash flow levels, imposes certain limitations on capital expenditures and thesale of assets, and restricts the amount of additional debt.  As of December 31, 2003, there was $6.5million available under the credit facility. As of March 2004, AirNet isnegotiating a new, secured bank revolving credit facility with its existingbank group to increase borrowing availability. AirNet expects to finalize the new credit facility in April 2004.

 

**Seasonality and Variability in QuarterlyResults**

 

AirNet’soperations historically have been somewhat seasonal relative to holidaysobserved 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.

 

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

 

**Selected Quarterly Data (unaudited)**

 

The following is a summary ofthe unaudited quarterly results of operations for the quarterly periods ended(in thousands, except per share data):

 
|                                                                                              |   | **Quarters  Ended,** |       |
|---------------------------------------------------------------------------------------------------|--------|----------------------|------------|
|                                                                                              |   | **March 31**         |       | **June 30** |   | **September  30** |   | **December  31** |   |
| **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** | ** ** |
|                                                                                              |   |                 | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **2002**                                                                                          |   |                 | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Net revenues                                                                                      |   | **$**                | **33,475** | ** ** | **$** | **35,417** | ** ** | **$** | **36,943** | ** ** | **$** | **36,109** | ** ** |
| Income from continuing operations before  income taxes and cumulative effect of accounting change |   | **1,963**            | ** ** | **1,910** | ** ** | **2,468** | ** ** | **(282** | **)** |
| Income (loss) from discontinued operations  –Note 1                                          |   | **(55**              | **)**      | **(57** | **)** | **(65** | **)** | **(82** | **)** |
| Cumulative effect of accounting change –  Note 2                                             |   | **(1,868**           | **)**      | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| Net income (loss) – Note 2                                                                   |   | **(725**             | **)**      | **1,108** | ** ** | **1,441** | ** ** | **(321** | **)** |
| Per share – basic and diluted:                                                               |   |                 | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Income (loss) from continuing operations                                                          |   | **$**                | **.12**    | ** ** | **$** | **.11** | ** ** | **$** | **.15** | ** ** | **$** | **(.02** | **)** |
| Cumulative effect of accounting change                                                            |   | **$**                | **(.18**   | **)** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| Net income (loss) – Note 2                                                                   |   | **$**                | **(.07**   | **)** | **$** | **.11** | ** ** | **$** | **.14** | ** ** | **$** | **(.03** | **)** |

 

----

Note 1 – In August 2003, AirNetsold the assets of its Mercury Business Services unit, resulting indiscontinued operations.

 

Note 2 – AirNet adoptedStatement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets* in 2002.  In accordance with the transition provisionsof this Statement, AirNet recorded the cumulative effect of the accountingchange effective January 1, 2002.

 

20

----

 

**CriticalAccounting Policies and Estimates**

 

The preparation of financialstatements in accordance with accounting principles generally accepted in theUnited States requires management to adopt accounting policies and makesignificant judgments and estimates to develop amounts reflected and disclosedin the financial statements. In many cases, there are alternative policies orestimation techniques that could be used. AirNet maintains a thorough processto review the application of its accounting policies and to evaluate theappropriateness of the estimates; however, even under optimal circumstances,estimates routinely require adjustment based on changing circumstances and thereceipt of new or better information.

 

The policies and estimatesdiscussed below include the financial statement elements that are either themost judgmental or involve the selection or application of alternativeaccounting policies, and are material to AirNet’s financial statements.Management has discussed the development and selection of these criticalaccounting policies and estimates with the Audit Committee of its Board ofDirectors and with its independent auditors.

 

*Allowance for Uncollectible AccountsReceivable*

 

Historically, AirNet’s creditlosses from bad debts have not fluctuated materially because its creditmanagement processes have been effective. AirNet also recognizes billingadjustments to revenue and accounts receivable for certain discounts, moneyback service guarantees and billing corrections.

 

Estimates for credit losses andbilling adjustments are regularly updated based on historical experience of baddebts, adjustments processed, current collection trends, and the individualassessment of customers’ credit quality. Once AirNet considers all these factors, a determination is made as tothe need for a bad debt allowance. Allowances for these future adjustments aggregated$0.5 million at December 31, 2003 and $0.9 million at December 31, 2002.  AirNet considers the sensitivity andsubjectivity of these estimates to be moderate, as changes in economicconditions and pricing arrangements can significantly affect the estimates usedto determine the allowances.

 

*Major Aircraft Maintenance*

 

Costs of major aircraftinspections, overhauls and engine work are capitalized as incurred anddepreciated based on hours flown.  Theoriginal costs of airframes, less an estimated salvage value, are depreciatedbased on the straight-line method over the estimated useful life of theaircraft.  Aircraft maintenance costsnot meeting AirNet’s capitalization requirements are expensed as incurred.  The engines of approximately 27 of AirNet’s33 Learjet 35 aircraft are covered under Fleet Management Plan (FMP), in whichAirNet prepays certain repair and overhaul costs.  These prepayments, which totaled $12.7 million and $7.0 millionat December 31,2003 and 2002, respectively, are classified in fixed assets on the consolidatedbalance sheet.  Amortization on theseprepaid balances does not begin until services have been performed, at whichtime the prepaid balances are reclassified into depreciable asset categoriesand depreciated based on hours flown. AirNet intends to cover all of its Learjet 35 jet engines under FMPplans over the next several years as major overhauls on the non-covered enginesbecome due.

 

# ***Property and Equipment***

 

AirNet’s delivery service and passenger charter service businesses arecapital intensive. Over 85% of its total assets are invested in flightequipment to serve these markets. AirNet capitalizes only those costs that meetthe definition of capital assets under accounting standards.

 

The depreciation or amortization of AirNet’s capital assets over theirestimated useful lives, and the determination of any salvage values, requiresmanagement to make judgments about future events. Because AirNet utilizes manyof its capital assets over relatively long periods, management periodicallyevaluates whether adjustments to estimated lives or salvage values arenecessary. The accuracy of these estimates affects the amount of depreciationexpense recognized in a period and, ultimately, the gain or loss on thedisposal of the asset. Historically, gains and losses on operating equipmenthave not been material. However, such amounts may differ materially in thefuture based on technological obsolescence, accident frequency, regulatoryrequirements, and other factors beyond AirNet’s control.

 

AirNet must project aircraft requirements multiple years in advancebased on expected volume levels.  As aresult, AirNet has risk that capacity may exceed demand and that an impairmentof its assets may occur. The accounting test for whether an asset held for useis impaired involves first comparing the carrying value of the asset with itsestimated future undiscounted cash flows. If the cash flows do not exceed thecarrying value, the asset must be adjusted to its current fair value. Because thecash flows of AirNet’s transportation network cannot be identified toindividual assets, and based on the ongoing profitability of its operations,AirNet has not experienced any significant impairment of assets to be held andused. However, from time to time AirNet makes decisions to remove certainlong-lived assets from service based on projections of capacity needs, andthose decisions may result in a loss being recognized.

 

21

----

 

# ***Stock-Based Compensation***

 

AirNet accounts for stock options under Accounting Principles BoardOpinion No. 25, “*Accounting for Stock Issued to Employees*”, which does notrequire compensation costs related to stock options to be recorded in netincome, as all options granted under its 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,*” provides guidance on acceptableapproaches to the implementation of SFAS No. 123, and requires more prominentdisclosures of pro forma net earnings and earnings per share determined as ifthe fair value method of accounting for stock options had been applied inmeasuring compensation cost. Stock options are further detailed in the Notes toAirNet’s Consolidated Financial Statements included in Item 8 of this AnnualReport on Form 10-K.

 

*Self-Insurance Accruals*

 

AirNet is self-insured up tocertain limits for costs associated with workers’ compensation claims andbenefits paid under employee health care programs. At December 31, 2003, AirNethad total self-insurance accruals reflected in its consolidated balance sheetof approximately $1.3 million ($1.2 million at December 31, 2002).

 

The measurement of these costsrequires the consideration of historical loss experience and judgments aboutthe present and expected levels of cost per claim.  AirNet accounts for these costs primarily through measurement ofclaims outstanding and projected payments. AirNet believes its recorded obligations for these expenses areconsistently measured on an appropriate basis; however, changes in healthcosts, loss development factors, accident frequency and severity, and otherfactors can materially affect the estimates for these liabilities.

 

# ***IncentiveCompensation Plans***

 

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

 

Costsrelated to the company earnings portion of the plan are accrued based on actualquarterly results.  At December 31, 2003and December 31, 2002, no accrual existed for this portion of the plan, as thequarterly targets were not met.

 

AirNetaccrues for costs related to the personal/departmental goals portion of theplan based on estimated achievement rates of set goals applied to individuals’base pay rates.  Payouts may be madequarterly or annually, depending on the nature of the goals.  At December 31, 2003 and 2002, a $0.6million accrual was recorded for the personal/departmental goals portion of theplan.

 

*Income Taxes*

 

AirNet accounts for incometaxes 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.

 

*Impairment of Goodwill and Other Intangibles*

 

Accounting standards adopted in2002 required that AirNet cease all goodwill amortization and reviewintangibles, including goodwill, for impairment on an annual basis. Aspreviously indicated, the adoption of these new rules resulted in a transitionimpairment of its recorded goodwill of $3.1 million ($1.9 million net of related deferred tax asset) in2002. AirNet has elected to test for goodwill impairment at the beginning ofthe fourth quarter of each year.  Theannual evaluation of goodwill impairment requires the use of estimates aboutthe future cash flows to determine estimated fair value. Changes in forecastedresults and changes in discount rates can materially affect these estimates.However, once an impairment of goodwill has been recorded, it cannot bereversed.   AirNet cannot predict the occurrence of certain future events that mightadversely affect the reported value of goodwill that totaled $4,018,000 atDecember 31, 2003.  Such events couldinclude, but are not limited to, strategic decisions made in response toeconomic and competitive conditions, the impact of the economic environment andmarket factors on AirNet’s customer base, or a material negative change in itsrelationship with its significant customers.

 

**Forward-looking statements**

 

The information included orincorporated by reference in this Annual Report on Form 10-K contains various“forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended, including those identified by the words “believe,”“anticipate,” “estimate,” “expect,” “intend,” “may,” “plan,” “project” andsimilar expressions.  Theseforward-looking statements reflect management’s 

 

22

----

 

expectations and are based uponcurrently available data; however, actual results are subject to future eventsand uncertainties, which could cause actual results to differ from thoseprojected in these statements.  Thefollowing factors, in addition to those included in the disclosure under theheading “Risk Factors” below, could cause actual results to differ materiallyfrom those expressed in forward looking statements:

 

•                    potential regulatory changes by the FederalAviation Administration, which could increase the regulation of AirNet’sbusiness, or the Federal Reserve, which could change the competitiveenvironment of transporting canceled checks;

 

•                    disruptions to operations due to adverse weatherconditions and air traffic control-related constraints;

 

•                    potential declines in the values of aircraft inAirNet’s fleet and any related asset impairment charges;

 

•                    the ability to successfully market the passengercharter business in light of global changes in the commercial airline industry;

 

•                    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 a new facility ;

 

•                    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 shipmentvolumes;

 

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

 

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

 

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

 

All forward-looking statementsare expressly qualified in their entirety by these cautionary statements.  AirNet assumes no obligation or duty toupdate any of the forward-looking statements included or incorporated byreference in this Annual Report on Form 10-K except to the extent required bylaw.

 

**Risk Factors**

 

**Competition fromother providers of express air and ground delivery services may adverselyaffect AirNet’s results of operations and financial condition.**

 

AirNet’sBank services competes primarily against the Federal Reserve’s Check RelayNetwork, which has significantly greater financial and other resources thanAirNet.  The Federal Reserve isregulated by the Monetary Control Act of 1980, which in general requires thatthe Federal Reserve price its services on an actual cost basis plus a setpercentage private sector market adjustment factor.  Failure by the Federal Reserve to comply with the MonetaryControl Act by pricing its services below the required rates could have anadverse competitive impact on AirNet. In addition, the Monetary Control Act may be amended, modified orrepealed, or new legislation affecting AirNet’s business may be enacted. Themarket for express air and ground delivery service is highly competitive.   Although major participants in the next-dayand second-day air delivery market (such as UPS and FedEx) have also enteredthe business of same day and early morning delivery, they have not had amaterial adverse effect on AirNet’s business to date.  However, the efforts of these competitors could have a materialadverse effect on AirNet in the future.

 

**The Check 21 Act orsimilar legislation could have a significant adverse effect on AirNet’srevenues derived from check delivery services.**

 

In October 2003,the Check 21 Act was signed into law with a one-year waiting period prior tobecoming effective.  The Check 21 Actcreates a new negotiable instrument called a substitute check (also known as animage replacement document or “IRD”) that becomes the legal equivalent of theoriginal item.  The Check 21 Act effectively removes the 

 

23

----

 

requirementof returning an original paper check to the account holder’s institution andrequires that all financial institutions accept an IRD in lieu of a cancelledcheck.   When it becomes effective inOctober 2004, The Check 21 Act will likely accelerate the transition in thebanking industry to electronic methods of clearing cancelled checks and willeventually replace the need for expedited air transportation services oforiginal cancelled checks by most of AirNet’s banking customers.

 

The Check21 Act eventually will have a significant adverse affect on AirNet’s revenuesderived from check delivery services. However, it is unclear when such an electronic clearing system will beimplemented on a widespread basis by banking customers and how suchimplementation would affect their expedited check transportation needs.

 

**Other Technologicalchanges in the check clearance and national payment systems may adverselyaffect the demand for AirNet’s Bank services from the financial servicesindustry.**

 

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

 

**Government regulationsignificantly affects AirNet.**

 

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

 

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

 

**Reclassification of GroundCouriers as employees rather than independent contractors could impact AirNet’soperating costs and subject it to back taxes and other liabilities.**

 

AirNet uses theservices of independent contractors as couriers to pick up and deliver itspackages.  From time to time, federaland state authorities have sought to assert that independent contractors in thetransportation industry, including independent contractors providing servicessimilar to those utilized by AirNet, are employees rather than independentcontractors. AirNet currently classifies its couriers providing services underan independent contractor agreement as independent contractors rather than asemployees.  However, there can be noassurance that federal or state authorities will not challenge this position,or that other laws or regulations, including tax laws or interpretationsthereof, will not change. If, as a result of any of the foregoing, AirNet wererequired to pay withholding taxes and pay for and administer added employeebenefits to these couriers, AirNet’s operating costs could increase.Additionally, in the event of any such reclassification, AirNet could berequired to pay back-up withholding with respect to amounts previously paid tosuch individuals and be required to pay penalties or be subject to other liabilitiesas a result of the incorrect classification of such individuals, such aspayment of past due workers compensation and unemployment insurance premiums.

 

**Changes to currenttransportation security requirements or procedures could adversely impact theAirNet’s ability to efficiently conduct its air and ground operations to meetits current delivery parameters or significantly increase costs to transactthose operations.**

 

Considerablefocus has been placed on package security requirements and procedures atdomestic and international airports since the September 11, 2001 tragedy andrelated incidents.  The TSA, commercial airlines, fixed based operations(where AirNet transacts a significant portion of its aircraft loading andunloading operations) and airport authorities are still in the process ofreviewing all aspects of their security requirements.  While many proposed changes are voluntary, many are beingmandated by the TSA, the DOT and the FAA.

 

24

----

 

During 2002, the TSAimplemented screening procedures for over-the-counter cargo tendered tocommercial airlines. The new screening procedures have resulted in additionaltender time for packages transported on the commercial airlines in certainlocations and during certain times.  Inaddition, the TSA continues to review and consider additional package screeningrequirements and changes to the vendor screening procedures, which AirNet mayneed to perform on packages from its customers.   Many commercial airlines arealso adding security surcharges to shipments.

 

Changesat fixed base operators and by local airport authorities could potentiallylimit AirNet’s ramp access to its aircraft, thereby increasing tender time fromcustomers.  Changes in chain of custodyrequirements could also potentially cause AirNet to incur additional costs tostaff additional hours at certain locations. In response to the new security-related procedures being implemented,AirNet added 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.

 

**Catastrophicaccidents involving AirNet’s Passenger Charter aircraft could result in asignificant reduction in its business and damage to its Jetride brand.**

 

Acatastrophic accident could substantially reduce the demand for Jetride’spassenger charter services and, therefore, significantly reduce itsrevenue.  In addition, Jetride may notbe able to secure liability insurance for its business or secure such insuranceat a reasonable cost.

 

**Environmental concerns related to the construction of afacility on leased land with known pollution conditions.**

 

AirNet intends to commence construction of theRickenbacker Facility on land leased from the Columbus Regional Port Authorityin 2004.  Portions of the leased land,as well as portions of the aircraft ramp, on which AirNet intends to conduct asignificant portion of its Columbus operations, contain known pollutionconditions.  The appropriate amendedpost closure plan and no further action letters addressing these sites are tobe supplied to AirNet by the Columbus Regional Port Authority prior tobeginning construction. AirNet has received the applicable no further actionletters.  Identification of additionalpollution conditions on the leased land or attached ramp or the inability ofthe Columbus Regional Port Authority to provide the approved amended postclosure plan could increase costs and have an adverse affect on AirNet’sability to construct the Rickenbacker Facility.

 

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

 

AirNet maintainsparty status to DOT E-7060, which permits AirNet to transport higher volumes ofradioactive pharmaceuticals than allowed by most air carriers.  AirNet isrequired to renew its party status every two years.  Although AirNetanticipates it will obtain its DOT E-7060 renewal at its next scheduled renewaldate in November 2004, there can be no assurances that the party status will beextended.  Further, although AirNet believes it is compliant with allcurrent DOT E-7060 requirements, there can be no assurances that suchrequirements will not change in the future negatively affecting AirNet’sability to maintain such status.

 

**Anti-takeoverprovisions may delay or prevent an acquisition or change in control of AirNetby a third party.**

 

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

 

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

 

Inaddition, Section 1701.831 of the Ohio Revised Code contains provisionsthat require shareholder approval of any proposed “control share acquisition”of any Ohio corporation at any of three voting power thresholds:  one-fifth, one-third and a majority. Inaddition, Chapter 1704 of the Ohio Revised Code contains provisions thatrestrict specified business combinations and other transactions between an Ohiocorporation and interested shareholders.

 

25

----

 

**ITEM 7A - QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

AirNetis exposed to certain market risks from transactions that are entered intoduring the normal course of business. AirNet’s primary market risk exposure relates to interest raterisk.  At December 31, 2003, AirNet had$35.7 million outstanding on credit facilities subject to market rate changesin interest.  These facilities bearinterest at various London Interbank Offering Rates (LIBORs) and floating ratesbased on prime rates and federal fund rates. Assuming borrowing levels at December 31, 2003, a one hundred basispoint change in interest rates would impact net interest expense byapproximately $357,000 per year.

 

In February 2002, AirNetentered into an interest rate swap agreement with a bank relative to a $3.0million term loan, with a notional amount of $3.0 million and a fixed rate of 4.25%plus a margin based on AirNet’s funded debt ratio.  At December 31, 2003, the aggregate fair value of the interestrate swap was approximately ($65,000).

 

26

----

**ITEM8****- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**Report of Independent Auditors**

 

 

Shareholders and Board ofDirectors

AirNet Systems, Inc.

 

 

We have audited theaccompanying consolidated balance sheets of AirNet Systems, Inc. as of December31, 2003 and 2002, and the related consolidated statements of operations,shareholders’ equity, and cash flows for each of the three years in the periodended December 31, 2003.  Our auditsalso included the financial statement schedule listed in the Index at Item 15(a) 2.  These financial statements andschedule are the responsibility of the 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 accordancewith auditing standards generally accepted in the United States.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of AirNet Systems, Inc. at December 31, 2003and 2002, and the consolidated results of its operations and its cash flows foreach of the three years in the period ended December 31, 2003, in conformitywith accounting principles generally accepted in the United States.  Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

As discussed in Note 2, in 2002AirNet Systems, Inc. changed its method of accounting for goodwill inaccordance with Statement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets*.

 

 

 

 

Columbus, Ohio

February 16, 2004

 

27

----

 

**AIRNET SYSTEMS, INC.**

 

**CONSOLIDATED BALANCE SHEETS**

 

In thousands,except per share data

 
|                                                                                                             |   | **December 31,** |        |
|------------------------------------------------------------------------------------------------------------------|--------|------------------|-------------|
|                                                                                                             |   | **2003**         |        | **2002** |   |
| **ASSETS**                                                                                                       |   |             |        |   |   |
| Current assets:                                                                                                  |   |             |        |   |   |
| Cash and cash equivalents                                                                                        |   | **$**            | **125**     |   | $ | 1,054 |   |
| Accounts receivable, less allowances of **$515** and $865 at December 31, 2003 and  2002, respectively           |   | **18,647**       |        | 17,939 |   |
| Inventory and spare parts                                                                                        |   | **6,589**        |        | 6,926 |   |
| Taxes receivable                                                                                                 |   | **1,401**        | ** **  | **—** | ** ** |
| Deferred income taxes                                                                                            |   | **—**       |        | 220 |   |
| Deposits and prepaids                                                                                            |   | **3,246**        |        | 3,675 |   |
| Net assets of discontinued operations                                                                            |   | **—**       |        | 1,188 |   |
| Total current assets                                                                                             |   | **30,008**       |        | 31,002 |   |
|                                                                                                             |   |             |        |   |   |
| Net property and equipment                                                                                       |   | **118,799**      |        | 111,302 |   |
|                                                                                                             |   |             |        |   |   |
| Other assets:                                                                                                    |   |             |        |   |   |
| Goodwill, net of accumulated amortization                                                                        |   | **4,018**        |        | 4,018 |   |
| Other                                                                                                            |   | **448**          |        | 1,002 |   |
| **Total assets**                                                                                                 |   | **$**            | **153,273** |   | $ | 147,324 |   |
|                                                                                                             |   |             |        |   |   |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                   |   |             |        |   |   |
| Current liabilities:                                                                                             |   |             |        |   |   |
| Accounts payable                                                                                                 |   | **$**            | **7,442**   |   | $ | 5,723 |   |
| Salaries and related liabilities                                                                                 |   | **4,955**        |        | 4,474 |   |
| Deferred revenue                                                                                                 |   | **184**          | ** **  | **—** | ** ** |
| Accrued expenses                                                                                                 |   | **887**          |        | 897 |   |
| Taxes payable                                                                                                    |   | **76**           |        | 499 |   |
| Deferred income taxes                                                                                            |   | **4**            |        | — |   |
| Current portion of notes payable                                                                                 |   | **5,256**        |        | 5,193 |   |
| Total current liabilities                                                                                        |   | **18,804**       |        | 16,786 |   |
|                                                                                                             |   |             |        |   |   |
| Other liabilities                                                                                                |   | **1,280**        |        | 106 |   |
| Notes payable, less current portion                                                                              |   | **32,520**       |        | 36,601 |   |
| Deferred income taxes                                                                                            |   | **16,389**       |        | 13,035 |   |
|                                                                                                             |   |             |        |   |   |
| Shareholders’ equity:                                                                                       |   |             |        |   |   |
| Preferred shares, $.01 par value; 10,000  shares authorized; and no shares issued and outstanding                |   | **—**       |        | — |   |
| Common shares, $.01 par value; 40,000  shares authorized; **12,753**shares  issued at December 31, 2003 and 2002 |   | **128**          |        | 128 |   |
| Additional paid-in capital                                                                                       |   | **77,759**       |        | 77,152 |   |
| Retained earnings                                                                                                |   | **31,938**       |        | 29,158 |   |
| Accumulated other comprehensive loss                                                                             |   | **(35**          | **)**       | (59 | ) |
| Treasury shares **2,720** and 2,599 shares held at cost at December 31, 2003 and  2002, respectively             |   | **(25,510**      | **)**       | **(25,583** | **)** |
| Total shareholders’ equity                                                                                  |   | **84,280**       |        | 80,796 |   |
|                                                                                                             |   |             |        |   |   |
| **Total liabilities and  shareholders’ equity**                                                             |   | **$**            | **153,273** |   | $ | 147,324 |   |

 

See notes toconsolidated financial statements

 

28

----

 

**AIRNET SYSTEMS, INC.**

 

**CONSOLIDATED STATEMENTS OFOPERATIONS**

 

In thousands, except per share data

 
|                                                                                                                                           |   | **Year Ended December 31,** |        |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|
|                                                                                                                                           |   | **2003**                    |        | **2002** |   | **2001** |   |
|                                                                                                                                           |   |                        |        |   |   |   |   |
| **NET REVENUES**                                                                                                                               |   |                        |        |   |   |   |   |
| Air  transportation, net of excise tax of $**3,579,**$3,893, and $ 3,636 for the years ended December 31, 2003, 2002,  and 2001, respectively: |   |                        |        |   |   |   |   |
| Delivery  services:                                                                                                                            |   |                        |        |   |   |   |   |
| Bank  services                                                                                                                                 |   | **$**                       | **103,399** |   | $ | 102,626 |   | $ | 106,716 |   |
| Express  services                                                                                                                              |   | **36,963**                  |        | 33,958 |   | 26,252 |   |
| Total  delivery services revenues                                                                                                              |   | **140,362**                 |        | 136,584 |   | 132,968 |   |
|                                                                                                                                           |   |                        |        |   |   |   |   |
| Passenger  Charter services                                                                                                                    |   | **7,599**                   |        | 4,316 |   | 737 |   |
| Aviation  services                                                                                                                             |   | **1,261**                   |        | 1,044 |   | 1,499 |   |
| **Total net revenues**                                                                                                                         |   | **149,222**                 |        | 141,944 |   | 135,204 |   |
|                                                                                                                                           |   |                        |        |   |   |   |   |
| **COSTS AND EXPENSES**                                                                                                                         |   |                        |        |   |   |   |   |
| Wages  and benefits                                                                                                                            |   | **25,755**                  |        | 24,182 |   | 19,715 |   |
| Aircraft  fuel                                                                                                                                 |   | **19,227**                  |        | 17,582 |   | 15,486 |   |
| Aircraft  maintenance                                                                                                                          |   | **12,242**                  |        | 12,305 |   | 10,962 |   |
| Contracted  air costs                                                                                                                          |   | **9,929**                   |        | 9,069 |   | 10,941 |   |
| Ground  courier                                                                                                                                |   | **25,698**                  |        | 24,292 |   | 23,171 |   |
| Depreciation                                                                                                                                   |   | **17,535**                  |        | 17,699 |   | 14,668 |   |
| Insurance,  rent and landing fees                                                                                                              |   | **9,054**                   |        | 7,352 |   | 5,540 |   |
| Travel,  training and other                                                                                                                    |   | **7,597**                   |        | 8,325 |   | 7,079 |   |
| Selling,  general and administrative                                                                                                           |   | **15,954**                  |        | 13,430 |   | 13,751 |   |
| **Total costs and expenses**                                                                                                                   |   | **142,991**                 |        | 134,236 |   | 121,313 |   |
|                                                                                                                                           |   |                        |        |   |   |   |   |
| Income  from operations                                                                                                                        |   | **6,231**                   |        | 7,708 |   | 13,891 |   |
| Impairment  on investment                                                                                                                      |   | **—**                  |        | — |   | 1,744 |   |
| Interest  expense                                                                                                                              |   | **1,340**                   |        | 1,649 |   | 1,668 |   |
| Income  from continuing operations before income taxes and cumulative effect of  accounting change                                             |   | **4,891**                   |        | 6,059 |   | 10,479 |   |
| Provision  for income taxes                                                                                                                    |   | **2,103**                   |        | 2,429 |   | 5,035 |   |
|                                                                                                                                           |   |                        |        |   |   |   |   |
| **Income from continuing operations before cumulative effect  of accounting change**                                                           |   | **2,788**                   |        | 3,630 |   | 5,444 |   |
|                                                                                                                                           |   |                        |        |   |   |   |   |
| **Loss from discontinued operations (including gain on sale  of $58,000 in 2003), net of taxes**                                               |   | **(8**                      | **)**       | (259 | ) | (251 | ) |
|                                                                                                                                           |   |                        |        |   |   |   |   |
| **Income before cumulative effect of accounting change**                                                                                       |   | **2,780**                   | ** **  | **3,371** | ** ** | **5,193** | ** ** |
|                                                                                                                                           |   |                        |        |   |   |   |   |
| Cumulative  effect of accounting change, net of $1,194 tax benefit                                                                             |   | **—**                  |        | (1,868 | ) | — |   |
|                                                                                                                                           |   |                        |        |   |   |   |   |
| **Net income**                                                                                                                                 |   | **$**                       | **2,780**   |   | $ | 1,503 |   | $ | 5,193 |   |
|                                                                                                                                           |   |                        |        |   |   |   |   |
| Income  (loss) per common share - basic and diluted                                                                                            |   |                        |        |   |   |   |   |
| Continuing  operations                                                                                                                         |   | $                           | 0.28        |   | $ | 0.36 |   | $ | 0.51 |   |
| Discontinued  operations                                                                                                                       |   | $                           | —      |   | $ | (0.03 | ) | $ | (0.02 | ) |
| Cumulative  effect of accounting change                                                                                                        |   | $                           | —      |   | $ | (0.18 | ) | $ | — |   |
| Net  income per share - basic and diluted                                                                                                      |   | **$**                       | **0.28**    |   | $ | 0.15 |   | $ | 0.49 |   |

 

Seenotes to consolidated financial statements

 

29

----

 

**AIRNET SYSTEMS, INC.**

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

 

In thousands

 
|                                                                               |   | **2003**    |       | **2002**   |       | **2001**   |       |
|------------------------------------------------------------------------------------|--------|-------------|------------|------------|------------|------------|------------|
|                                                                               |   |        | ** ** |       |       |       |       |
| **OPERATING ACTIVITIES**                                                           |   |        | ** ** |       |       |       |       |
| Net  income                                                                        |   | **$**       | **2,780**  | ** ** | $          | 1,503      |       | $ | 5,194 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |        | ** ** |       |       |       |       |
| Non-cash  charge for investment impairment                                         |   | **—**  | ** ** | **—** |       | 1,744      |       |
| Cumulative  effect of accounting change                                            |   | **—**  | ** ** | 1,868      |       | —     |       |
| Depreciation                                                                       |   | **17,535**  | ** ** | 17,699     |       | 14,668     |       |
| Amortization  of intangibles                                                       |   | **—**  | ** ** | 17         |       | 520        |       |
| Deferred  taxes                                                                    |   | **3,533**   | ** ** | 588        |       | 2,413      |       |
| Provision  for losses on accounts receivable                                       |   | **495**     | ** ** | 433        |       | 457        |       |
| Loss  (gain) on disposition of assets                                              |   | **(89**     | **)**      | 86         |       | 53         |       |
| Cash  provided by (used in) operating assets and liabilities:                      |   |        | ** ** |       |       |       |       |
| Accounts  receivable                                                               |   | **(1,659**  | **)**      | (2,701     | )          | (1,002     | )          |
| Inventory  and spare parts                                                         |   | **337**     | ** ** | (222       | )          | (87        | )          |
| Deposits  and prepaids                                                             |   | **506**     | ** ** | (1,972     | )          | (230       | )          |
| Accounts  payable                                                                  |   | **1,715**   | ** ** | (49        | )          | 321        |       |
| Accrued  expenses                                                                  |   | **173**     | ** ** | 374        |       | (167       | )          |
| Taxes  payable/receivable                                                          |   | **(528**    | **)**      | 503        |       | 254        |       |
| Salaries  and related liabilities                                                  |   | **480**     | ** ** | (264       | )          | 1,469      |       |
| Other,  net                                                                        |   | **1,266**   | ** ** | (213       | )          | (404       | )          |
| Net  assets of discontinued operations                                             |   | **1,229**   | ** ** | 77         |       | 660        |       |
| **Net cash provided by operating activities**                                      |   | **27,773**  | ** ** | 17,727     |       | 25,863     |       |
|                                                                               |   |        | ** ** |       |       |       |       |
| **INVESTING ACTIVITIES**                                                           |   |        | ** ** |       |       |       |       |
| Purchases  of property and equipment                                               |   | **(25,287** | **)**      | (30,845    | )          | (27,377    | )          |
| Proceeds  from sales of property and equipment                                     |   | **195**     | ** ** | 353        |       | 310        |       |
| Proceeds  from sale of business                                                    |   | **565**     | ** ** | **—** | ** ** | **—** | ** ** |
| **Net cash used in investing activities**                                          |   | **(24,527** | **)**      | (30,492    | )          | (27,067    | )          |
|                                                                               |   |        | ** ** |       |       |       |       |
| **FINANCING ACTIVITIES**                                                           |   |        | ** ** |       |       |       |       |
| Proceeds  from 1996 Incentive Stock Plan programs                                  |   | **158**     | ** ** | 198        |       | 84         |       |
| Net  borrowings (repayments) under revolving credit facilities                     |   | **1,100**   | ** ** | (10,449    | )          | 5,549      |       |
| Borrowings  under term loan facilities                                             |   | **1,500**   | ** ** | 25,983     | ** ** | **—** | ** ** |
| Repayments  of term loan facilities                                                |   | **(6,696**  | **)**      | (1,974     | )          | (33        | )          |
| Purchase  of treasury shares, net of issuances                                     |   | **(237**    | **)**      | 14         |       | (4,983     | )          |
| **Net cash provided by (used in) financing activities**                            |   | **(4,175**  | **)**      | 13,772     |       | 617        |       |
|                                                                               |   |        | ** ** |       |       |       |       |
| Net  increase (decrease) in cash                                                   |   | **(929**    | **)**      | 1,007      |       | (587       | )          |
| Cash  and cash equivalents at beginning of period                                  |   | **1,054**   | ** ** | 47         |       | 634        |       |
|                                                                               |   |        | ** ** |       |       |       |       |
| **Cash and cash equivalents at end of period**                                     |   | **$**       | **125**    | ** ** | $          | 1,054      |       | $ | 47 |   |

 

See notes to consolidated financialstatements

 

30

----

 

**AIRNET SYSTEMS, INC.**

 

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

 

In thousands

 
|                                                                |   | **Common Shares**     |       | **Additional** |       |                 |       | **Accumulated  Other** |       |                    |       |                 |       |
|---------------------------------------------------------------------|--------|-----------------------|------------|----------------|------------|----------------------|------------|------------------------|------------|-------------------------|------------|----------------------|------------|
|                                                                |   | **Number  of Shares** |       | **Amount**     |       | **Paid-in  Capital** |       | **Retained  Earnings** |       | **Comprehensive  Loss** |       | **Treasury  Shares** |       | **Total** |   |
|                                                                |   |                  |       |           |       |                 |       |                   |       |                    |       |                 |       |   |   |
| Balance December 31, 2000                                           |   | 12,753                |       | $              | 128        |                 | $          | 77,702                 |       | $                       | 22,462     |                 | $          | — |   | $ | (21,447 | ) | $ | 78,845 |   |
|                                                                |   |                  |       |           |       |                 |       |                   |       |                    |       |                 |       |   |   |
| Net income                                                          |   | —                |       | —         |       | —               |       | 5,194                  |       | —                  |       | —               |       | 5,194 |   |
| Loss on derivative instruments, net of $90  tax benefit             |   | —                |       | —         |       | —               |       | —                 |       | (132                    | )          | —               |       | (132 | ) |
| Cumulative effect of accounting change, net  of $42 tax benefits    |   | —                |       | —         |       | —               |       | —                 |       | (62                     | )          | —               |       | (62 | ) |
| Comprehensive income                                                |   |                  |       |           |       |                 |       |                   |       |                    |       |                 |       | 5,000 |   |
|                                                                |   |                  |       |           |       |                 |       |                   |       |                    |       |                 |       |   |   |
| Purchase of treasury shares                                         |   | —                |       | —         |       | —               |       | —                 |       | —                  |       | (5,000               | )          | (5,000 | ) |
| Issuance of treasury shares - Associate  Stock Purchase Program     |   | —                |       | —         |       | (238                 | )          | —                 |       | —                  |       | 329                  |       | 91 |   |
| Stock option exercises                                              |   | —                |       | —         |       | (24                  | )          | —                 |       | —                  |       | 34                   |       | 10 |   |
|                                                                |   |                  |       |           |       |                 |       |                   |       |                    |       |                 |       |   |   |
| Balance December 31, 2001                                           |   | 12,753                |       | 128            |       | 77,440               |       | 27,656                 |       | (194                    | )          | (26,084              | )          | 78,946 |   |
|                                                                |   |                  |       |           |       |                 |       |                   |       |                    |       |                 |       |   |   |
| Net income                                                          |   | —                |       | —         |       | —               |       | 1,503                  |       | —                  |       | —               |       | 1,503 |   |
| Gain on derivative instruments, net of $86  tax expense             |   | —                |       | —         |       | —               |       | —                 |       | 134                     |       | —               |       | 134 |   |
| Comprehensive income                                                |   |                  |       |           |       |                 |       |                   |       |                    |       |                 |       | 1,637 |   |
|                                                                |   |                  |       |           |       |                 |       |                   |       |                    |       |                 |       |   |   |
| Issuance of treasury shares - Associate  Stock Purchase Program     |   |                  |       |           |       | (263                 | )          |                   |       |                    |       | 461                  |       | 198 |   |
| Stock option exercises                                              |   | —                |       | —         |       | (25                  | )          | —                 |       | —                  |       | 39                   |       | 14 |   |
|                                                                |   |                  |       |           |       |                 |       |                   |       |                    |       |                 |       |   |   |
| 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** | ** ** |

 

See notes toconsolidated financial statements

 

31

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

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

 

*Basis of Presentation*

 

The accompanying consolidatedfinancial statements include the accounts of AirNet Systems, Inc. and itssubsidiaries.  All significantintercompany accounts and transactions have been eliminated.

 

Preparation of the consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the consolidated financialstatements and accompanying notes. Actual results could differ from those estimates.

 

Certain 2002 and 2001 balanceshave been reclassified to conform with the 2003 presentation.

 

*Revenue Recognition*

 

Revenue on Express and Bankservices is recognized when the packages are delivered to their destination.Revenue related to Passenger Charter services is recognized in the period inwhich the charter services are completed. Revenue on fixed based operations within Aviation Services is recognizedwhen the maintenance services are complete or fuel is delivered.

 

AirNet receives advancepayments from some customers.  Theseadvances secure space on AirNet’s air transportation network during the periodfor which the payment applies.  Theseprepaid revenues are classified as deferred revenue  and revenue is recognized based on the number of flying dayselapsed.

 

*Cash and Cash Equivalents*

 

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

 

*Accounts Receivable*

 

AirNet performs periodic creditevaluations of its customers’ financial condition and generally does notrequire collateral.  AirNet establishesan allowance for doubtful accounts based upon factors surrounding the creditrisks of specific customers, historical trends and other information.

 

*Inventory and Spare Parts*

 

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

 

*Property and Equipment*

 

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

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

 

The engines of twenty-seven ofAirNet’s thirty-three Learjet 35 aircraft are covered under a Fleet ManagementPlan (FMP), in which AirNet prepays certain repair and overhaul costs.  These prepayments, which totaled $12,701,000and $7,043,000

 

32

----

 

at December 31, 2003 and 2002,respectively, are classified in fixed assets on the consolidated balancesheet.  Amortization on these prepaidbalances does not begin until services have been performed, at which time theprepaid balances are reclassified into depreciable asset categories and depreciatedbased on hours flown.

 

AirNet reevaluates theremaining salvage values and depreciable lives on its property and equipment asconditions dictate.  In response tochanges in the projected usage for its fleet of Cessna 310 aircraft, in 2003AirNet reduced the salvage values and shortened the depreciable lives for theseaircraft.  This change in estimateresulted in approximately $489,000 of additional depreciation expense in 2003.

 

Property and equipmentconsisted of the following at December 31:

 
|                          |   | **2003**    |        | **2002**    |   |
|-------------------------------|--------|-------------|-------------|-------------|--------|
|                          |   |        |        |        |   |
| Flight equipment              |   | $           | 190,432,000 |        | $      | 187,201,000 |   |
| Other property and equipment  |   | 27,992,000  |        | 24,203,000  |   |
|                          |   | 218,424,000 |        | 211,404,000 |   |
| Less accumulated depreciation |   | 99,625,000  |        | 100,102,000 |   |
| Net property and equipment    |   | $           | 118,799,000 |        | $      | 111,302,000 |   |

 

*Investment inSubsidiary*

 

AirNetSystems, Inc. wholly owns Float Control, Inc., which holds a 19% interest inThe Check Exchange System Co. (“CHEXS”). Float Control accounts for its investment in CHEXS under the equitymethod of accounting.  During 2001,CHEXS received notice that one of its customers, who accounted for asignificant portion of CHEXS’s revenue, would not renew its contract with CHEXSbeyond August 2001.  As a result, FloatControl recognized a $1,744,000 impairment on its investment in CHEXS in thesecond quarter of 2001, which included a write-off of approximately $300,000 ofgoodwill.  As of December 31, 2003 and2002, Float Control’s remaining recorded investment in CHEXS totaled $49,000and $384,000 respectively and is included in Other Assets – Other on theconsolidated balance sheet, and represents expected final distributions fromthe partnership.

 

*Income Taxes*

 

AirNet accounts for incometaxes 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.

 

### *Goodwill*

 

AirNetadopted SFAS No. 141, *Business Combination*s,and SFAS No. 142, *Goodwill and OtherIntangible Assets*, effective January 1, 2002.  SFAS No. 141 requires business combinationscompleted after June 30, 2001, to be accounted for using the purchase method ofaccounting and changes the criteria for recording intangible assets apart fromgoodwill.  AirNet evaluated its goodwilland intangibles acquired prior to June 30, 2001, and determined that allintangible assets were properly classified using the criteria of SFAS No. 141.

 

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

 

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

 

*Financial Instruments*

 

The fair value of AirNet’sfinancial instruments approximated their carrying value at December 31, 2003and 2002.

 

33

----

 

*Derivatives*

 

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

 

InFebruary 2002, AirNet entered into a five-year interest rate swap agreementwith a bank relative to a $3.0 million term loan, with a notional amount atDecember 31, 2003 of $1.9 million and a fixed rate of 4.25% plus a margin basedon AirNet’s funded debt ratio.  AirNetwas also party to two additional three-year swap agreements which ended in2002, each with a $5.0 million notional amount and fixed rates of 6.3% and 6.5%plus a margin based on AirNet’s funded debt ratio.

 

AirNetaccounts for it swap agreements under SFAS Statement No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, and itsamendments, SFAS No. 137 and 138.   Thestatements require AirNet to recognize all derivatives on the balance sheet atfair value.  Derivatives that are nothedges are adjusted to fair value through income.  If the derivative is a hedge, depending on the nature of thehedge, changes in the fair value of the derivative are either offset againstthe change in fair value of assets, liabilities, or firm commitments throughearnings or recognized in other comprehensive income until the hedged item isrecognized in earnings.  The ineffectiveportion of a derivative’s change in fair value is immediately recognized inearnings.  AirNet’s adoption of SFAS No.133 on January 1, 2001 resulted in a cumulative effect of an accounting changecharge of $62,155, net of tax, to accumulated other comprehensive income.  In 2003, AirNet recognized comprehensiveincome of $24,000, net of tax, related to the swaps, compared to $134,000 ofcomprehensive income, net of tax, in 2002. At December 31, 2003 and 2002, the aggregate fair value of the interestrate swaps was approximately ($65,000) and ($106,000), respectively, and isrecorded in other liabilities on the consolidated balance sheets.  The ineffective portion of the change in fairvalue is immaterial for all years presented.

 

*Stock-Based Compensation*

 

AtDecember 31, 2003, AirNet had one stock-based employee compensation plan, whichis described more fully in Note 4. AirNet accounts for the plan under the recognition and measurementprinciples of APB Opinion No. 25, *Accountingfor Stock Issued to Employees,* and related interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under the plan have an exerciseprice equal to the market value of the underlying common shares on the date ofgrant.  Pro forma information regardingnet income and earnings per share is required by SFAS No. 148, *Accounting for Stock-Based Compensation – Transitionand Disclosure*, and has been determined as if AirNet had accountedfor its employee stock options under the fair value method of SFAS No. 123, *Accounting for Stock-Based Compensation*.The fair value of these options was estimated at the date of grant using theBlack-Scholes option pricing model with the following weighted average assumptionsfor the years ended December 31:

 
|                                                                            |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Risk free interest rate                                                         |   | 4.00     | %      | 4.75     | %      | 5.00     | %      |
| Volatility factor of expected  market priceof  the company’s common shares |   | 65.4     | %      | 55.3     | %      | 46.1     | %      |
| Weighted average expected lifeof options (years)                                |   | 4.81     |   | 5.30     |   | 5.44     |   |

 

Theweighted average fair value of options granted was $2.37, $4.21 and $2.70 inthe years ended December 31, 2003, 2002 and 2001, respectively.

 

34

----

 

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

 
|                                                                                                                                                     |   | **Year Ended December 31** |      |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|-----------|
|                                                                                                                                                     |   | **2003**                   |      | **2002** |   | **2001** |   |
|                                                                                                                                                     |   |                       |      |   |   |   |   |
| Net income, as reported                                                                                                                                  |   | $                          | 2,780,000 |   | $ | 1,503,000 |   | $ | 5,194,000 |   |
|                                                                                                                                                     |   |                       |      |   |   |   |   |
| Deduct:  Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |   | (132,000                   | )         | (398,000 | ) | (672,000 | ) |
|                                                                                                                                                     |   |                       |      |   |   |   |   |
| Pro forma net income                                                                                                                                     |   | $                          | 2,648,000 |   | $ | 1,105,000 |   | $ | 4,522,000 |   |
|                                                                                                                                                     |   |                       |      |   |   |   |   |
| Net income per common share -  basic and diluted:                                                                                                        |   |                       |      |   |   |   |   |
| As reported                                                                                                                                              |   | $                          | .28       |   | $ | .15 |   | $ | .49 |   |
| Pro forma                                                                                                                                                |   | $                          | .26       |   | $ | .11 |   | $ | .43 |   |

 

*Supplemental Cash Flow Data*

 

Cash paid for interest was$1,584,000, $1,433,000, and $1,591,000 for the years ended December 31, 2003,2002, and 2001, respectively.  AirNetpaid  $459,000, $1,216,000, and $2,603,000and received $1,332,000, $51,000, and $492,000 for the years ended December 31,2003, 2002, and 2001, respectively, related to income taxes .

 

**2.**                                      **Goodwill andOther Intangible Assets**

 

AirNetadopted SFAS No. 142, *Goodwill and OtherIntangible Assets* as of January 1, 2002. AirNet performed thetransitional goodwill impairment test using the two-step process prescribed inSFAS No. 142 with a measurement date of January 1, 2002. The first step is ascreen of potential impairment, while the second step measures the amount ofthe impairment, if any. AirNet performed the first of the required transitionalgoodwill impairment tests in the second quarter of 2002. AirNet performed thesecond of the required transitional goodwill impairment tests in the fourthquarter of 2002. Under SFAS No. 142, an impairment charge resulting from the transitionalimpairment tests was reflected as the cumulative effect of a change inaccounting principle in the first quarter of 2002. 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 division as a cumulative effect of a change in accounting principle inthe first quarter of 2002.

 

AirNetperforms an annual goodwill impairment test required by the SFAS No. 142 as ofOctober 1. The annual impairment test indicated that no additional goodwillimpairment charge was required in 2003 or 2002.

 

Priorto the adoption of SFAS No. 142, AirNet’s goodwill was amortized by thestraight-line method over 25 years. Since goodwill is no longer amortized,AirNet’s reported results for 2003 and 2002 are not comparable with previousyears. The following table presents pro forma information assuming that AirNetadopted SFAS No.142 as of January 1, 2001.

 
|                                                    |   | **Year Ended  December 31,** |      |
|---------------------------------------------------------|--------|------------------------------|-----------|
|                                                    |   | **2003**                     |      | **2002** |   | **2001** |   |
| Reported net income                                     |   | $                            | 2,780,000 |   | $ | 1,503,000 |   | $ | 5,194,000 |   |
| Adjustments:                                            |   |                         |      |   |   |   |   |
| Goodwill amortization                                   |   | —                       |      | — |   | 342,000 |   |
| Income tax benefit                                      |   | —                       |      | — |   | (135,000 | ) |
| Adjusted net income                                     |   | 2,780,000                    |      | 1,503,000 |   | 5,401,000 |   |
|                                                    |   |                         |      |   |   |   |   |
| Adjusted net income per share – basic and  diluted |   | $                            | .28       |   | $ | .15 |   | $ | .51 |   |

 

35

----

 

Following is a progression of goodwill for theyears ended December 31:

 
|                    |   | **2003** |      | **2002**   |   |
|-------------------------|--------|----------|-----------|------------|--------|
|                    |   |     |      |       |   |
| Balance at January 1,   |   | $        | 4,018,000 |       | $      | 7,080,00 |   |
| Goodwill acquired       |   | —   |      | —     |   |
| Impairment loss         |   | —   |      | (3,062,000 | )      |
| Balance at December 31, |   | $        | 4,018,000 |       | $      | 4,018,000 |   |

 

**3.**                                      **NotesPayable**

 

AirNet had borrowings asfollows at December 31:

 
|                               |   | **2003**   |       | **2002**   |   |
|------------------------------------|--------|------------|------------|------------|--------|
| Term notes                         |   | $          | 18,976,000 |       | $      | 24,094,000 |   |
| Revolving credit facility          |   | 18,800,000 |       | 17,700,000 |   |
|                               |   | 37,776,000 |       | 41,794,000 |   |
| Current portion of notes payable   |   | 5,256,000  |       | 5,193,000  |   |
| Long-term portion of notes payable |   | $          | 32,520,000 |       | $      | 36,601,000 |   |

 

In September 2002, AirNetreplaced its $50 million revolving credit agreement.  The new credit agreement provides AirNet with a three-year $35million unsecured revolving credit facility scheduled to expire on September30, 2005 and a five-year $20.0 million unsecured term loan.  The term loan requires quarterlyinstallments of $1.0 million commencing on the last day of December 2002 andcontinuing through September 30, 2007. The agreement bears interest at AirNet’s option of a fixed rate basedupon LIBOR plus a margin determined by AirNet’s leverage ratio as defined inthe agreement, or a floating rate based on the greater of the prime rate andthe sum of .5% plus the federal funds rate in effect from time to time. Theinterest rate in effect at December 31, 2003 was 2.39%. The agreement requiresthe maintenance of certain minimum tangible net worth and cash flow levels,imposes certain limitations on capital expenditures and the sale of assets, andrestricts the amount of additional debt. As of December 31, 2003, AirNet was in compliance with these restrictions.As of December 31, 2003, $6.5 million was available under the credit facility.

 

During the first quarter of2002, AirNet entered into three term loans with banks.  As of December 31, 2003 the first note has aprincipal balance of $832,000 with a 60-month term, a 5.77% interest rate and a$24,000 monthly principal and interest payment.  The second note has a principal balance of $1,146,000 with a60-month term, a 5.77% interest rate and a $33,000 monthly principal andinterest payment.  The third note has a principal balanceof $1,900,000 with a floating interest rate based upon LIBOR (London InterbankOffered Rate) and a $50,000 principal payment due monthly over 60 months.  Four aircraft with a net book value totalingapproximately $7,116,000 at December 31, 2003 secure these loans.

 

In conjunction with thepurchase of AirNet’s operations facility in 1997, AirNet issued a $263,000 termnote.  The terms of the note requiremonthly principal and interest payments of $4,000 through 2005 and the note iscollateralized by the facility.

 

Aggregatefuture maturities of long-term debt as of December 31, 2003 are as follows:

 
| 2004   |   | $          | 5,256,000  |   |
|--------|--------|------------|------------|--------|
| 2005   |   | 5,249,000  |       |
| 2006   |   | 24,025,000 |       |
| 2007   |   | 3,246,000  |       |
| 2008   |   | —     |       |
|   |   | $          | 37,776,000 |   |

 

AirNet also maintains standbyletters of credit totaling $1,600,000 with a bank related to its insurancepolicy agreements.

 

**4.**                                   **Incentive Stock Plan**

 

In 1996, AirNet Systems, Inc.adopted the AirNet Systems, Inc. 1996 Incentive Stock Plan (the “Plan”).  The Plan provides for the issuance ofincentive and non-qualified stock options, restricted stock and performanceawards and a stock purchase plan (collectively, “Awards”).  The Plan also provides for the grant ofnon-qualified stock options to non-employee directors.  The maximum number of common sharesavailable for issuance under the Plan is 1,650,000 through May 1, 2006.  The Plan is administered by the CompensationCommittee of the Board of Directors, which determines the terms and conditionsapplicable to the options, restricted stock and performance awards, other thanoptions automatically granted to non-employee directors in accordance with theterms of the Plan.  The exercise priceof each option equals the market price

 

36

----

 

of a common share on the dateof grant.  An option’s maximum term isten years (five years for ISOs granted to 10% shareholders).  Option vesting periods range from vestingupon grant to vesting over four years.

 

A summary of AirNet’s stockoption activity and related information follows (in thousands, except price pershare data) for the years ended December 31:

 
|                                |   | **2003**           |   | **2002**                               |   | **2001**           |   |
|-------------------------------------|--------|--------------------|--------|----------------------------------------|--------|--------------------|--------|
|                                |   | **Common  Shares** |   | **Weighted  Average  Exercise  Price** |   | **Common  Shares** |   | **Weighted  Average  Exercise  Price** |   | **Common  Shares** |   | **Weighted  Average  Exercise  Price** |   |
|                                |   |               |   |                                   |   |               |   |   |   |   |   |   |   |
| Outstanding at beginning of  period |   | 1,045              |   | $                                      | 9.55   |               | 1,029  |   | $ | 10.05 |   | 1,142 |   | $ | 12.45 |   |
| Granted                             |   | 132                |   | 4.32                                   |   | 102                |   | 7.78 |   | 208 |   | 4.12 |   |
| Exercised                           |   | —             |   | —                                 |   | (3                 | )      | 5.24 |   | (2 | ) | 4.51 |   |
| Cancelled                           |   | (163               | )      | 11.90                                  |   | (83                | )      | 13.33 |   | (319 | ) | 14.83 |   |
| Outstanding at end of period        |   | 1,014              |   | 8.52                                   |   | 1,045              |   | 9.58 |   | 1,029 |   | 10.05 |   |
|                                |   |               |   |                                   |   |               |   |   |   |   |   |   |   |
| Options exercisable at end ofperiod |   | 787                |   | $                                      | 9.50   |               | 790    |   | $ | 10.63 |   | 688 |   | $ | 11.65 |   |

 

Thefollowing summarizes information about options outstanding as of December 31,2003:

 
| **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               |   | 311,900                |   | 7.5                                                       |   | $                                      | 4.08   |                    | 143,960 |   | $ | 3.99 |   |
|                          |   |                   |   |                                                      |   |                                   |   |                    |    |   |   |
| $5.01-$10.00                  |   | 464,870                |   | 5.6                                                       |   | 8.24                                   |   | 405,660                 |    | 8.31 |   |
|                          |   |                   |   |                                                      |   |                                   |   |                    |    |   |   |
| $10.01-$15.00                 |   | 183,700                |   | 2.6                                                       |   | 14.16                                  |   | 183,700                 |    | 14.16 |   |
|                          |   |                   |   |                                                      |   |                                   |   |                    |    |   |   |
| $15.01-$20.00                 |   | 53,000                 |   | 4.5                                                       |   | 17.42                                  |   | 53,000                  |    | 17.42 |   |
|                          |   |                   |   |                                                      |   |                                   |   |                    |    |   |   |
| $20.01-$25.00                 |   | 500                    |   | 4.4                                                       |   | 22.00                                  |   | 500                     |    | 22.00 |   |
|                          |   |                   |   |                                                      |   |                                   |   |                    |    |   |   |
|                          |   | 1,013,970              |   | 5.6                                                       |   | $                                      | 8.52   |                    | 786,820 |   | $ | 9.50 |   |

 

AirNet’s Associate StockPurchase Program, which is part of the Plan, allows eligible employees theopportunity to acquire common shares of AirNet at up to a 15% discount throughpayroll deductions.  AirNet issued39,597, 26,552, and 27,271 common shares respectively during 2003, 2002, and2001 from treasury shares.

 

**5.**                                      **LeaseObligations**

 

AirNet leases facility spaceand courier vehicles at various locations throughout the United States.  In addition, in 2002, AirNet entered intooperating leases for four Cessna Caravan 208 aircraft each with a lease term ofthree years

and two Cessna Caravan 208B aircraft,one with a lease term of 3.5 years and one with a lease term of 4.5 years.  The three-year lease terms were subsequentlyextended an additional year.   AirNetincurred lease expense of $4,131,000, $3,747,000, and $1,961,000 for the yearsended December 31, 2003, 2002 and 2001, respectively.  As of December 31, 2003, future minimum lease payments by yearand in the aggregate under non-cancelable operating leases with initial orremaining terms exceeding one year are as follows:  2004 - $912,000; 2005 - $658,000; 2006 - $376,000; 2007 -$55,000; 2008 - $29,000.

 

**6.**                                      **RelatedParty Transactions**

 

During 2001, the Board ofDirectors approved a retirement agreement with Gerald G. Mercer, Founder andformer Chairman, of AirNet Systems, Inc. As contemplated by the retirement agreement, Mr. Mercer retired asChairman and a Director effective August 3, 2001.  AirNet recorded $975,000 in selling, general and administrativeexpense in 2001 to cover salary continuance requirements and benefitsassociated with this agreement that continue until 2003.  Additionally as part

 

37

----

 

of the retirement agreement, in2001 AirNet Systems,Inc. purchased 818,330 common shares at $6.11 per share from the formerChairman at a total cost of $5.0 million. AirNet intends to hold the common shares in treasury.  Underthe terms of the retirement agreement, Mr. Mercer also had the option to sellup to $250,000 of AirNet Systems, Inc. common shares each quarter of 2002 toAirNet based on then current market prices. Mr. Mercer exercised his option effective January 2, 2003 and sold52,410 AirNet Systems, Inc. common shares to AirNet at a total cost of$249,996.

 

Alsounder the terms of his retirement agreement, Mr. Mercer retained his rights tosell his remaining AirNet common shares to private investors at any time inaccordance with the applicable laws.  Onor about December 26, 2002, Mr. Mercer sold an aggregate of 733,200 commonshares to seven separate investors in privately negotiated transactions.  On December 24, 2002, he made a gift of256,800 common shares to Spring Hill Camps, which sold those common shares tothree separate investors, one of which also purchased common shares from Mr.Mercer, in privately negotiated transactions. In connection with and as a condition to the investors’ consummatingthose transactions, AirNet granted registration rights in respect to the990,000 common shares collectively purchased by these investors from Mr. Merceror Spring Hill Camps and registered the shares in 2003.

 

**7.**                                      **RetirementPlan**

 

AirNet has a 401(k) retirementsavings plan.  All associates who havecompleted a minimum of one month of service may contribute up to 15% of theireligible annual earnings to the plan. AirNet may elect, at its discretion, to make matching and profit-sharingcontributions. AirNet’s contribution expense related to the 401(k) retirementsavings plan totaled $519,000, $481,000, and $526,000 for the years ended December 31,2003, 2002, and 2001, respectively.

 

**8.**                                      **Income Taxes**

 

Income taxes are summarized asfollows for the years ended December 31:

 
|            |   | **2003**  |       | **2002**  |   | **2001**  |   |
|-----------------|--------|-----------|------------|-----------|--------|-----------|--------|
| Current:        |   |      |       |      |   |      |   |
| Federal         |   | $         | (1,227,000 | )         | $      | 1,751,000 |   | $ | 2,415,000 |   |
| State and local |   | 295,000   |       | 431,000   |   | 510,000   |   |
|            |   | (932,000  | )          | 2,182,000 |   | 2,925,000 |   |
| Deferred:       |   |      |       |      |   |      |   |
| Federal         |   | 2,978,000 |       | 341,000   |   | 1,930,000 |   |
| State and local |   | 57,000    |       | (94,000   | )      | 180,000   |   |
|            |   | 3,035,000 |       | 247,000   |   | 2,110,000 |   |
|            |   | $         | 2,103,000  |      | $      | 2,429,000 |   | $ | 5,035,000 |   |

 

Significant components ofAirNet’s deferred tax liabilities and assets are as follows at December 31:

 
|                                           |   | **2003**    |        | **2002**    |   |
|------------------------------------------------|--------|-------------|-------------|-------------|--------|
| Long-term deferred tax asset:                  |   |        |        |        |   |
| Alternative minimum tax credits                |   | $           | 3,621,000   |        | $      | 1,057,000 |   |
| Goodwill                                       |   | —      |        | 1,027,000   |   |
| Other                                          |   | 188,000     |        | 184,000     |   |
| Long-term deferred tax liabilities:            |   |        |        |        |   |
| Property and equipment                         |   | (19,968,000 | )           | (13,875,000 | )      |
| Other                                          |   | (230,000    | )           | (1,428,000  | )      |
| Net long-term deferred tax liabilities         |   | $           | (16,389,000 | )           | $      | (13,035,000 | ) |
|                                           |   |        |        |        |   |
| Current deferred tax assets:                   |   |        |        |        |   |
| Workers’ compensation reserves            |   | $           | 494,000     |        | $      | 448,000 |   |
| Allowance for bad debt reserves                |   | 204,000     |        | 353,000     |   |
| Other                                          |   | 153,000     |        | 200,000     |   |
|                                           |   |        |        |        |   |
| Total current deferred tax assets              |   | 851,000     |        | 1,001,000   |   |
|                                           |   |        |        |        |   |
| Current deferred tax liabilities:              |   |        |        |        |   |
| Prepaid expenses                               |   | (828,000    | )           | (756,000    | )      |
| Other                                          |   | (27,000     | )           | (25,000     | )      |
| Total current deferred tax liabilities         |   | (855,000    | )           | (781,000    | )      |
| Net current deferred tax assets  (liabilities) |   | $           | (4,000      | )           | $      | 220,000 |   |

 

Differences arising between theprovision for income taxes and the amount computed by applying the statutoryfederal income tax rate to income before income taxes are as follows for theyears ended December 31:

 

38

----

 
|                                                     |   | **2003** |      | **2002** |   | **2001** |   |
|----------------------------------------------------------|--------|----------|-----------|----------|--------|----------|--------|
| Tax expense at federal statutory rate on  pre-tax income |   | $        | 1,663,000 |     | 34.0   | %        | $      | 2,069,000 |   | 34.0 | % | $ | 3,600,000 |   | 34.0 | % |
| Add:                                                     |   |     |      |     |   |     |   |   |   |   |   |   |   |
| State taxes, net of federal benefit                      |   | 311,000  |      | 6.4      |   | 220,000  |   | 3.6 |   | 559,000 |   | 5.3 |   |
| Non-deductible permanent differences                     |   | 129,000  |      | 2.6      |   | 140,000  |   | 2.5 |   | 876,000 |   | 8.7 |   |
| Total taxes                                              |   | $        | 2,103,000 |     | 43.0   | %        | $      | 2,429,000 |   | 40.1 | % | $ | 5,035,000 |   | 48.0 | % |

 

In connection withthe 1996 repurchase and cancellation of the Donald Wright Warrant, AirNetrecognized a related tax benefit estimated to be $7.0 million based uponmanagement’s judgment and estimation of the portion of the Donald WrightWarrant which would be deductible for income tax purposes.  This tax benefit was recognized asadditional paid in capital on AirNet’s consolidated balance sheet and has hadno effect on AirNet’s consolidated statement of operations.  During the third quarter 2003, this matterwas partially resolved and AirNet has realized tax deductions related to thistransaction in excess of management’s original estimates resulting inadditional tax benefits.  The additionaltax benefits associated with the deductible portion of the Donald WrightWarrant have exceeded the original estimate by $1.3 million.  The additional tax benefit, as was theinitial estimated tax benefit associated with the Donald Wright Warrant, hasbeen recorded as an increase to additional paid in capital.

 

***10.  DiscontinuedOperations***

 

 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 accountsreceivable, personal property and intellectual property, with a carrying amountat the time of sale of approximately $1.0 million, for approximately $1.1million.

 

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., prior to the closing at $4.30 per commonshare (the closing price of the AirNet Systems, Inc., common shares on the NYSEon July 25, 2003) and 68,494 common shares tendered to AirNet Systems, Inc., onthe closing date at $4.31 per common share (the average closing price of theAirNet Systems, Inc., common shares on the NYSE on August 4-6, 2003). Thebalance of the purchase price was paid in cash.

 

AirNet accountedfor these operations as discontinued operations.

 

The MercuryBusiness Services unit had revenues for the year ended December 31, 2003, whichconsisted of the seven months prior to the sale, of $5,939,000, as compared to$8,940,000 and $8,572,000 for the full years in 2002 and 2001, respectively.

 

Pre-tax loss forAirNet’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, as comparedto a $432,000 and $483,000 pre-tax loss for the full years 2002 and 2001,respectively.

 

39

----

 

**11.**                               **Net Income Per Share**

 

The following table sets forththe computation of basic and diluted net income per share for the years endedDecember 31:

 
|                                                                              |   | **2003**   |      | **2002**   |   | **2001**   |   |
|-----------------------------------------------------------------------------------|--------|------------|-----------|------------|--------|------------|--------|
|                                                                              |   |       |      |       |   |       |   |
| Numerator:                                                                        |   |       |      |       |   |       |   |
| Income before discontinued operations and  cumulative effect of accounting change |   | $          | 2,788,000 |       | $      | 3,630,000  |   | $ | 5,445,000 |   |
| Loss from discontinued operations, net of  tax                                    |   | (8,000     | )         | (259,000   | )      | (251,000   | )      |
|                                                                              |   |       |      |       |   |       |   |
| Cumulative effect of accounting change, net  of tax                               |   | —     |      | (1,868,000 | )      | —     |   |
| Net income                                                                        |   | $          | 2,780,000 |       | $      | 1,503,000  |   | $ | 5,194,000 |   |
|                                                                              |   |       |      |       |   |       |   |
| Denominator:                                                                      |   |       |      |       |   |       |   |
| Basic - weighted average shares outstanding                                       |   | 10,088,000 |      | 10,141,000 |   | 10,576,000 |   |
|                                                                              |   |       |      |       |   |       |   |
| Diluted                                                                           |   |       |      |       |   |       |   |
| Options - associates, officers and directors                                      |   | 1,000      |      | 120,000    |   | 60,000     |   |
| Adjusted weighted average shares  outstanding                                     |   | 10,089,000 |      | 10,261,000 |   | 10,636,000 |   |
|                                                                              |   |       |      |       |   |       |   |
| Net income per share – basic and diluted:                                    |   |       |      |       |   |       |   |
| Income from continuing operations before  cumulative effect of accounting change  |   | $          | .28       |       | $      | .36        |   | $ | .51 |   |
| Loss from discontinued operations, net of  tax                                    |   | —     |      | (.03       | )      | (.02       | )      |
| Cumulative effect of accounting change, net  of tax                               |   | —     |      | (.18       | )      | —     |   |
| Net income                                                                        |   | $          | .28       |       | $      | .15        |   | $ | .49 |   |

 

For the years ended December31, 2003, 2002, and 2001, 981,000, 697,000, and 787,000 options, respectively,were excluded from the diluted weighted average shares outstanding calculation,as their exercise prices exceeded the average fair market value of theunderlying common shares for the year.

 

**12.**                               **Litigation and Contingencies**

 

AirNet is subject to claims andlawsuits in the ordinary course of its business.  In the opinion of management, the outcome of these actions, whichare not clearly determinable at the present time, are either adequately coveredby insurance, or if not insured, will not, in the aggregate, have a materialadverse impact upon AirNet’s financial position or the results of futureoperations.

 

**13.**                               **Subsequent Events**

 

On January 20, 2004, AirNetSystems, Inc. entered into a land lease with the Columbus Regional AirportAuthority (the “Authority”) whereby AirNet Systems, Inc. will leaseapproximately 8 acres located within the Rickenbacker International Airport(“Rickenbacker”) in Franklin and Pickaway Counties, Ohio.  The land lease is for a term of 20 yearswith minimum annual lease payments based on the square footage of the premiseswhich are at a fixed rate which escalates annually for the first three yearsafter construction is complete and then increases based on an index.  AirNet Systems, Inc. intends to construct anew corporate and operational headquarters on the Rickenbacker property.  In anticipation of AirNet’s future move tothe Rickenbacker property on January 20, 2004, AirNet Systems, Inc. enteredinto an agreement to sell its existing corporate headquarters facility to theAuthority for $3,850,000.  AirNet hasretained the right to continue to occupy its existing facility untilconstruction and relocation to Rickenbacker is complete.

 

The quarterly financial datarequired to be disclosed in this Item 8 is incorporated herein by reference tothe table captioned “Selected Quarterly Data (unaudited) in Item 7-Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

 

**ITEM 9****. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE.**

 

No response required.

 

40

----

 

**ITEM 9A****.   CONTROLS ANDPROCEDURES.**

 

**Evaluation of Disclosure Controlsand Procedures**

 

With theparticipation of the Chairman of the Board, President and Chief ExecutiveOfficer (the principal executive officer) and the Chief Financial Officer,Treasurer and Secretary  (the principalfinancial officer) of AirNet Systems, Inc. (“AirNet”), AirNet’s management hasevaluated the effectiveness of AirNet’s disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934, asamended (the “Exchange Act”)) as of the end of the period covered by thisAnnual Report on Form 10-K.  Basedon that evaluation, AirNet’s Chairman of the Board, President and ChiefExecutive Officer and AirNet’s Chief Financial Officer, Treasurer and Secretaryhave concluded that:

 

•                          informationrequired to be disclosed by AirNet in this Annual Report on Form 10-K would beaccumulated and communicated to AirNet’s management, including its principalexecutive officer and principal financial officer, as appropriate to allowtimely decisions regarding required disclosure;

 

•                          informationrequired to be disclosed by AirNet in this Annual Report on Form 10-K would berecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms; and

 

•                          AirNet’s disclosurecontrols and procedures are effective as of the end of the period covered by thisAnnual Report on Form 10-K to ensure that material information relating toAirNet and its consolidated subsidiaries is made known to them, particularlyduring the period for which the periodic reports of AirNet, including thisAnnual Report on Form 10-K, are being prepared.

 

**Changes in Internal Control overFinancial Reporting**

 

There were nochanges in AirNet’s internal control over financial reporting (as defined inRule 13a-15(f) under the Exchange Act) that occurred during AirNet’s fiscalquarter ended December 31, 2003, that have materially affected, or arereasonably likely to materially affect, AirNet’s internal control overfinancial reporting.

 

**PART III**

 

**ITEM10****- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The information called for in thisItem 10 is incorporated herein by reference from AirNet’s definitive ProxyStatement relating to the Annual Meeting of Shareholders to be held on June 4,2004, under the captions “ELECTION OF DIRECTORS”, “EXECUTIVE COMPENSATION –Employment Contracts and Termination of Employment and Change-In-ControlArrangements” and “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTINGCOMPLIANCE.”  In addition, informationconcerning AirNet’s executive officers is included in the portion of Part I ofthis Annual Report on Form 10-K entitled “Supplemental Item:  Executive Officers of the Registrant.”  Also, information concerning AirNet’s AuditCommittee and the determination by AirNet’s Board of Directors that at leastone member of the Audit Committee qualifies as an “audit committee financialexpert” is incorporated herein by reference from AirNet’s definitive ProxyStatement related to the Annual Meeting of Shareholders to be held on June 4,2004, under the Caption “ELECTION OF DIRECTORS – Committees and Meetings of theBoard – Audit Committee.”  Informationconcerning the nomination process for director candidates is incorporatedherein by reference from AirNet’s definitive Proxy Statement relating to theAnnual Meeting of Shareholders to be held on June 4, 2004, under the captions“ELECTION OF DIRECTORS – Committees and Meetings of the Board – Nominating andCorporate Governance Committee” and “ELECTION OF DIRECTORS – NominatingProcedures.”

 

AirNet’s –Board of Directorshas adopted charters for each of the Audit Committee, the CompensationCommittee and the Nominating and Corporate Governance Committee as well asCorporate Governance Guidelines as contemplated by the applicable sections ofthe New York Stock Exchange listed Company Manual.

 

In accordance with the requirementsof Section 303A(10) of the New York Stock Exchange Listed Company Manual, theBoard of  Directors of AirNet hasadopted a Code of Business Conduct and Ethics covering the directors, officersand employees (team members) of AirNet, including AirNet’s Chairman of theBoard, President and Chief Executive Officer (the principal executive officer),AirNet’s Chief Financial Officer, Treasurer and Secretary (the principalfinancial officer) and AirNet’s Controller and Principal Accounting Officer.  AirNet intends to disclose the following onthe “Corporate Governance” page of its website located at www.airnet.com withinfive business days following their occurrence required by the applicable rulesof the SEC and the requirements of Section 303A(10) of the New York StockExchange Listed Company Manual: (A) the nature of any amendment to a provisionof its Code of Business Conduct and Ethics that (i) applies to AirNet’sprincipal executive officer, principal financial officer, principal accountingofficer or controller, or persons performing similar functions, (ii) relates toany element of the “code of ethics” definition enumerated in Item 406(b) of SECRegulation S-K, and (iii) is not a technical, administrative or othernon-substantive amendment; and (B) a description of any waiver

 

41

----

 

(including the nature of thewaiver, the name of the person to whom the waiver was granted and the date ofthe waiver), including an implicit waiver, from a provision of the Code ofBusiness Conduct and Ethics granted to AirNet’s principal; executive officer,principal financial officer, principal accounting officer or controller, ofpersons 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 AuditCommittee Charter, the Compensation Committee Charter, the Nominating andCorporate Governance Committee Charter, Corporate Governance Guidelines andCode of Business Conduct and Ethics is posted on the “Corporate Governance”page of AirNet’s website located at www.airnet.com .  Interested persons may also obtain Copies of the Audit CommitteeCharter, the Compensation Committee Charter, the Nominating and CorporateGovernance Committee Charter, the Corporate Governance Guidelines and the Codeof Business Conduct and Ethics, without charge, by writing to the ChiefFinancial Officer, Treasurer and Secretary of AirNet at AirNet Systems, Inc.,3939 International Gateway, Columbus, Ohio 43219, Attention:  Gary W. Qualmann.  In addition, a copy of AirNet’s Code of Business Conduct andEthics is being filed as Exhibit 14 to this Annual Report on Form 10-K.

 

**ITEM11****- EXECUTIVE COMPENSATION**

 

The information called for inthis Item 11 is incorporated herein by reference from AirNet’s definitive ProxyStatement relating to the Annual Meeting of Shareholders to be held on June 4,2004, under the captions “ELECTION OF DIRECTORS –  Compensation of Directors” and “EXECUTIVE COMPENSATION.”  Such incorporation by reference shall not bedeemed to specifically incorporate by reference the information referred to inItem 402(a)(8) of SEC Regulation S-K.

 

**ITEM12****- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

The information called for inthis Item 12 regarding security ownership of certain beneficial owners andmanagement is incorporated herein by reference from AirNet’s definitive ProxyStatement relating to the Annual Meeting of Shareholders to be held on June 4,2004, under the captions “BENEFICIAL OWNERSHIP OF COMMON SHARES” and“TRANSACTIONS WITH MANAGEMENT.”

 

The information called for inthis Item 12 regarding securities authorized for issuance under equitycompensation plans is incorporated herein by reference from AirNet’s definitiveProxy Statement relating to the Annual Meeting of Shareholders to be held onJune 4, 2004, under the caption “EXECUTIVE COMPENSATION—Equity CompensationPlan Information.”

 

**ITEM13****- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

The information called for inthis Item 13 is incorporated herein by reference from AirNet’s definitive ProxyStatement relating to the Annual Meeting of Shareholders to be held on June 4,2004, under the captions “ELECTION OF DIRECTORS—Nominees Standing for Electionto the Board of Directors” and “TRANSACTIONS WITH MANAGEMENT.”

 

**ITEM14****- PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

The information called for inthis Item 14 is incorporated herein by reference from AirNet’s definitive ProxyStatement relating to the Annual Meeting of Shareholders to be held on June 4,2004, under the captions “AUDIT COMMITTEE MATTERS—Pre-Approval of ServicesPerformed by Independent Auditors” and “AUDIT COMMITTEE MATTERS—Fees ofIndependent Auditors.”

 

**PARTIV**

 

**ITEM15****- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTSON FORM 8-K**

 

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

 

1.               Thefollowing consolidated financial statements are included in Item 8:

 
| Report of independent auditors                                                                             |
|------------------------------------------------------------------------------------------------------------|
| Consolidated balance sheets as of December 31, 2003 and 2002                                               |
| Consolidated statements of operations for  the years ended December 31, 2003, 2002 and 2001                |
| Consolidated statements of cash flows for  the years ended December 31, 2003, 2002 and 2001                |
| Consolidated statements of shareholders’  equity for the years ended December 31, 2003, 2002 and 2001 |
| Notes to consolidated financial statements                                                                 |

 

42

----

 

2.               ScheduleII - Valuation and Qualifying Accounts is included below:

 
| **COL A**                                                                                        |   | **COL B**                        |    | **COL C**                           |   | **COL D**                       |   | **COL E**           |   |
|--------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|-------------------------------------|--------|---------------------------------|--------|---------------------|--------|
|                                                                                             |   |                             |    | **Additions**                       |   |                            |   |                |   |
| **Description**                                                                                  |   | **Balance at  Start of  Period** |    | **Charged to  Costs and  Expenses** |   | **Charged to  Other  Accounts** |   | **Deductions  (1)** |   | **Balance at  End of  Period** |   |
| Year end December 31, 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 |   |
| Year end December 31, 2001:  Deducted from asset accounts; Allowance  for doubtful accounts |   | $                                | 601,114 |                                | $      | 457,386                         |   | $                   | 0      |   | $ | 397,853 |   | $ | 660,647 |   |

 

----

(1)  Uncollectible accounts written off, net ofrecoveries

 

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

 

43

----

 

3.                    Exhibits

 

The followingexhibits are included or incorporated by reference in this Annual Report onForm 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 to 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | Incorporated herein by  reference to Exhibit 2.1 to AirNet Systems, Inc.’s Registration Statement on  Form 8-A (File No. 0-28428) filed on May 3, 1996 (the “1996 Form 8-A”)               |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |
| 3.2              |   | Certificate  of Amendment to the Amended Articles of AirNet Systems, Inc. as filed with  the Ohio Secretary of State on May 28, 1996                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | Incorporated  herein by reference to Exhibit 4(b) to AirNet Systems, Inc.’s Registration  Statement on Form S-8 (Registration No. 333-08189) filed on July 16, 1996  (the “1996 Form S-8”) |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |
| 3.3              |   | Amended  Articles of AirNet Systems, Inc. (as amended through May 28, 1996) [for SEC  reporting compliance purposes only - not filed with the Ohio Secretary of  State]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | Incorporated  herein by reference to Exhibit 4(c) to AirNet Systems, Inc.’s 1996 Form S-8                                                                                                            |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |
| 3.4              |   | Code of  Regulations of AirNet Systems, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Incorporated  herein by reference to Exhibit 2.2 to AirNet Systems, Inc.’s 1996 Form 8-A                                                                                                             |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |
| 3.5              |   | Certificate  regarding adoption of amendment to Section 1.10 of the Code of Regulations of  AirNet Systems, Inc. by the shareholders on May 12, 2000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | Incorporated  herein by reference to Exhibit 3.1 to AirNet Systems, Inc.’s Form 10-Q for  the quarterly period ended June 30, 2000 (File No. 1-13025)                                                |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |
| 3.6              |   | Code of Regulations  of AirNet Systems, Inc. (reflecting amendments through May 12, 2000) [for SEC  reporting compliance purposes only]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | Incorporated  herein by reference to Exhibit 3.2 to AirNet Systems, Inc.’s Form 10-Q for  the quarterly period ended June 30, 2000 (File No. 1-13025)                                                |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |
| 4.1              |   | Credit Agreement dated September 30, 2002, among AirNet Systems,  Inc.,  the Lenders from time to time  party thereto and The Huntington National Bank, as Administrative Agent and  Lead Arranger                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | Incorporated  herein by reference to Exhibit 4.1 to AirNet Systems, Inc.’s Quarterly Report  on Form 10-Q for the quarterly period ended September 30, 2002 (File No.  1-13025)                      |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |
| 4.2              |   | Agreement to furnish instruments defining rights of holders of  long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | Filed  herewith.                                                                                                                                                                                          |

 

44

----

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                  |   | **Location**                                                                                                                                                                                                                         |
|------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.1*            |   | AirNet  Systems, Inc. Amended and Restated 1996 Incentive Stock Plan (reflects  amendments through February 17, 2004)                                                                                            |   | Filed  herewith.                                                                                                                                                                                                                     |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.2             |   | Indemnification  Agreement, dated as of May 15, 1996, among AirNet Systems, Inc. and Eric P.  Roy, Glenn M. Miller, Charles A. Renusch, Guy S. King, Lincoln L. Rutter,  Kendall W. Wright and William R. Sumser |   | Incorporated  herein by reference to Exhibit 10.11 to AirNet’s Amendment No. 2 to AirNet  Systems Inc.’s Form S-1 Registration Statement (Registration No. 333-03092)  filed on May 24, 1996 (“Amendment No. 2”) |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.3             |   | Indemnification  Agreement, dated as of May 15, 1996, between Gerald G. Mercer and AirNet  Systems, Inc.                                                                                                         |   | Incorporated  herein by reference to Exhibit 10.12 to AirNet Systems, Inc.’s Amendment No.  2                                                                                                                                   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.4*            |   | Employment  Agreement, effective March 1, 2001, between AirNet Systems, Inc. and Joel E.  Biggerstaff                                                                                                            |   | Incorporated  herein by reference to Exhibit 10.4 to AirNet Systems, Inc.’s Annual Report  on Form 10-K for the fiscal year ended December 31, 2000 (File No. 1-13025)                                                          |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.5*            |   | Employment  Agreement, effective March 1, 2001, between AirNet Systems, Inc. and William  R. Sumser                                                                                                              |   | Incorporated  herein by reference to Exhibit 10.5 to AirNet Systems, Inc.’s Annual Report  on Form 10-K for the fiscal year ended December 31, 2000 (File No. 1-13025)                                                          |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.6*            |   | Employment  Agreement, effective March 1, 2001, between AirNet Systems, Inc. and Jeffrey  B. Harris                                                                                                              |   | Incorporated  herein by reference to Exhibit 10.6 to AirNet Systems, Inc.’s Annual Report  on Form 10-K for the fiscal year ended December 31, 2000 (File No. 1-13025)                                                          |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.7*            |   | AirNet  Systems, Inc. Director Deferred Compensation Plan amended March 17, 2004                                                                                                                                 |   | Filed  herewith.                                                                                                                                                                                                                     |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.8*            |   | AirNet  Systems, Inc. Salary for Options Conversion Plan, effective February 6, 2000                                                                                                                             |   | Incorporated  herein by reference to Exhibit 10.8 to AirNet Systems, Inc.’s Annual Report  on Form 10-K for the fiscal year ended December 31, 2000 (File No. 1-13025)                                                          |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.9*            |   | Agreement,  made as of July 17, 2001,  between  AirNet Systems, Inc. and Gerald G. Mercer                                                                                                                   |   | Incorporated  herein by reference to Exhibit 10.9 to AirNet Systems, Inc.’s Quarterly  Report on Form 10-Q for the quarterly period ended June 30, 2001 (File No.  1-13025)                                                     |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.10*           |   | Jerry Mercer  Transition Agreement, effective May 26, 2001, between AirNet Systems, Inc.  and Gerald G. Mercer                                                                                                   |   | Incorporated  herein by reference to Exhibit 10.10 to AirNet Systems, Inc.’s Quarterly  Report on Form 10-Q for the quarterly period ended June 30, 2001 (File No.  1-13025)                                                    |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.11*           |   | Agreement  between AirNet Systems, Inc. and Guy King, effective February 7, 2003                                                                                                                                 |   | Incorporated  herein by reference to 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)                                                         |

 

45

----

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | **Location**                                                                                                                                                                                                                                                   |
|------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                           |
| 10.12            |   | Stock  Purchase Agreement, dated as of December 26, 2002, between Gerald G. Mercer  and Gryphon Master Fund, L.P. with AirNet Systems, Inc. as a party for  purposes of the registration rights provisions contained in Section 7 thereof  and Exhibit III attached thereto; and Schedule A to Exhibit 10.1 identifying  other substantially identical Stock Purchase Agreements between Gerald G.  Mercer and other purchasers as identified in such Schedule A to Exhibit 10.1 |   | Incorporated  herein by reference to Exhibit 10.1 to AirNet Systems, Inc.’s Current Report  on Form 8-K, dated January 14, 2003 and filed on January 15, 2003 (File No.  1-13025)                                                                         |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                           |
| 10.13            |   | Stock  Purchase Agreement, dated as of January 9, 2003, between Spring Hill Camps  and Bonanza Master Fund, Ltd. with AirNet Systems, Inc. as a party for  purposes of the registration rights provisions contained in Section 7 thereof  and Exhibit III attached thereto; and Schedule A to Exhibit 10.2 identifying  other substantially identical Stock Purchase Agreements between Spring Hill  Camps and other purchasers as identified in such Schedule A to Exhibit 10.2 |   | Incorporated  herein by reference to Exhibit 10.2 to Registrant’s Current Report on Form  8-K, dated January 14, 2003 and filed on January 15, 2003 (File No. 1-13025)                                                                                    |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                           |
| 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 to 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) (“AirNet Systems, Inc.’s 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 to 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 to 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 to Exhibit 10.4 to AirNet Systems, Inc.’s February 2004 Form 8-K                                                                                                                                                        |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                           |
| 10.18            |   | Rickenbacker International  Airport Non-Public Self-Fueling Permit, executed by  Columbus Regional Airport Authority on January 20, 2004 and by  AirNet Systems, Inc. on January 15, 2004                                                                                                                                                                                                                                                                                   |   | Incorporated herein by  reference to 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 to Exhibit 10.6 to AirNet Systems, Inc.’s February 2004 Form 8-K                                                                                                                                                        |

 

46

----

 
| **Exhibit  No.** |   | **Description**                                                                                                                               |   | **Location**                                                                                            |
|------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                          |   |                                                                                                    |
| 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 to 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 to Exhibit 10.8 to AirNet Systems, Inc.’s February 2004 Form 8-K |
|             |   |                                                                                                                                          |   |                                                                                                    |
| 14               |   | Code of Business Conduct  and Ethics                                                                                                          |   | Filed herewith                                                                                          |
|             |   |                                                                                                                                          |   |                                                                                                    |
| 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.

 

(b)         Reportson Form 8-K:

 

On December 4, 2003, AirNet Systems, Inc.filed a Current Report on Form 8-K, dated December 3, 2003, reporting under Item5. Other Events and Regulation FD Disclosure, the creation of awholly-owned electronic check processing subsidiary, Fast Forward Solutions,LLC.  A copy of the related news release was included as Exhibit 99.

 

On December 9, 2003, AirNet Systems, Inc.filed a Current Report on Form 8-K dated December 8, 2003 reporting under Item5. Other Events and Regulation FD Disclosure, that Fast Forward Solutions,LLC, a wholly-owned subsidiary of AirNet Systems, Inc., issued a news releaseannouncing that it had signed a term sheet with NetDeposit, Inc. regardingtheir intent to finalize an agreement to provide a standard Image ReplacementDocument (“IRD”) check processing solution to the payments industry.  Acopy of the news release was included as Exhibit 99 and incorporatedherein by reference.

 

(c)          Exhibitsfiled with or incorporated by reference in this Annual Report on Form 10-K arelisted in Item 14(a)(3) above.

 

(d)         Therequired financial statement schedule is included in Item 14(a)(2) above.

 

47

----

 

SIGNATURES

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant hasduly caused this Report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                   |                                                                                | AIRNET  SYSTEMS, INC.          |
|------------------------|-------------------------------------------------------------------------------------|--------------------------------|
|                   |                                                                                |
|                   |                                                                                |
| Dated: March  29, 2004 | By:                                                                                 |  /s/  Joel E. Biggerstaff |   |
|                   | Joel E.  Biggerstaff, Chairman of the Board,  Chief Executive Officer and President |
|                        |                                                                                     |                                |  |  |

 

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this Report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and on thedates indicated.

 
| **Signature**            |   | **Title**                                                    |   | **Date**        |
|--------------------------|--------|--------------------------------------------------------------|--------|-----------------|
|                     |   |                                                         |   |            |
| /s/ Joel E.  Biggerstaff |   | Chairman of  the Board, Chief Executive Officer,   and  |   | March 29,  2004 |
| Joel E.  Biggerstaff     |   | President  (Principal Executive Officer)                     |   |            |
|                     |   |                                                         |   |            |
| /s/ Gary W.  Qualmann    |   | Chief  Financial Officer, Treasurer and Secretary (Principal |   | March 29,  2004 |
| Gary W.  Qualmann        |   | Financial  Officer)                                          |   |            |
|                     |   |                                                         |   |            |
| /s/ Denise  D. Brown     |   | Controller  and Principal Accounting Officer                 |   | March 29,  2004 |
| Denise D.  Brown         |   |                                                         |   |            |
|                     |   |                                                         |   |            |
| *Russell M.  Gertmenian  |   | Director                                                     |   | March 29,  2004 |
| Russell M.  Gertmenian   |   |                                                         |   |            |
|                     |   |                                                         |   |            |
| *David P.  Lauer         |   | Director                                                     |   | March 29,  2004 |
| David P.  Lauer          |   |                                                         |   |            |
|                     |   |                                                         |   |            |
| *Bruce D.  Parker        |   | Director                                                     |   | March 29,  2004 |
| Bruce D.  Parker         |   |                                                         |   |            |
|                     |   |                                                         |   |            |
| *James E.  Riddle        |   | Director                                                     |   | March 29,  2004 |
| James E.  Riddle         |   |                                                         |   |            |

 

----

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

 

48

----

 

INDEX TOEXHIBITS

 
| **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 to 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | Incorporated  herein by reference to Exhibit 2.1 to AirNet Systems, Inc.’s Registration  Statement on Form 8-A (File No. 0-28428) filed on May 3, 1996 (the “1996 Form  8-A”)              |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |
| 3.2              |   | Certificate  of Amendment to the Amended Articles of AirNet Systems, Inc. as filed with  the Ohio Secretary of State on May 28, 1996                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | Incorporated  herein by reference to Exhibit 4(b) to AirNet Systems, Inc.’s Registration  Statement on Form S-8 (Registration No. 333-08189) filed on July 16, 1996  (the “1996 Form S-8”) |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |
| 3.3              |   | Amended  Articles of AirNet Systems, Inc. (as amended through May 28, 1996) [for SEC  reporting compliance purposes only - not filed with the Ohio Secretary of  State]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | Incorporated  herein by reference to Exhibit 4(c) to AirNet Systems, Inc.’s 1996 Form S-8                                                                                                            |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |
| 3.4              |   | Code of  Regulations of AirNet Systems, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Incorporated  herein by reference to Exhibit 2.2 to AirNet Systems, Inc.’s 1996 Form 8-A                                                                                                             |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |
| 3.5              |   | Certificate  regarding adoption of amendment to Section 1.10 of the Code of Regulations of  AirNet Systems, Inc. by the shareholders on May 12, 2000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | Incorporated  herein by reference to Exhibit 3.1 to AirNet Systems, Inc.’s Form 10-Q for  the quarterly period ended June 30, 2000 (File No. 1-13025)                                                |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |
| 3.6              |   | Code of  Regulations of AirNet Systems, Inc. (reflecting amendments through May 12,  2000) [for SEC reporting compliance purposes only]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | Incorporated  herein by reference to Exhibit 3.2 to AirNet Systems, Inc.’s Form 10-Q for  the quarterly period ended June 30, 2000 (File No. 1-13025)                                                |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |
| 4.1              |   | Credit Agreement dated September 30, 2002, among AirNet Systems,  Inc., the Lenders from time to time party thereto and The Huntington National  Bank, as Administrative Agent and Lead Arranger                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | Incorporated  herein by reference to Exhibit 4.1 to AirNet Systems, Inc.’s Quarterly Report  on Form 10-Q for the quarterly period ended September 30, 2002 (File No.  1-13025)                      |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                      |
| 4.2              |   | Agreement to furnish instruments defining rights of holders of  long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | Filed  herewith.                                                                                                                                                                                          |

 

49

----

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                  |   | **Location**                                                                                                                                                                                                                         |
|------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.1*            |   | AirNet  Systems, Inc. Amended and Restated 1996 Incentive Stock Plan (reflects  amendments through February 17, 2004)                                                                                            |   | Filed  herewith.                                                                                                                                                                                                                     |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.2             |   | Indemnification  Agreement, dated as of May 15, 1996, among AirNet Systems, Inc. and Eric P.  Roy, Glenn M. Miller, Charles A. Renusch, Guy S. King, Lincoln L. Rutter,  Kendall W. Wright and William R. Sumser |   | Incorporated  herein by reference to Exhibit 10.11 to AirNet’s Amendment No. 2 to AirNet  Systems Inc.’s Form S-1 Registration Statement (Registration No. 333-03092)  filed on May 24, 1996 (“Amendment No. 2”) |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.3             |   | Indemnification  Agreement, dated as of May 15, 1996, between Gerald G. Mercer and AirNet  Systems, Inc.                                                                                                         |   | Incorporated  herein by reference to Exhibit 10.12 to AirNet Systems, Inc.’s Amendment No.  2                                                                                                                                   |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.4*            |   | Employment  Agreement, effective March 1, 2001, between AirNet Systems, Inc. and Joel E.  Biggerstaff                                                                                                            |   | Incorporated  herein by reference to Exhibit 10.4 to AirNet Systems, Inc.’s Annual Report  on Form 10-K for the fiscal year ended December 31, 2000 (File No. 1-13025)                                                          |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.5*            |   | Employment  Agreement, effective March 1, 2001, between AirNet Systems, Inc. and William  R. Sumser                                                                                                              |   | Incorporated  herein by reference to Exhibit 10.5 to AirNet Systems, Inc.’s Annual Report  on Form 10-K for the fiscal year ended December 31, 2000 (File No. 1-13025)                                                          |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.6*            |   | Employment  Agreement, effective March 1, 2001, between AirNet Systems, Inc. and Jeffrey  B. Harris                                                                                                              |   | Incorporated  herein by reference to Exhibit 10.6 to AirNet Systems, Inc.’s Annual Report  on Form 10-K for the fiscal year ended December 31, 2000 (File No. 1-13025)                                                          |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.7*            |   | AirNet  Systems, Inc. Director Deferred Compensation Plan amended March 17, 2004                                                                                                                                 |   | Filed  herewith.                                                                                                                                                                                                                     |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.8*            |   | AirNet  Systems, Inc. Salary for Options Conversion Plan, effective February 6, 2000                                                                                                                             |   | Incorporated  herein by reference to Exhibit 10.8 to AirNet Systems, Inc.’s Annual Report  on Form 10-K for the fiscal year ended December 31, 2000 (File No. 1-13025)                                                          |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.9*            |   | Agreement,  made as of July 17, 2001,  between  AirNet Systems, Inc. and Gerald G. Mercer                                                                                                                   |   | Incorporated  herein by reference to Exhibit 10.9 to AirNet Systems, Inc.’s Quarterly  Report on Form 10-Q for the quarterly period ended June 30, 2001 (File No.  1-13025)                                                     |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.10*           |   | Jerry Mercer  Transition Agreement, effective May 26, 2001, between AirNet Systems, Inc. and  Gerald G. Mercer                                                                                                   |   | Incorporated  herein by reference to Exhibit 10.10 to AirNet Systems, Inc.’s Quarterly  Report on Form 10-Q for the quarterly period ended June 30, 2001 (File No.  1-13025)                                                    |
|             |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                 |
| 10.11*           |   | Agreement  between AirNet Systems, Inc. and Guy King, effective February 7, 2003                                                                                                                                 |   | Incorporated  herein by reference to 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)                                                         |

 

50

----

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | **Location**                                                                                                                                                                                                                                                   |
|------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                           |
| 10.12            |   | Stock  Purchase Agreement, dated as of December 26, 2002, between Gerald G. Mercer  and Gryphon Master Fund, L.P. with AirNet Systems, Inc. as a party for  purposes of the registration rights provisions contained in Section 7 thereof  and Exhibit III attached thereto; and Schedule A to Exhibit 10.1 identifying  other substantially identical Stock Purchase Agreements between Gerald G.  Mercer and other purchasers as identified in such Schedule A to Exhibit 10.1 |   | Incorporated  herein by reference to Exhibit 10.1 to AirNet Systems, Inc.’s Current Report  on Form 8-K, dated January 14, 2003 and filed on January 15, 2003 (File No.  1-13025)                                                                         |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                           |
| 10.13            |   | Stock  Purchase Agreement, dated as of January 9, 2003, between Spring Hill Camps  and Bonanza Master Fund, Ltd. with AirNet Systems, Inc. as a party for  purposes of the registration rights provisions contained in Section 7 thereof  and Exhibit III attached thereto; and Schedule A to Exhibit 10.2 identifying  other substantially identical Stock Purchase Agreements between Spring Hill  Camps and other purchasers as identified in such Schedule A to Exhibit 10.2 |   | Incorporated  herein by reference to Exhibit 10.2 to Registrant’s Current Report on Form  8-K, dated January 14, 2003 and filed on January 15, 2003 (File No. 1-13025)                                                                                    |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                           |
| 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 to 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) (“AirNet Systems, Inc.’s 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 to 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 to 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 to Exhibit 10.4 to AirNet Systems, Inc.’s February 2004 Form 8-K                                                                                                                                                        |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                           |
| 10.18            |   | Rickenbacker International  Airport Non-Public Self-Fueling Permit, executed by  Columbus Regional Airport Authority on January 20, 2004 and by  AirNet Systems, Inc. on January 15, 2004                                                                                                                                                                                                                                                                                   |   | Incorporated herein by  reference to 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 to 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 to Exhibit 10.7 to AirNet Systems, Inc.’s February 2004 Form 8-K                                                                                                                                                        |

 

51

----

 
| **Exhibit  No.** |   | **Description**                                                                                                                   |   | **Location**                                                                                            |
|------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                              |   |                                                                                                    |
| 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 to Exhibit 10.8 to AirNet Systems, Inc.’s February 2004 Form 8-K |
|             |   |                                                                                                                              |   |                                                                                                    |
| 14               |   | Code of Business Conduct  and Ethics                                                                                              |   | Filed herewith                                                                                          |
|             |   |                                                                                                                              |   |                                                                                                    |
| 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 contractor compensatory plan or arrangement required to be filed pursuant to Item 15 ofForm 10-K.

 

52

----