**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

 

| **(Mark One)**                                                                                                        |       |                                                                                                |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|
| ý                                                                                                                | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**  |
|                                                                                                                  | ** ** | ** **                                                                                          |
| **For the quarterly period ended  June 30, 2004**                                                                |
|                                                                                                                  |       | ** **                                                                                          |
| **or**                                                                                                                |
|                                                                                                                  |       | ** **                                                                                          |
| o                                                                                                                     | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                  | ** ** | ** **                                                                                          |
| **For the transition period  from         to      ** |
|                                                                                                                  |       | ** **                                                                                          |
| **Commission File Number 1-13025**                                                                                    |

 

| **AirNet Systems, Inc.**                                                       |
|-------------------------------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)                              |
|                                                                                |   |   |
| **Ohio**                                                                            | ** ** | **31-1458309** |
| (State or other jurisdiction  of incorporation or organization)                     |   | (I.R.S. Employer  Identification No.) |
|                                                                                |   |   |
| **3939 International Gateway  Columbus, Ohio 43219**                                |
| (Address, including zip code, of registrant’s principal executive  offices)    |
|                                                                                |   |   |
| **(614) 237-9777**                                                                  |
| (Registrant’s telephone number, including area code)                           |
|                                                                                |   |   |
| **Not Applicable**                                                                  |
| (Former name, former address and former fiscal year, if changed since  last report) |

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days. Yes ý No o

 

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

 

As of August 2, 2004, 10,085,829 of the registrant’s commonshares, par value $0.01, were outstanding.

 

 

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**TABLE OF CONTENTS**

 
| **PART I. FINANCIAL INFORMATION** | ** **                                                                                                                  |
|-----------------------------------|-----------------------------------------------------------------------------------------------------------------------------|
|                              |                                                                                                                        |
| Item 1.                      | Financial Statements:                                                                                                       |   |
|                              |                                                                                                                        |   |
|                              | Condensed Consolidated Balance Sheets:  June 30, 2004 (Unaudited) and  December 31, 2003                     |   |
|                              |                                                                                                                        |   |
|                              | Condensed Consolidated Statements of  Operations (Unaudited):  Three and Six  Months Ended June 30, 2004 and 2003 |   |
|                              |                                                                                                                        |   |
|                              | Condensed Consolidated Statements of Cash  Flows (Unaudited):  Six Months Ended  June 30, 2004 and 2003           |   |
|                              |                                                                                                                        |   |
|                              | Notes to Condensed Consolidated Financial  Statements (Unaudited)                                                           |   |
|                              |                                                                                                                        |   |
| Item 2.                      | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                 |   |
|                              |                                                                                                                        |   |
| Item 3.                      | Quantitative and Qualitative Disclosures  about Market Risk                                                                 |   |
|                              |                                                                                                                        |   |
| Item 4.                      | Controls and Procedures                                                                                                     |   |
|                              |                                                                                                                        |   |
| **PART II. OTHER INFORMATION**    |                                                                                                                        |
| ** **                        |                                                                                                                        |   |
| Item 1.                           | Legal Proceedings                                                                                                           |   |
|                              |                                                                                                                        |   |
| Item 2.                           | Changes in Securities, Use of Proceeds and  Issuer Purchases of Equity Securities                                           |   |
|                              |                                                                                                                        |   |
| Item 3.                           | Defaults Upon Senior Securities                                                                                             |   |
|                              |                                                                                                                        |   |
| Item 4.                           | Submission of Matters to a Vote of Security  Holders                                                                        |   |
|                              |                                                                                                                        |   |
| Item 5.                           | Other Information                                                                                                           |   |
|                              |                                                                                                                        |   |
| Item 6.                           | Exhibits and Reports on Form 8-K                                                                                            |   |
|                              |                                                                                                                        |
| SIGNATURES                        |                                                                                                                        |
|                              |                                                                                                                        |
| INDEX TO EXHIBITS                 |                                                                                                                        |

 

2

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**AIRNET SYSTEMS, INC.**

 

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| **In  thousands**                                                                                                                      | ** ** | **June 30,  2004** | ** **  | **December 31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                             | ** ** | **(unaudited)**         | ** **  | ** **                  | ** ** |
| **ASSETS**                                                                                                                             |       |                    |        |                        |       |
| Current assets:                                                                                                                        |       |                    |        |                        |       |
| Cash and cash equivalents                                                                                                              | ** ** | **$**                   | **1,338**   |                        | $          | 125 |   |
| Accounts receivable, less allowances                                                                                                   | ** ** | **21,130**              |        | 18,647                      |       |
| Inventory and spare parts                                                                                                              | ** ** | **7,634**               |        | 6,589                       |       |
| Taxes receivable                                                                                                                       | ** ** | **1,388**               |        | 1,401                       |       |
| Deposits and prepaids                                                                                                                  | ** ** | **1,985**               |        | 3,246                       |       |
| Total current assets                                                                                                                   | ** ** | **33,475**              |        | 30,008                      |       |
|                                                                                                                                   |       |                    |        |                        |       |
| Net property and equipment                                                                                                             | ** ** | **140,093**             |        | 118,799                     |       |
| Other assets:                                                                                                                          |       |                    |        |                        |       |
| Goodwill, net of accumulated amortization                                                                                              | ** ** | **4,018**               |        | 4,018                       |       |
| Other                                                                                                                                  | ** ** | **382**                 |        | 448                         |       |
|                                                                                                                                   |       |                    |        |                        |       |
| **Total assets**                                                                                                                       | ** ** | **$**                   | **177,968** |                        | $          | 153,273 |   |
|                                                                                                                                   |       |                    |        |                        |       |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                                         |       |                    |        |                        |       |
| Current liabilities:                                                                                                                   |       |                    |        |                        |       |
| Accounts payable                                                                                                                       | ** ** | **$**                   | **9,827**   |                        | $          | 7,442 |   |
| Salaries and related liabilities                                                                                                       | ** ** | **4,568**               |        | 4,955                       |       |
| Deferred revenues                                                                                                                      | ** ** | **2,488**               |        | 184                         |       |
| Accrued expenses                                                                                                                       | ** ** | **675**                 |        | 887                         |       |
| Taxes payable                                                                                                                          | ** ** | **—**              |        | 76                          |       |
| Deferred income taxes                                                                                                                  | ** ** | **4**                   |        | 4                           |       |
| Current portion of notes payable                                                                                                       | ** ** | **5,348**               |        | 5,256                       |       |
| Total current liabilities                                                                                                              | ** ** | **22,910**              |        | 18,804                      |       |
|                                                                                                                                   |       |                    |        |                        |       |
| Other liabilities                                                                                                                      | ** ** | **1,004**               |        | 1,280                       |       |
| Notes payable, less current portion                                                                                                    | ** ** | **53,003**              |        | 32,520                      |       |
| Deferred tax liability                                                                                                                 | ** ** | **16,391**              |        | 16,389                      |       |
|                                                                                                                                   |       |                    |        |                        |       |
| Shareholders’ equity:                                                                                                             |       |                    |        |                        |       |
| Preferred shares, $.01 par value; 10,000  shares authorized; no shares issued and outstanding                                          | ** ** | **—**              |        | —                      |       |
| Common shares, $.01 par value; 40,000  shares authorized; **12,753**shares  issued at June 30, 2004 and at December 31, 2003 | ** ** | **128**                 |        | 128                         |       |
| Additional paid-in-capital                                                                                                             | ** ** | **77,251**              |        | 77,759                      |       |
| Retained earnings                                                                                                                      | ** ** | **32,142**              |        | 31,938                      |       |
| Accumulated other comprehensive loss                                                                                                   | ** ** | **(32**                 | )           | (35                         | )          |
| Treasury shares, 2,677 and 2,720 shares  held at cost at June 30, 2004 and December 31, 2003, respectively                   | ** ** | **(24,829**             | )           | (25,510                     | )          |
| Total shareholders’ equity                                                                                                        | ** ** | **84,660**              |        | 84,280                      |       |
|                                                                                                                                   |       |                    |        |                        |       |
| **Total liabilities  and shareholders’ equity**                                                                                   | ** ** | **$**                   | **177,968** |                        | $          | 153,273 |   |

 

See notes to condensed consolidated financialstatements

 

3

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**AIRNET SYSTEMS, INC.**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS** - Unaudited

 
| **In  thousands, except per share data**                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                   | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                         |       |                                  |       |                                |       |   |   |   |   |
| **NET REVENUES**                                             |       |                                  |       |                                |       |   |   |   |   |
| Air transportation, net of excise tax                        |       |                                  |       |                                |       |   |   |   |   |
| Delivery services:                                           |       |                                  |       |                                |       |   |   |   |   |
| Bank services                                                | ** ** | **$**                                 | **26,230** |                                | $          | 25,682 | ** ** | **$** | **52,062** |   | $ | 52,005 |   |
| Express services                                             | ** ** | **12,083**                            |       | 8,631                               | ** ** | **22,881** |   | 17,641 |   |
| Total delivery services revenues                             | ** ** | **38,313**                            |       | 34,313                              | ** ** | **74,943** |   | 69,646 |   |
|                                                         |       |                                  |       |                                |       |   |   |   |   |
| Passenger charter services                                   | ** ** | **3,616**                             |       | 1,777                               | ** ** | **7,253** |   | 3,216 |   |
| Aviation services and other operations                       | ** ** | **211**                               |       | 494                                 | ** ** | **415** |   | 798 |   |
| **Total net revenues**                                       | ** ** | **42,140**                            |       | 36,584                              | ** ** | **82,611** |   | 73,660 |   |
|                                                         |       |                                  |       |                                |       |   |   |   |   |
| **COSTS AND EXPENSES**                                       |       |                                  |       |                                |       |   |   |   |   |
| Air transportation                                           |       |                                  |       |                                |       |   |   |   |   |
| Wages and benefits                                           | ** ** | **6,657**                             |       | 6,148                               | ** ** | **13,003** |   | 12,360 |   |
| Aircraft fuel                                                | ** ** | **6,186**                             |       | 4,951                               | ** ** | **11,722** |   | 9,893 |   |
| Aircraft maintenance                                         | ** ** | **3,690**                             |       | 2,954                               | ** ** | **6,880** |   | 6,335 |   |
| Contracted air costs                                         | ** ** | **3,127**                             |       | 2,378                               | ** ** | **6,197** |   | 5,185 |   |
| Ground courier                                               | ** ** | **7,887**                             |       | 6,174                               | ** ** | **15,029** |   | 12,440 |   |
| Depreciation                                                 | ** ** | **5,050**                             |       | 4,319                               | ** ** | **9,939** |   | 8,511 |   |
| Insurance, rent and landing fees                             | ** ** | **2,638**                             |       | 2,384                               | ** ** | **5,202** |   | 4,628 |   |
| Travel, training and other                                   | ** ** | **2,650**                             |       | 2,165                               | ** ** | **5,211** |   | 4,343 |   |
| Selling, general and administrative                          | ** ** | **4,050**                             |       | 3,648                               | ** ** | **8,009** |   | 7,543 |   |
| Net (gain) loss on disposition of assets                     | ** ** | **(3**                                | )          | —                              | ** ** | **289** |   | 35 |   |
| **Total costs and  expenses**                                | ** ** | **41,932**                            |       | 35,121                              | ** ** | **81,481** |   | 71,273 |   |
| Income from continuing operations                            | ** ** | **208**                               |       | 1,463                               | ** ** | **1,130** |   | 2,387 |   |
| Interest expense                                             | ** ** | **407**                               |       | 340                                 | ** ** | **774** |   | 742 |   |
|                                                         |       |                                  |       |                                |       |   |   |   |   |
| Income(loss) from continuing operations  before income taxes | ** ** | **(199**                              | )          | 1,123                               | ** ** | **356** |   | 1,645 |   |
| Provision for income taxes                                   | ** ** | **(86**                               | )          | 438                                 | ** ** | **153** |   | 641 |   |
|                                                         |       |                                  |       |                                |       |   |   |   |   |
| **Income(loss) from  continuing operations**                 | ** ** | **$**                                 | **(113**   | )                                   | $          | 685 | ** ** | **$** | **203** |   | $ | 1,004 |   |
|                                                         |       |                                  |       |                                |       |   |   |   |   |
| **Income from discontinued  operations, net of taxes**       | ** ** | **$**                                 | **0**      |                                | $          | 39 | ** ** | **$** | **0** |   | $ | 17 |   |
|                                                         |       |                                  |       |                                |       |   |   |   |   |
| **Net income (loss)**                                        | ** ** | **$**                                 | **(113**   | )                                   | 724        | ** ** | **$** | **203** |   | $ | 1,021 |   |
|                                                         |       |                                  |       |                                |       |   |   |   |   |
| Income (loss) per share - basic and diluted                  |       |                                  |       |                                |       |   |   |   |   |
| Continuing operations                                        | ** ** | **$**                                 | **(0.01**  | )                                   | $          | 0.07 | ** ** | **$** | **0.02** |   | $ | 0.10 |   |
| Discontinued operations                                      | ** ** | **—**                            | ** ** | **—**                          | ** ** | **—** | ** ** | **—** | ** ** |
| Net income (loss) per share - basic and  diluted             | ** ** | **$**                                 | **(0.01**  | )                                   | $          | 0.07 | ** ** | **$** | **0.02** |   | $ | 0.10 |   |

 

See notes to condensed consolidated financialstatements

 

4

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**AIRNET SYSTEMS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS** - Unaudited

 
| **In  thousands**                                                                            | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                   | ** ** | **2004**                            | ** ** | **2003** | ** ** |
|                                                                                         |       |                                |       |   |   |
| **Operating  activities:**                                                                   |       |                                |       |   |   |
| Net income                                                                                   | ** ** | **$**                               | **203**    |   | $ | 1,021 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |       |                                |       |   |   |
| Depreciation                                                                                 | ** ** | **9,939**                           |       | 8,511 |   |
| Deferred taxes                                                                               | ** ** | **(3**                              | **)**      | **—** | ** ** |
| Provision  for losses on accounts receivable                                                 | ** ** | **117**                             |       | 188 |   |
| Loss on  disposition of assets                                                               | ** ** | **289**                             |       | 35 |   |
| Cash  provided by (used in) operating assets and liabilities:                                |       |                                |       |   |   |
| Accounts  receivable                                                                         | ** ** | **(2,599**                          | )          | 725 |   |
| Inventory  and spare parts                                                                   | ** ** | **(1,045**                          | )          | (174 | ) |
| Prepaid  expenses                                                                            | ** ** | **1,260**                           |       | 1,254 |   |
| Accounts  payable                                                                            | ** ** | **2,106**                           |       | 177 |   |
| Deferred  revenues and accrued expenses                                                      | ** ** | **2,103**                           |       | 2,126 |   |
| Taxes  payable                                                                               | ** ** | **(59**                             | )          | 384 |   |
| Salaries  and related liabilities                                                            | ** ** | **(387**                            | )          | (507 | ) |
| Other,  net                                                                                  | ** ** | **62**                              |       | 435 |   |
| Net  assets of discontinued operations                                                       | ** ** | **—**                          |       | 397 |   |
| **Net cash provided by operating activities**                                                | ** ** | **11,986**                          |       | 14,572 |   |
|                                                                                         |       |                                |       |   |   |
| **Investing activities:**                                                                    |       |                                |       |   |   |
| Purchases  of property and equipment                                                         | ** ** | **(34,625**                         | )          | (8,782 | ) |
| Proceeds  from sales of property and equipment                                               | ** ** | **3,103**                           |       | 109 |   |
| **Net cash used in investing activities**                                                    | ** ** | **(31,522**                         | )          | (8,673 | ) |
|                                                                                         |       |                                |       |   |   |
| **Financing activities:**                                                                    |       |                                |       |   |   |
| Proceeds  from incentive stock plan programs                                                 | ** ** | **80**                              |       | 98 |   |
| Net  borrowings (repayments) under the revolving credit facility                             | ** ** | **4,000**                           |       | (6,100 | ) |
| Net  borrowings (repayments) of long-term debt                                               | ** ** | **16,575**                          |       | (594 | ) |
| Issuance  (purchase) of treasury shares                                                      | ** ** | **94**                              |       | (250 | ) |
| **Net cash provided by (used in) financing activities**                                      | ** ** | **20,749**                          |       | (6,846 | ) |
|                                                                                         |       |                                |       |   |   |
| Net  increase (decrease) in cash                                                             | ** ** | **1,213**                           |       | (947 | ) |
| Cash and  cash equivalents at beginning of period                                            | ** ** | **125**                             |       | 1,054 |   |
| **Cash and cash equivalents at end of period**                                               | ** ** | **$**                               | **1,338**  |   | $ | 107 |   |

 

See notes to condensedconsolidated financial statements

 

5

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**AIRNET SYSTEMS, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**1.****              Basis ofPresentation**

 

AirNetSystems, Inc. and its subsidiaries (“AirNet” or the “Company”) operate a fullyintegrated national air transportation network which provides delivery servicefor time-critical shipments for customers in the U.S. banking industry andother industries requiring the express delivery of packages.  AirNet also offers passenger charter servicesand retail aviation fuel sales and related ground services.

 

Theaccompanying condensed consolidated financial statements include the accountsof AirNet Systems, Inc. and its subsidiaries. These financial statements are unaudited and have been prepared pursuantto the rules and regulations of the United States Securities and ExchangeCommission.

 

Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted as permitted by such rules and regulations.These condensed consolidated financial statements should be read in conjunctionwith the consolidated financial statements and notes thereto included in AirNetSystems, Inc.’s Annual Report on Form 10-K for the fiscal year endedDecember 31, 2003. The results of operations for the quarterly and sixmonth periods ended June 30, 2004 are not necessarily indicative of theresults for the full year.

 

Thefinancial information included herein reflects all adjustments (consisting ofnormal recurring adjustments), which are, in the opinion of management,necessary for a fair presentation of the results of interim periods.

 

Thepreparation of the condensed consolidated financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the amountsreported in those financial statements and accompanying notes thereto.  Actual results could differ from thoseestimates.

 

Certainreclassifications have been made in the prior year’s financial statements toconform to the presentation for the three and six month periods endedJune 30, 2004.

 

2**.****               Stock Plans andAwards**

 

SFASNo. 148, *Accounting for Stock-Based Compensation-Transitionand Disclosure*, requires prominent disclosures in both annual andinterim financial statements regarding the method of accounting for stock-basedemployee compensation and the effect of the method used on reported results.

 

TheCompany accounts for its employee and director stock-based compensation plansunder the recognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees,* and relatedinterpretations.  No stock-based employeecompensation cost is reflected in net income, as all options granted have anexercise price equal to the market value of the underlying common shares on thedate of grant.  Pro forma informationregarding net income and net income per share, as required by SFAS No. 148, hasbeen determined as if the Company had accounted for its employee stock optionsunder the fair value method of SFAS No. 123, *Accountingfor Stock-Based Compensation*. The fair value of these options wasestimated at the date of grant using the Black-Scholes option pricing model.

 

6

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Thefollowing table illustrates the effect on net income and net income per shareas if the Company had applied the fair value recognition provisions of SFAS No.123 to stock-based employee compensation (in thousands, except per share data).

 
| ** **                                                                                                                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                         | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Net income (loss), as reported                                                                                                                     |       | $                                     | (113       | )                                   | $          | 724 |   | $ | 203 |   | $ | 1,021 |   |
| Deduct:   Total stock-based employee compensation expense determined under fair  value method for all awards, net of related tax effects |       | (29                                   | )          | (28                                 | )          | (182 | ) | (88 | ) |
| Pro forma net income (loss)                                                                                                                        |       | $                                     | (142       | )                                   | $          | 696 |   | $ | 21 |   | $ | 933 |   |
|                                                                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Net income (loss) per share – basic and  diluted:                                                                                             |       |                                  |       |                                |       |   |   |   |   |
| As reported                                                                                                                                        |       | $                                     | (.01       | )                                   | $          | .07 |   | $ | .02 |   | $ | .10 |   |
| Pro forma                                                                                                                                          |       | $                                     | (.01       | )                                   | $          | .07 |   | $ | .00 |   | $ | .09 |   |

 

**3.****              Income Per ShareFrom Continuing Operations**

 

The following table sets forth the computationof basic and diluted income per common share from continuing operations (inthousands, except per share data):

 
| ** **                                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                             | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Numerator:                                             |       |                                  |       |                                |       |   |   |   |   |
| Income(loss) from continuing operations                |       | $                                     | (113       | )                                   | $          | 685 |   | $ | 203 |   | $ | 1,004 |   |
|                                                   |       |                                  |       |                                |       |   |   |   |   |
| Denominator:                                           |       |                                  |       |                                |       |   |   |   |   |
| Basic - weighted average shares outstanding            |       | 10,076                                |       | 10,132                              |       | 10,063 |   | 10,125 |   |
|                                                   |       |                                  |       |                                |       |   |   |   |   |
| Diluted                                                |       |                                  |       |                                |       |   |   |   |   |
| Stock options–employees, officers, and  directors |       | 40                                    |       | 0                                   |       | 35 |   | 0 |   |
| Adjusted weighted average shares  outstanding          |       | 10,116                                |       | 10,132                              |       | 10,098 |   | 10,125 |   |
|                                                   |       |                                  |       |                                |       |   |   |   |   |
| Income (loss) per share from continuing  operations -  |       |                                  |       |                                |       |   |   |   |   |
| Basic and diluted:                                     |       | $                                     | (0.01      | )                                   | $          | 0.07 |   | $ | 0.02 |   | $ | 0.10 |   |

 

Commonshares subject to outstanding stock options excluded from the diluted adjustedweighted average shares outstanding calculation, as the exercise price of thestock options exceeded the average fair market value of the underlying commonshares for the period, were 729,370 and 709,370 for the three and six monthperiods ended June 30, 2004.

 

**4.     ComprehensiveIncome**

 

Comprehensiveincome is comprised of net income of the Company and the change in the fairvalue of interest rate swap agreements, net of income taxes.  Comprehensiveincome for the six months ended June 30, 2004 and June 30, 2003 was$543,000 and $1,021,000, respectively. Comprehensive income for the threemonths ended June 30, 2004 and 2003 was $203,000 and $722,000,respectively.

 

7

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**5.****              DiscontinuedOperations**

 

OnAugust 11, 2003, AirNet Systems, Inc. completed the sale of substantiallyall of the assets of its Mercury Business Services unit to Mercury BusinessServices, Inc., a Delaware corporation owned by a group that include theoriginal owners of the Mercury business.

 

The sales price of the transaction wasapproximately $1.1 million.  Mercury Business Services, Inc. paidapproximately $455,000 of the sales price through the issuance of a ninety daypromissory note secured by the assets being sold and guaranteed by each of theshareholders of Mercury Business Services, Inc.  Under the terms of theAsset Purchase Agreement, approximately $536,000 of the purchase price was paidwith AirNet Systems, Inc. common shares owned by the shareholders of MercuryBusiness Services, Inc., including 56,000 common shares tendered to AirNetSystems, Inc. prior to closing at $4.30 per share (the closing price of theAirNet Systems, Inc. common shares on the NYSE on July 25, 2003) and68,494 common shares tendered to AirNet Systems, Inc. on the closing date at$4.31 per share (the average closing price of the AirNet Systems, Inc. commonshares on the NYSE on August 4-6, 2003).  The balance of the salesprice was paid in cash.

 

AirNet accounted for these operations asdiscontinued operations.

 

The Mercury Business Services unit had revenues forof $2,487,000 and $4,919,000 for the three months ended June 30, 2003 andthe six months ended June 30, 2003, respectively.

 

Pre-tax profit for AirNet’s Mercury BusinessServices unit was $64,000 and $28,000 for the three months ended June 30,2003 and for the six months ended June 30, 2003, respectively.

 

**6.****             ****BankFinancing Matters**

 

In June 2004, AirNet entered into anamended and restated term loan and revolving loan facility (collectively, the“Amended Credit Agreement”) with its banks. The Amended Credit Agreementprovides AirNet with a secured revolving credit facility with up to $35.0million available and a secured term loan in the aggregate amount of $14.0million.  The amount of revolving loansavailable under the Amended Credit Agreement is further limited to a borrowingbase equal to the aggregate of 80% of eligible accounts receivable, plus 50% ofeligible inventory, plus 70% of the market value of certain fixed assets,reduced by the aggregate amount of AirNet’s outstanding letters of credit. Asof June 30, 2004, $22.8 million and $13.0 million were outstanding underthe secured revolving credit facility and secured term loan, respectively. Asof June 30, 2004, AirNet had approximately $10.7 million available toborrow on its secured revolving loan facility.

 

The revolving credit facility underthe Amended Credit Agreement expires on September 30, 2005 and the securedterm loan matures on September 30, 2007. Quarterly principal payments of $1.0 million are required for thesecured term loan beginning in June 2004 and continuing throughSeptember 30, 2007. The Amended Credit Agreement is secured by a firstlien on all of the property of AirNet and its subsidiaries, other than anyinterest in real estate and certain excluded fixed assets.  The Amended Credit Agreement permits AirNetand its subsidiaries to incur other indebtedness for the purpose of purchasingor refinancing aircraft and related tangible fixed assets, subject to certainannual limitations.  AirNet has alsopledged the interests in its subsidiaries, and each of AirNet’s subsidiarieshas guaranteed AirNet’s obligations under the Amended Credit Agreement.  The Amended Credit Agreement containslimitations on operating leases, indebtedness, significant corporate changesincluding mergers and sales of assets, investments in subsidiaries andacquisitions, liens, capital expenditures, transactions with affiliates, salesof accounts receivable, sale and leaseback transactions and other off-balancesheet liabilities, contingent obligations and hedging transactions.  The Amended Credit Agreement also containsfinancial covenants that require AirNet to maintain a minimum consolidated tangiblenet worth and to not exceed fixed charge coverage and leverage ratios specifiedin the Amended Credit Agreement.  As ofJune 30, 2004, AirNet was in compliance with these covenants. The AmendedCredit Agreement 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 CreditAgreement, or (b) a floating rate based on the greater of the sum of (i) theprime rate established by The Huntington National Bank from time to time plus amargin determined by AirNet’s leverage ratio and (ii) the sum of 0.5% plus thefederal funds rate in effect from time to time. After the effective date of the Amended Credit Agreement, AirNet paid offits three five-year term loans totaling approximately $3.4 million incurredduring first quarter 2002.

 

Duringthe second quarter 2004, AirNet entered into four seven-year term loanstotaling $22.5 million with fixed interest rates of approximately 6.7%. Each ofthe term loans is secured by aircraft used in the Passenger Charter fleet. Asof June 30, 2004, there was $22.5 million outstanding on these securedterm loans, and the net book value of the aircraft securing the loans totaledapproximately $28.9 million.  InJuly 2004, AirNet financed two additional passenger charter Learjet 60’sfor the Passenger Charter fleet at $5.0 million each, for a total of $32.5million in financing related to AirNet’s Passenger Charter services.

 

8

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**AIRNET SYSTEMS, INC.**

 

**ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**Safe Harbor Statement**

 

Exceptfor the historical information contained in this Form 10-Q, the mattersdiscussed, including, but not limited to, information regarding future economicperformance and plans and objectives of AirNet’s management, areforward-looking statements that involve risks and uncertainties. When used inthis document, the words “believe”, “anticipate”, “estimate”, “expect”, “intend”,“may”, “plan”, “project” and similar expressions are intended to be amongstatements that identify forward-looking statements.  Such statements involve risks anduncertainties including, but not limited to, the following which could causeactual results to differ materially from any forward-looking statement:potential regulatory changes by the Federal Aviation Administration (“FAA”),which could increase the regulation of AirNet’s business, or potentialregulatory changes by the Federal Reserve which could change the competitiveenvironment of transporting cancelled checks; changes in check processing andshipment patterns of bank customers; adverse weather conditions; potentialdeclines in the values of aircraft in AirNet’s fleet and any related asset impairmentcharges; the ability to successfully market the passenger charter business inlight of global changes in the commercial airline industry; potential changesin locally and federally mandated security requirements; increases in aviationfuel costs not fully offset by AirNet’s fuel surcharge program; potential costoverruns associated with the construction of a new facility at RickenbackerInternational Airport; acts of war and terrorist activities; the acceptance ofAirNet’s time-critical service offerings within targeted Express markets;technological advances and increases in the use of electronic funds transfers;as well as other economic, competitive and domestic and foreign governmentalfactors affecting AirNet’s markets, prices and other facets of itsoperations.  Should one or more of theserisks or uncertainties materialize, or should underlying assumptions proveincorrect, actual outcomes may vary materially from those indicated.  Please refer to the sections captioned“Forward-looking statements” and “Risk Factors” in Item 7 of the Annual Reporton Form 10-K for the fiscal year ended December 31, 2003 of AirNetSystems, Inc. (File No. 1-13025) for additional details relating to riskfactors that could affect AirNet’s results and cause those results to differmaterially from those expressed in forward-looking statements.

 

**General**

 

CriticalAccounting Policies and Estimates

 

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

 

Managementhas discussed the development and selection of AirNet’s critical accountingpolicies and estimates with the Audit Committee of AirNet Systems, Inc.’s Boardof Directors and with its independent auditors. AirNet’s critical accounting policies have not changed significantlyfrom the policies disclosed in Item 7 of AirNet Systems, Inc.’s Annual Reporton Form 10-K for the fiscal year ended December 31, 2003.

 

AirNet’saudited consolidated financial statements for the fiscal year endedDecember 31, 2003, included in Item 8 of AirNet Systems, Inc.’s AnnualReport on Form 10-K for the fiscal year ended December 31, 2003, containadditional disclosures regarding AirNet’s significant accounting policies andItem 7 of that Annual Report on Form 10-K includes a summary of AirNet’scritical accounting policies. The information appearing therein may be usefulwhen reading this discussion and analysis of financial condition and results ofoperations.

 

9

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**Results of Operations**

 

*Net Revenues*

 
| **In  ‘000’s  Revenues** | ** ** | **3 months**** ****ending  June 30, 2004** | ** ** | **3 months  ending  June 30, 2003** | ** ** | **$ Increase  (Decrease)   2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** | **6 months  ending********June 30, 2004** | ** ** | **6 months  ending  June 30, 2003** | ** ** | **$ Increase  (Decrease)   2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------|------------|
| **Package  Delivery Services:**    | ** ** | ** **                                           | ** ** | ** **                               | ** ** | ** **                                     | ** ** | ** **                               | ** ** | ** **                                     | ** ** | ** **                               | ** ** | ** **                                     | ** ** | ** **                               | ** ** |
| Bank Services                      |       | $                                                    | 26,230     |                                     | $          | 25,682                                         |       | $                                        | 548        |                                           | 2          | %                                        | $          | 52,062                                         |       | $                                        | 52,005     |   | $ | 57 |   | 0 | % |
| Express Services                   |       | 12,083                                               |       | 8,631                                    |       | 3,452                                          |       | 40                                       | %          | 22,881                                         |       | 17,641                                   |       | 5,240                                          |       | 30                                       | %          |
| Total Package Delivery Services    |       | 38,313                                               |       | 34,313                                   |       | 4,000                                          |       | 12                                       | %          | 74,943                                         |       | 69,646                                   |       | 5,297                                          |       | 8                                        | %          |
| Passenger Charter Services         |       | 3,616                                                |       | 1,777                                    |       | 1,839                                          |       | 103                                      | %          | 7,253                                          |       | 3,216                                    |       | 4,037                                          |       | 126                                      | %          |
| Aviation Services                  |       | 211                                                  |       | 494                                      |       | -283                                           |       | -57                                      | %          | 415                                            |       | 798                                      |       | -383                                           |       | -48                                      | %          |
| **Total Net Revenues**             |       | $                                                    | 42,140     |                                     | $          | 36,584                                         |       | $                                        | 5,556      |                                           | 15         | %                                        | $          | 82,611                                         |       | $                                        | 73,660     |   | $ | 8,951 |   | 12 | % |

 

AirNethas experienced overall net revenue growth for the quarter and six months endedJune 30, 2004 over the same periods of the prior year.  This can be attributed to several factorsincluding increased Express shipment volume and growth in Passenger Charterservices as well as additional fuel surcharge revenues.

 

*BankServices Revenues*

 
| **In  ‘000’s  Revenues** | ** ** | **3 months**** ****ending********June 30, 2004** | ** ** | **3 months  ending  June 30, 2003** | ** ** | **$ Increase  (Decrease)   2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** | **6 months**** ****ending  June 30, 2004** | ** ** | **6 months  ending  June 30, 2003** | ** ** | **$ Increase  (Decrease)   2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** |
|------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------|------------|
|                               |       |                                                       |       |                                     |       |                                           |       |                                     |       |                                                 |       |                                     |       |                                           |       |                                     |       |
| Bank Weekday                       |       | $                                                          | 23,831     |                                     | $          | 23,840                                         |       | $                                        | -9-        |                                                 | 0          | %                                        | $          | 47,428                                         |       | $                                        | 47,535     |   | $ | -107 |   | 0 | % |
| Bank Weekend                       |       | 1,901                                                      |       | 1,742                                    |       | 159                                            |       | 9                                        | %          | 3,807                                                |       | 3,597                                    |       | 210                                            |       | 6                                        | %          |
| Fuel Surcharge                     |       | 1,150                                                      |       | 695                                      |       | 455                                            |       | 65                                       | %          | 2,104                                                |       | 2,131                                    |       | -27                                            |       | -1                                       | %          |
| Federal Excise Tax                 |       | -652                                                       |       | -595                                     |       | -57                                            |       | 10                                       | %          | -1,276                                               |       | -1,258                                   |       | -18                                            |       | 1                                        | %          |
| **Net Revenues**                   |       | $                                                          | 26,230     |                                     | $          | 25,682                                         |       | $                                        | 548        |                                                 | 2          | %                                        | $          | 52,062                                         |       | $                                        | 52,005     |   | $ | 57 |   | 0 | % |

 

Bankweekday and weekend revenues held constant for the three and six month periodsended June 30, 2004 as compared to the same periods of the prioryear.  Increased fuel prices in thequarter of 2004  resulted insignificantly higher fuel surcharge revenues compared to the same quarter of2003.  AirNet believes that lower checkdelivery volume as a result of historically low interest rates,  the declining use of checks, and the Check 21Act which becomes effective in October 2004, will contribute to areduction in bank revenues in future periods, as will increased competitive factorsfrom regional carriers and transportation cost reduction initiatives byAirNet’s Bank customers.  AirNet isunable to predict the ultimate impact of these factors on future periods.

 

*ExpressServices Revenues*

 
| **In  ‘000’s   Revenues** | ** ** | **3 months  ending  June 30, 2004** | ** ** | **3 months  ending********June 30, 2003** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** | **6 months********ending********June 30, 2004** | ** ** | **6 months********ending********June 30, 2003** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
|                                |       |                                     |       |                                           |       |                                          |       |                                     |       |                                                 |       |                                                 |       |                                          |       |                                     |       |
| Express services                    |       | $                                        | 12,033     |                                           | $          | 8,646                                         |       | $                                        | 3,387      |                                                 | 39         | %                                                    | $          | 22,830                                        |       | $                                        | 17,640     |   | $ | 5,190 |   | 29 | % |
| Fuel Surcharge                      |       | 437                                      |       | 246                                            |       | 191                                           |       | 78                                       | %          | 761                                                  |       | 533                                                  |       | 228                                           |       | 43                                       | %          |
| Federal Excise Tax                  |       | -387                                     |       | -261                                           |       | -126                                          |       | -48                                      | %          | -710                                                 |       | -532                                                 |       | -178                                          |       | 33                                       | %          |
| **Net Revenues**                    |       | $                                        | 12,083     |                                           | $          | 8,631                                         |       | $                                        | 3,452      |                                                 | 40         | %                                                    | $          | 22,881                                        |       | $                                        | 17,641     |   | $ | 5,240 |   | 30 | % |

 

Express services revenues continue to increaseas a percentage of total revenues, increasing from 24% to 29% of total revenuesfor both the three and six month periods ended June 30, 2004, compared tothe same periods of the prior year. Shipments using AirNet’s air transportation network were up 9% and 5%for the quarter and year to date, respectively. Shipments sent via commercialairlines and point to point surface shipments were up over 50% and 40% for thequarter and year to date, respectively.  Commercial air and point to point surface shipments incur higher couriercosts compared to shipments using AirNet’s airline.  The increase in shipments sent via commercial

 

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airlines is principally due to an increase in shipments outside theAirNet airline’s scheduled delivery times and locations, which generallyresults in lower gross margins per shipment than shipments carried on AirNet’sairline.

 

*Passenger Charter ServicesRevenues*

 
| **In  ‘000’s   Revenues** | ** ** | **3 months********ending********June 30, 2004** | ** ** | **3 months********ending********June 30, 2003** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** | **6 months********ending********June 30, 2004** | ** ** | **6 months********ending********June 30 2003** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)   2003 to 2004** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|
| Passenger Charter Services          |       | $                                                    | 3,616      |                                                 | $          | 1,777                                         |       | $                                        | 1,839      |                                                 | 103        | %                                                   | $          | 7,253                                         |       | $                                         | 3,216      |   | $ | 4,037 |   | 126 | % |
|                                     |            |                                                      |            |                                                      |            |                                               |            |                                          |            |                                                      |            |                                                     |            |                                               |            |                                           |            |  |  |  |  |  |  |

 

Passenger Charter services revenues continueto grow as a percentage of total revenues, as AirNet invests in additionalaircraft to support additional passenger charter demand.  Revenues increased from 4.9% to 8.6% of totalrevenue for the quarter and from 4.4% to 8.8% year to date compared to the sameperiods of the prior year.  AirNetincreased the number of passenger charter aircraft it operates from sevenaircraft (two Learjet 60’s and five Learjet 35’s) at June 30, 2003 tofourteen (nine Learjet 60’s and five Learjet 35’s) at June 30, 2004.

 
| **In  ‘000’s  Costs and Expenses** | ** ** | **3 months********ending********June 30, 2004** | ** ** | **3 months********ending********June 30, 2003** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)   2003 to 2004** | ** ** | **6 months  ending********June 30, 2004** | ** ** | **6 months********ending********June 30, 2003** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **% Increase  (Decrease)  2003 to 2004** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
|                                         |       |                                                 |       |                                                 |       |                                          |       |                                      |       |                                           |       |                                                 |       |                                          |       |                                     |       |
| Wages and benefits                           |       | $                                                    | 6,657      |                                                 | $          | 6,148                                         |       | $                                         | 509        |                                           | 8          | %                                                    | $          | 13,003                                        |       | $                                        | 12,360     |   | $ | 643 |   | 5 | % |
| Aircraft fuel                                |       | 6,186                                                |       | 4,951                                                |       | 1,235                                         |       | 25                                        | %          | 11,722                                         |       | 9,893                                                |       | 1,829                                         |       | 18                                       | %          |
| Aircraft maintenance                         |       | 3,690                                                |       | 2,954                                                |       | 736                                           |       | 25                                        | %          | 6,880                                          |       | 6,335                                                |       | 545                                           |       | 9                                        | %          |
| Contracted air costs                         |       | 3,127                                                |       | 2,378                                                |       | 749                                           |       | 31                                        | %          | 6,197                                          |       | 5,185                                                |       | 1,012                                         |       | 20                                       | %          |
| Ground courier                               |       | 7,887                                                |       | 6,174                                                |       | 1,713                                         |       | 28                                        | %          | 15,029                                         |       | 12,440                                               |       | 2,589                                         |       | 21                                       | %          |
| Depreciation                                 |       | 5,050                                                |       | 4,319                                                |       | 731                                           |       | 17                                        | %          | 9,939                                          |       | 8,511                                                |       | 1,428                                         |       | 17                                       | %          |
| Insurance, rent and landing fees             |       | 2,638                                                |       | 2,384                                                |       | 254                                           |       | 11                                        | %          | 5,202                                          |       | 4,628                                                |       | 574                                           |       | 12                                       | %          |
| Travel, training and other                   |       | 2,650                                                |       | 2,165                                                |       | 485                                           |       | 22                                        | %          | 5,211                                          |       | 4,343                                                |       | 868                                           |       | 20                                       | %          |
| Selling, general and administrative          |       | 4,050                                                |       | 3,648                                                |       | 402                                           |       | 11                                        | %          | 8,009                                          |       | 7,578                                                |       | 431                                           |       | 6                                        | %          |
| Net loss on disposition of assets            |       | -3                                                   |       | —                                               |       | -3                                            |       |                                      |       | 289                                            |       | —                                               |       | 289                                           |       |                                     |       |
| **Total costs and expenses**                 |       | $                                                    | 41,932     |                                                 | $          | 35,121                                        |       | $                                         | 6,811      |                                           | 19         | %                                                    | $          | 81,481                                        |       | $                                        | 71,273     |   | $ | 10,208 |   | 14 | % |

 

***Costs and Expenses***

 

As operating activities for AirNet’s Expressand Passenger Charter services continue to increase, total operating costs andexpenses increased for both the quarter and year to date compared to the sameperiods of the prior year.

 

Increases in fuel costs, wages, maintenanceand depreciation are attributable, in part, to the expansion of AirNet’sPassenger Charter Services.  Sevenaircraft, two of which are managed aircraft, have been added to AirNet’sPassenger Charter fleet in the first six months of 2004.  An additional 20 pilots were hired duringthis six month period to support Passenger Charter Services.  Wages and benefits associated with theseadditional pilots were $381,000 and $631,000, respectively, for the quarter andyear to date.

 

Fuel costs increased for both the quarter andyear to date as a result of increasing fuel prices, additional fuel purchasedat higher retail rates at FBO locations outside of the Port Columbus facility,and additional fuel purchases related to the increase in Passenger CharterServices.  Fuel costs related toPassenger Charter Services increased by $358,000 and $691,000, respectively,for the quarter and year to date.  Theincrease in fuel costs, net of fuel surcharge, related to AirNet’s packagedelivery services was $231,000 and $937,000 for the quarter and year to date.

 

Ground courier costs continue to increase asAirNet serves a broader group of customers outside of AirNet’s traditional bankcustomer.  AirNet’s growing number ofExpress customers are more costly to serve than the traditional bank customerdue to more unscheduled pickup and delivery services and more geographicallydispersed locations.  Ground couriercosts have risen as Express shipments continue to increase as a proportion oftotal shipments.  The growth rate inshipments transported either exclusively via point to point surface orcommercial airlines is increasing as AirNet expands the number of Expresscustomers; a trend Management believes will continue.

 

Depreciation increased as a result of theaddition of five Learjet 60’s (acquired in December 2003, January, May andJune 2004) to the Passenger Charter fleet since the end of the 2003 fiscalyear and continuing reductions to AirNet’s estimates of aircraft and enginesalvage values.

 

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AirNetrecognized a net loss on disposition of assets during the six months endedJune 30, 2004.  This amount includeda loss of approximately $584,000 related to an accident involving one of itscargo aircraft (net of insurance proceeds of $2,300,000).  In addition, as AirNet continues to adjustits aircraft fleet in response to changing customer needs, AirNet sold sevenpiston aircraft during the six months ended June 30, 2004 resulting in aloss on sale of approximately $114,000. Offsetting these losses was a gain on the sale of an aircraft ofapproximately $400,000.

 

**Liquidity and Capital Resources**

 

*Cash flow from operatingactivities.*  Net cash provided by operating activities was$12.0 million for the six months ended June 30, 2004, compared to $14.6million for the same period in 2003.

 

*Bank Financing Matters*

 

In June 2004, AirNet entered into anamended and restated term loan and revolving loan facility (collectively, the“Amended Credit Agreement”) with its banks. The Amended Credit Agreementprovides AirNet with a secured revolving credit facility with up to $35.0million available and a secured term loan in the aggregate amount of $14.0million.  The amount of revolving loansavailable under the Amended Credit Agreement is further limited to a borrowingbase equal to the aggregate of 80% of eligible accounts receivable, plus 50% ofeligible inventory, plus 70% of the market value of certain fixed assets,reduced by the aggregate amount of AirNet’s outstanding letters of credit. Asof June 30, 2004, $22.8 million and $13.0 million were outstanding underthe secured revolving credit facility and secured term loan, respectively. Asof June 30, 2004, AirNet had approximately $10.7 million available toborrow on its secured revolving loan facility.

 

The revolving credit facility underthe Amended Credit Agreement expires on September 30, 2005 and the securedterm loan matures on September 30, 2007. Quarterly principal payments of $1.0 million are required for the securedterm loan beginning in June 2004 and continuing through September 30,2007. The Amended Credit Agreement is secured by a first lien on all of theproperty of AirNet and its subsidiaries, other than any interest in real estateand certain excluded fixed assets.  TheAmended Credit Agreement permits AirNet and its subsidiaries to incur otherindebtedness for the purpose of purchasing or refinancing aircraft and relatedtangible fixed assets, subject to certain annual limitations.  AirNet has also pledged the interests in itssubsidiaries, and each of AirNet’s subsidiaries has guaranteed AirNet’sobligations under the Amended Credit Agreement. The Amended Credit Agreement contains limitations on operating leases,indebtedness, significant corporate changes including mergers and sales ofassets, investments in subsidiaries and acquisitions, liens, capitalexpenditures, transactions with affiliates, sales of accounts receivable, saleand leaseback transactions and other off-balance sheet liabilities, contingentobligations and hedging transactions. The Amended Credit Agreement also contains financial covenants thatrequire AirNet to maintain a minimum consolidated tangible net worth and to notexceed fixed charge coverage and leverage ratios specified in the AmendedCredit Agreement.  As of June 30,2004, AirNet was in compliance with these covenants. 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 CreditAgreement, or (b) a floating rate based on the greater of the sum of (i) theprime rate established by The Huntington National Bank from time to time plus amargin determined by AirNet’s leverage ratio and (ii) the sum of 0.5% plus thefederal funds rate in effect from time to time. After the effective date of the Amended Credit Agreement, AirNet paidoff its three five-year term loans totaling approximately $3.4 million incurredduring first quarter 2002.

 

Duringthe second quarter 2004, AirNet entered into four seven-year term loanstotaling $22.5 million with fixed interest rates of approximately 6.7%. Each ofthe term loans is secured by aircraft used in the Passenger Charter fleet. Asof June 30, 2004, there was $22.5 million outstanding on these securedterm loans, and the net book value of the aircraft securing the loans totaledapproximately $28.9 million.  InJuly 2004, AirNet financed two additional passenger charter Learjet 60’sfor the Passenger Charter fleet at $5.0 million each, for a total of $32.5million in financing related to AirNet’s Passenger Charter services.

 

*Investingactivities.*  Capital expenditures totaled $35.0 millionfor the six months ended June 30, 2004 versus $8.8 million for the sameperiod in 2003.  Of the 2004expenditures, $31.6 million was for the purchase of four Learjet 60’s dedicatedto Passenger Charter services, major periodic aircraft inspections, and majorengine overhauls and related flight equipment.. AirNet anticipates it will spend between $41.5 million and $56 millionin total capital expenditures in 2004. AirNet anticipates it will continue to acquire aircraft and flightequipment as necessary to maintain growth and continue offering quality serviceto its customers and will evaluate whether future asset acquisitions should bepurchases or leases.

 

AirNetSystems, Inc. announced a stock repurchase plan in February 2000 allowingAirNet Systems, Inc., to purchase up to $3.0 million of its common shares.  As of the end of the 2001 fiscal year, $2.4million of common shares had been repurchased, and there has been no repurchaseactivity under the plan since. As such, purchases of approximately $0.6 millionof the common shares of AirNet Systems, Inc., may still be made over time inthe

 

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open market or through privately negotiated transactions.  Such future purchases would be consideredbased on current market conditions, the stock price and funds available forrepurchase. AirNet Systems, Inc., acquired 52,410 common shares, outside the repurchaseplan, for $249,996 on January 2, 2003 from former Chairman Gerald Mercerunder the terms of his retirement agreement.

 

AirNet anticipates that operating cash andcapital expenditure requirements will continue to be funded by cash flow fromoperations, cash on hand, borrowings in conjunction with the Amended CreditAgreement or other sources, including leasing.  There were no material capital commitments at June 30, 2004, otherthan the Company’s construction of its new office and hangar facility describedbelow.

 

Inanticipation of AirNet’s move to its new facility within the RickenbackerInternational Airport (“Rickenbacker”), on January 20, 2004, AirNetentered into an agreement to sell its current facility at 3939 InternationalGateway in Columbus, Ohio (the “Port Columbus Facility”) to the ColumbusRegional Airport Authority for $3.9 million. AirNet has retained the right to continue to occupy the Port ColumbusFacility until construction and relocation to the new the Rickenbacker site(the “Rickenbacker Facility”) is complete, which is expected to be the secondquarter of 2005.

 

OnJanuary 20, 2004, AirNet entered into a Land Lease with the ColumbusRegional Airport Authority to lease approximately 8 acres located withinRickenbacker.  Rickenbacker is located inFranklin and Pickaway Counties, Ohio, southeast of Columbus, Ohio,approximately fifteen miles from AirNet’s Port Columbus Facility.  AirNet is constructing a new corporate andoperational headquarters at the Rickenbacker Facility.  Construction of the Rickenbacker Facility isanticipated to be completed in the summer of 2005. As of June 30, 2004,$3.6 million has been invested in the construction of the Rickenbackerfacility, with a total estimated cost of $12.5 million.  Upon completion of the Rickenbacker Facility,AirNet’s current corporate and operational functions that are conducted at thePort Columbus Facility, and the administrative functions being conducted at 555Morrison Avenue, will be consolidated at the new Rickenbacker Facility.

 

Therehave been no material changes in AirNet’s contractual obligations from thosedisclosed in AirNet System Inc.’s Annual Report on Form 10-K for the fiscalyear ended December 31, 2003, except for new debt as disclosed above.

 

**Seasonality and Variability in Quarterly Results**

 

AirNet’s operations historically have beensomewhat seasonal and somewhat dependent on the number of banking holidaysfalling during the week.  Becausefinancial institutions are currently AirNet’s principal customers, AirNet’s airsystem is scheduled primarily around the needs of financial institutioncustomers.  When financial institutionsare closed, AirNet does not operate a full system.  AirNet’s fiscal quarter endingDecember 31 is often the most impacted by bank holidays (includingThanksgiving and Christmas) recognized by its primary customers.  When these holidays fall on Monday throughThursday, AirNet’s revenues and net income are adversely affected. AirNet’sannual results fluctuate as well based on when holidays fall during the weekover the course of the year. Operating results are also affected by theweather.  AirNet generally experienceshigher maintenance costs during its fiscal quarter ending March 31.  Winter weather often requires additionalcosts for de-icing, hangar rental and other aircraft services.

 

**Item 3.****           Quantitative andQualitative Disclosures About Market Risk**

** **

**Inflation and Interest Rates**

 

AirNetis exposed to certain market risks from transactions that are entered intoduring the normal course of business. AirNet’s primary market risk exposure relates to interest raterisk.  At June 30, 2004, AirNet hada $35.8 million outstanding balance under its Amended Credit Agreement(described above in “Item 2 – Management’s Discussion and Analysis of FinancialCondition and Results of Operations”) subject to market rate changes ininterest. The Amended Credit Agreement bears interest, at AirNet’s option, at(a) a fixed rate equal to LIBOR plus a margin determined by AirNet’s leverageratio as defined in the Amended Credit Agreement, or (b) a floating rate basedon the greater of the sum of (i) the prime rate established by The HuntingtonNational Bank from time to time plus a margin determined by AirNet’s leverageratio as definded in the Amended Credit Agreement and  (ii) the sum of 0.5% plus the federal fundsrate in effect from time to time. Assuming borrowing levels at June 30, 2004, a one hundred basispoint change in interest rates would impact net interest expense byapproximately $358,000 per year.

 

Followingthe effectiveness of the Amended Credit Agreement,  AirNet paid off three secured term loanswhich had been secured by aircraft. One of those loans had an interest rateswap agreement associated with it.  Thisinterest rate swap agreement with a notional amount of $3.0 million and a fixedrate of 4.25% plus a margin based on AirNet’s funded debt ratio remains inplace.  At June 30, 2004, theaggregate fair value of the interest rate swap was approximately ($31,000).

 

13

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**Fuel Surcharge**

 

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

 

**Item 4.****           Controlsand Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

Withthe participation of the Chairman of the Board, Chief Executive Officer andPresident (the principal executive officer) and the Chief Financial Officer,Treasurer and Secretary (the principal financial officer) of AirNet Systems,Inc. (the “Registrant”), the Registrant’s management has evaluated theeffectiveness of the Registrant’s disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the“Exchange Act”)) as of the end of the period covered by this Quarterly Reporton Form 10-Q. Based upon that evaluation, the Registrant’s Chairman of theBoard, Chief Executive Officer and President and the Registrant’s ChiefFinancial Officer, Treasurer and Secretary have concluded that:

 

•                    information required to be disclosed by theRegistrant in this Quarterly Report on Form 10-Q would be accumulated andcommunicated to the Registrant’s management, including its principal executiveofficer and principal financial officer, as appropriate to allow timelydecisions regarding required disclosure;

 

•                    information required to be disclosed by theRegistrant in this Quarterly Report on Form 10-Q would be recorded,processed, summarized and reported within the time period specified in theSEC’s rules and forms; and

 

•                    the Registrant’s disclosure controls andprocedures are effective as of the end of the period covered by this QuarterlyReport on Form 10-Q to ensure that material information relating to theRegistrant and its consolidated subsidiaries is made known to them,particularly during the period for which the Registrant’s periodic reports,including this Quarterly Report on Form 10-Q, are being prepared.

 

**Changes in Internal Control Over Financial Reporting**

 

Inaddition, there were no changes that occurred during the fiscal quarter coveredby this Quarterly Report on Form 10-Q in the Registrant’s internal control overfinancial reporting (as defined in Rule 13a -15(f) under the Exchange Act) thathave materially affected, or are reasonably likely to materially affect, theRegistrant’s internal control over financial reporting.

 

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**AIRNET SYSTEMS, INC.**

 

**PART II - OTHER INFORMATION**

 

Item 1.                                     Legal Proceedings**.**

 

There are no pending legalproceedings involving AirNet other than routine litigation incidental to its business.  In the opinion of AirNet’s management, theseproceedings should not, individually or in the aggregate, have a materialadverse effect on AirNet’s results of operations or financial condition.

 

Item 2.                                     Changes in Securities, Use of Proceeds and Issuer Purchases of EquitySecurities.

 

(a)                                  Not applicable.

 

(b)                                 Not applicable.

 

(c)                                  Not applicable.

 

(d)                                 Not applicable

 

(e)                                  AirNet Systems, Inc. did not purchase anycommon shares during the fiscal quarter ended June 30, 2004.  On February 18, 2000, AirNet Systems,Inc. announced a stock repurchase plan under which up to $3.0 million of itscommon shares may be repurchased from time to time.  These repurchases may be made in open markettransactions or through privately negotiated transactions.  As of June 30, 2004, AirNet Systems,Inc. had the authority to still repurchase approximately $0.6 million of itscommon shares under this stock repurchase plan.

 

Item 3.                                     Defaults Upon Senior Securities.  Not Applicable

 

Item 4.                                     Submission of Matters to a Vote of Security Holders.

 

(a)          The Annual Meeting of Shareholders (the “Annual Meeting”) of AirNetSystems, Inc. was held on June 4, 2004. The number of common shares of AirNet Systems, Inc. outstanding andentitled to vote at the Annual Meeting was 10,063,167.  The number of common shares represented inperson or by proxy at the Annual Meeting was 9,173,402.

 

(b)         Directors elected at the Annual Meeting:

 
| Joel  E. Biggerstaff   |   |      |   |              |   |   |
|------------------------|--------|-----------|--------|-------------------|--------|--------|
| For:                   |   | 8,328,263 |   |              |   |   |
| Withheld:              |   | 848,939   |   | Broker  non-vote: |   | -0-    |
|                   |   |      |   |              |   |   |
| Russell  M. Gertmenian |   |      |   |              |   |   |
| For:                   |   | 8,336,867 |   |              |   |   |
| Withheld:              |   | 840,335   |   | Broker  non-vote: |   | -0-    |
|                   |   |      |   |              |   |   |
| David  P. Lauer        |   |      |   |              |   |   |
| For:                   |   | 8,228,137 |   |              |   |   |
| Withheld:              |   | 949,065   |   | Broker  non-vote: |   | -0-    |
|                   |   |      |   |              |   |   |
| Bruce  D. Parker       |   |      |   |              |   |   |
| For:                   |   | 8,317,029 |   |              |   |   |
| Withheld:              |   | 860,173   |   | Broker  non-vote: |   | -0-    |
|                   |   |      |   |              |   |   |
| James  E. Riddle       |   |      |   |              |   |   |
| For:                   |   | 8,318,667 |   |              |   |   |
| Withheld:              |   | 858,535   |   | Broker  non-vote: |   | -0-    |

 

(c)          Matters voted upon at the Annual Meeting

(i)             See Item 4(b) for voting results fordirectors.

 

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(ii)          Approvalof the AirNet Systems, Inc. 2004 Stock Incentive Plan:

 
| Common  Shares Voted “For”       |   | 4,412,110 |   |
|--------------------------------------------|--------|-----------|--------|
| Common  Shares Voted “Against”   |   | 1,663,061 |   |
| Common  Shares Voted “Abstain”   |   | 8,915     |   |
| Common  Shares Subject to Broker Non-Votes |   | 3,093,116 |   |

 

(d)         Not applicable.

 

Item 5.                                     Other Information.

 

In July 2004 Airnet became aware that some ofits employees had received a letter from a union regarding potential unionrepresentation.  Airnet believes that itsrelationship with employees is good.

 

In June 2004 Airnet underwent a RegionalAviation Safety Inspection (RASIP) by a team of FAA inspectors to determinecompliance with Federal Aviation Regulations. The FAA and Airnet are currently discussing the outcome of this inspection.

 

Item 6.                                     Exhibits and Reports on Form 8-K.

 

(a)          Exhibits:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **      | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1             |       | Amended  and Restated Credit Agreement, dated as of May 28, 2004, among AirNet  Systems, Inc., the lenders from time to time party thereto, and The  Huntington National Bank, as LC Issuer, as Swingline Lender and as  Administrative Agent [Incorporated herein by reference from Exhibit 4.1 to  the Current Report on Form 8-K, dated June 21, 2004, filed by AirNet  Systems, Inc. with the SEC on June 22, 2004 (File No. 1-13025)(the “June 2004  Form 8-K”)] |
| 4.2             |       | Continuing  Security Agreement, dated as of May 28, 2004, between AirNet Systems,  Inc. and The Huntington National Bank, as lender and as agent [Incorporated  herein by reference from Exhibit 4.2 to the June 2004 Form 8-K]                                                                                                                                                                                                                                                           |
| 4.3             |       | Continuing  Security Agreement, dated as of May 28, 2004, between Float Control,  Inc. and The Huntington National Bank, as lender and as agent [Incorporated  herein by reference from Exhibit 4.3 to the June 2004 Form 8-K]                                                                                                                                                                                                                                                            |
| 4.4             |       | Continuing  Security Agreement, dated as of May 28, 2004, between AirNet Management,  Inc. and The Huntington National Bank, as lender and as agent [Incorporated  herein by reference from Exhibit 4.4 to the June 2004 Form 8-K]                                                                                                                                                                                                                                                        |
| 4.5             |       | Continuing  Security Agreement, dated as of May 28, 2004, between Jetride, Inc. and  The Huntington National Bank, as lender and as agent [Incorporated herein by  reference from Exhibit 4.5 to the June 2004 Form 8-K]                                                                                                                                                                                                                                                                  |
| 4.6             |       | Continuing  Security Agreement, dated as of May 28, 2004, between timexpress.com,  inc. and The Huntington National Bank, as lender and as agent [Incorporated  herein by reference from Exhibit 4.6 to the June 2004 Form 8-K]                                                                                                                                                                                                                                                           |
| 4.7             |       | Continuing  Security Agreement, dated as of May 28, 2004, between Fast Forward  Solutions, LLC and The Huntington National Bank, as lender and as agent  [Incorporated herein by reference from Exhibit 4.7 to the June 2004 Form  8-K]                                                                                                                                                                                                                                                   |

 

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| 4.8  |   | Stock  Pledge Agreement, dated as of May 28, 2004, by AirNet Systems, Inc. in  favor of The Huntington National Bank, as agent [Incorporated herein by  reference from Exhibit 4.8 to the June 2004 Form 8-K]                                                 |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.9  |   | Security  Agreement Pledge and Assignment of Membership Interest, dated as of  May 28, 2004, between AirNet Systems, Inc. and The Huntington National  Bank, as agent [Incorporated herein by reference from Exhibit 4.9 to the  June 2004 Form 8-K]          |
| 4.10 |   | Mortgage,  Security Agreement and Assignment, dated as of May 28, 2994m between AirNet  Systems, Inc. and The Huntington National Bank, as agent [Incorporated herein  by reference from Exhibit 4.10 to the June 2994 Form 8-K]                                   |
| 4.11 |   | Replacement  Subsidiary Guaranty, dated as of May 29, 2004, by AirNet Management, Inc.,  Float Control, Inc. and Jetride, Inc. in favor of the Huntington National  Bank, as agent [Incorporated herein by reference from Exhibit 4.11 to the  June 2004 Form 8-K] |
| 4.12 |   | Subsidiary  Guaranty, dated as of May 29, 2994, by timexpress.com,  inc. in favor of The Huntington National  Bank, as agent [Incorporated herein by reference from Exhibit 4.12 to the  June 2004 Form 8-K]                                                  |
| 4.13 |   | Subsidiary  Guaranty, dated as of May 29, 2004, by Fast Forward Solutions, LLC in favor  of The Huntington National Bank, as agent [Incorporated herein by reference  from Exhibit 4.13 to the June 2004 Form 8-K]                                                 |
| 10.1 |   | AirNet  Systems, Inc. 2004 Stock Incentive Plan (reflects amendments through  June 4, 2004) [Filed herewith]                                                                                                                                                       |
| 31.1 |   | Rule  13a-14(a)/15d-14(a) Certification (Principal Executive Officer) [Filed  herewith]                                                                                                                                                                                 |
| 31.2 |   | Rule  13a-14(a)/15d-14(a) Certification (Principal Financial Officer) [Filed  herewith]                                                                                                                                                                                 |
| 32.1 |   | Section 1350  Certification (Principal Executive Officer) [Filed herewith]                                                                                                                                                                                         |
| 32.2 |   | Section 1350  Certification (Principal Financial Officer) [Filed herewith]                                                                                                                                                                                         |

 

 

(b)         Reports on Form 8-K:

 

OnMay 19, 2004, AirNet Systems, Inc. (the “Registrant”)  filed a Current Report on Form 8-K,dated May 19, 2004, reporting under Item 5.  Other Events and Regulation FD Disclosure,  that on May 17,2004, Fiserv, Inc. (“Fiserv”) issued a news release announcing that Fiserv andFast Forward Solutions, LLC (“Fast Forward”), the wholly-owned electronic checkprocessing subsidiary of the Registrant, are pursuing an agreement that willallow Fiserv and Fast Forward to provide a comprehensive substitute checksolution including printing and delivery.

 

OnJune 22, 2004, the Registrant filed a Current Report on Form 8-K,dated June 21, 2004, reporting under Item 2.  Acquisition or Disposition of Assets,that on June 7, 2004, the conditions precedent to the effectiveness of theAmended and Restated Credit Agreement, dated May 28, 2004, among theRegistrant, the lenders party thereto and The Huntington National Bank, as LCIssuer, as Swingline Lender and as Administrative Agent, were satisfied.

 

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**AIRNET SYSTEMS, INC.**

 

**SIGNATURES**

** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
| Dated:  August 13, 2004 | By:    |                                             | /s/ Gary W. Qualmann |   |
|-----------------------------------|--------|--------------------------------------------------|----------------------|--------|
|                              |   | Gary  W. Qualmann,                               |
|                              |   | Chief Financial Officer, Treasurer and Secretary |
|                              |   | (Duly  Authorized Officer)                       |
|                              |   | (Principal  Financial Officer)                   |
|                              |   |                                             |
| Dated:  August 13, 2004 | By:    |                                             | /s/ Denise D. Brown  |   |
|                              |   | Denise  D. Brown,                                |
|                              |   | Controller                                       |
|                              |   | (Duly  Authorized Officer)                       |
|                              |   | (Principal  Accounting Officer)                  |

 

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**AIRNET SYSTEMS, INC.**

 

**INDEX TO EXHIBITS**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.1             |       | Amended  and Restated Credit Agreement, dated as of May 28, 2004, among AirNet  Systems, Inc., the lenders from time to time party thereto, and The  Huntington National Bank, as LC Issuer, as Swingline Lender and as  Administrative Agent (incorporated herein by reference from Exhibit 4.1 to  the Current Report on Form 8-K, dated June 21, 2004, filed by AirNet  Systems, Inc. with the SEC on June 22, 2004(File No. 1-13025)(the  “June 2004 Form 8-K”)) |
| 4.2             |       | Continuing  Security Agreement, dated as of May 28, 2004, between AirNet Systems,  Inc. and The Huntington National Bank, as lender and as agent (incorporated  herein by reference from Exhibit 4.2 to the June 2004 Form 8-K)                                                                                                                                                                                                                                                          |
| 4.3             |       | Continuing  Security Agreement, dated as of May 28, 2004, between Float Control,  Inc. and The Huntington National Bank, as lender and as agent (incorporated  herein by reference from Exhibit 4.3 to the June 2004 Form 8-K)                                                                                                                                                                                                                                                           |
| 4.4             |       | Continuing  Security Agreement, dated as of May 28, 2004, between AirNet Management,  Inc. and The Huntington National Bank, as lender and as agent (incorporated  herein by reference from Exhibit 4.4 to the June 2004 Form 8-K)                                                                                                                                                                                                                                                       |
| 4.5             |       | Continuing  Security Agreement, dated as of May 28, 2004, between Jetride, Inc. and  The Huntington National Bank, as lender and as agent(incorporated herein by  reference from Exhibit 4.5 to the June 2004 Form 8-K)                                                                                                                                                                                                                                                                  |
| 4.6             |       | Continuing  Security Agreement, dated as of May 28, 2004, between timexpress.com,  inc. and The Huntington National Bank, as lender and as agent (incorporated  herein by reference from Exhibit 4.6 to the June 2004 Form 8-K)                                                                                                                                                                                                                                                          |
| 4.7             |       | Continuing  Security Agreement, dated as of May 28, 2004, between Fast Forward  Solutions, LLC and The Huntington National Bank, as lender and as agent  (incorporated herein by reference from Exhibit 4.7 to the June 2004 Form  8-K)                                                                                                                                                                                                                                                  |
| 4.8             |       | Stock  Pledge Agreement, dated as of May 28, 2004, by AirNet Systems, Inc. in  favor of The Huntington National Bank, as agent (incorporated herein by  reference from Exhibit 4.8 to the June 2004 Form 8-K)                                                                                                                                                                                                                                                                            |
| 4.9             |       | Security  Agreement Pledge and Assignment of Membership Interest, dated as of  May 28, 2004, between AirNet Systems, Inc. and The Huntington National  Bank, as agent (incorporated herein by reference from Exhibit 4.9 to the  June 2004 Form 8-K)                                                                                                                                                                                                                                     |
| 4.10            |       | Mortgage,  Security Agreement and Assignment, dated as of May 28, 2994m between AirNet  Systems, Inc. and The Huntington National Bank, as agent [Incorporated herein  by reference from Exhibit 4.10 to the June 2994 Form 8-K]                                                                                                                                                                                                                                                              |
| 4.11            |       | Replacement  Subsidiary Guaranty, dated as of May 29, 2004, by AirNet Management, Inc.,  Float Control, Inc. and Jetride, Inc. in favor of the Huntington National  Bank, as agent [Incorporated herein by reference from Exhibit 4.11 to the  June 2004 Form 8-K]                                                                                                                                                                                                                            |
| 4.12            |       | Subsidiary  Guaranty, dated as of May 29, 2994, by timexpress.com,  inc. in favor of The Huntington National  Bank, as agent [Incorporated herein by reference from Exhibit 4.12 to the  June 2004 Form 8-K]                                                                                                                                                                                                                                                                             |
| 4.13            |       | Subsidiary  Guaranty, dated as of May 29, 2004, by Fast Forward Solutions, LLC in favor  of The Huntington National Bank, as agent [Incorporated herein by reference  from Exhibit 4.13 to the June 2004 Form 8-K]                                                                                                                                                                                                                                                                            |
| 10.1            |       | AirNet  Systems, Inc. 2004 Stock Incentive Plan (reflects amendments through  June 4, 2004) [Filed herewith]                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.1            |       | Rule  13a-14(a)/15d-14(a) Certification (Principal Executive Officer) [Filed  herewith]                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2            |       | Rule  13a-14(a)/15d-14(a) Certification (Principal Financial Officer) [Filed  herewith]                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.1            |       | Section 1350  Certification (Principal Executive Officer) [Filed herewith]                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 32.2            |       | Section 1350  Certification (Principal Financial Officer) [Filed herewith]                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

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