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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549****FORM 10-K**   þ **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****For the fiscal year ended December 31, 2005****OR**   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****For the transition period from                      to                     ****Commission file number: 1-13025****AirNet Systems, Inc.**(Exact name of Registrant as specified in its charter)   **Ohio** **31-1458309**(State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification No.)   **7250 Star Check Drive, Columbus, Ohio** **43217**(Address of principal executive offices) (Zip Code)**(614) 409-4900**(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, $0.01 par value American Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act: **None**Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. o Yes þ NoIndicate by check mark if the Registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.o Yesþ NoIndicate by check mark whether the Registrant (1) has filed all reports required to be filedby Section 13 or 15(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 beensubject to such filing requirements for the past 90 days.þ Yeso NoIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of Registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. oIndicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):     Large accelerated filer o Accelerated filer o Non-accelerated filer þIndicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).o Yesþ NoState the aggregate market value of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold, or the average bid andasked price of such common equity, as of the last business day of the Registrant’s most recentlycompleted second fiscal quarter: As of June 30, 2005, the aggregate market value of theRegistrant’s common shares (the only common equity of the Registrant) held by non-affiliates of theRegistrant was $42,354,506 based on the closing sale price as reported on the New York StockExchange.Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, asof the latest practicable date.   Class Outstanding at March 21, 2006      Common Shares, $0.01 par value 10,153,599 common shares  
 

 
**INDEX**     PART I      Item 1: Business3   Item 1A: Risk Factors9   Item 1B: Unresolved Staff Comments12   Item 2: Properties12   Item 3: Legal Proceedings14   Item 4: Submission of Matters to a Vote of Security Holders14      PART II      Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities15   Item 6: Selected Financial Data16   Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operation17   Item 7A: Quantitative and Qualitative Disclosures About Market Risk34   Item 8: Financial Statements and Supplementary Data35   Item 9: Changes in and Disagreements With Accountants on Accounting and Financial Disclosure52   Item 9A: Controls and Procedures52   Item 9B: Other Information53      PART III      Item 10: Directors and Executive Officers of the Registrant55   Item 11: Executive Compensation61   Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters70   Item 13: Certain Relationships and Related Transactions74   Item 14: Principal Accountant Fees and Services75      PART IV      Item 15: Exhibits and Financial Statement Schedules75        Signatures86        Exhibit Index87  EX-4.21 EX-4.22 EX-4.48 EX-10.21 EX-10.24 EX-10.25 EX-10.29 EX-21 EX-23 EX-24 EX-31.1 EX-31.2 EX-32
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**PART I****ITEM 1 — BUSINESS****General**AirNet Systems, Inc. (“AirNet”) is a specialty air carrier for time-sensitive deliveries, operatingbetween most major U.S. cities each working day. AirNet is the leading transporter of cancelledchecks and related information for the U.S. banking industry. AirNet also provides specialized,high-priority delivery services to customers, primarily those involved in the medical andentertainment industries. AirNet also provides private passenger charter services through itswholly-owned subsidiary, Jetride, Inc. (“Jetride”).As of December 31, 2005, AirNet operated a fleet of 111 aircraft (including 30 Learjets and 14Cessna Caravan turboprops) that depart from over 90 cities and complete 400 cargo flights pernight, primarily Monday through Thursday. Approximately 20% of AirNet’s cargo flights per nightare subcontracted to third-party aircraft operators. To supplement its air transportation network,AirNet uses commercial airlines during daytime and weekend hours when its aircraft are operatingunder a limited flight schedule. In addition, as of December 31, 2005, Jetride operated 14Learjets that offer private passenger charter services.In addition to regularly scheduled delivery services, AirNet offers on-demand cargo charterdelivery services. AirNet also provides ground pick-up and delivery services throughout the nationseven days per week, primarily through a network of third-party vendors.AirNet’s air and ground network provides dependable, time-critical delivery services to itscustomers. Later pick-up and earlier delivery times than those offered by other national carriersis one of the primary differentiating characteristics of AirNet’s time-critical delivery network.AirNet’s flight schedule is designed to provide delivery times between midnight and 8:00 a.m.,providing earlier delivery times than those generally available through other national carriers.AirNet uses a number of proprietary customer service and management information systems to sort,dispatch, track and control the flow of packages throughout AirNet’s delivery system. AirNetprovides customer service 24 hours per day, seven days a week to assist customers with shipmentorders, inquiries, supply requests and proof of delivery documentation.AirNet Systems, Inc. was incorporated under the laws of the State of Ohio in 1996. AirNet’sprincipal executive offices are located at 7250 Star Check Drive, Columbus, Ohio 43217, and can bereached at (614) 409-4900. AirNet’s Internet web site address is www.airnet.com (this uniformresource locator (URL) is an inactive textual reference only and is not intended to incorporateAirNet’s web site into this Annual Report on Form 10-K).AirNet makes available free of charge on or through its Internet web site, its annual reports onForm 10-K, quarterly reports 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 Securities Exchange Act of1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material iselectronically filed with or furnished to the Securities and Exchange Commission (the “SEC”).As further described in “Note 3 – Segment Reporting” of the Notes to Consolidated FinancialStatements included in “Item 8 – Financial Statements and Supplementary Data” of this Annual Reporton Form 10-K, AirNet operates two distinct reportable segments, Delivery Services and PassengerCharter Services. AirNet’s Delivery Services segment provides delivery service of time-criticalshipments for Bank customers and Express customers. AirNet’s Passenger Charter Services segmentprovides private passenger charter service. Financial information for AirNet’s reportable segmentsis provided in “Note 3 – Segment Reporting” of the Notes to Consolidated Financial Statements andis incorporated herein by reference.*Delivery Services**Bank Services*Bank Services, primarily consisting of cancelled check delivery, generated approximately58%, 61% and 69% of AirNet’s total net revenues for the fiscal years ended December 31,2005, 2004 and 2003, respectively. AirNet’s time-critical cancelled check delivery serviceallows its banking customers to reduce their float costs and related processing fees.AirNet also transports other items, such as proof of deposit transactions and interoffice mail, for many of the same bankcustomers. The U.S. banking industry, including commercial banks andthird-partyprocessors, represents AirNet’s largest category of customers. AirNet’s bank customersrepresent many of the nation’s largest bank holding companies.*Express Services*Express Services, which focus on customers with time-critical delivery needs, generatedapproximately 27%, 28% and 25% of AirNet’s total net revenues for the fiscal years endedDecember 31, 2005, 2004 and 2003, respectively. Express Services are primarily targeted atcustomers involved in the life sciences and entertainment industries, and other customerswhose shipment needs are highly time sensitive or time definite. In the life sciencesindustry, Express Services are offered to customers shipping packages that requirespecialized handling, the transportation of
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which is often highly regulated by various governmental authorities. Targeted markets within the medical industry include producersand recipients of radioactive pharmaceuticals, diagnostic specimens, blood, umbilical cordblood, human tissue and organs.For those customers requiring time-critical delivery options not available on AirNet’sregularly scheduled routes, cargo charter services are available. Cargo charter servicesmay be regularly scheduled or scheduled on an on-demand, as-needed basis, 24 hours per day,seven days a week.*Passenger Charter Services*Jetride’s Passenger Charter Services generated approximately 15%, 11% and 5% of AirNet’s total netrevenues for the fiscal years ended December 31, 2005, 2004 and 2003, respectively. Jetrideprovides private passenger charter services that offer customers a safe, fast, and convenient wayto travel. Jetride’s private passenger charter service is available 24 hours a day, 7 days a weekprimarily within the continental United States and neighboring countries. Jetride provides charterservices to fractional charter companies, third-party charter brokers and, to a lesser extent, toretail customers. As of December 31, 2005, Jetride operated 14 Learjets from nine locations acrossthe country. Jetride also operated 2 Challenger aircraft under management agreements for a portionof 2005. As of December 31, 2005, Jetride’s fleet consisted of nine owned aircraft and fiveaircraft that are managed for other owners. Jetride’s fleet of Learjets are configured tocomfortably carry seven to eight passengers. All passenger charter pilots are Airline TransportPilot rated – the highest Federal Aviation Administration (“FAA”) rating possible. Jetride iscertified by the Wyvern Network of Charter Operators and holds an Aviation Research Group/USPlatinum rating, the highest rating in the industry.*Aviation Services*AirNet operates a fixed base operation from AirNet’s Columbus, Ohio facility, offering retailaviation fuel sales and related ground support services.**Business Strategy**As a result of the continuing evolution of electronic alternatives to the physical movement ofcancelled checks, AirNet believes that its Bank Services net revenue will decline in futureperiods. AirNet believes that the transition in the banking industry to the electronic clearing ofcancelled checks will continue to accelerate in the future. AirNet continues to evaluate andadjust its aircraft mix and fleet size in response to these changing business conditions as well asreview its ground operations for efficiencies and cost reductions. AirNet continues to focus onthe implementation of operational changes to increase the efficiency of its national airlinenetwork and delivery services to maximize cash flow for the purpose of reducing its debt. DuringFiscal Year 2005, AirNet reduced its outstanding debt by approximately $6 million.AirNet continues to focus on Express Services customers in time-critical and time-definite deliverymarkets, such as life sciences, radioactive pharmaceutical and on-demand cargo charters, topartially offset anticipated declines in its Bank Services revenues. The anticipated declines inAirNet’s Bank Services revenues will likely require significant changes in AirNet’s airtransportation network over time, including a reduction in AirNet’s current route schedule and the number ofaircraft it operates. In February 2006, AirNet decided to market for sale all nine of the Cessna310 piston aircraft it operates as a result of the reduction in its required airline capacity.AirNet’s ability to expand or maintain its Express Services may be limited by continuing reductionsin AirNet’s route schedule.Future growth in Passenger Charter Services revenues in Fiscal Year 2006 will be dependent uponsecuring additional aircraft under aircraft management agreements and operational improvements.AirNet does not intend to purchase any additional Passenger Charter aircraft during Fiscal Year2006.On January 5, 2005, upon the approval of the Board of Directors (the “Board”) of AirNet, AirNetengaged Brown Gibbons Lang & Company (“BGL”) to serve as AirNet’s exclusive financial advisor andinvestment banker to review, develop and evaluate various strategic alternatives to enhanceshareholder value, including the possible sale of AirNet. AirNet’s Board also established aSpecial Committee, consisting solely of independent directors, to oversee the marketing process,which resulted in a number of indications of interest with respect to the sale of AirNet andculminated in the execution of a letter of intent for the sale of AirNet on October 26, 2005. OnDecember 16, 2005, AirNet announced that it had been unable to reach a definitive merger agreementwith the private equity investment firm that entered into the letter of intent and that theexclusivity period under such letter of intent had been allowed to expire.Following the termination of the letter of intent, in December of 2005, the Board dissolved theSpecial Committee and appointed a Strategy Committee to work with management on the ongoingbusiness strategy and alternatives for the company to enhance shareholder value. The StrategyCommittee, together with the full Board, determined that AirNet’s business strategy would includeoperating its businesses with emphasis on cash flows from operations while seeking otherde-leveraging opportunities. The Board has elected to continue its engagement of BGL as itsfinancial advisor on a month-to-month basis in connection with the development and evaluation ofvarious strategies and opportunities to enhance shareholder value and de-leverage the business.**Operations***Air operations*
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AirNet’s air operations are headquartered in Columbus, Ohio. In June 2005, AirNet relocated itsoperational headquarters from Port Columbus International Airport (“Port Columbus”) to RickenbackerInternational Airport (“Rickenbacker”).AirNet and Jetride utilize an extensive screening process to evaluate potential pilots prior tohiring. New pilots must meet stringent company qualifications, as well as mandated FAArequirements. New pilots must satisfactorily complete a five-week training program conducted byAirNet’s flight training staff prior to assignment of pilot duties. This training program includesflight simulator training prior to any actual flight time in an AirNet or Jetride aircraft, as wellas intensive ground instruction. Additionally, new pilots gain operating experience in astructured setting prior to assignment in order to gain a familiarity with AirNet’s route systemand the unique demands of the flight environment. In addition to FAA requirements, pilotsproviding Passenger Charter Services for Jetride must also meet additional in-flight experiencerequirements specifically related to the types of aircraft operated by Jetride.AirNet’s central dispatch system coordinates all components of the air cargo operation. Departureand arrival times are continuously updated, and weather conditions throughout the nation aremonitored. AirNet dispatchers remain in contact with pilots, out-based hub managers, fuelers,maintenance technicians and ground delivery personnel to identify and minimize any potential delaysin the delivery process.Capacity management is an important factor in maintaining profitability of AirNet’s packagedelivery services. AirNet’s air transportation network is positioned around a flexible nationalroute structure designed to facilitate late pick-up and early delivery times, minimize delays andsimplify flight scheduling. AirNet’s flexible route structure allows it to respond to the changingvolume needs of its customers. AirNet’s primary hub in Columbus, Ohio, and several mini-hubsacross the nation, are located primarily in less congested regional airports. These locations, inconjunction with AirNet’s off-peak departure and arrival times, provide easy take-off and landings,convenient loading and unloading and fast refueling and maintenance. AirNet also uses commercialairlines, primarily to transport shipments during the daytime and weekend hours when its aircraftare operating under a limited flight schedule.AirNet employs approximately 80 aircraft and avionics technicians in seven separate locationsacross the United States who perform maintenance on AirNet’s fleet of aircraft. AirNet has anin-house engine shop at its 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 its Columbus facility to provide for maximum efficiency and minimumaircraft downtime for the fleet. AirNet’s aircraft maintenance center at its Columbus hub hasreceived ISO 9001:2000 certification and holds a repair station certificate granted by the FAA.*Shipment processing*Bank shipments are pre-sorted by bank customer personnel and packaged in AirNet-supplied bags withthree letter city identifier tags to show final destination. Express shipments are packaged ineither AirNet-provided packaging or the customers’ packaging. Shipments transported on AirNet’sair transportation network are typically picked up by a courier and transported to the localairport where an airbill is either scanned using bar code technology or entered manually.Information on each airbill pertaining to the shipper, receiver, airbill number and applicabledeadline is captured and downloaded into AirNet’s computer system, where it is available toAirNet’s customer service representatives (“CSRs”). Upon arrival at AirNet’s Columbus hub or oneof its mini-hubs, the shipment is off-loaded, sorted by destination and reloaded onto an aircraft.At the final destination city, the shipment is off-loaded and delivered by courier to the receiver.When delivered, information from the airbill is once again captured and downloaded into AirNet’scomputer system. Delivery information for all shipments is then available on-line to customers andAirNet’s CSRs.For banking customers meeting daytime banking deadlines and Express customers requiringnext-flight-out timing, shipments are typically picked up by a courier and transported viacommercial airlines or other integrators to destination cities where couriers recover the packagesand deliver them to their final destinations.*Ground support*AirNet manages its ground delivery services through the combined use of employees and a network ofindependent contractors and vendor couriers. Independent contractors and vendor couriers performthe majority of ground delivery services, allowing AirNet to better match its ground costs with itsvolume requirements. In limited situations, employees are used for ground delivery services onscheduled routes where volume requirements economically justify employing full-time couriers.Dispatching functions related to ground delivery services occur at AirNet’s Columbus, Ohio hub andon a regional basis in some of the major cities served.*Fast Forward Solutions*Fast Forward Solutions, LLC (“Fast Forward Solutions”), a wholly-owned subsidiary of AirNet, wasformed to explore growth opportunities associated with existing and emerging image replacementplatforms and technologies. Fast Forward Solutions is no longer pursuing opportunities in the imagereplacement market and AirNet expects to dissolve Fast Forward Solutions during fiscal year 2006,without any financial impact in Fiscal Year 2006.**Regulation**
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AirNet holds an air carrier operating certificate granted by the FAA pursuant to Part 135 of theFederal Aviation Regulations. AirNet also holds a repair station certificate granted by the FAA pursuant to Part145 of the Federal Aviation Regulations. In addition, Jetride holds its own air carrier operatingcertificate granted by the FAA pursuant to Part 135. These certificates are of unlimited durationand remain in effect so long as AirNet and Jetride maintain the required standards of safety andmeet the operational requirements of the Federal Aviation Regulations. The FAA’s regulatoryauthority relates primarily to operational aspects of air transportation, including aircraftstandards and maintenance, personnel, and ground facilities.The U. S. Department of Transportation (“DOT”) and Transportation Security Administration (“TSA”)have regulatory authority concerning operational and security concerns in transportation, includingsafety, insurance and hazardous materials. AirNet holds various operational certificates issued bythese agencies, including party status to DOT E-7060, which permits AirNet to transport highervolumes of time-critical radioactive pharmaceuticals than is allowed by the DOT for most carriers.Party status to DOT E-7060 is renewed every two years, with AirNet’s next renewal due August 2006.AirNet is also subject to Food and Drug Administration regulation of AirNet’s transportation ofpharmaceuticals and live animals.In addition to federal regulations, AirNet’s operations are subject to various state and localregulations, and in many instances, require permits and licenses from state authorities.AirNet believes that both AirNet and Jetride have all permits, approvals and licenses required toconduct their respective operations and that they are in compliance with applicable regulatoryrequirements relating to their operations including all applicable noise level regulations.Because current noise level regulations would have required AirNet to modify its three cargoconfigured Model 25 Learjets, and because such Learjets are less efficient to operate, AirNetretired and sold its three Model 25 Learjets prior to the end of fiscal year 2005. AirNet cooperates with various local governments to minimize noise issues;however, future noise pollution regulations could require the modification or replacement of otherAirNet aircraft.AirNet conducts a portion of its operations through the transportation of packages via commercialairlines. TSA regulations provide that only indirect air carriers that maintain a TSA approvedIndirect Air Carrier Standard Security Program (“IACSSP”) may tender packages to commercialairlines. In February, 2005, the TSA informed AirNet that the TSA would no longer approve theIACSSP maintained by AirNet based upon the definition of an “indirect air carrier” provided under49 CFR §1540.5. At the same time, the TSA requested that AirNet submit an application for a newIACSSP under the name of an affiliated company.In accordance with the TSA’s request, during 2005 AirNet submitted an application for a new IACSSPunder the name of AirNet Management, Inc., a wholly-owned subsidiary of AirNet (“AirNetManagement”). On June 21, 2005, the TSA approved the IACSSP submitted by AirNet Management. Uponreceipt of such approval, AirNet began implementing operational changes necessary to transition thetender of packages to commercial airlines under the new IACSSP maintained by AirNet Management.This transition process was completed by August 28, 2005, the date on which the IACSSP authoritymaintained by AirNet expired. In connection with the transition to the new IACSSP maintained byAirNet Management, AirNet entered into a service agreement with AirNet Management under whichAirNet retained the services of AirNet Management to process packages with commercial airlines. Under the service agreement,AirNet also performs certain functions related to the new IACSSP on behalf of AirNet Management,such as site visits to qualify potential customers as “known shippers”.The TSA conducts periodic audits of all indirect air carriers to ensure compliance with the rulesand regulations governing indirect carriers. From time to time, the TSA has notified AirNetManagement of possible violations of the IACSSP it maintains. Such alleged violations generallyinvolve the failure of ground vendors to comply with certain provisions of AirNet Management’sIACSSP. Upon receipt of any such TSA notification, AirNet Management conducts an internalinvestigation of the alleged failure and notifies the TSA of any corrective actions it hasimplemented to address such failure. While the TSA can impose penalties for violations of therules and regulations governing an IACSSP, including fines and revocation of IACSSP authority, nofines or other penalties have been proposed by the TSA with respect to the IACSSP maintained byAirNet Management.The U. S. DOT implemented new regulations regarding the transportation of hazardous materials thatbecame effective on April 1, 2005. These new regulations require that certain informationconcerning hazardous material shipments be maintained by the pilot-in-command of an aircraft and bereadily accessible at the airport of departure and the intended airport of arrival for the durationof each flight leg. AirNet has implemented new operating procedures to comply with theregulations; however, a significant portion of AirNet’s operations are conducted at night atairports where it maintains no ground operations. In order to comply with the regulatoryrequirement that information concerning hazardous material shipments be readily accessible at eachairport of departure, AirNet has made arrangements to deposit such information with ground vendors,fixed based operators, or in drop boxes located at departing airports. The location of thedeposited information is maintained at AirNet’s dispatch center in Columbus, Ohio. AirNet’sdispatch personnel can direct any regulatory authorities or emergency response team to the locationof the hazardous material information in the event of an emergency. While AirNet continues toevaluate its procedures for complying with the new DOT regulations, there can be no assurances thatthe TSA, DOT or FAA would agree that AirNet’s operating procedures comply with all of therequirements of the new regulations.
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Failure to comply with the new hazardous material regulations could reduce or otherwise restrictAirNet’s ability to transport hazardous materials, including its ability to transport radioactivepharmaceuticals under its DOT E-7060 permit described above.
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**Seasonality**See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operation”under the heading “Seasonality and Variability in Quarterly Results” of this Annual Report on Form10-K for a discussion of the seasonal aspects of AirNet’s business, which discussion is incorporated hereinby reference.**Competition**The air and ground courier industry is highly competitive. AirNet’s primary competitor in thetransportation of cancelled checks is the Federal Reserve’s Check Relay Network. The actions of theFederal Reserve are regulated by the Monetary Control Act, which requires the Federal Reserve toprice its services at actual cost plus a set percentage private sector adjustment factor. AirNetbelieves that the purpose of the Monetary Control Act is to curtail the possibility of predatorypricing by the Federal Reserve when it competes with the private sector. No assurance beyond theremedies of law can be given that the Federal Reserve will comply with the Monetary Control Act.In the private sector, there are a large number of smaller, regional carriers that transportcancelled checks, none of which AirNet believes has a significant interstate market share. The twolargest private sector air couriers, FedEx and United Parcel Service (“UPS”), both carry cancelledchecks where the required deadlines fit into their existing system. AirNet does not believe thatFedEx or UPS represent significant competitors in the time-critical cancelled check market to date.AirNet provides customized service for its customer base, often with later pick-ups and earlierdeliveries than the large, national couriers provide.AirNet competes with commercial airlines and numerous other carriers in its Express Servicesdelivery business and estimates its market share in this industry at less than 1%. AirNet believesthat its national air transportation network system, proprietary information technology andhistorically high on-time performance level allow it to compete in this market. Aggressivecompetition for customers with express delivery needs resulted in reduced Express Servicesshipments in fiscal year 2005. In addition, in fiscal year 2005, AirNet became aware that acompetitor received a DOT E-7060 permit which may increase competition for radioactivepharmaceuticals customers.In the Passenger Charter business, AirNet competes with other owner/operators and charter brokersof small business jets. AirNet believes its maintenance and related support facilities provideadded flexibility in deploying and servicing the Passenger Charter fleet to meet customer demands.**Environmental matters**In 2004, AirNet commenced construction of a new corporate and operational facility (the“Rickenbacker Facility”) on land leased from the Columbus Regional Airport Authority (the“Authority”). Construction of the Rickenbacker Facility was completed in May of 2005 and AirNetcompleted the relocation of its flight and administrative operations to the Rickenbacker Facilityin June of 2005. Portions of the leased land on which the Rickenbacker Facility was constructed,as well as portions of the aircraft ramp used by AirNet at the Rickenbacker Facility, contain knownpollution conditions. The appropriate amended post closure plan and no further action lettersaddressing the Rickenbacker Facility and the aircraft ramp were obtained by AirNet from theAuthority prior to beginning construction. No additional pollution conditions on the leased landwere noted during construction of the Rickenbacker Facility or the aircraft ramp and none have beennoted through the date of this Annual Report on Form 10-K.In June 2005, AirNet relocated its corporate and operational headquarters from 3939 InternationalGateway in Columbus, Ohio (the “Port Columbus Facility”) to the new Rickenbacker Facility.AirNet’s lease of its Port Columbus Facility expired on August 31, 2005. In connection withvacating its Port Columbus Facility, AirNet was required to conduct an environmental assessment ofthe Port Columbus Facility. The results of the environmental assessment demonstratedconcentrations of petroleum hydrocarbons and vinyl chloride above the regulatory limits in samplesassociated with one of three oil-water separators located in the hanger portion of the PortColumbus Facility. Except for the area associated with the one oil-water separator, it was theopinion of the environmental testing firm engaged to conduct the assessment that no obviouslyrecognized environmental conditions existed at AirNet’s Port Columbus Facility in the areasassessed, including the fuel farm which AirNet maintains at the Port Columbus Facility.Following completion of the environmental assessment, AirNet, with the assistance of the Authority,determined what actions were necessary to remediate the identified pollution conditions. In Marchof 2006, AirNet completed remedial work to remove the pollution conditions, which consistedprimarily of the removal and replacement of a portion of the concrete floor in the hangar area ofthe Port Columbus Facility, the removal and replacement of the contaminated soil, and theinstallation of a new oil-water separator. Environmental testing conducted at the completion ofthe remedial work demonstrated no presence of petroleum hydrocarbons or vinyl chloride above theregulatory limits in the area associated with the remedial work. As of December 31, 2005, AirNet had an accrual of approximately $0.2million for such remedial environmental work and work that may be required to return the fuel farmto its original condition, as discussed below in “Item 2 – Properties”.AirNet believes that compliance with applicable laws and regulations governing environmentalmatters has not had, and is not expected to have, a material effect on AirNet’s capitalexpenditures, operations or competitive position.
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**Employees**As of December 31, 2005, AirNet employed approximately 790 persons, which included approximately235 pilots. AirNet’s employees are not represented by any union or covered by any collectivebargaining agreement. AirNet has experienced no work stoppages and believes that its relationshipwith employees is good.**ITEM1A — RISK FACTORS****Competition from other providers of express air and ground delivery services may adversely affectAirNet’s results of operations and financial condition.**AirNet’s Bank Services compete primarily against the Federal Reserve’s Check Relay Network, whichhas significantly greater financial and other resources than AirNet. The Federal Reserve isregulated by the Monetary Control Act of 1980, which in general requires that the Federal Reserveprice its services on an actual cost basis plus a set percentage private sector market adjustmentfactor. Failure by the Federal Reserve to comply with the Monetary Control Act by pricing itsservices below the required rates could have an adverse competitive impact on AirNet. In addition,the Monetary Control Act may be amended, modified or repealed, or new legislation affectingAirNet’s business may be enacted. Also, the market for Express Delivery Services is highlycompetitive. Aggressive competition for customers with express delivery needs could have amaterial adverse affect on revenue and contribution margins in Delivery Services.**The Check 21 Act or similar legislation and electronic methods of clearing cancelled checks willhave a significant adverse effect on AirNet’s revenues derived from check delivery services.**The Check 21 Act, which became effective in October 2004, creates a new negotiable instrumentcalled a substitute check (also known as an image replacement document or “IRD”) that becomes thelegal equivalent of the original item. The Check 21 Act effectively removes the requirement ofreturning an original paper check to the account holder’s institution and requires that allfinancial institutions accept an IRD in lieu of a cancelled check. The Check 21 Act and thetransition in the banking industry to electronic methods of clearing cancelled checks willeventually replace the need for expedited air transportation services of original cancelled checksby most of AirNet’s banking customers. The Check 21 Act and electronic methods of clearingcancelled checks will have a significant adverse affect on AirNet’s revenues derived from checkdelivery services. However, it is unclear how quickly IRD’s and electronic methods of clearingcancelled checks will be implemented on a widespread basis by banking customers and how suchimplementation would affect their expedited check transportation needs.**Other technological changes in the check clearance and national payment systems may adverselyaffect the demand for AirNet’s Bank Services from the financial services industry.**Some analysts have predicted that the increased use of electronic funds transfers will lead to a“checkless society,” which could also adversely affect the demand for AirNet’s Bank Services to thefinancial services industry. In addition, some financial services industry analysts have predictedthe development of various forms of imaging technology that could reduce or eliminate the need forprompt delivery of cancelled checks. Similarly, technological advances in the nature of“electronic mail” and “telefax” have affected the demand for on-call delivery services by customersneeding express delivery services. While none of these technological advances has had asignificant adverse impact on AirNet’s business to date, these or similar technologies, or otherregulatory or technological changes in the check clearance and national payment systems, could havean adverse affect on AirNet’s business in the future.**Reductions in AirNet’s route schedule and the number of aircraft it operates may adversely impactAirNet’s Express Services business.**AirNet’s air and ground network that provides later pick-up and earlier delivery times than thoseoffered by other national carriers is one of the primary differentiating characteristics ofAirNet’s time-critical delivery network. A significant portion of AirNet’s Express shipments aretransported on AirNet’s airline. The anticipated decline in AirNet’s transportation of cancelledchecks will require significant changes in AirNet’s air transportation network, including areduction in its current route schedule and the number of aircraft it operates. Reductions inAirNet’s route schedule and the number of aircraft it operates will require AirNet to transport a greater portion of its Express shipments on commercialairlines and may adversely impact AirNet’s ability to expand or maintain its Express Servicesbusiness.**Government regulation significantly affects AirNet.**AirNet’s delivery operations are subject to various federal, state and local regulations that inmany instances require permits and licenses. Failure by AirNet to maintain required permits orlicenses, or to comply with the applicable regulations, could result in substantial fines orpossible revocation of AirNet’s authority to conduct certain of its operations.AirNet’s flight operations are regulated by the FAA under Part 135 of the Federal AviationRegulations. Among other things, these regulations govern permissible flight and duty time foraviation flight crews. The FAA has contemplated, from time to
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time, certain changes in flight and duty time guidelines which, if adopted, could increase AirNet’s operating costs. These changes, ifadopted, could also require AirNet and other operators regulated by the FAA to hire additionalflight crew personnel. In addition, Congress, from time to time, has considered various means,including excise taxes, to raise revenues directly from the airline industry to pay for air trafficcontrol facilities and personnel. There can be no assurances that Congress will not change thecurrent federal excise tax rate or enact new excise taxes, which could adversely affect AirNet’sbusiness.**Loss of AirNet Management’s Indirect Air Carrier Standard Security Program approval could adverselyaffect AirNet’s business.**A significant portion of AirNet’s shipments are transported via commercial airlines. TSAregulations provide that only indirect air carriers that maintain a TSA approved Indirect AirCarrier Standard Security Program (“IACSSP”) may tender packages to commercial airlines. Inaccordance with the TSA’s request, during Fiscal Year 2005 AirNet secured TSA approval for a newIACSSP under the name of AirNet Management, Inc., a wholly-owned subsidiary of AirNet. AirNet’sability to transport packages on commercial airlines is dependent upon AirNet Management, Inc.’scontinuing compliance with the rules and regulations governing Indirect Air Carrier StandardSecurity Programs and the TSA’s continuing approval of the AirNet Management, Inc. IACSSP. Theloss of AirNet Management, Inc.’s IACSSP approval would have a significant and immediate adverseeffect on AirNet’s business.**Changes in government regulations regarding the transportation of hazardous materials mayincrease AirNet’s costs of transporting such shipments or reduce AirNet’s ability to transport suchshipments.**The DOT implemented new regulations regarding the transportation of hazardous materials that wentinto effect on April 1, 2005. The new regulations required that AirNet institute new operatingprocedures and make arrangements with ground vendors and/or fixed based operators to assist AirNetin complying with the new regulations. Failure to comply with the new or existing regulationsgoverning the transportation of hazardous materials would reduce or otherwise restrict AirNet’sability to transport hazardous materials, including its ability to transport radioactivepharmaceuticals under AirNet’s DOT E-7060 permit. Future changes in government regulationsregarding the transportation of hazardous materials may also increase AirNet’s costs oftransporting such shipments or reduce AirNet’s ability to transport such shipments.**Reclassification of ground couriers as employees rather than independent contractors could impactAirNet’s operating costs and subject it to back taxes and other liabilities.**AirNet uses the services of independent contractors as couriers to pick up and deliver itspackages. From time to time, federal and state authorities have sought to assert that independentcontractors in the transportation industry, including independent contractors providing servicessimilar to those utilized by AirNet, are employees rather than independent contractors. AirNetcurrently classifies its couriers providing services under an independent contractor agreement asindependent contractors rather than as employees. However, there can be no assurance that federalor state authorities will not challenge this position, or that other laws or regulations, includingtax laws or interpretations thereof, will not change. If, as a result of any of the foregoing,AirNet were required to pay withholding taxes and pay for and administer added employee benefits tothese couriers, AirNet’s operating costs would increase. Additionally, in the event of any suchreclassification, AirNet could be required to pay back-up withholding with respect to amountspreviously paid to such individuals and be required to pay penalties or be subject to otherliabilities as a result of the incorrect classification of such individuals, such as payment ofpast due workers compensation and unemployment insurance premiums.**Changes to current transportation security requirements or procedures could adversely impactAirNet’s ability to efficiently conduct AirNet’s air and ground operations to meet AirNet’s current delivery parametersor significantly increase costs to transact those operations.**Considerable focus has been placed on package security requirements and procedures at domestic andinternational airports since the September 11, 2001 tragedy and related incidents. The TSA,commercial airlines, fixed based operations (where AirNet transacts a significant portion of itsaircraft loading and unloading operations) and airport authorities are still in the process ofreviewing and improving all aspects of their security requirements. While many proposed changesare voluntary, many are being mandated by the TSA, the DOT and the FAA.During 2002, the TSA implemented screening procedures for over-the-counter cargo tendered tocommercial airlines. These screening procedures have resulted in additional tender time forpackages transported on the commercial airlines in certain locations and during certain times. Inaddition, the TSA continues to review and consider additional package screening requirements andchanges to the vendor screening procedures, which AirNet may need to perform on packages from itscustomers. Many commercial airlines are also adding security surcharges to shipments.Changes at fixed base operators and by local airport authorities could potentially limit AirNet’sramp access to its aircraft, thereby increasing tender time from customers. Changes in chain ofcustody requirements could also potentially cause AirNet to incur additional costs to staffadditional hours at certain locations. In response to the new security-related procedures beingimplemented, AirNet added a security surcharge in 2002 for its Bank and Express Services customers.
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Although the surcharge is expected to help offset the increasing costs associated with securityissues, AirNet’s current surcharge program may not be sufficient to cover all new costs it mayincur as additional transportation safety procedures are developed and/or required.As a company actively engaged in providing aviation services, AirNet is subject to current andfuture regulations with which it must comply in order to maintain its ability to provide suchservices. Various governmental agencies are implementing and expanding policies, procedures, andcompliance measures to enhance the safety and security of both domestic and international airtransportation. This increasing regulatory environment may require AirNet to change itsoperational processes, modify its flight schedules, and incur additional costs of compliance. Thecosts associated with regulatory compliance could impact AirNet’s financial results. AirNet’sinability to comply with current or future governmental regulations could limit or restrictAirNet’s ability to provide specific services, including but not limited to, the transportation ofhazardous materials.**Catastrophic accidents involving AirNet’s Passenger Charter aircraft could result in asignificant reduction in AirNet’s business and damage to the Jetride brand.**A catastrophic accident could substantially reduce the demand for Jetride’s Passenger CharterServices and, therefore, significantly reduce its revenue. In such event, Jetride may not be ableto secure liability insurance for its business or secure such insurance at a reasonable cost.**Environmental concerns may arise in connection with AirNet’s operation at its new facility onleased land with known pollution conditions.**In 2005, AirNet completed construction of its new Rickenbacker Facility on land leased from theAuthority. Portions of the leased land, as well as portions of the aircraft ramp, on which AirNetconducts a significant portion of its operations at the RickenbackerFacility, contain knownpollution conditions. The appropriate amended post closure plan and no further action lettersaddressing these areas were supplied to AirNet by the Authority prior to beginning construction.Identification of additional pollution conditions on the leased land or attached ramp couldincrease AirNet’s costs and have an adverse affect on its ability to operate at the RickenbackerFacility.**Failure to renew party status to Department of Transportation E-7060 would result in significantloss of Express Services revenue.**AirNet maintains party status to DOT E-7060, which permits AirNet to transport higher volumes ofradioactive pharmaceuticals than allowed by most air carriers. AirNet is required to renew itsparty status every two years. Although AirNet anticipates it will obtain its DOT E-7060 renewal atits next scheduled renewal date in August 2006, there can be no assurances that the party statuswill be extended. Further, there can be no assurance that AirNet can continue to comply with allcurrent DOT E-7060 requirements, or that such requirements will not change in the future whichwould negatively affect AirNet’s ability to maintain such status.**Anti-takeover provisions may delay or prevent an acquisition or change in control of AirNet by athird party.**Provisions of AirNet’s amended articles and code of regulations and of the Ohio Revised Code,together or separately, could discourage potential acquisition proposals, delay or prevent a changein control of AirNet and limit the price that certain investors might be willing to pay in thefuture for the common shares. Among other things, these provisions require certain supermajorityvotes, establish advance notice procedures for shareholder nomination of candidates for election asdirectors and for shareholder proposals to be considered at shareholders’ meetings, eliminatecumulative voting in the election of directors and provide that directors may only be removed fromoffice for cause.AirNet’s amended articles authorize the board of directors to issue up to 10,000,000 preferredshares without further shareholder approval, subject to any limitations prescribed by law and therules and regulations of the American Stock Exchange. The preferred shares could have dividend,liquidation, conversion and other rights and privileges that are superior or senior to the commonshares. Issuance of preferred shares could result in the dilution of the voting power of thecommon shares, adversely affect holders of the common shares in the event of liquidation of AirNetor delay, defer or prevent a change in control of AirNet.In addition, Section 1701.831 of the Ohio Revised Code contains provisions that require shareholderapproval of any proposed “control share acquisition” of any Ohio corporation at any of three votingpower thresholds: one-fifth, one-third and a majority. Further, Chapter 1704 of the Ohio RevisedCode contains provisions that restrict specified business combinations and other transactionsbetween an Ohio corporation and interested shareholders.**AirNet’s substantial indebtedness could adversely affect AirNet’s financial condition and preventAirNet from fulfilling its obligations.**
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AirNet has a significant amount of debt. AirNet’s substantial indebtedness could: (1) requireAirNet to dedicate a substantial portion of cash flows from operating activities to payments onAirNet’s indebtedness, which would reduce the cash flows available to fund working capital, capitalexpenditures and other general corporate requirements; (2) limit AirNet’s flexibility in planningfor, or reacting to, changes in AirNet’s business and the industry in which AirNet operates; and(3) limit AirNet’s ability to borrow additional funds. AirNet’s liquidity and its ability to meetits current and long-term financial obligations as they become due will be dependent upon AirNet’sfinancial performance, its ability to meet financial covenants in financing agreements and itsability to replace or extend the revolving credit facility. AirNet’s failure to meet thesefinancial covenants would have a material adverse effect on AirNet’s financial position and abilityto continue operations. A substantial portion of AirNet’s revolving credit facility was used to fund theRickenbacker Facility.**AirNet may encounter issues in documenting and testing its internal control over financialreporting for purposes of complying with Section 404 of the Sarbanes-Oxley Act of 2002.**AirNet is in the process of documenting and testing its internal control over financial reportingin order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which will requiremanagement to annually assess the effectiveness of AirNet’s internal control over financialreporting beginning with the fiscal year ending December 31, 2007 and a report by AirNet’sindependent registered public accounting firm addressing management’s assessment and theeffectiveness of the internal control over financial reporting beginning with the fiscal yearending December 31, 2007. During the course of AirNet’s testing, AirNet may identify deficienciesand weaknesses, which AirNet may not be able to remediate in time to meet the deadline imposed bythe Sarbanes-Oxley Act for compliance with the requirements for Section 404. If management isunable to conclude that AirNet’s internal control over financialreporting is effective at year-end2007 or AirNet’s independent registered public accounting firm is unable to give a favorable reporton management’s assessment, this could have a material adverse effect on AirNet’s reputation,financial condition and on the market price of AirNet’s common shares.**ITEM1B — UNRESOLVED STAFF COMMENTS**None.**ITEM 2 — PROPERTIES****Operating facilities**On January 20, 2004, AirNet entered into a land lease with the Authority to lease approximately 8acres located within Rickenbacker. AirNet completed construction of its new Rickenbacker Facilityin May 2005 and AirNet’s relocation to the Rickenbacker Facility was completed in June 2005.AirNet’s corporate and operational functions that were previously conducted at the Port ColumbusFacility and the administrative functions previously conducted at 555Morrison Road in Gahanna, Ohio were consolidated at the new Rickenbacker Facility. Rickenbacker is located inFranklin and Pickaway Counties, Ohio, southeast of Columbus, Ohio, approximately fifteen miles fromAirNet’s former Port Columbus Facility.On January 20, 2004, in anticipation of AirNet’s move to its new Rickenbacker Facility, AirNet alsoentered into an agreement to sell its Port Columbus Facility to the Authority for $3.9 million.Closing of the sale of the Port Columbus Facility to the Authority took place on December 15, 2004.Concurrently with the sale, AirNet entered into a new lease agreement with the Authority (the “NewPort Columbus Lease”) pursuant to which AirNet leased the real property associated with the PortColumbus Facility and the buildings and all other improvements thereon pending AirNet’s relocationto its Rickenbacker Facility. The New Port Columbus Lease expired on August 31, 2005. Inconnection with vacating its Port Columbus Facility, AirNet was required to return certain portionsof the premises to their prior condition. The remedial work required to return the Port ColumbusFacility to its prior condition, except for the environmental work discussed below, was completedby December 31, 2005.AirNet also maintains certain assets at Port Columbus for dispensing aviation fuel under the termsand conditions of a separate lease agreement (the “Fuel Farm Lease”). The Fuel Farm Lease requiresAirNet to return the premises leased under the Fuel Farm Lease to their original condition at thetermination of the lease. In lieu of returning the premises to their original condition, theAuthority may take title to any improvements constructed by AirNet on the leased premises. AirNetand the Authority have entered into discussions regarding the transfer of title of AirNet’s fuelfarm assets to the Authority, which includes two underground fuel storage tanks. If the Authoritydeclines to take title to the fuel farm assets, or if AirNet and the Authority are unable to reachacceptable terms and conditions regarding the transfer of the fuel farm assets to the Authority,AirNet will remove the fuel farm assets and return the premises to their original condition.In connection with the termination of the New Port Columbus Lease, the Authority required thatAirNet conduct an environmental assessment of the Port Columbus Facility, including the undergroundstorage tanks associated with AirNet’s fuel farm operation. The objective of the environmental assessmentwas to determine and quantify any environmental impact AirNet’s operations may have had at the PortColumbus Facility. The results of the environmental sampling demonstrated concentrations above theregulatory limits for petroleum hydrocarbons and vinyl chloride in samples associated with one ofthree oil-water separators located in the hanger portion of the Port Columbus Facility. AirNetcompleted certain remedial work in connection with the pollution conditions in March of 2006. Asof December 31, 2005,
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AirNet had an accrual of $0.2 million for such remedial environmental workand the work necessary to return the fuel farm premise to its original condition if the Authoritydoes not take title to the fuel farm assets, as discussed above.AirNet also operates at approximately 40 additional locations throughout the country. Theselocations, which are leased from unrelated third parties, generally include office space and/or asection of the lessor’s hangar or ramp.**Fleet***Cargo aircraft*The following table shows information about AirNet’s cargo aircraft fleet used in its DeliveryServices reportable segment as of December 31, 2005. AirNet’s cargo aircraft have been modifiedfor cargo use and contain no passenger seats and interiors to provide maximum payload.                     Aircraft Type Owned  Leased (1)  Payload (2)  Range (3)  Speed (4) Learjets, Model 35/35A  30   —   3,800   1,700   440 Cessna Caravans  7   7   3,400   825   170 Piper Navajo  18   —   1,500   800   170 Beech Baron  40   —   1,000   800   170 Cessna 310  9   —   900   800   170                    Total  104   7              (1) AirNet entered into a one-year lease for an additional Cessna Caravan in February 2006, which increased the total to 8 leased aircraft. (2) Maximum payload in pounds for a one-hour flight plus required fuel reserves. (3) Maximum range in nautical miles, assuming zero wind, full fuel and maximum payload. (4) Maximum speed in knots, assuming maximum payload.The Learjet 35 is among the fastest and most reliable small jet aircraft available in the worldand meets all Stage Three noise requirements currently being implemented across the United States.The Cessna Caravan Super Cargomaster aircraft is a turbo-prop aircraft.The Piper Navajo, Beech Baron and Cessna 310 are twin-engine piston aircraft. In February 2006,AirNet decided to market for sale all nine of the Cessna 310 aircraft it owns.*Passenger Charter aircraft*The following table shows information about Jetride’s Passenger Charter aircraft fleet as ofDecember 31, 2005:                     Aircraft Type Owned  Managed  Seating (1)  Range (2)  Speed (3) Learjets, Model 35A  3   —   7 - 8   1,700   440 Learjets, Model 31A  —   1   7 - 8   1,200   440 Learjets, Model 60  6   4   7 - 8   2,300   440                    Total  9   5              (1) Maximum number of passengers is 8 (2) Maximum range in nautical miles, assuming zero wind, full fuel and full payload. (3) Maximum speed in knots, assuming full payloadThe Learjet is a midsize business jet with transcontinental range and meets all Stage Three noise requirements.*Vehicles*AirNet operated a fleet of approximately 50 ground transportation vehicles as of December 31, 2005.Vehicles range in size from passenger cars to full sized vans. AirNet also rents lightweighttrucks for certain weekend ground routes. In 2001, AirNet entered into a leasing agreement with athird party provider and began replacing owned vehicles with leased vehicles
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as replacement became necessary. AirNet leased approximately 20 of the 50 vehicles it operated as of December 31, 2005.In addition to the ground transportation vehicles it operates, AirNet operates approximately 25vehicles not licensed for road use, including fuel trucks and tugs.**ITEM 3 — LEGAL PROCEEDINGS**In July 2005, AirNet received a letter from an attorney representing an association of softwarepublishers indicating that the association had evidence that AirNet had engaged in the unlawfulinstallation and use of certain software products. At the request of the association’s attorney,AirNet conducted a company wide review of its use of software published by members of theassociation. The internal review did not disclose any unauthorized installation or use of suchsoftware and the results of the review were submitted to the association’s attorney. The attorneyfor the association subsequently requested certain supplemental information regarding AirNet’ssoftware usage, which AirNet has supplied to the attorney for the association. AirNet believesthat it is in compliance with all software licensing requirements and that it has not engaged inany unlawful use of the software published by the association’s members.AirNet uses the services of independent contractors as couriers to pick up and deliver itspackages. During 2004, the California Employment Development Department (the “EDD”) concluded anemployment tax audit of AirNet’s operations in California. As a result of its audit, the EDDconcluded that certain independent contractors used by AirNet should be reclassified as employees.Based upon such reclassification, the EDD proposed a $53,061 assessment against AirNet underSection 1127 of the California Unemployment Insurance Code. After receipt of the proposedassessment, AirNet filed a Petition for Reassessment with the California Unemployment InsuranceAppeals Board. Since the filing of the Petition for Reassessment, AirNet has submitted furtherdocumentation to the EDD to reduce the assessment based upon employment taxes paid directly to theState of California by the affected independent contractors. No hearing has been scheduled withregard to AirNet’s Petition for Reassessment.Other than the items noted above, there are no pending legal proceedings involving AirNet and itssubsidiaries other than routine litigation incidental to their respective business. In the opinionof AirNet’s management, these proceedings should not, individually or in the aggregate, have amaterial adverse effect on AirNet’s results of operations or financial condition.**ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**(a) The Annual Meeting of Shareholders (the “2005 Annual Meeting”) of AirNet Systems, Inc. washeld on December 16, 2005. The number of common shares of AirNet Systems, Inc. outstanding andentitled to vote at the 2005 Annual Meeting was 10,149,205. The number of common sharesrepresented in person or by proxy at the 2005 Annual Meeting was 9,500,436.(b) Directors elected at the 2005 Annual Meeting for terms expiring at the 2006 Annual Meetingof Shareholders:     Joel E. Biggerstaff    For:  8,081,887 Withheld:  1,418,549      James M. Chadwick    For:  9,185,579 Withheld:  314,857      Russell M. Gertmenian    For:  6,991,050 Withheld:  2,509,386      Gerald Hellerman    For:  9,174,969 Withheld:  325,467      David P. Lauer    For:  8,010,101 Withheld:  1,490,335      Bruce D. Parker    For:  8,089,780 Withheld:  1,410,656      James E. Riddle    For:  8,089,780 Withheld:  1,410,656 
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(c) Matters voted upon at the 2005 Annual Meeting(i) See Item 4(b) for voting results for the election of directors.(d) Not applicable.**PART II****ITEM 5 — MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES**The common shares of AirNet Systems, Inc. traded on the New York Stock Exchange until January 24,2006. On January 25, 2006, the common shares of AirNet Systems, Inc. began trading on the AmericanStock Exchange under the symbol “ANS”. The table below sets forth the high and low sales prices ofthe common shares reported on the New York Stock Exchange for the periods indicated.                   2005  2004 Quarter ended High  Low  High  Low March 31 $4.75  $3.31  $4.99  $3.75 June 30  5.19   3.71   4.95   3.80 September 30  5.44   3.91   6.20   3.81 December 31  5.36   3.22   4.50   2.73 AirNet has not paid any dividends on its common shares and does not intend to pay any dividends inthe foreseeable future. AirNet anticipates using future earnings to finance operations and reducedebt.The payment of any future dividends on common shares will be determined by the AirNet Board ofDirectors in light of conditions then existing, including earnings, financial condition and capitalrequirements, restrictions in financing agreements, business conditions and other factors.On March 21, 2006, there were approximately 824 record holders of AirNet’s common shares.Neither AirNet nor any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the SecuritiesExchange Act of 1934, as amended, purchased any common shares of AirNet during the fourth quarterof the fiscal year ended December 31, 2005. On February 18, 2000, AirNet announced a stockrepurchase plan under which up to $3.0 million of AirNet common shares may be repurchased from timeto time. These repurchases may be made in open market transactions or through privately negotiatedtransactions. As of December 31, 2005, AirNet had the authority, subject to bank approval, torepurchase approximately $0.6 million of AirNet common shares under this stock repurchase plan.
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**ITEM 6 — SELECTED FINANCIAL DATA**                     **Statement of Operations Data**   (in thousands, except per share data) Years Ended December 31,   **2005**  2004  2003  2002  2001 **Net Revenues**                    Bank Services **$****113,748**  $106,117  $103,399  $102,626  $106,716 Express Services  **52,346**   49,096   36,963   33,958   26,252 Passenger Charter Services  **29,454**   18,494   7,599   4,316   737 Aviation Services and other  **865**   1,243   1,261   1,044   1,499  **Total net revenues**  **196,413**   174,950   149,222   141,944   135,204                       **Costs and Expenses**                    Operating costs and expenses (Note 1)  **182,620**   168,554   142,991   134,236   121,313 Impairment charges (Notes 2, 3 and 4)  **16,073**   47,009   —   —   1,744  **Total costs and expenses**  **198,693**   215,563   142,991   134,236   123,057  Income (loss) from operations  **(2,280****)**  (40,613)  6,231   7,708   12,147                      Interest expense  **4,066**   2,468   1,340   1,649   1,668  Income (loss) from continuing operationsbefore income taxes and cumulative effectof accounting change  **(6,346****)**  (43,081)  4,891   6,059   10,479  Provision (benefit) for income taxes  **(2,100****)**  (8,935)  2,103   2,429   5,035    **Income (loss) from continuing operations beforecumulative effect of accounting change**  **(4,246****)**  (34,146)  2,788   3,630   5,444                         **Loss from discontinued operations,net of taxes (Note 5)**  **—**   —   (8)  (259)  (251)                     Cumulative effect of accounting change, net oftax benefit (Note 6)  **—**   —   —   (1,868)  —  **Net income (loss)** **$****(4,246****)** $(34,146) $2,780  $1,503  $5,193                       Income (loss) per common share — basic and diluted                                         Continuing operations **$****(0.42****)** $(3.39) $0.28  $0.36  $0.51 Discontinued operations **$****—**  $—  $—  $(0.03) $(0.02)Cumulative effect of accounting change **$****—**  $—  $—  $(0.18) $—                 Net income (loss) **$****(0.42****)** $(3.39) $0.28  $0.15  $0.49                                      **Balance Sheet Data**                    (in thousands)                                         Total assets **$****123,293**  $137,470  $153,273  $147,324  $133,079 Total debt  **56,019**   62,245   37,776   41,794   28,235 Total shareholders’ equity  **46,379**   50,466   84,280   80,796   78,946 **Note 1** The year 2001 includes a $1.0 million non-recurring charge related to the retirement agreement of Gerald G. Mercer (see Note 7 — Related Party Transactions of the Notes to Consolidated Financial Statements included in “Item 8 — Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.) **Note 2** Represents 2005 charge related to the impairment of AirNet’s cargo assets (See Note 2 — Impairment of Property and Equipment and Goodwill of the Notes to Consolidated Financial Statements included in “Item 8 — Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.) **Note 3** Represents 2004 charge related to the impairment of AirNet’s cargo assets and related goodwill (See Note 2 — Impairment of Property and Equipment and Goodwill of the Notes to Consolidated Financial Statements included in “Item 8 — Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.) **Note 4** Represents 2001 non-recurring charge related to the impairment of Float Control, Inc.’s investment in The Check Exchange System Co. partnership. **Note 5** In August 2003, AirNet sold the assets of its Mercury Business Services unit, resulting in discontinued operations. **Note 6** Represents the effect of adopting Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”.
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**ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION****General**As a result of the continuing evolution of electronic alternatives to the physical movement ofcancelled checks and other market factors, AirNet’s Bank Services net revenues are expected todecline. This expected decline in Bank Services revenues requires that AirNet restructure itsexisting transportation network which was originally established to service its bank customers.AirNet continues to evaluate and adjust its aircraft mix and fleet size in response to thesechanging business conditions as well as review its ground operations for efficiencies and costreductions. In February 2006, AirNet decided to market for sale all nine of the Cessna 310 pistoncargo aircraft it operates as a result of the reduction in its required airline capacity.The following management’s discussion and analysis describes the principal factors affecting theresults of operations, liquidity and capital resources, as well as the critical accounting policiesof AirNet. This discussion should be read in conjunction with the accompanying auditedconsolidated financial statements, which include additional information about AirNet’s significantaccounting policies, practices and the transactions that underlie its financial results, and therisk factors described in “Item 1A – Risk Factors”.**Financial Overview**This financial overview contains certain non-GAAP financial data to show results of operationsexcluding charges for impairment of assets and goodwill. The company believes this information isuseful and informative to the readers in providing a complete view of AirNet’s operating results.**Selected Non-GAAP Financial Data**                             ***Dollarsin ‘000’s***                                      ***$ Increase***  ***% Increase***  ***$ Increase***  ***% Increase***               ***(Decrease)***  ***(Decrease)***  ***(Decrease)***  ***(Decrease)***   ***2005***  ***2004***  ***2003***  ***2004 to 2005***  ***2004 to 2005***  ***2003 to 2004***  ***2003 to 2004***    Income (loss) from operations **$****(2,280****)** $(40,613) $6,231  $38,333   *  $(46,844)  * Impairment charges  **16,073**   47,009   —   (30,936)  *   47,009   *                         Income from operations before impairmentcharges **$****13,793**  $6,396  $6,231  $7,397   116% $165   3%                                                     Net income (loss) **$****(4,246****)** $(34,146) $2,780  $29,900   *  $(36,926)  * Impairment charges — net of tax  **9,965**   31,026   —   (21,061)  *   31,026   *                         Net income (loss) before impairment charges **$****5,719**  $(3,120) $2,780  $8,839   283% $(5,900)  (212)%                                                     Net income(loss) per common share — basic anddiluted **$****(0.42****)** $(3.39) $0.28  $2.97   *  $(3.67)  * Impairmentcharges — net of tax - per common share  **0.98**   3.08   —   (2.10)  *   3.08   *                         Net income(loss) per common share beforeimpairment charges — basic and diluted **$****0.56**  $(0.31) $0.28  $0.87   281% $(0.59)  (211)%                         *** *The percentage increase (decrease) is not meaningful.*Excluding the non-cash impairment charges recognized in 2005 and 2004, income before taxes was$13.8 million for 2005 compared to $6.4 million for 2004. Loss before income tax benefit was $6.3million for the 2005, including $16.1 million for impairment of assets, compared to a loss beforeincome tax benefit of $43.1 million, including $47.0 million for impairment of assets and goodwill,for the same period last year.Excluding the non-cash impairment charges in each period, net income was $5.7 million ($0.56 percommon share) for 2005 compared to a net loss of $3.1 million ($0.31 per common share) for 2004.For 2005, the net loss was $ 4.2 million, ($0.42 per common share), including the $10.0 millionafter-tax ($0.98 per common share) charge for the impairment, versus a net loss of $34.1 million, ($3.39 per common share), including $31.0 million after-tax($3.08 per common share) charge for the impairment of assets and goodwill, for 2004.
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In 2005, Delivery Services experienced net revenue growth primarily due to the significant increasein fuel surcharge revenues. The impact of increased fuel surcharge revenues accounted for $10.3million, or 95%, of the total increase in Delivery Services revenues in 2005.In 2005, Passenger Charter Services experienced net revenue growth as a result of the increase inflight hours after AirNet invested in additional aircraft in 2004 to support passenger charterdemand. Jetride’s contribution margin decreased from$2.8 million in the first six months of 2005 to a contributionmargin shortfall of ($0.1) million in the last six months of 2005, primarily due to major aircraft maintenance performed on the Jetrideaircraft fleet, increased pilot travel and training expense, and increased fuel costs. Jetridecharges its customers a fuel surcharge per hour based upon current fuel prices which changesaccording to prevailing market rates. In the third and fourth quarters of 2005, Jetride did notrecover a substantial portion of the increased fuel costs because increases in fuel surcharges didnot keep pace with increased fuel costs.This financial overview contains certain non-GAAP financial data to show results of operationsexcluding charges for impairment of assets and goodwill. The company believes this information isuseful and informative to the readers in providing a complete view of AirNet’s operating results.**Results of Operations*****Net Revenues***                             ***Dollarsin ‘000’s***                                      ***$ Increase***  ***% Increase***  ***$ Increase***  ***% Increase***               ***(Decrease)***  ***(Decrease)***  ***(Decrease)***  ***(Decrease)*** ***Net Revenues*** ***2005***  ***2004***  ***2003***  ***2004 to 2005***  ***2004 to 2005***  ***2003 to 2004***  ***2003 to 2004***  Delivery Services Revenues, Net ofExcise Tax:                            Bank Services **$****113,748**  $106,117  $103,399  $7,631   7% $2,718   3%Express Services  **52,346**   49,096   36,963   3,250   7%  12,133   33%                        Total Delivery Services Revenues **$****166,094**  $155,213  $140,362   10,881   7%  14,851   11%Passenger Charter Services Revenues  **29,454**   18,494   7,599   10,960   59%  10,895   143%Aviation Services and Other Revenues  **865**   1,243   1,261   (378)  (30)%  (18)  (1)%                        **Total Net Revenues** **$****196,413**  $174,950  $149,222  $21,463   12% $25,728   17%                        Total net revenues have increased each of the last three years primarily due to additional fuelsurcharge revenues and growth in Passenger Charter Services revenues.AirNet generally assesses its Bank Services customers a fuel surcharge, which is based on the OilPrice Index Summary – Columbus, Ohio (OPIS-CMH index). As index rates increase above a setthreshold, surcharge rates increase. The 2005 average annual price on the OPIS index increasedapproximately 43% from the 2004 average annual price. The 2004 average annual price on the OPISindex increased approximately 17% from the 2003 annual price. AirNet assesses most of its ExpressServices customers a fuel surcharge which is based on the OPIS index, and is adjusted monthly. Inaddition, Jetride charges its customers a fuel surcharge per hour based upon current fuel priceswhich changes according to prevailing market rates.***Bank Services Revenues***                             ***Dollarsin ‘000’s***                                      ***$ Increase***  ***% Increase***  ***$ Increase***  ***% Increase***               ***(Decrease)***  ***(Decrease)***  ***(Decrease)***  ***(Decrease)*** ***Bank Services Revenues*** ***2005***  ***2004***  ***2003***  ***2004 to 2005***  ***2004 to 2005***  ***2003 to 2004***  ***2003 to 2004***  Bank Services Revenues **$****103,413**  $102,563  $101,914  $850   1% $649   1%Fuel Surcharge  **12,785**   6,058   3,939   6,727   111%  2,119   54%Federal Excise Tax  **(2,450****)**  (2,504)  (2,454)  54   2%  (50)  (2)%                        **Total Net Bank Services Revenues** **$****113,748**  $106,117  $103,399  $7,631   7% $2,718   3%                        Although there were 2 fewer flying days in 2005 compared to 2004, Bank Services revenuesincreased during 2005 primarily due to fuel surcharge revenues resulting from the approximate 43%increase in 2005 in the average annual price on the OPIS index. While pounds shipped per flyingday decreased by approximately 1% from 2004 to 2005, revenues per pound shipped increasedapproximately 2% from 2004 to 2005 as a result of rate increases on Bank Services.
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As banks transition to other alternatives to the physical movement of checks, certain banks cancelledselected AirNet services as reflected by the following events: in the second quarter of 2005,certain Bank Services customers terminated agreements to transport cancelled checks from theWestern U.S. to various points in the East; in the fourth quarter of 2005, AirNet received noticefrom a major bank customer that the customer intended to terminate a certain portion of the airtransportation services provided by AirNet effective March 3, 2006; on January 9, 2006, AirNetreceived notice from a bank customer that the customer intended to terminate a substantial portionof the air transportation services provided by AirNet, effective March 3, 2006; and, during 2005,other small Bank Services customers terminated or reduced air transportation services provided byAirNet.In response to the loss in revenue from its Western U.S. routes, AirNet negotiated price increaseswith several of its Bank Services customers, primarily those requiring transportation services fromthe Eastern portions of the U.S. to the West, which generally took effect in June 2005. Theseprice increases substantially replaced the contribution margin which was lost due to thetermination of the Bank Services in the second quarter of 2005 discussed above. AirNet continues to evaluate its operational structureand associated costs to more closely align them with the expected volume and revenue changes.However, given the high fixed cost nature of AirNet’s national airline network, it will becomeincreasingly difficult to reduce costs in proportion to decreases in Bank Services revenues.AirNet continues to modify its pricing for bank customers and the contracts under which bankservices are provided. AirNet’s bank contracts historically did not provide any revenue or volumeguarantees, limited AirNet’s ability to institute price increases during the contract term, andoften authorized a bank to terminate its contract for convenience. Commencing in fiscal year 2004,AirNet began introducing bank pricing that contained both fixed fee and per pound pricingcomponents that would be impacted to a lesser degree by decreasing volume. In anticipation ofadditional requests from banks to reduce services, in 2005 AirNet began implementing bank contractsthat contain primarily fixed fee pricing and require a bank to provide AirNet with 90 days advancenotice prior to cancelling services. AirNet’s more recent bank contracts also provide AirNet withthe right to propose price increases upon 90 days notice during the contract term and contain moremutual termination rights. Advance notification of service cancellations will provide AirNet withthe opportunity to analyze the impact of such service losses and discuss route and pricing changeswith its remaining bank customers.AirNet continues to focus on additional services for banks, such as proof of deposit andinteroffice mail delivery services, which provide additional revenue but at lower yields thanAirNet’s traditional cancelled check business.Revenue yields per pound are similar for Bank and Express shipments; however, because the densityof cancelled check shipments is much greater than the typical Express shipment, contributionmargins on Bank shipments are substantially higher than Express shipments after considering thecubic dimension of shipments. Furthermore, due to the unscheduled nature of Express shipments,pick-up and delivery costs per shipment are higher for Express shipments than Bank shipments.AirNet believes that lower check delivery volume as a result of the declining use of checks andelectronic alternatives to the physical movement of cancelled checks will contribute to asignificant reduction in Bank Services revenues and the contribution margin from Delivery Servicesin future periods. As Bank Services revenues decline, it will be necessary to reduce AirNet’sairline capacity because Express Services contribution margins are insufficient to support theoperation of AirNet’s airline as presently configured.There were 2 more flying days in 2004 compared to 2003. Bank Services revenues increased during2004 as compared to 2003 primarily due to fuel surcharge revenues resulting from the approximate17% increase in the average annual price on the OPIS index in 2004. From 2003 to 2004, revenuesper pound shipped increased approximately 6%.***Express Services Revenues***                             ***Dollarsin ‘000’s***                                      ***$ Increase***  ***% Increase***  ***$ Increase***  ***% Increase***               ***(Decrease)***  ***(Decrease)***  ***(Decrease)***  ***(Decrease)*** ***Express Services Revenues*** ***2005***  ***2004***  ***2003***  ***2004 to 2005***  ***2004 to 2005***  ***2003 to 2004***  ***2003 to 2004***  Express Revenues — Non Charter **$****33,924**  $34,890  $28,035  $(966)  (3)% $6,855   24%Express Revenues — Charters  **14,314**   13,557   9,046   757   6%  4,511   50%Fuel Surcharge  **5,712**   2,142   1,007   3,570   167%  1,135   113%Federal Excise Tax  **(1,604****)**  (1,493)  (1,125)  (111)  (7)%  (368)  (33)%                        **Total Net Express Services Revenues** **$****52,346**  $49,096  $36,963  $3,250   7% $12,133   33%                        Express Revenues – Non Charter represent revenues AirNet derives from shipments on AirNet’sairline, commercial airlines and point-to-point surface (ground only) shipments. The total numberof Non Charter Express shipments decreased approximately 8% from 2004 to 2005 as a result of theloss of certain Express Services customers and reduced shipment volume by other Express Servicescustomers. The number of Non Charter Express shipments transported on AirNet’s airline decreasedapproximately 12% in 2005 compared to 2004 while these shipments increased approximately 2% in2004
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compared to 2003. Revenues per shipment increased approximately 5% from 2004 to 2005 primarily as a result of theincrease in fuel surcharge revenues.Express Revenues – Charters represent revenues AirNet derives from cargo charters transported onAirNet’s airline and on aircraft operated by other third parties. Charter revenues have increaseddue to a significant increase in the number of charters, primarily for radioactive pharmaceuticalcustomers. AirNet expects Express charter revenues to decrease in 2006 as compared to 2005primarily as a result of the loss of certain entertainment industry charters due to changes in thedistribution methods in that industry.Higher fuel prices during 2005 and changes to the fuel surcharge program instituted in October2004 resulted in significantly higher fuel surcharge revenues for 2005.The increase in revenues from 2003 to 2004 was primarily due to a significant increase in thenumber of charters, primarily for life sciences customers. The total number of Non CharterExpress shipments increased approximately 9% from 2003 to 2004. Revenues from point-to-pointsurface shipments increased approximately $3.1 million for the fiscal year 2004 compared to thefiscal year 2003. Revenues per shipment increased approximately 14% from 2003 to 2004.***Passenger Charter Services Revenues***                             ***Dollarsin ‘000’s***                                      ***$ Increase***  ***% Increase***  ***$ Increase***  ***% Increase***               ***(Decrease)***  ***(Decrease)***  ***(Decrease)***  ***(Decrease)*** ***Passenger Charter Services Revenues*** ***2005***  ***2004***  ***2003***  ***2004 to 2005***  ***2004 to 2005***  ***2003 to 2004***  ***2003 to 2004***  Passenger Charter services revenues **$****26,482**  $17,112  $7,521  $9,370   55% $9,591   128%Management fee revenues  **1,131**   703   67   428   61%  636   * Fuel surcharge  **1,894**   664   —   1,230   185%  664   * Federal Excise Tax  **(53****)**  15   11   (68)  *   4   36%                        **Total Passenger CharterServices Revenues** **$****29,454**  $18,494  $7,599  $10,960   59% $10,895   143%                        Average annual number of ownedaircraft  9.0   8.9   6.0                 Average annual number of managedaircraft  5.9   4.3   1.2                  *** *The percentage increase (decrease) is not meaningful.*Passenger Charter Services derives its revenues primarily from passenger charter brokers andother companies that provide fractional aircraft ownership programs and card membership programs.Passenger Charter Services revenues grew as a percentage of total revenues during 2005, afterAirNet invested in additional aircraft in 2004 to support passenger charter demand. PassengerCharter Services revenues increased from 11% of total revenues in 2004 to 15% of total revenues in2005. Flight hours for Passenger Charter Services increased approximately 45% from 2004 to 2005and increased approximately 113% from 2003 to 2004. AirNet’s Passenger Charter Services revenuesinclude revenue from both owned and managed aircraft. Management fee revenues generally include amonthly fee and a specific percentage of revenues earned under each managed aircraft agreement.At December 31, 2005, AirNet’s Passenger Charter fleet consisted of fourteen passenger Learjets,nine owned aircraft and five aircraft that were managed for other owners, compared to fifteenaircraft at December 31, 2004 and nine aircraft at December 31, 2003. Jetride also operated 2passenger Challenger aircraft for approximately seven months in 2005 as compared to approximately 3months in 2004.***Aviation Services and Other Revenues***Aviation services revenues primarily relate to AirNet’s fixed base operation services providedin Columbus, Ohio.Approximately $0.4 million of other revenues in 2004 relate to royalty revenue earned from theinstallation by a third party of Reduced Vertical Separation Minimum (“RVSM”). No significantroyalty revenue is expected in future years.
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***Costs and Expenses***                             ***Dollarsin ‘000’s***                                      ***$ Increase***  ***% Increase***  ***$ Increase***  ***% Increase***               ***(Decrease)***  ***(Decrease)***  ***(Decrease)***  ***(Decrease)*** ***Operating Costs and Expenses*** ***2005***  ***2004***  ***2003***  ***2004 to 2005***  ***2004 to 2005***  ***2003 to 2004***  ***2003 to 2004***  Wages and benefits **$****24,469**  $24,823  $23,297  $(354)  (1)% $1,526   7%Aircraft fuel  **34,487**   26,865   19,227   7,622   28%  7,638   40%Aircraft maintenance  **22,521**   15,086   12,242   7,435   49%  2,844   23%Contracted air costs  **14,587**   13,813   9,929   774   6%  3,884   39%Ground courier  **31,610**   30,285   25,834   1,325   4%  4,451   17%Depreciation  **14,714**   19,513   17,535   (4,799)  (25)%  1,978   11%Insurance, rent and landing fees  **9,625**   10,115   9,895   (490)  (5)%  220   2%Travel, training and other  **10,929**   9,359   8,003   1,570   17%  1,356   17%Selling, general and administrative  **19,837**   18,661   17,032   1,176   6%  1,629   10%Net (gain) loss on disposition of assets  **(159****)**  34   (3)  (193)  *   37   *                         Operating costs and expenses beforeimpairment charges  **182,620**   168,554   142,991   14,066   8%  25,563   18%Impairment of property and equipment  **16,073**   42,991   —   (26,918)  *   42,991   * Impairment of goodwill  **—**   4,018   —   (4,018)  *   4,018   *                         **Total Costs and Expenses** **$****198,693**  $215,563  $142,991  $(16,870)  (8)% $72,572   51%                         *** *The percentage increase (decrease) is not meaningful.*Total costs and expenses for Passenger Charter Services increased from $15.6 million in 2004 to$26.7 million in 2005 as operating activities for Passenger Charter Services increased. Excludingthe impact of the impairment charges as described below, the increase in the total costs andexpenses of Passenger Charter Services from 2004 to 2005 accounted for approximately $11.1 million,or 79%, of the overall increase in operating costs and expenses. Flight hours increasedapproximately 45% for Passenger Charter Services from 2004 to 2005. In addition, costs andexpenses increased due to additional aircraft fuel, aircraft maintenance, and contracted air costs tosupport AirNet’s Delivery and Passenger Charter Services.The increase in the use of Passenger Charter Services from 2003 to 2004 accounted forapproximately $9.4 million, or 37%, of the overall increase in operating costs and expensesbefore impairment charges. Flight hours for Passenger Charter Services increased 113% from 2003to 2004. In addition, costs and expenses increased due to increased hours flown, service andsupport costs associated with the increase in the use of Express Services and additional aircraftfuel, aircraft maintenance and contracted air costs to support AirNet’s Bank customers.The increase in wages and benefits from 2003 to 2004 was substantially due to the increase in thenumber of Passenger Charter pilots and support staff.                             ***Dollarsin ‘000’s***                                      ***$ Increase***  ***% Increase***  ***$ Increase***  ***% Increase***               ***(Decrease)***  ***(Decrease)***  ***(Decrease)***  ***(Decrease)*** ***Aircraft Fuel*** ***2005***  ***2004***  ***2003***  ***2004 to 2005***  ***2004 to 2005***  ***2003 to 2004***  ***2003 to 2004***  Delivery Services aircraft fuel **$****27,629**  $23,212  $18,045  $4,417   19% $5,167   29%Passenger Charter Services aircraft fuel  **6,858**   3,653   1,182   3,205   88%  2,471   209%                        **Total Aircraft fuel** **$****34,487**  $26,865  $19,227  $7,622   28% $7,638   40%                        
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                                           ***Increase***  ***% Increase***  ***Increase***  ***% Increase***               ***(Decrease)***  ***(Decrease)***  ***(Decrease)***  ***(Decrease)*** ***Hours Flown*** ***2005***  ***2004***  ***2003***  ***2004 to 2005***  ***2004 to 2005***  ***2003 to 2004***  ***2003 to 2004*** **Hours Flown — Total**  **103,653**   107,344   103,660   (3,691)  (3)%  3,684   4%                          Aircraft fuel expense increased $7.6 million, or 28%, from 2004 to 2005, as a result ofsignificantly higher fuel prices. The 2005 average annual price on the OPIS index increasedapproximately 43% from the 2004 average annual price. Offsetting a portion of the $4.3 millionincrease in Delivery Services fuel expense was the approximate 6% decrease in hours flown.Approximately $3.3 million, or 43%, of the increase related to the passenger charter fleet with a45% increase in passenger charter hours flown over 2004. Fuel expense for owned passenger charteraircraft increased $1.2 million from 2004 to 2005. Aircraft fuel expense for managed passengercharter aircraft, which is reimbursed by the aircraft’s owner, increased $2.1 million from 2004 to2005. Amounts collected for fuel surcharges are classified as revenues.Fuel surcharges related to AirNet and Jetride operated aircraft increased approximately $9.3million, or 105%, from 2004 to 2005 as a result of the significant increase in fuel prices in 2005.Of the increase, approximately $8.1 million was for Delivery Services, while $1.2 million was forPassenger Charter Services, of which $.7 million corresponded to managed aircraft. In the third andfourth quarters of 2005, Jetride did not recover a substantial portion of the increased fuel costsbecause increases in fuel surcharges did not keep pace with increased fuel costs. The increases in2004 compared to 2003 are primarily due to the increase in fuel prices and the additional passengercharter hours flown. The 2004 average annual price on the OPIS index increased approximately 17%from the 2003 average annual price. AirNet expects fuel prices, and corresponding fuel surchargesto remain at 2005 levels in 2006.                             ***Dollarsin ‘000’s***                                      ***$ Increase***  ***% Increase***  ***$ Increase***  ***% Increase***               ***(Decrease)***  ***(Decrease)***  ***(Decrease)***  ***(Decrease)*** ***Aircraft Maintenance*** ***2005***  ***2004***  ***2003***  ***2004 to 2005***  ***2004 to 2005***  ***2003 to 2004***  ***2003 to 2004***  Delivery Services aircraft maintenance **$****16,900**  $12,969  $11,435  $3,931   30% $1,534   13%Passenger Charter Services:                            Owned aircraft **$****2,254**  $901  $200  $1,353   150% $701   351%Managed aircraft  **3,367**   1,216   607   2,151   177%  609   100%                        TotalPassenger Charter Services aircraft maintenance **$****5,621**  $2,117  $807  $3,504   166% $1,310   162%                        **Total Aircraft Maintenance** **$****22,521**  $15,086  $12,242  $7,435   49% $2,844   23%                        Total aircraft maintenance expense increased approximately $7.4 million, or 49%, from 2004 to2005. Approximately $3.5 million, or 47%, of such increase related to the passenger charter fleetand primarily coincided with the increase in flight hours. Aircraft maintenance expense for ownedpassenger charter aircraft increased $1.4 million from 2004 to 2005. Aircraft maintenance expensefor managed passenger charter aircraft, which is reimbursed by the aircraft’s owner, increased $2.1million from 2004 to 2005. Aircraft maintenance is primarily based on pre-determined inspectionintervals determined by usage, hours flown, cycles and the number of aircraft take-offsand landings. Consequently, high use, older aircraft such as those in AirNet’s cargo fleetrequires greater maintenance than lower use, newer aircraft.The increase in cargo fleet maintenance expense primarily reflects the age of AirNet’s cargo fleet,including Learjets, which averaged approximately 24 years in service at the end of 2005. Given theage of the Delivery Services aircraft and the recent impairment charge taken on September 30, 2005,management determined that none of the major maintenance expenditures incurred during the fourth quarter of2005, with the exception of engine maintenance, extended the useful life of the Delivery Servicesaircraft. Consequently, such expenditures were charged to aircraft maintenance expense. AirNetdoes not expect to make any capital additions to the Delivery Services aircraft fleet, with theexception of certain engine repairs and improvements and paymentsunder manufacturer engine maintenance plans, in 2006.Maintenance expense increased $2.8 million, or 23%, from 2003 to 2004 primarily due to theexpansion of the Passenger Charter fleet, including managed aircraft, and an increase in flighthours for the Passenger Charter fleet and cargo fleet Learjets.***Contracted Air Costs***Contracted air costs include expenses associated with shipments transported on commercialairlines and costs to third- party air operators for subcontracted air routes and back-up charterservices. Back-up and subcontracted charter expenses
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increased approximately 19% from 2004 to 2005 as AirNet increased the outsourcing of routes to third-party providers. Commercial airline costsdecreased approximately 9% from 2004 to 2005 primarily due to the approximate 12% decrease inExpress Services shipments transported on commercial airlines. Commercial airline costs increased21% from 2003 to 2004 primarily due to the increase in Express shipments transported on commercialairlines.                             ***Dollarsin ‘000’s***                                      ***Increase***  ***% Increase***  ***Increase***  ***% Increase***               ***(Decrease)***  ***(Decrease)***  ***(Decrease)***  ***(Decrease)*** ***Ground Courier Costs*** ***2005***  ***2004***  ***2003***  ***2004 to 2005***  ***2004 to 2005***  ***2003 to 2004***  ***2003 to 2004***  Company courier costs **$****4,478**  $6,091  $8,267  $(1,613)  (26)% $(2,176)  (26)%Contracted courier costs  **27,132**   24,194   17,567   2,938   12%  6,627   38%                        **Total Ground Courier Costs** **$****31,610**  $30,285  $25,834  $1,325   4% $4,451   17%                        Percentage of Delivery Servicesrevenue, excluding fuel surchargeand federal excise tax  **23****%**  22%  20%                Ground courier costs increased in 2005 as a result of higher costs per shipment, partially as aresult of increased fuel costs that are passed through to AirNet from its contracted groundcouriers. Ground courier costs also increased in 2005 in part as a result of an increase in shipments transported via point-to-point surface, whichtypically involve higher shipment weights and delivery distances. AirNet’s Express customers aremore costly to serve than the traditional Bank customer due to more unscheduled pick-up anddelivery services and more geographically dispersed locations.                             ***Dollarsin ‘000’s***                                      ***$ Increase***  ***% Increase***  ***$ Increase***  ***% Increase***               ***(Decrease)***  ***(Decrease)***  ***(Decrease)***  ***(Decrease)*** ***Depreciation Expense*** ***2005***  ***2004***  ***2003***  ***2004 to 2005***  ***2004 to 2005***  ***2003 to 2004***  ***2003 to 2004***  Aircraft **$****1,791**  $4,031  $2,613  $(2,240)  (56)% $1,418   54%Aircraftimprovements, engines, inspections  **11,626**   14,401   13,687   (2,775)  (19)%  714   5%Leasehold improvements, computers,furniture, fixtures, and equipment  **1,297**   1,081   1,235   216   20%  (154)  (12)%                        **Total Depreciation** **$****14,714**  $19,513  $17,535  $(4,799)  (25)% $1,978   11%                                                     **Total Delivery Services**                                                         **Depreciation** **$****10,829**  $16,565  $15,752  $(5,736)  (35)% $813   5%                                                     **Total Passenger Services**                                                         **Depreciation** **$****2,588**  $1,887  $548  $701   37% $1,339   244%                        Aircraft depreciation decreased in 2005 due to a reduction in aircraft values as a result ofthe impairment charge recorded on September 30, 2004 as discussed below. This decline waspartially offset by approximately $0.7 million of additional depreciation for 2005 related to theincrease in the number of operating hours flown by the passenger charter fleet. AirNet continuallyreviews the remaining useful life and expected salvage value of its aircraft in connection with itsdepreciation calculation. Aircraft engines are depreciated based on the number of hours flown.Non-aircraft related depreciation increased in 2005 primarily due to AirNet’s move to its newRickenbacker Facility in June 2005.***Insurance, Rent and Landing Fees***Insurance, rent and landing fees decreased in 2005 primarily as a result of the decrease inworkers’ compensation insurance expense generally attributable to a reduction in the number ofAirNet ground couriers.AirNet incurred increased insurance costs in 2004 compared to 2003 primarily as a result of theincrease in its Passenger Charter fleet size. Rent expense increased in 2004 and 2003 mainly due AirNet leasingadditional aircraft for both its Delivery Services and Passenger Charter services businesses.
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                             ***Dollarsin ‘000’s***                                      ***$ Increase***  ***% Increase***  ***$ Increase***  ***% Increase***               ***(Decrease)***  ***(Decrease)***  ***(Decrease)***  ***(Decrease)*** ***Travel, Training and Other*** ***2005***  ***2004***  ***2003***  ***2004 to 2005***  ***2004 to 2005***  ***2003 to 2004***  ***2003 to 2004***  Travel, training and other **$****10,929**  $9,359  $8,003  $1,570   17% $1,356   17%Less: Fees paid to managed aircraft owners  **2,502**   1,542   321   960   62%  1,221   380%                        **Total Travel, Training and Other,Net of Fees Paid to ManagedAircraft Owners** **$****8,427**  $7,817  $7,682  $610   8% $135   2%                        The fees paid by AirNet to managed aircraft owners under aircraft management agreements for theuse of the owners’ aircraft are included in travel, training and other expenses. The increase intravel, training and other expenses over the three year period is primarily due to the increase infees paid by Jetride to managed aircraft owners as a result of the significant increase in the useof managed aircraft by Passenger Charter Services. Jetride operated 2 Challengers for a portion offiscal year 2005. At December 31, 2005, Jetride managed five aircraft compared to six aircraft atDecember 31, 2004 and three aircraft at December 31, 2003. In addition, Jetride incurred anincrease in travel, training and other costs of $0.9 million in 2005 compared to 2004.***Selling, General and Administrative***Total selling, general and administrative costs increased approximately $1.2 million in 2005compared to 2004. The increase is primarily due to approximately $1.6 million of incentivecompensation expense recorded during 2005 under the 2005 Incentive Compensation Plan as a resultof higher pre-tax income, excluding the non-cash impairment charges. No incentive compensationwas recorded in 2004. Professional fees increased in 2005 due to AirNet’s engagement offinancial advisors and an investment banker in 2005 to review, develop and evaluate variousstrategic alternatives to enhance shareholder value. Offsetting the above increases weredecreases in commissions for Express Services as well as a decrease in advertising expense in2005 as compared to 2004.Selling, general and administrative costs increased from 2003 to 2004 due to increases incommissions for Express Services, including commissions for third-party air charter brokers, andtravel and advertising expense increases. Information technology expenses increased from 2003 to2004 to support the technological needs of AirNet’s business. Professional fees also increased in 2004 related toAirNet’s work on compliance with the Sarbanes-Oxley Act.AirNet continues to work toward identifying additional cost reduction opportunities and to createmore efficiency in its air transportation network.***Impairment Charges***AirNet recognizes impairment losses on long-lived assets in accordance with Statement ofFinancial Accounting Standards (SFAS) No. 144, “*Accounting for the Impairment or Disposal ofLong-Lived Assets*” (SFAS No. 144). AirNet recognizes impairment losses on long-lived assets whenevents or changes in circumstances indicate, in management’s judgment, that AirNet’s assets mightbe impaired and the undiscounted cash flows estimated to be generated by those assets are lessthan the carrying value of those assets. The net carrying value of the assets not recoverable isreduced to fair market value if lower than carrying value. In determining the fair market valueof the assets, AirNet considers market trends, published market data, recent transactionsinvolving sales of similar assets and, as discussed below, the letter of intent for the sale ofAirNet that was announced on October 26, 2005.On October 26, 2005, AirNet announced that it had entered into a letter of intent for its sale ina going private transaction at $4.55 per share. Since the price per share in the letter ofintent was less than AirNet’s net book value per share at the time, AirNet performed theimpairment tests required by SFAS No. 144 for the quarter ended September 30, 2005 and concludedthat its long-lived assets used in its Delivery Services segment were further impaired.Accordingly, a non-cash charge of $16.1 million ($10.0 million net of tax) was recorded as ofSeptember 30, 2005. The impairment charge was based upon the fair values of the long-livedassets in the Delivery Services segment derived from published sources, information provided by athird-party valuation firm retained to assist AirNet in completing its analysis, and the discountinherent in the price per share set forth in the letter of intent.AirNet’s long-lived assets used in its cargo operations, consisting primarily of aircraft andspare parts, were determined to be impaired as of September 30, 2004. This determination wasmade as a result of industry trends in the adoption of electronic payment alternatives andevolving electronic alternatives to the physical movement of cancelled checks at a more rapidpace than previously anticipated by the industry. AirNet’s cargo airline was originallydesigned, and continues to operate, primarily to meet the needs of Bank Services customers.AirNet determined that its airline capacity would exceed future demand, which created animpairment of the aircraft and related assets. The impairment also reflected the overall declinein the
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market values of the aircraft in its cargo fleet which had not recovered asin previous economic cycles. AirNet determined that the expected future undiscounted cash flowsfrom its assets used in its cargo operations were less than the carrying value of those assets andwere impaired. Accordingly, a non-cash impairment charge of $43.0 million was recorded as ofSeptember 30, 2004, using estimated aircraft fair market values. The aircraft fair values used forthis purpose were based upon published market sources as of September 30, 2004, which were usedunder AirNet’s Amended Credit Agreement described below under “Liquidity and Capital Resources”.Under SFAS No. 142, “Goodwill and Other Intangible Assets”, AirNet evaluates its goodwill forimpairment annually, or more frequently if changes in circumstances indicate impairment may haveoccurred sooner. At September 30, 2004, AirNet determined that as a result of the impairment ofits long-lived assets used in its Delivery Services operations, the remaining goodwill assigned tothe cargo operations should be evaluated for potential impairment. AirNet evaluated the fair valueof its goodwill related to its Delivery Services operations based upon a discounted future cashflow analysis. As a result of the impairment test, AirNet determined that its goodwill wasimpaired and, accordingly, a non-cash impairment charge of $4.0 million was recorded at September30, 2004.***Interest Expense******Dollars in ‘000’s***                                           ***Increase*** ***% Increase*** ***Increase*** ***% Increase***              ***(Decrease)*** ***(Decrease)*** ***(Decrease)*** ***(Decrease)***  ***2005*** ***2004*** ***2003*** ***2004 to 2005*** ***2004 to 2005*** ***2003 to 2004*** ***2003 to 2004***Interest expense **$****4,066**  $2,468  $1,340  $1,598   65% $1,128   84%Debt balances **$****56,019**  $62,245  $37,775  $(6,226)  (10)% $24,470   65%**Average annual interest rate**  **7.3****%**  6.3%  3.5%                Interest expense increased from 2004 to 2005 due to the higher amount of debt outstandingduring 2005 to finance the additions to the fleet of Passenger Charter aircraft and theRickenbacker Facility. Interest expense increased from 2003 to 2004 as AirNet increased its debtto finance additional aircraft for its Passenger Charter Services business.***Income Taxes******Dollars in ‘000’s***                                           ***Increase*** ***% Increase*** ***Increase*** ***% Increase***              ***(Decrease)*** ***(Decrease)*** ***(Decrease)*** ***(Decrease)***  ***2005*** ***2004*** ***2003*** ***2004 to 2005*** ***2004 to 2005*** ***2003 to 2004*** ***2003 to 2004****Income (loss) from continuing operations                            before income taxes **$****(6,346****)** $(43,081) $4,891  $36,735   85% $(47,972)    Provision (benefit) for income taxes  **(2,100****)**  (8,935)  2,103   (6,835)  (76)%  (11,038)    **Effective Income Tax Rate**  **33.1****%**  21.0%  43.0%                 *** *The percentage increase (decrease) from 2003 to 2004 is not meaningful.*AirNet’s effective tax rates, excluding the effect of discontinued operations, were 33% for2005, 21% for 2004, and 43% for 2003. The increase in the effectivetax rate from 2004 to 2005 was primarily due to a decrease in incometax expense from $5.7 million in 2004 to $0.6 million in 2005,attributable to the valuation allowance. The decrease in the effective tax rate from 2003 to 2004 wasprimarily due to the impact of the impairment charge of $47.0 million and the valuation allowancefor certain deferred tax assets. AirNet reviews its deferred tax assets in accordance with SFASNo. 109,”*Accounting for Income Taxes*”. As a result of this review, at December 31, 2005 and 2004,AirNet maintained a valuation allowance of $6.3 million and $5.7 million, respectively, to offsetdeferred tax assets associated with AirNet’s net operating loss carryforwards and alternativeminimum tax credit carryforwards as a result of the uncertainty surrounding AirNet’s ability torealize such assets.***Discontinued Operations***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 Delaware corporation owned by a groupthat included the original owners of the Mercury business.
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The sales price of the transaction was approximately $1.1 million. Mercury Business Services, Inc.paid approximately $455,000 of the sales price through the issuance of a ninety day promissory notesecured by the assets being sold and guaranteed by each of the shareholders of Mercury BusinessServices, 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 of Mercury BusinessServices, Inc., including 56,000 common shares tendered to AirNet prior to closing at $4.30 pershare (the closing price of the AirNet common shares on the New York Stock Exchange (“NYSE”) onJuly 25, 2003) and 68,494 common shares tendered to AirNet on the closing date at $4.31 per share(the average closing price of the AirNet common shares on the NYSE on August 4-6, 2003). Thebalance of the sales price was paid in cash.The Mercury Business Services unit had revenues for the year ended December 31, 2003, whichconsisted of the seven months prior to the sale, of $5.9 million. Pre-tax loss for AirNet’sMercury Business Services unit for the year ended December 31, 2003, which consisted of the sevenmonths prior to the sale, was $24,000.***Net Income (Loss) and Earnings (Loss) Per Share***Based on the factors noted above, AirNet’s net income (loss) and earnings (loss) per share,together with the related dollar amount and percentage changes are noted below.***Dollars in ‘000’s***                                           ***Increase***  ***% Increase***  ***Increase***  ***% Increase***               ***(Decrease)***  ***(Decrease)***  ***(Decrease)***  ***(Decrease)***   ***2005***  ***2004***  ***2003***  ***2004 to 2005***  ***2004 to 2005***  ***2003 to 2004***  ***2003 to 2004**** Income (loss) from continuing operations                            before income taxes **$****(6,346****)** $(43,081) $4,891  $36,735   85% $(47,972)    Provision (benefit) for income taxes  **(2,100****)**  (8,935)  2,103   (6,835)  (76)%  (11,038)    Gain from discontinued operations  **—**   —   (8)  —   —   8                            **Net Income (Loss)** **$****(4,246****)** $(34,146) $2,780  $29,900   (84)% $(36,926)                                                        Number of common shares outstanding:                            Basic  **10,133**   10,080   10,088   53   1%  (8)    Diluted  **10,153**   10,099   10,089   54   1%  10                                  Net income (loss) per common share:                            Basic and diluted **$****(0.42****)** $(3.39) $0.28                  *** *The percentage increase (decrease) is not meaningful.***Liquidity and Capital Resources**AirNet has historically met its working capital needs with cash flows from operations and borrowingunder its credit facilities. Cash flows from operations were $24.5 million for 2005, $20.4 millionfor 2004, and $27.8 million for 2003.The following table sets forth AirNet’s contractual obligations, along with the cash payments dueeach period (in millions):                           Payments Due by Period        Less than 1-3 3-5 More than 5  Total 1 year years years yearsContractual Obligations:                    Long-term Debt $56.0  $3.9  $29.0  $5.2  $17.9 Operating Leases  2.3   0.6   0.3   0.2   1.2 Other Purchase and Payment Obligations  12.0   12.0   0.0   0.0   0.0  Total Contractual Cash Obligations $70.3  $16.5  $29.3  $5.4  $19.1  AirNet has certain future purchase obligations as to which it has signed contracts. Approximately85% of AirNet’s Learjet 35 aircraft engines and all of AirNet’s Learjet 60 aircraft engines arecovered under manufacturer engine maintenance plans, under which AirNet prepays certain repair andoverhaul costs based on a rate per engine hour. Based upon projected engine hours in 2006, AirNetestimates payments under the engine maintenance plans to be approximately $12.0 million.
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AirNet anticipates that cash flows from operations and AirNet’s bank credit facility will provideadequate sources of liquidity and capital resources to meet AirNet’s expected needs for theoperation of its business, including anticipated capital expenditures; however, AirNet may not haveadditional capital to pursue other strategic alternatives.There were no significant capital commitments at December 31, 2005.Following is a summary of AirNet’s capital expenditures (in millions) for 2003 through 2005 andexpected amounts for 2006:                   2006  2005  2004  2003 Aircraft $0  $0.0  $21.1  $6.7 Aircraft improvements, engines and inspections  12.5-15.0   13.4   21.8   16.5 Rickenbacker Facility, technology and other  .5-1.0   4.3   8.3   2.0              Total $13.0-$16.0  $17.7  $51.2  $25.2              Costs of major overhauls and engine work which are expected to extend the useful life of therelated asset are capitalized as incurred and depreciated based on hours flown. The original costof airframes less a salvage value is depreciated based on the straight-line method over theestimated remaining useful life of the aircraft. Aircraft maintenance costs not meeting AirNet’scapitalization requirements are expensed as incurred. In 2005, the engines of approximately 85% ofAirNet’s Learjet 35 aircraft and all of AirNet’s Learjet 60 aircraft engines were covered undermanufacturer engine maintenance plans, under which AirNet prepays certain repair and overhaulcosts. These prepayments, which totaled approximately $20.0 million at December 31, 2005(approximately $19.3 million at December 31, 2004), are classified in fixed assets on theConsolidated Balance Sheets. Amortization on these prepaid balances does not begin until majorengine overhaul services have been performed, at which time the prepaid balances are reclassifiedinto depreciable asset categories and depreciated based on hours flown.In September 2002, AirNet entered into a $35.0 million unsecured revolving credit facility and afive-year $20.0 million unsecured term loan (collectively, the “Credit Agreement”). The term loanrequired quarterly installments of $1.0 million beginning in December 2002 and continuing throughSeptember 30, 2007. The revolving credit facility under the Credit Agreement was originallyscheduled to expire on September 30, 2005 and the secured term loan was to mature on September 30,2007.On May 28, 2004, AirNet and its lenders amended the terms and conditions of the Credit Agreement(the “Amended Credit Agreement”). The Amended Credit Agreement was further amended by the First,Second, Third and Fourth Change in Terms Agreements as described below. The Amended CreditAgreement is secured by a first lien on all of the property of AirNet and its subsidiaries, otherthan any interest in real estate and certain excluded fixed assets. AirNet also pledged the stockand interests of its subsidiaries to secure the loans under the Amended Credit Agreement, and eachof AirNet’s subsidiaries guaranteed AirNet’s obligations under the Amended Credit Agreement. TheAmended Credit Agreement permits AirNet and its subsidiaries to incur other indebtedness for thepurpose of purchasing or refinancing aircraft and related tangible fixed assets, subject to certainannual limitations. The Amended Credit Agreement contains limitations on operating leases,indebtedness, significant corporate changes including mergers and sales of assets, investments insubsidiaries and acquisitions, liens, capital expenditures, transactions with affiliates, sales ofaccounts receivable, sale and leaseback transactions and other off-balance sheet liabilities,contingent obligations and hedging transactions. The Amended Credit Agreement also contains certainfinancial covenants that require AirNet to maintain a minimum consolidated tangible net worth andto not exceed certain fixed charge coverage and leverage ratios specified in the Amended CreditAgreement.The Amended Credit Agreement provided for a secured revolving credit facility of up to $35.0million and a secured term loan in the aggregate amount of $14.0 million. The amount of revolvingloans available under the Amended Credit Agreement is limited to a borrowing base equal to theaggregate of 80% of eligible accounts receivable, plus 50% of eligible aircraft parts, plus 70% ofthe market value of certain fixed assets, reduced by the aggregate amount of AirNet’s outstandingletters of credit. The Amended Credit Agreement bears interest, at AirNet’s option, at (a) a fixedrate equal to LIBOR plus a margin determined by AirNet’s leverage ratio as defined in the AmendedCredit Agreement, or (b) a floating rate based on the greater of (i) the prime rate established byThe Huntington National Bank from time to time plus a margin determined by AirNet’s leverage ratio or (ii) the sum of 0.5% plus the federal funds rate ineffect from time to time plus a margin determined by AirNet’s leverage ratio. At December 31,2005, as a result of the various timing and duration of short-term debt maturities, AirNet’sinterest rates ranged from 4.5% to 6.5%.As of December 31, 2005, $16.5 million was outstanding under the secured revolving credit facilitywhich is included in “Notes payable, less current portion” in the Consolidated Balance Sheet. Inaddition, AirNet had $1.4 million in letters of credit outstanding as of such date related toinsurance programs, which reduced the amount available under the revolving credit facility. Aftergiving effect to the Fourth Change in Terms Agreement discussed below, AirNet had approximately$7.1 million available to borrow under its secured revolving credit facility under the AmendedCredit Agreement as of December 31, 2005.
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As a result of the impairment charges recorded in September 2004 as described in Note 2 of theNotes to Consolidated Financial Statements, AirNet was not in compliance with certain terms of theAmended Credit Agreement, including the fixed charge coverage ratio and the leverage ratiocalculated as of September 30, 2004, and AirNet would not have been in compliance with the minimumconsolidated tangible net worth requirement as of December 31, 2004. On November 12, 2004, AirNetand its lenders under the Amended Credit Agreement agreed to modify the terms and conditions of theAmended Credit Agreement (the “First Change in Terms Agreement”). The First Change in TermsAgreement modified the fixed charge coverage ratio, the leverage ratio, and the minimumconsolidated tangible net worth financial covenants in such a manner that, on a going-forwardbasis, the September 2004 impairment charges, in and of themselves, would not cause a default ofthese financial covenants in the future. At the same time as the First Change of Terms Agreementwas entered into, AirNet and its lenders executed a waiver of any defaults or potential defaultsunder the Amended Credit Agreement which occurred, or may have occurred, as a result of AirNet’sfailure to comply with the foregoing financial covenants due to the September 2004 impairmentcharges.On March 24, 2005, AirNet and its lenders entered into a “Second Change in Terms Agreement” thatfurther modified the terms and conditions of the Amended Credit Agreement. In accordance with theSecond Change in Terms Agreement, AirNet prepaid in full the remaining $11.0 million balanceoutstanding on its secured term loan. Upon the prepayment of the term loan, the term loan portionof the Amended Credit Agreement was terminated. In addition, the revolving credit facility underthe Amended Credit Agreement was reduced from $35.0 million to $30.0 million. In the event AirNetsecured permanent financing on all or a portion of its Rickenbacker Facility, the revolving creditfacility was to be reduced from $30.0 million to $25.0 million. Under the Second Change in TermsAgreement, the term of the revolving credit facility was extended from September 30, 2005 toOctober 15, 2006. The December 31, 2004 Consolidated Balance Sheet gives effect to the SecondChange in Terms Agreement entered into on March 24, 2005. The Second Change in Terms Agreementalso provided for the release of certain fixed assets that were securing the loans under theAmended Credit Agreement and modified certain other financial covenants.On March 24, 2005, AirNet entered into a three-year term loan totaling $11.0 million with a fixedinterest rate of 8.12%. This term loan is secured by seven Cessna Caravans and nine Learjet 35’sfrom AirNet’s cargo aircraft fleet. The aircraft securing this loan were released from thecollateral securing the loans under Amended Credit Agreement in accordance with the Second Changein Terms Agreement. The proceeds from this term loan were used to prepay in full AirNet’s termloan under the Amended Credit Agreement as described above. The December 31, 2004 ConsolidatedBalance Sheet reflects the reclassification of approximately $22.4 million from current tolong-term notes payable as a result of the extension of the Amended Credit Agreement under theSecond Change in Terms Agreement and the financing of the cargo aircraft described above. As ofDecember 31, 2005, $9.7 million was outstanding under these term loans.As a result of the impairment charge recorded in September 2005 as described in Note 2 of the Notesto Consolidated Financial Statements, AirNet was not in compliance with certain terms of theAmended Credit Agreement, including the fixed charge coverage ratio and the leverage ratiocalculated as of September 30, 2005, and AirNet would not have been in compliance with the minimumconsolidated tangible net worth requirement as of December 31, 2005. On November 21, 2005, AirNetand its lenders under the Amended Credit Agreement agreed to modify the terms and conditions of theAmended Credit Agreement (the “Third Change in Terms Agreement”). The Third Change in TermsAgreement modified the fixed charge coverage ratio and the leverage ratio financial covenants insuch a manner that, on a going-forward basis, the September 2005 impairment charge, in and ofitself, would not cause a default of these financial covenants in the future. At the same time asthe Third Change of Terms Agreement was entered into, AirNet and its lenders executed a waiver ofany defaults or potential defaults under the Amended Credit Agreement which occurred, or may haveoccurred, as a result of AirNet’s failure to comply with the foregoing financial covenants due tothe September 2005 impairment charge.On March 28, 2006, AirNet and its lenders entered into a “Fourth Change in Terms Agreement”extending the term of the secured revolving credit facility under the Amended Credit Agreement fromOctober 15, 2006 to October 15, 2007. The Fourth Change in Terms Agreement also reduced the amountof the secured revolving credit facility from $30 million to$25 million, reduced the amount ofannual capital expenditures permitted under the terms of the Amended Credit Agreement from $30million to $20 million, and modified the calculation of the borrowing base under the revolvingcredit facility. As a result of the Fourth Change in Terms Agreement, amounts outstanding underthe revolving credit facility at December 31, 2005 are classified as long-term debt in theConsolidated Balance Sheet.During the second quarter of 2004, Jetride entered into four seven-year term loans totaling $22.5million with fixed interest rates of approximately 6.7%. In July 2004, Jetride financed twoadditional passenger charter Learjet 60’s for the Passenger Charter fleet at $5.0 million each withseven year terms and fixed rates of approximately 6.5%, for a total of $32.5 million in financingrelated to AirNet’s Passenger Charter Services. As of December 31, 2005, there was $29.8 millionoutstanding under all six loans. These term loans are secured by aircraft used in the PassengerCharter fleet. Each of the term loans is guaranteed by AirNet. Jetride incurred approximately$2.0 million in interest expense in 2005 related to the financing of the nine Passenger Charteraircraft under all six loans.In December 2003, AirNet financed the $5.3 million cost of a Learjet 60 for its Passenger CharterServices business using its bank credit facility.
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In January 2002, AirNet entered into operating leases for six Cessna Caravan 208 aircraft, whichafter certain extensions entered into in September 2002, terminate in 2006 and 2007. In January of2003 and January of 2006, AirNet entered into two additional operating leases on Cessna Caravan 208aircraft that expire, respectively, in 2008 and 2007. In February 2006, AirNet entered into aone-year operating lease on an additional Cessna Caravan 208 aircraft.In accordance with accounting principles generally accepted in the United States of America, AirNetdoes not record operating leases in its Consolidated Balance Sheet; however, the minimum leasepayments related to these leases are disclosed in “Note 6 – Lease Obligations” of the Notes toConsolidated Financial Statements included in “Item 8 – Financial Statements and SupplementaryData” of this Annual Report on Form 10-K.Under the terms of Gerald G. Mercer’s retirement agreement, AirNet purchased 818,330 common sharesfrom Mr. Mercer at a total cost of $5.0 million in July 2001. This privately negotiatedtransaction was funded through a revolving bank credit facility and AirNet intends to hold thesecommon shares in treasury. Under the terms of the retirement agreement, Mr. Mercer also had theoption to sell up to $250,000 of AirNet common shares each quarter at the closing market prices onthe last business day of March, June, September and December of 2002 to AirNet. Mr. Mercerexercised his option and sold 52,410 AirNet common shares to AirNet at a total cost of $249,996 inJanuary 2003.Also under the terms of his retirement agreement, Mr. Mercer retained his rights to sell hisremaining AirNet common shares to private investors at any time in accordance with applicable laws.On or about December 26, 2002, Mr. Mercer sold an aggregate of 733,200 common shares to sevenseparate 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 to three separateinvestors, one of which also purchased common shares from Mr. Mercer, in privately negotiatedtransactions. In connection with and as a condition to the investors’ consummating thosetransactions, AirNet granted registration rights with respect to the 990,000 common sharescollectively purchased by these investors from Mr. Mercer or Spring Hill Camps. AirNet has filed aregistration statement with respect to those common shares under the Securities Act of 1933, asamended, for resale by the investors as selling shareholders.In February 2000, AirNet announced a stock repurchase plan allowing AirNet to purchase up to $3.0million of its common shares. During 2000, AirNet purchased $2.4 million in common shares fundedby cash flows from operations. There have been no repurchase activity under this program since2000. As such, purchases of approximately $0.6 million of AirNet’s common shares may still be madein the open market or through privately negotiated transactions.**Off-Balance Sheet Arrangements**AirNet had no “off-balance sheet” arrangements as of December 31, 2005, as that term is defined bythe SEC.**Seasonality and Variability in Quarterly Results**AirNet’s operations historically have been somewhat seasonal relative to holidays observed byfinancial institutions. When financial institutions are closed on holidays falling on Mondaythrough Thursday, AirNet’s revenue and net income are adversely affected. AirNet’s fiscal quarterending December 31 is often the most impacted by bank holidays.Operating results are also affected by the weather. Winter weather often requires additional costsfor de-icing, hangar rental and other aircraft services. AirNet generally experiences highermaintenance costs during its fiscal quarter ending March 31.
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**Selected Quarterly Data (unaudited)**The following is a summary of the unaudited quarterly results of operations for the quarterlyperiods ended (in thousands, except per share data):                   ***Quarters Ended,***  ***March 31*** ***June 30*** ***September 30*** ***December 31*****2005**                **Net revenues** **$****49,893**  **$****49,889**  **$****48,091**  **$****48,540** **Income (loss) from continuing operations**                **before income taxes**  **2,952**   **2,828**   **(12,742****)**  **616** **Net income (loss)**  **1,517**   **2,054**   **(7,933****)**  **116** **Per common share — basic and diluted:**                **Netincome (loss) per common share** **$****0.15**  **$****0.20**  **$****(0.78****)** **$****0.01**                  2004                Net revenues $40,471  $42,140  $43,937  $48,402 Income (loss) from continuing operations                before income taxes  555   (199)  (45,783)  2,347 Net income (loss)  316   (113)  (30,184)  (4,164)Per common share — basic and diluted:                Net income(loss) per common share $0.03  $(0.01) $(2.99) $(0.41)**Critical Accounting Policies and Estimates**The preparation of financial statements in accordance with accounting principles generally acceptedin the United States requires management to adopt accounting policies and make significantjudgments and estimates to develop amounts reflected and disclosed in the financial statements. Inmany cases, there are alternative policies or estimation techniques that could be used. AirNetmaintains a thorough process to review the application of its accounting policies and to evaluatethe appropriateness of the estimates; however, even under optimal circumstances, estimatesroutinely require adjustment based on changing circumstances and the receipt of new or betterinformation.The policies and estimates discussed below include the financial statement elements that are eitherthe most judgmental or involve the selection or application of alternative accounting policies, andare material to AirNet’s consolidated financial statements. Management has discussed thedevelopment and selection of these critical accounting policies and estimates with the AuditCommittee of its Board of Directors and with its independent registered public accounting firm.*Allowance for Uncollectible Accounts Receivable*Historically, AirNet’s credit losses from bad debts have not fluctuated materially because itscredit management processes have been effective. AirNet also recognizes billing adjustments torevenue and accounts receivable for certain discounts, money back service guarantees and billingcorrections.Estimates for credit losses and billing adjustments are regularly updated based on historicalexperience of bad debts, adjustments processed, current collection and aging trends, and theindividual assessment of customers’ credit quality. Once AirNet considers all these factors, adetermination is made as to the appropriate amount of the allowance for uncollectible accountsreceivable. Allowances for these future adjustments aggregated $0.7 million at December 31, 2005and $0.9 million at December 31, 2004. AirNet considers the sensitivity and subjectivity of theseestimates to be moderate, as changes in economic conditions and pricing arrangements cansignificantly affect the estimates used to determine the allowances.*Major Aircraft Maintenance*Costs of major overhauls and engine work which are expected to extend the useful life of therelated asset are capitalized as incurred and depreciated based on hours flown. The original costsof airframes, less an estimated salvage value, are depreciated based on the straight-line methodover the estimated useful life of the aircraft. Aircraft maintenance costs not meeting AirNet’scapitalization requirements are expensed as incurred. Approximately 85% of AirNet’s Learjet 35aircraft engines and all of AirNet’s Learjet 60 aircraft engines are covered under manufacturerengine maintenance plans, under
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which AirNet prepays certain repair and overhaul costs. These prepayments, which totaled $20.0 million and $19.3 million at December 31, 2005 and 2004,respectively, are classified in fixed assets on the ConsolidatedBalance Sheets. Amortization onthese prepaid balances does not begin until major engine overhaul services have been performed, atwhich time the prepaid balances are reclassified into depreciable asset categories and depreciatedbased on hours flown.*Property and Equipment*AirNet’s Delivery Service and Passenger Charter Service businesses are capital intensive. Over 85%of AirNet’s total assets are invested in flight equipment to serve these markets. AirNetcapitalizes those costs that meet the definition of capital assets under applicable accountingstandards.The depreciation or amortization of AirNet’s capital assets over their estimated useful lives,and the determination of any salvage values, requires management to make judgments about futureevents. Because AirNet utilizes many of its capital assets over relatively long periods,management periodically evaluates whether adjustments to estimated lives or salvage values arenecessary. The accuracy of these estimates affects the amount of depreciation expense recognizedin a period and, ultimately, the gain or loss on the disposal of the asset.*Stock-Based Compensation*At December 31, 2005, AirNet had two stock-based employee compensation plans, the Amended andRestated 1996 Incentive Stock Plan and the 2004 Stock Incentive Plan. AirNet has accounted for theplans under the recognition and measurement principles of APB Opinion No. 25, *“Accounting for StockIssued to Employees”,*and related interpretations. No stock-based employee compensation cost isreflected in net income, as all stock options granted under the plans have an exercise price equalto the fair market value of the underlying common shares on the date of grant. Pro formainformation regarding net income and net income per share is required by Statement of FinancialAccounting Standards SFAS No. 148, *“Accounting for Stock-Based Compensation – Transition andDisclosure”*(SFAS No. 148), and has been determined as if AirNet had accounted for its employeestock options under the fair value method of SFAS No. 123, *“Accounting for Stock-BasedCompensation”*(SFAS No. 123).On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised2004), “*Share-Based Payment”*(SFAS No. 123(R)), which is a revision of SFAS No. 123. SFAS No.123(R) supersedes APB Opinion No. 25, *“Accounting for Stock Issued to Employees”*, and amends SFASNo. 95, *“Statement of Cash Flows*.*”*Generally, the approach in SFAS No. 123(R) is similar to theapproach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized as expense in the incomestatement based on their fair values. Pro forma disclosure will no longer be an alternative.SFAS No. 123(R) must be adopted no later than the first annual period beginning after June 15,2005. AirNet adopted SFAS No. 123(R) on January 1, 2006. SFAS No. 123(R) permits companies toadopt its requirements using one of two methods: 1. A “modified prospective” method in which compensation cost is recognized beginning withthe effective date (a) based on the requirements of SFAS No. 123(R) for all share-basedpayments granted after the effective date and (b) based on the requirements of SFAS No. 123for all awards granted to employees prior to the effective date of SFAS No. 123(R) thatremain unvested on the effective date.  2. A “modified retrospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate financialstatements based on the amounts previously recognized under SFAS No. 123 for purposes ofpro forma disclosures either (a) for all prior periods presented or (b) for prior interimperiods of the year of adoption.AirNet adopted SFAS No. 123(R) using the modified prospective method. The impact of adoption ofSFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-basedpayments granted in the future. However, had AirNet adopted SFAS No. 123(R) in prior periods, theimpact of that standard would have approximated the impact of SFAS No. 123 as described in thedisclosure of pro forma net income (loss) and net income (loss) per common share in “Note 1 –Significant Accounting Policies” of the Notes to Consolidated Financial Statements included in“Item 8 – Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. AirNetdoes not anticipate that adoption of SFAS No. 123(R) will have a material impact on its results ofoperations or its financial position. However, SFAS No. 123(R) also requires that the benefits oftax deductions in excess of recognized compensation cost be reported as a financing cash flow,rather than as an operating cash flow. This requirement will reduce net operating cash flows andincrease net financing cash flows in periods after the effective date. While AirNet cannotestimate what those amounts will be in the future (because they depend on, among other things, whenemployees exercise stock options), the amount of operating cash flows recognized in prior periodsfor such excess tax deductions were not material. Stock options are further detailed in “Note 1 –Significant Accounting Policies” and “Note 5 – Incentive Stock Plans” of the Notes to ConsolidatedFinancial Statements included in “Item 8 – Financial Statements and Supplementary Data” of thisAnnual Report on Form 10-K.
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*Self-Insurance Accruals*AirNet is self-insured up to certain limits for costs associated with workers’ compensation claimsand benefits paid under employee health care programs. At December 31, 2005 and 2004, AirNet hadtotal self-insurance accruals reflected in its Consolidated Balance Sheets of approximately $0.9million and $1.1 million, respectively.The measurement of these costs requires the consideration of historical loss experience andjudgments about the present and expected levels of costs. AirNet accounts for these costsprimarily through measurement of claims outstanding and projected payments based on recent claimsexperience. AirNet believes its recorded obligations for these expenses are consistently measuredon an appropriate basis; however, changes in health costs, loss development factors, accidentfrequency and severity, and other factors can materially affect the estimates for theseliabilities.*Incentive Compensation Plans*AirNet maintains an incentive compensation plan with payouts tied to the achievement ofcompany-wide earnings goals and personal/departmental goals. Incentive compensation is calculatedas a percent of base pay, depending on participation levels, which vary among management tiers.Costs related to the company-wide earnings portion of the plan are accrued based on actualquarterly results. For the year ended December 31, 2005, AirNet recorded approximately $1.6million of incentive compensation expense, and for the year ended December 31, 2004, no incentivecompensation expense was recorded because the earnings goals were not met.*Income Taxes*AirNet accounts for income taxes under the liability method pursuant to SFAS No. 109, “*Accountingfor Income Taxes*.” Under the liability method, deferred tax liabilities and assets are determinedbased on the differences between the financial reporting and tax bases of assets and liabilitiesusing enacted tax rates and laws that will be in effect when the differences are expected toreverse.Accounting principles generally accepted in the United States of America require AirNet to record avaluation allowance against future deferred tax assets if it is “more likely than not” that AirNetwill not be able to utilize such benefits in the future. At December 31, 2005 and 2004, AirNetmaintained a valuation allowance of $6.3 million and $5.7 million, respectively, to offset thedeferred tax assets associated with its net operating loss carryforwards (NOL) and alternativeminimum tax credit carryforwards (AMT) because of the uncertainty surrounding its ability torealize such assets.*Impairment of Assets and Goodwill*AirNet recognizes impairment losses on long-lived assets in accordance with SFAS No. 144,“*Accounting for the Impairment or Disposal of Long-Lived Assets*” (SFAS No. 144). AirNet recognizesimpairment losses on long-lived assets when events or changes in circumstances indicate, inmanagement’s judgment, that AirNet’s assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carryingvalue of those assets. The net carrying value of the assets not recoverable is reduced to fairmarket value if lower than carrying value. In determining the fair market value of the assets,AirNet considers market trends, published market data, recent transactions involving sales ofsimilar assets and, as discussed below, the letter of intent for the sale of AirNet that wasannounced on October 26, 2005.On October 26, 2005, AirNet announced that it had entered into a letter of intent for its sale in agoing private transaction at $4.55 per share. Since the price per share in the letter of intentwas less than AirNet’s net book value per share, AirNet performed the impairment tests required bySFAS No. 144 for the quarter ended September 30, 2005 and concluded that its long-lived assets usedin its Delivery Services segment were further impaired. Accordingly, a non-cash charge of $16.1million ($10.0 million net of tax) was recorded as of September 30, 2005. The impairment chargewas based upon the fair values of the long-lived assets in the Delivery Services segment derivedfrom published sources, information provided by a third-party valuation firm retained to assistAirNet in completing its analysis, and the discount inherent in the price per common share setforth in the letter of intent.AirNet’s long-lived assets used in its cargo operations, consisting primarily of aircraft and spareparts, were also determined to be impaired as of September 30, 2004. This determination was madeas a result of industry trends in the adoption of electronic payment alternatives and evolvingelectronic alternatives to the physical movement of cancelled checks at a more rapid pace thanpreviously anticipated by the industry. AirNet’s cargo airline was originally designed, andcontinues to operate, primarily to meet the needs of Bank Services customers. AirNet determinedthat its airline capacity would exceed future demand, which created an impairment of the aircraftand related assets. The impairment also reflected the overall decline in the market values of theaircraft in its cargo fleet which had not recovered as in previous economic cycles. AirNetdetermined that the expected future undiscounted cash flows from its assets used in its cargooperations were less than the
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carrying value of those assets and were impaired. Accordingly, a non-cash impairment charge of $43.0 million was recorded as of September 30, 2004, using estimatedaircraft fair values. The aircraft fair values used for this purpose were based upon publishedmarket sources as of September 30, 2004, which were also used under AirNet’s Amended CreditAgreement.Under SFAS No. 142, “Goodwill and Other Intangible Assets”, AirNet evaluates its goodwill forimpairment annually, or more frequently if changes in circumstances indicate impairment may haveoccurred sooner. At September 30, 2004, AirNet determined that as a result of the impairment ofits long-lived assets used in its Delivery Services operations, the remaining goodwill assigned tothe cargo operations should be evaluated for potential impairment. AirNet evaluated the fair valueof its goodwill related to its Delivery Services operations based upon a discounted future cashflow analysis. As a result of the impairment test, AirNet determined that its goodwill wasimpaired and, accordingly, a non-cash impairment charge of $4.0 million was recorded at September30, 2004.**Forward-looking statements**The information included or incorporated by reference in this Annual Report on Form 10-K containsvarious “forward-looking statements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, includingthose identified by the words “believe,” “anticipate,” “estimate,” “expect,” “intend,” “may,”“plan,” “project” and similar expressions. These forward-looking statements reflect management’sexpectations and are based upon currently available data; however, actual results are subject tofuture events and uncertainties, which could cause actual results to differ from those projected inthese statements. The following factors, in addition to those included in the disclosure under theheading “Risk Factors” in Item 1A of this Annual Report on Form 10-K, could cause actual results todiffer materially from those expressed in forward-looking statements: **•** an acceleration in the migration of AirNet’s Bank customers to electronicalternatives to the physical movement of cancelled checks;  **•** potential regulatory changes by the FAA, DOT and TSA which could increase theregulation of AirNet’s business, or the Federal Reserve, which could change thecompetitive environment of transporting canceled checks;  **•** disruptions to operations due to adverse weather conditions, air trafficcontrol-related constraints or aircraft accidents;  **•** potential further declines in the value of aircraft in AirNet’s fleet and anyrelated asset impairment charges;  **•** the ability to successfully market the Passenger Charter business in light of globalchanges in the commercial airline industry;  **•** potential changes in locally and federally mandated security requirements;  **•** increases in aviation fuel costs not fully offset by AirNet’s fuel surcharge program;  **•** changes in check processing and shipment patterns of bank customers;  **•** acts of war and terrorist activities;  **•** the impact of prolonged weakness in the U. S. economy on time-critical shipment volumes;  **•** the acceptance of AirNet’s time-critical service offerings within targeted Express markets;  **•** technological advances and increases in the use of electronic funds transfers;  **•** the availability and cost of financing required for operations;  **•** the impact of unusual items resulting from ongoing evaluations of our business strategies;  **•** our substantial indebtedness;  **•** insufficient capital for future expansion; and
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 **•** other economic, competitive and domestic and foreign governmental factors affectingAirNet’s markets, prices and other facets of its operations.All forward-looking statements are expressly qualified in their entirety by these cautionarystatements. AirNet assumes no obligation or duty to update any of the forward-looking statementsincluded or incorporated by reference in this Annual Report on Form 10-K except to the extentrequired by law.**ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK****Inflation and Interest Rates**AirNet is exposed to certain market risks from transactions that are entered into during the normalcourse of business. AirNet’s primary market risk exposure relates to interest rate risk. AtDecember 31, 2005, AirNet had a $16.5 million outstanding balance under its Amended CreditAgreement (described above in “Item 7 – Management’s Discussion and Analysis of Financial Conditionand Results of Operation”) subject to market rate changes in interest. The Amended CreditAgreement bears interest, at AirNet’s option, at (a) a fixed rate equal to LIBOR plus a margindetermined by AirNet’s leverage ratio as defined in the Amended Credit Agreement, or (b) a floatingrate based on the greater of (i) the prime rate established by The Huntington NationalBank from time to time plus a margin determined by AirNet’s leverage ratio as defined in theAmended Credit Agreement and (ii) the sum of 0.5% plus the federal funds rate in effect from timeto time. Assuming borrowing levels at December 31, 2005, a one hundred basis point change ininterest rates would impact net interest expense by approximately $165,000 per year.Following the effectiveness of the Amended Credit Agreement dated May 28, 2004, AirNet paid offthree secured term loans which had been secured by aircraft. One of those loans had an interestrate swap agreement associated with it. This interest rate swap agreement with a notional amountof $3.0 million and a fixed rate of 4.25% plus a margin based on AirNet’s funded debt ratio wasterminated in August 2005.**Fuel Surcharge**AirNet generally assesses its Bank Services customers a fuel surcharge which is based on the OilPrice Index Summary – Columbus, Ohio (OPIS-CMH Index). Fuel surcharges are assessed to DeliveryServices customers as a percentage of transportation charges. As index rates increase aboveestablished base rates, AirNet increases the fuel surcharge percentage applied to thetransportation charges. AirNet assesses most of its Express Services customers a fuel surchargewhich is based on the OPIS index, and is adjusted monthly. In addition, Jetride charges itscustomers a fuel surcharge stated as an hourly rate based upon current fuel prices which changesaccording to prevailing market rates.
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**ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA****Report of Independent Registered Public Accounting Firm**Shareholders and Board of Directors