**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**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 September 30, 2003**                                        |
|                                                                                               |
| **or**                                                                                             |
|                                                                                               |
| **o**                                                                                              | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|                                                                                               |
| **For the  transition period  from     to     ** |
|                                                                                               |
| **Commission  File Number 1-13025**                                                                |

 

**AirNetSystems, Inc.**

(Exact name of registrant asspecified 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 theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. Yes ýNo o

 

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct). Yes o Noý

 

As of October 29, 2003,10,033,691 of the registrant’s common shares, par value $0.01, wereoutstanding.

 

 

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**TABLE OFCONTENTS**

 
| **PART I.  FINANCIAL INFORMATION** |
|------------------------------------|
|                               |
| Item 1.                            | Financial Statements: |
|                               |
|                               | Condensed Consolidated  Balance Sheets:  September 30, 2003 (Unaudited) and December 31, 2002 |
|                               |
|                               | Condensed Consolidated  Statements of Operations (Unaudited):  Three and Nine Months Ended September 30, 2003 and 2002 |
|                               |
|                               | Condensed Consolidated  Statements of Cash Flows (Unaudited):  Nine Months Ended September 30, 2003 and 2002 |
|                               |
|                               | 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 and Use of  Proceeds |
|                               |
| 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 |
|                               |
| SIGNATURE                          |
|                               |
| INDEX TO EXHIBITS                  |

 

2

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**AIRNET SYSTEMS, INC.**

 

**CONDENSED CONSOLIDATEDBALANCE SHEETS**

 
| **In  thousands**                                                                                                                        |   | **September 30  2003** |        | **December 31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|-----------------------------|--------|
|                                                                                                                                     |   | **(unaudited)**             |        |                        |   |
| **ASSETS**                                                                                                                               |   |                        |        |                        |   |
| Current assets:                                                                                                                          |   |                        |        |                        |   |
| Cash and cash  equivalents                                                                                                               |   | **$**                       | **1,519**   |                        | $      | 1,484 |   |
| Accounts receivable,  less allowances                                                                                                    |   | **17,678**                  |        | 19,029                      |   |
| Inventory and spare  parts                                                                                                               |   | **7,140**                   |        | 6,926                       |   |
| Deferred taxes                                                                                                                           |   | **217**                     |        | 220                         |   |
| Taxes receivable                                                                                                                         |   | **1,228**                   |        | —                      |   |
| Deposits and prepaids                                                                                                                    |   | **4,433**                   |        | 3,675                       |   |
| Total current assets                                                                                                                     |   | **32,215**                  |        | 31,334                      |   |
|                                                                                                                                     |   |                        |        |                        |   |
| Net property and  equipment                                                                                                              |   | **111,615**                 |        | 111,349                     |   |
| Other assets:                                                                                                                            |   |                        |        |                        |   |
| Goodwill, net of  accumulated amortization                                                                                               |   | **4,018**                   |        | 4,018                       |   |
| Other intangibles, net  of accumulated amortization                                                                                      |   | **38**                      |        | 38                          |   |
| Other                                                                                                                                    |   | **455**                     |        | 964                         |   |
| **Total  assets**                                                                                                                        |   | **$**                       | **148,341** |                        | $      | 147,703 |   |
|                                                                                                                                     |   |                        |        |                        |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                           |   |                        |        |                        |   |
| Current liabilities:                                                                                                                     |   |                        |        |                        |   |
| Accounts payable                                                                                                                         |   | **$**                       | **7,723**   |                        | $      | 6,008 |   |
| Salaries and related  liabilities                                                                                                        |   | **4,388**                   |        | 4,568                       |   |
| Deferred revenues                                                                                                                        |   | **1,381**                   |        | —                      |   |
| Accrued expenses                                                                                                                         |   | **1,333**                   |        | 897                         |   |
| Taxes payable                                                                                                                            |   | **200**                     |        | 499                         |   |
| Current portion of notes  payable                                                                                                        |   | **5,221**                   |        | 5,193                       |   |
| Total current  liabilities                                                                                                               |   | **20,246**                  |        | 17,165                      |   |
|                                                                                                                                     |   |                        |        |                        |   |
| Other liabilities                                                                                                                        |   | **84**                      |        | 106                         |   |
| Notes payable, less  current portion                                                                                                     |   | **29,980**                  |        | 36,601                      |   |
| Deferred tax liability                                                                                                                   |   | **14,490**                  |        | 13,035                      |   |
|                                                                                                                                     |   |                        |        |                        |   |
| Shareholders’ equity:                                                                                                               |   |                        |        |                        |   |
| Preferred shares, $.01  par value; 10,000 shares authorized; no shares issued and outstanding                                            |   | **—**                  |        | —                      |   |
| Common shares, $.01 par  value; 40,000 shares authorized; 12,753 shares issued at September 30,  2003 and at December 31, 2002 |   | **128**                     |        | 128                         |   |
| Additional paid-in-capital                                                                                                               |   | **77,862**                  |        | 77,152                      |   |
| Retained earnings                                                                                                                        |   | **31,227**                  |        | 29,158                      |   |
| Accumulated other  comprehensive loss                                                                                                    |   | **(46**                     | )           | (59                         | )      |
| Treasury shares, 2,728  and 2,599 shares held at cost at September 30, 2003 and  December 31, 2002, respectively               |   | **(25,630**                 | )           | (25,583                     | )      |
| Total shareholders’  equity                                                                                                         |   | **83,541**                  |        | 80,796                      |   |
|                                                                                                                                     |   |                        |        |                        |   |
| **Total  liabilities and shareholders’ equity**                                                                                     |   | **$**                       | **148,341** |                        | $      | 147,703 |   |

 

See notes to condensed consolidated financialstatements

 

3

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**AIRNET SYSTEMS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS** - Unaudited

 
|                                                                                                 |   | **Three Months Ended  September 30,** |       | **Nine Months Ended  September 30,** |   |
|------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|-------------------------------------------|--------|
| **In  thousands, except per share data**                                                             |   | **2003**                                   |       | **2002**                                  |   | **2003** |   | **2002** |   |
|                                                                                                 |   |                                       | ** ** |                                      |   |   | ** ** |   |   |
| **NET  REVENUES**                                                                                    |   |                                       | ** ** |                                      |   |   | ** ** |   |   |
| Air transportation, net  of excise tax                                                               |   |                                       | ** ** |                                      |   |   | ** ** |   |   |
| Bank services                                                                                        |   | **$**                                      | **25,996** | ** **                                | $      | 26,293 |   | **$** | **78,000** | ** ** | $ | 77,097 |   |
| Express services                                                                                     |   | **9,265**                                  | ** ** | 9,256                                     |   | **26,906** | ** ** | 25,036 |   |
| Aviation services and  other operations                                                              |   | **2,759**                                  | ** ** | 1,394                                     |   | **6,773** | ** ** | 3,701 |   |
| **Total  net revenues**                                                                              |   | **38,020**                                 | ** ** | 36,943                                    |   | **111,679** | ** ** | 105,834 |   |
|                                                                                                 |   |                                       | ** ** |                                      |   |   | ** ** |   |   |
| **COSTS  AND EXPENSES**                                                                              |   |                                       | ** ** |                                      |   |   | ** ** |   |   |
| Air transportation                                                                                   |   |                                       | ** ** |                                      |   |   | ** ** |   |   |
| Wages and benefits                                                                                   |   | **5,790**                                  | ** ** | 5,504                                     |   | **16,917** | ** ** | 15,673 |   |
| Aircraft fuel                                                                                        |   | **4,655**                                  | ** ** | 4,728                                     |   | **14,548** | ** ** | 12,694 |   |
| Aircraft maintenance                                                                                 |   | **2,750**                                  | ** ** | 2,899                                     |   | **9,085** | ** ** | 9,030 |   |
| Contracted air costs                                                                                 |   | **2,411**                                  | ** ** | 2,099                                     |   | **7,596** | ** ** | 6,624 |   |
| Ground courier                                                                                       |   | **6,392**                                  | ** ** | 6,405                                     |   | **18,730** | ** ** | 18,061 |   |
| Depreciation                                                                                         |   | **4,549**                                  | ** ** | 4,375                                     |   | **13,060** | ** ** | 13,036 |   |
| Other                                                                                                |   | **4,141**                                  | ** ** | 3,287                                     |   | **11,898** | ** ** | 9,846 |   |
| Selling, general and  administrative                                                                 |   | **5,086**                                  | ** ** | 4,701                                     |   | **15,206** | ** ** | 13,305 |   |
| **Total  costs and expenses**                                                                        |   | **35,774**                                 | ** ** | 33,998                                    |   | **107,040** | ** ** | 98,269 |   |
| Income from continuing  operations before interest, taxes and cumulative effect of accounting change |   | **2,246**                                  | ** ** | 2,945                                     |   | **4,639** | ** ** | 7,565 |   |
| Interest expense                                                                                     |   | **312**                                    | ** ** | 477                                       |   | **1,060** | ** ** | 1,224 |   |
| Income from continuing  operations before taxes and cumulative effect of accounting change           |   | **1,934**                                  | ** ** | 2,468                                     |   | **3,579** | ** ** | **6,341** | ** ** |
| Provision for income  taxes                                                                          |   | **862**                                    | ** ** | 963                                       |   | **1,503** | ** ** | 2,475 |   |
|                                                                                                 |   |                                       | ** ** |                                      |   |   | ** ** |   |   |
| **Income  from continuing operations before cumulative effect of accounting change**                 |   | **1,072**                                  | ** ** | 1,505                                     |   | **2,076** | ** ** | 3,866 |   |
|                                                                                                 |   |                                       | ** ** |                                      |   |   | ** ** |   |   |
| **Loss  from discontinued operations, net of taxes**                                                 |   | **(25**                                    | **)**      | (64                                       | )      | **(8** | **)** | (174 | ) |
|                                                                                                 |   |                                       | ** ** |                                      |   |   | ** ** |   |   |
| Cumulative effect of  accounting change, net of taxes                                                |   | —                                     | ** ** | —                                    |   | — | ** ** | 1,868 |   |
|                                                                                                 |   |                                       | ** ** |                                      |   |   | ** ** |   |   |
| **Net  income**                                                                                      |   | **$**                                      | **1,047**  | ** **                                | $      | 1,441 |   | **$** | **2,068** | ** ** | $ | 1,824 |   |
|                                                                                                 |   |                                       | ** ** |                                      |   |   | ** ** |   |   |
| Income (loss) per share  - basic and diluted                                                         |   |                                       | ** ** |                                      |   |   | ** ** |   |   |
| Continuing operations                                                                                |   | **$**                                      | **0.11**   | ** **                                | $      | 0.15 |   | **$** | **0.21** | ** ** | $ | 0.38 |   |
| Discontinued operations                                                                              |   | **$(0.01**                                 | **)**      | $(0.01                                    | )      | **$(0.01** | **)** | $(0.02 | ) |
| Cumulative effect of  accounting change                                                              |   | —                                     | ** ** | —                                    |   | **—** | ** ** | $ | 0.18 |   |
| Net income per share -  basic and diluted                                                            |   | **$**                                      | **0.10**   | ** **                                | $      | 0.14 |   | **$** | **0.20** | ** ** | $ | 0.18 |   |

 

See notes tocondensed consolidated financial statements

 

4

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**AIRNET SYSTEMS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS** - Unaudited

 
|                                                                                         |   | **Nine Months Ended  September 30,** |       |
|----------------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|
| **In  thousands**                                                                            |   | **2003**                                  |       | **2002** |   |
|                                                                                         |   |                                      | ** ** |   |   |
| **Operating  activities:**                                                                   |   |                                      | ** ** |   |   |
| Net income                                                                                   |   | **$**                                     | **2,068**  | ** ** | $ | 1,824 |   |
| Cumulative effect of  accounting change in 2002                                              |   | **—**                                | ** ** | 1,868 |   |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities: |   |                                      | ** ** |   |   |
| Depreciation                                                                                 |   | **13,101**                                | ** ** | 13,103 |   |
| Amortization of  intangibles                                                                 |   | **—**                                | ** ** | 17 |   |
| Deferred taxes                                                                               |   | **1,450**                                 | ** ** | **—** | ** ** |
| Provision for losses on  accounts receivable                                                 |   | **347**                                   | ** ** | 302 |   |
| (Gain) loss on  disposition of assets                                                        |   | **(93**                                   | **)**      | 79 |   |
| Cash provided by (used  in) operating assets and liabilities:                                |   |                                      | ** ** |   |   |
| Accounts receivable                                                                          |   | **1,004**                                 | ** ** | (2,748 | ) |
| Inventory and spare  parts                                                                   |   | **(215**                                  | **)**      | (1,078 | ) |
| Prepaid expenses                                                                             |   | **(759**                                  | **)**      | (2,349 | ) |
| Accounts payable                                                                             |   | **1,716**                                 | ** ** | 2,170 |   |
| Deferred income and  accrued expenses                                                        |   | **1,817**                                 | ** ** | (213 | ) |
| Taxes payable                                                                                |   | **(232**                                  | **)**      | 1,210 |   |
| Salaries and related  liabilities                                                            |   | **(180**                                  | **)**      | (838 | ) |
| Other, net                                                                                   |   | **(26**                                   | **)**      | (204 | ) |
| **Net  cash provided by operating activities**                                               |   | **19,998**                                | ** ** | 13,143 |   |
|                                                                                         |   |                                      | ** ** |   |   |
| **Investing  activities:**                                                                   |   |                                      | ** ** |   |   |
| Purchases of property  and equipment                                                         |   | **(13,413**                               | **)**      | (25,402 | ) |
| Proceeds from sales of  property and equipment                                               |   | **17**                                    | ** ** | 336 |   |
| Proceeds from sale of  Mercury Business Services                                             |   | **122**                                   | ** ** | **—** | ** ** |
| **Net  cash used in investing activities**                                                   |   | **(13,274**                               | **)**      | (25,066 | ) |
|                                                                                         |   |                                      | ** ** |   |   |
| **Financing  activities:**                                                                   |   |                                      | ** ** |   |   |
| Proceeds from Incentive  Stock Plan programs                                                 |   | **141**                                   | ** ** | 163 |   |
| Net borrowings  (repayments) under the revolving credit facility                             |   | **(5,700**                                | **)**      | 10,397 |   |
| Net borrowings  (repayments) of long-term debt                                               |   | **(894**                                  | **)**      | 5,288 |   |
| Purchase of treasury  shares                                                                 |   | **(236**                                  | **)**      | — |   |
| **Net  cash provided by (used in) financing activities**                                     |   | **(6,689**                                | **)**      | 15,848 |   |
|                                                                                         |   |                                      | ** ** |   |   |
| Net increase in cash                                                                         |   | **35**                                    | ** ** | 3,925 |   |
| Cash and cash  equivalents at beginning of period                                            |   | **1,484**                                 | ** ** | 377 |   |
| **Cash  and cash equivalents at end of period**                                              |   | **$**                                     | **1,519**  | ** ** | $ | 4,302 |   |

 

See notes to condensed consolidated financialstatements

 

5

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**AIRNETSYSTEMS, INC.**

 

**NOTES TO CONDENSED****CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.****             ****Basis of Presentation**

 

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

 

The accompanying condensedconsolidated financial statements include the accounts of AirNet.  These financial statements are unaudited andhave been prepared pursuant to the rules and regulations of the United StatesSecurities and Exchange Commission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted as permitted by such rules andregulations.

 

The financial information includedherein reflects all adjustments (consisting of normal recurring adjustments),which are, in the opinion of management, necessary for a fair presentation ofthe results of interim periods.  Theresults of operations for the three-month and nine-month periods presented arenot necessarily indicative of the results to be expected for the year endingDecember 31, 2003.

 

The preparation of the condensedconsolidated financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the amounts reported in those financial statements and accompanyingnotes thereto.  Actual results coulddiffer from those estimates.

 

Certain reclassifications have beenmade in the prior year’s financial statements to conform to the presentationfor the three months and nine months ended September 30, 2003.

 

**2.****             ****Goodwilland Other Intangible Assets**

### ** **

AirNet adopted Statement ofFinancial Accounting Standards (SFAS) No. 142, *Goodwilland Other Intangible Assets* as of January 1, 2002.  The Company performed the transitionalgoodwill impairment test using the process prescribed in SFAS No. 142 with ameasurement date of January 1, 2002. Under SFAS No. 142, an impairment charge resulting from the transitionalimpairment tests is reflected as a cumulative effect of a change in accountingprinciple in the first quarter of 2002. Based on the results of itstransitional goodwill impairment test, the Company recognized an impairmentloss, net of tax, of $1,868,000, for goodwill related to the Mercury BusinessServices unit as a cumulative effect of a change in accounting principle in thefirst quarter of 2002.

 

6

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**3.****             ****Stock Plans and Awards**

 

SFAS No. 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.

 

The Company accounts for itsemployee and director stock-based compensation plan under the recognition andmeasurement principles of APB Opinion No. 25, *Accountingfor Stock Issued to Employees,* and related interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under the plan have an exerciseprice equal to the market value of the underlying common shares on the date ofgrant.  Pro forma information regardingnet income and net income per share, as required by SFAS No. 148, has beendetermined as if the Company had accounted for its employee stock options underthe 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.

 

The following table illustrates theeffect on net income and net income per share as if the Company had applied thefair value recognition provisions of SFAS No. 123 to stock-based employeecompensation (in thousands, except per share data).

 
|                                                                                                                                          |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                                                                          |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
|                                                                                                                                          |   |                                       |   |                                      |   |   |   |   |   |
| Net  income, as reported                                                                                                                      |   | $                                          | 1,047  |                                      | $      | 1,441 |   | $ | 2,068 |   | $ | 1,824 |   |
|                                                                                                                                          |   |                                       |   |                                      |   |   |   |   |   |
| Deduct:  Total stock-based employee compensation  expense determined under fair value method for all awards, net of related tax  effects |   | (23                                        | )      | (40                                       | )      | (108 | ) | (196 | ) |
|                                                                                                                                          |   |                                       |   |                                      |   |   |   |   |   |
| Pro  forma net income                                                                                                                         |   | $                                          | 1,024  |                                      | $      | 1,401 |   | $ | 1,960 |   | $ | 1,628 |   |
|                                                                                                                                          |   |                                       |   |                                      |   |   |   |   |   |
| Net  income per share – basic and diluted:                                                                                               |   |                                       |   |                                      |   |   |   |   |   |
| As  reported                                                                                                                                  |   | $                                          | .10    |                                      | $      | .14 |   | $ | .20 |   | $ | .18 |   |
| Pro  forma                                                                                                                                    |   | $                                          | .10    |                                      | $      | .14 |   | $ | .19 |   | $ | .16 |   |

 

7

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**4.****             ****Income Per Share From Continuing Operations**

 

The following table sets forth thecomputation of basic and diluted income from continuing operations per share(in thousands, except per share data):

 
|                                                      |   | **Three Months Ended  September 30,** |   | **Nine Months  Ended  September 30,** |   |
|-----------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
|                                                      |   | **2003**                                   |   | **2002**                                   |   | **2003** |   | **2002** |   |
| Numerator:                                                |   |                                       |   |                                       |   |   |   |   |   |
| Income  from continuing operations                        |   | $                                          | 1,072  |                                       | $      | 1,505 |   | $ | 2,076 |   | $ | 3,866 |   |
|                                                      |   |                                       |   |                                       |   |   |   |   |   |
| Denominator:                                              |   |                                       |   |                                       |   |   |   |   |   |
| Basic –  weighted average shares outstanding         |   | 10,070                                     |   | 10,143                                     |   | 10,106 |   | 10,137 |   |
|                                                      |   |                                       |   |                                       |   |   |   |   |   |
| Diluted                                                   |   |                                       |   |                                       |   |   |   |   |   |
| Stock  options – associates, officers, and directors |   | 19                                         |   | 78                                         |   | 20 |   | 142 |   |
| Adjusted  weighted average shares outstanding             |   | 10,089                                     |   | 10,221                                     |   | 10,126 |   | 10,279 |   |
|                                                      |   |                                       |   |                                       |   |   |   |   |   |
| Income  per share from continuing operations –       |   |                                       |   |                                       |   |   |   |   |   |
| Basic  and diluted:                                       |   | $                                          | 0.11   |                                       | $      | 0.15 |   | $ | 0.21 |   | $ | 0.38 |   |

 

Common shares subject tooutstanding stock options were excluded from the diluted weighted averageshares outstanding calculation, as the exercise price of the stock optionsexceeded the average fair market value of the underlying common shares for theperiod, were 883,000 and 1,025,000 for the three months and nine months endedSeptember 30, 2003, respectively.

 

**5.****             ****Comprehensive income**

 

Comprehensive income is comprisedof net income of the Company and the change in the fair value of interest rateswap agreements, net of income taxes. Comprehensive income for the nine months ended September 30, 2003and September 30, 2002 was $2,081,000 and $1,954,000, respectively.Comprehensive income for the three months ended September 30, 2003 was$1,060,000 and comprehensive income for the three months endedSeptember 30, 2002 was $1,466,000.

 

8

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**6.****             ****Discontinued Operations**

 

The Company sold certain assets ofits Mercury Business Services unit that focuses on customers with next daytransportation needs. The Company is increasing its marketplace effort toprovide value-added, expedited transportation services. Since these twodivergent business models serve different customers with distinctly differenttransportation needs, the Company decided to divest certain assets of the MercuryBusiness Services unit.

 

The Company sold the assets,primarily the accounts receivable, personal property and intellectual property,with a carrying amount at the time of sale of approximately $1.0 million,  to Mercury Business Services, Inc, a Delawarecorporation, on August 11, 2003 for approximately $1.1 million.

 

The Company received approximately$455,000 of the purchase price in a ninety day promissory note secured by theassets being sold and guaranteed by the shareholders of Mercury Business Services,Inc. At September 30, 2003, approximately $303,000 was outstanding underthe promissory note. Under terms of the Asset Purchase Agreement, approximately$536,000 of the purchase price was paid with AirNet Systems, Inc. common sharesowned by the shareholders of Mercury Business Services, Inc., including 56,000common shares tendered to AirNet Systems, Inc., prior to the closing at $4.30per common share (the closing price of the AirNet Systems, Inc., common shareson the NYSE on July 25, 2003) and 68,494 common shares tendered to AirNetSystems, Inc., on the closing date at $4.31 per common share (the averageclosing price of the AirNet Systems, Inc., common shares on the NYSE onAugust 4-6, 2003). The balance of the purchase price was paid in cash.

 

Revenues from the Mercury BusinessServices unit, included in loss from discontinued operations, for the ninemonths ended September 30, 2003, were $5.9 million compared to $6.6million a year ago. For the quarter ended September 30 2003, revenuestotaled $1.0 million compared to $2.2 million for the same quarter last year.

 

Loss before taxes for the ninemonths ended September 30, 2003 was $13,000, net of $100,000 gain on thesale of assets, compared to a loss before taxes of $290,000 a year ago. For thequarter ended September 30, 2003, loss before taxes was $41,000, net of$100,000 gain on the sale of assets, compared to a loss before taxes of$106,000 for the same period last year.

 

The Company realized an after taxgain on the sale of the assets of approximately $60,000, which is included inthe loss from discontinued operations on the statement of operations.

 

**7.****             ****Income Taxes**

 

In connection with the 1996repurchase and cancellation of the Donald Wright Warrant, the Companyrecognized a related tax benefit estimated to be $7.0 million based uponmanagement’s judgment and estimation of the portion of the Donald WrightWarrant which would be deductible for income tax purposes.  This tax benefit was recognized as additionalpaid in capital on the Company’s Balance Sheet and has had no effect on theCompany’s Statement of Operations. During the third quarter 2003, this matter was partially resolved andthe Company has realized tax deductions related to this transaction in excessof management’s original estimates resulting in additional tax benefits.  The additional tax benefits associated withthe deductible portion of the Donald Wright Warrant have exceeded the originalestimate by $1.3 million.  Theadditional tax benefit, as was the initial estimated tax benefit associatedwith the Donald Wright Warrant, has been recorded at September 30, 2003 asan increase to additional paid in capital.

 

During the third quarter of 2003,the Company reviewed and adjusted its estimated effective income tax rate from39% to 42% based on forecasted income for the remainder of the year.

 

9

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**AIRNETSYSTEMS, INC.**

 

**ITEM 2****-MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL**

**CONDITIONAND RESULTS OF OPERATIONS**

 

**Safe HarborStatement**

 

Except for the historicalinformation contained in this Form 10-Q, the matters discussed, including, butnot limited to, information regarding future economic performance and plans andobjectives of AirNet’s management, are forward-looking statements that involverisks and uncertainties. When used in this document, the words “believe”,“anticipate”, “estimate”, “expect”, “intend”, “may”, “plan”, “project” andsimilar expressions are intended to be among statements that identifyforward-looking statements.  Suchstatements involve risks and uncertainties including, but not limited to, thefollowing which could cause actual results to differ materially from anyforward-looking statement: potential regulatory changes by the Federal AviationAdministration (“FAA”), which could increase the regulation of AirNet’sbusiness, or the Federal Reserve, implementation of the Check Clearing Act ofthe 21st Century, or similar legislation, which could change thecompetitive environment of transporting canceled checks; adverse weatherconditions; potential changes in locally and federally mandated securityrequirements; increases in aviation fuel costs not fully offset by AirNet’sfuel surcharge program; changes in check processing and shipment patterns ofbank customers; acts of war and terrorist activities; the impact of a prolongedweakening U.S. economy on time-critical shipment volumes; 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 Item 7 of the Annual Reporton Form 10-K for the fiscal year ended December 31, 2002 for additionaldetails relating to risk factors that could affect AirNet’s results and causethose results to differ materially from those expressed in forward-lookingstatements.

 

**General**

 

Critical Accounting Policies andEstimates

 

The preparation of financialstatements in accordance with accounting principles generally accepted in theUnited States requires management to adopt accounting policies and makesignificant judgements and estimates to develop amounts reflected and disclosedin the financial statements. In many cases, there are alternative policies orestimation techniques that could be used. AirNet’s management maintains athorough process to review the application of its accounting policies and toevaluate the appropriateness of the estimates; however, even under optimalcircumstances, estimates routinely require adjustment based on changingcircumstances and the receipt of new or better information.

 

Management has discussed thedevelopment and selection of the Company’s critical accounting policies andestimates with the Audit Committee of AirNet Systems, Inc.’s Board of Directorsand with its independent auditors.

 

AirNet’s 2002 audited consolidatedfinancial statements, included in Item 8 of AirNet Systems, Inc.’s AnnualReport on Form 10-K for the fiscal year ended December 31, 2002 (File No.1-13025), contain additional disclosures regarding AirNet’s accounting policiesand Item 7 of that Annual Report includes a summary of AirNet’s criticalaccounting policies. The information appearing therein may be useful whenreading this discussion and analysis of financial condition and results ofoperations.

 

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**Results ofOperations**

 

*Three monthsended September 30, 2003 compared to three months ended September 30,2002*

 

Net revenues increased 2.9% to$38.0 million for third quarter 2003 from $36.9 million in the same quarterlast year.  Revenues for Aviationservices and Express services rose 98.0% and 0.1%, respectively, while Bankservices revenues declined 1.1% for the third quarter compared to third quarter2002.  In August 2003, AirNet soldcertain assets of its Mercury Business Services unit.  Revenue and expense comparisons do not include revenues and expensesassociated with the Mercury Business Services unit as they are included in discontinuedoperations.  For more information, seeFootnote 6, Discontinued Operations, to Condensed Consolidated FinancialStatements.

 

Bank services revenues were $26.0million for the third quarter 2003 versus $26.3 million a year ago.  The third quarter 2003 results includedrevenues from several Proof of Delivery (“POD”) routes added in the fourthquarter 2002, new weekend business, as well as security and dispatch chargesimplemented in the third quarter 2002.  Theseincremental revenues were offset by the loss of approximately $0.7 million inrevenues tied to the loss of the Federal Reserve weekend program in the fourthquarter of last year. AirNet’s new pricing plan for Bank services addressesvolume and profitability issues through increased shipment flexibility andincentives.  This pricing strategygained additional support from customers during the first nine months of2003.  The Company believes thisapproach is helping to stabilize revenues and may result in the recapture of aportion of the revenues previously removed from the system.  The number of bank shipments declined 1.6%for the third quarter 2003 compared with last year, primarily due to a 25.7%reduction in the volume of weekend shipments resulting primarily from the lossof the Federal Reserve weekend program. Bank services revenues include $0.8million in fuel surcharges for the third quarter 2003 compared to $0.5 milliona year ago.

 

Revenues for Express servicesremained flat at $9.3 million for the third quarter 2003 and the same quarter ayear ago.  Total Express shipments were1.7% lower than the third quarter 2002. Shipments on the AirNet airline rose 6.2% compared to the third quarter2002 and were 1.3% higher than the second quarter 2003.  Medical revenues were down $0.5 millioncompared to the same quarter a year ago. The loss is primarily due to thereduction of shipment volume that resulted from the implementation of newscreening procedures stipulated by the Transportation Safety Administration inthe third quarter 2002.  In addition,there has been less on-demand charter activity from Express customers in 2003than the prior year.  These decreaseswere offset by increased activity with international customers.  Air Courier revenues increased 18.8%compared to a year ago. Revenues for Express services include $0.2 million infuel surcharges compared to $0.1 million in the same period last year.

 

Aviation services revenues rose98.0% to $2.8 million in the third quarter 2003 compared with $1.4 million ayear ago.  This was due to an improvedperformance in the private passenger charter business where revenues increased106% or approximately $1.2 million compared to the same quarter a yearago.  Aviation services revenuesincreased to 7.3% of total revenues for the third quarter 2003 versus 3.8% lastyear.

 

An index-based fuel surchargeprogram continued during 2003. Approximately $1.0 million in revenues were recorded in the thirdquarter 2003 as a result of the fuel surcharge program, an increase of nearly$0.5 million from the prior year, due to significantly higher fuel prices andthe modification of the fuel surcharge program in third quarter 2002. Fuelsurcharges were historically included as a reduction of fuel expense. All priorperiod amounts have been reclassified to conform to the 2003 presentation.

 

Total costs and**expenses were $35.8 million forthird quarter 2003 versus $34.0 million the prior year.

 

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Wages and benefit expenses rose$0.3 million for the third quarter 2003 compared to last year and were impactedby an increase in higher claims for health care, which the Company self-insuresand which are allocated between operational and administrativedepartments.  Additionally, pilot wagesto support the growth of the passenger charter initiative and call centerstaffing to support the Express business, were higher than the third quarter2002.

 

Although fuel prices were upslightly during the third quarter 2003, hours flown were similar to those flownin the third quarter of the prior year. The increased fuel prices during the third quarter 2003 were offset by achange in mix of hours flown by aircraft type and improved buying habits ascompared to the same time period for the prior year.

 

Aircraft maintenance expense was$0.1 million less than the same period last year due in part to the timing ofrequired inspections and repairs and to a 1.7% reduction in system operatinghours compared to the same period a year ago.

 

Contracted air costs rose $0.3million due to additional sameday and weekend shipments on commercial airlines,more routes subcontracted to third party providers than a year ago, and changesin routes directly related to the weekend business.

 

Ground courier costs remained flatat $6.4 million for the third quarter 2003 compared to last year.  Progress is being achieved toward theCompany’s objective to reduce ground costs per shipment, including a transitionfrom team members to vendors and independent contractors for theseservices.  Operational audits continuein many of the Company’s markets in an effort to determine a more costeffective and appropriate level of third party contractors in each ofthem.  These efforts provide AirNet withthe information that allows it  toachieve greater flexibility in its cost structure.

 

Other expenses for third quarter2003 were $0.9 million higher than a year ago and included an increase inaircraft operating lease expense of $0.1 million, increased operational traveland training costs of $0.2 million and $0.2 million higher aircraft insurancecosts versus the third quarter 2002. Aircraft insurance expenses rose as a result of premium increases inthird quarter and the addition of aircraft to the fleet.

 

Selling, general and administrativeexpense for the third quarter 2003 increased $0.4 million compared to lastyear, of which $0.3 million was for severance expenses.

 

During the third quarter of 2003,the Company reviewed and adjusted its estimated effective income tax rate from39% to 42% based on forecasted income for the remainder of the year.

 

*Nine months endedSeptember 30, 2003 compared to nine months ended September 30, 2002*

 

Net revenues increased 5.5% to$111.7 million for the nine months ended September 30, 2003 from $105.8million last year. Bank services revenues improved 1.2% for the 2003year-to-date period, while Express services revenues rose 7.5% and Aviationservices revenues were 83.0% above the same period in 2002. Revenue and expensecomparisons for the nine months ended September 30, 2003 compared to thenine months ended September 30, 2002, do not include revenues and expensesassociated with the Mercury Business Services unit as they are included indiscontinued operations. For more information, see Footnote 6, DiscontinuedOperations, to Condensed Consolidated Financial Statements.

 

The increase in Bank servicesrevenues included a $2.2 million increase in fuel surcharges. Lost revenuesfrom the transportation of cash letters have been nearly offset by revenuesfrom additional POD business. The loss of the Federal Reserve weekend businessin the fourth quarter 2002 resulted in a decrease in weekend revenues of nearly$2.0 million.

 

Express services revenues were$26.9 million for the nine months ended September 30, 2003 compared to$25.0 million a year ago. Compared to a year ago, revenues from Medicalcustomers

 

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are up 6.2%, revenues from aircourier customers are up 2.7% while revenues from retail customers are down1.8%.

 

The growth in Aviation services andother operations revenues, an increase of $3.1 million over the same periodlast year, is the primarily the result of a 94.3% growth in passenger charterrevenues.

 

An index-based fuel surchargeprogram continued during 2003. Approximately $3.7 million in revenue was recorded in the nine monthsended September 30, 2003 as a result of the fuel surcharge program, anincrease of $2.8 million from the prior year due to significantly higher fuelprices and the modification of the fuel surcharge program in third quarter2002.

 

Total costs and**expenses were $107.0 million for thenine months ended September 30, 2003 versus $98.3 million the prior year.

 

Wages and benefit expenses rose$1.2 million for the nine months ended September 30, 2003 compared to lastyear and were impacted by an increase in higher claims for health care, whichthe Company self-insures.  Additionally,pilot wages to support the growth of passenger charter and call center staffingto support the growth of the Express business were $0.7 million higher than inthe same period a year ago.

 

Aircraft fuel expense increased$1.9 million for the nine months ended September 30, 2003 compared to lastyear, despite an improved mix of hours flown by type of aircraft, due to higherfuel prices. This increase was offset by a $2.8 million increase in fuelsurcharge that is reflected in revenues.

 

Contracted air costs rose $1.0million for the nine months ended September 30, 2003 compared to lastyear, due to additional same day and weekend shipments on commercial airlines,more routes flown by third party providers than a year ago, and changes inroutes directly related to the weekend business. An FAA mandated grounding of apart of the Company’s Navajo fleet also resulted in an increase in contractedair cost in the early part of 2003.  AllNavajo aircraft were returned to service by the end of the first quarter 2003.

 

Ground courier costs also rose $0.7million or 3.7%, for the nine months ended September 30, 2003 compared tolast year as a result of an 8.4% increase in Express shipments. Progress isbeing achieved toward the Company’s objective to reduce ground costs pershipment, including a transition from team members to vendors and independentcontractors for these services.  Operational audits continue to be conducted in all of the Company’smarkets in an effort to determine a more cost effective and appropriate levelof third party contractors in each of them. These efforts provide AirNet withthe information that allows it to achieve greater flexibility in its coststructure.

 

Other expenses for the nine monthsended September 30, 2003 were $11.9 million compared to $9.8 million ayear ago and included $0.5 million of higher costs for aircraft leases and $0.5million of higher costs for aircraft insurance versus the prior year, as theresult of a premium increase in third quarter 2002 and the addition of aircraftto the fleet throughout 2002. Ramp and landing fees also increased $0.2 millioncompared to the same period last year. Operational travel and training costsincreased $0.3 million compared to last year.

 

Selling, general and administrativeexpense for the nine months ended September 30, 2003 were $15.2 million,an increase of $1.9 million compared to last year, of which $0.7 million wasfor severance expenses.  The increasewas also impacted by an increase in health care costs and outside servicesassociated with the development of the passenger charter business and growth ofthe government business. Director and Officer insurance expense increased $0.1million for the nine-month period.

 

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**Liquidity andCapital Resources**

 

*Cash flow fromoperating activities.* Net cash provided by operating activities was $20.0 million for the ninemonths ended September 30, 2003, compared to $13.1 million for the sameperiod in 2002.  Positively impactingcash flow were $1.4 million in prepayments by bank customers under the newpricing strategy implemented during the first quarter 2003 and a $0.3 milliondistribution from the investment of a subsidiary.

 

*Current creditarrangements.* In September 2002, the Company replaced its $50 million revolvingcredit agreement.  The new creditagreement provides the Company with a three-year $35 million unsecuredrevolving credit facility scheduled to expire on September 30, 2005 and afive-year $20.0 million unsecured term loan. The term loan requires quarterly principal installments of $1.0 million.  The credit agreement bears interest, at theCompany’s option, at a fixed rate based upon LIBOR plus a margin determined bythe Company’s leverage ratio as defined in the credit agreement, or a floatingrate based on the greater of the prime rate and the sum of 0.5% plus thefederal funds rate in effect from time to time.  The new credit agreement requires the maintenance of certainminimum tangible net worth and cash flow levels, imposes certain limitations oncapital expenditures and the sale of assets, and restricts the amount ofadditional debt.  As of September 30,2003, there was $16.0 million outstanding on the unsecured term loan and $15.0million outstanding and $20.0 million unused and available on the unsecuredrevolving credit facility.

 

During first quarter 2002, AirNetentered into two five-year term loans totaling approximately $3.0 million withfixed interest rates of 5.77%, each secured by aircraft, and a $3.0 millionterm loan with a floating interest rate based upon LIBOR, secured by twoaircraft. As of September 30, 2003 there was $4.2 million outstanding onthese secured term loans, and the net book value of the aircraft securing theloans totaled approximately $7.2 million.

 

*Investingactivities.*  Capitalexpenditures totaled $13.4 million for the nine months ended September 30,2003 versus $25.4 million in 2002.  Ofthe 2003 expenditures, $1.5 million was for the purchase of a Learjet 35dedicated to passenger charter services, and $9.0 million was for majorperiodic aircraft inspections, major engine overhauls and related flightequipment.  AirNet anticipates it willspend between $20 million and $30 million in total capital expenditures in2003.  AirNet anticipates it willcontinue to acquire aircraft and flight equipment as necessary to maintaingrowth and continue offering quality service to its customers and will evaluatewhether future asset acquisitions should be purchases or leases.

 

AirNet Systems, Inc., announced astock repurchase program in February 2000 allowing AirNet Systems, Inc.,to purchase up to $3.0 million of its common shares.  As of the end of the 2001 fiscal year, $2.4 million of commonshares had been repurchased, and there has been no repurchase activity underthe program since. As such, purchases of approximately $0.6 million of thecommon shares of AirNet Systems, Inc., may still be made over time in the openmarket or through privately negotiated transactions.  Such future purchases would be considered based on current marketconditions and the stock price. AirNet Systems, Inc., acquired 52,410 commonshares, outside the repurchase program, for $249,996 on January 2, 2003from former Chairman Gerald Mercer under the terms of his retirement agreement.

 

The Company sold certain assets,primarily the accounts receivable, personal property and intellectual propertyof its Mercury Business Services unit to Mercury Business Services, Inc., aDelaware corporation on August 11, 2003 for approximately $1.1 million.Mercury Business Services, Inc., paid approximately $455,000 of the purchaseprice through the issuance of a ninety day promissory note secured by theassets being sold and guaranteed by the shareholders of Mercury BusinessServices, Inc. At September 30, 2003, approximately $303,000 wasoutstanding under the promissory note. Under terms of the Asset Purchase Agreement,

 

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approximately $536,000 of thepurchase price was paid with AirNet Systems, Inc. common shares owned by theshareholders of Mercury Business Services, Inc., including 56,000 common sharestendered to AirNet Systems, Inc., prior to the closing at $4.30 per commonshare (the closing price of the AirNet Systems, Inc., common shares on the NYSEon July 25, 2003) and 68,494 common shares tendered to AirNet Systems,Inc., on the closing date at $4.31 per common share (the average closing priceof the AirNet Systems, Inc., common shares on the NYSE on August 4-6,2003). The balance of the purchase price was paid in cash.

 

AirNet anticipates that operatingcash and capital expenditure requirements will continue to be funded by cashflow from operations, cash on hand, borrowings in conjunction with the bankcredit facility or other sources, including leasing.

 

**Seasonality andVariability in Quarterly Results**

 

AirNet’s operations historicallyhave been somewhat seasonal and somewhat dependent on the number of bankingholidays falling during the week. Because financial institutions are currently AirNet’s principalcustomers, AirNet’s air system is scheduled primarily around the needs offinancial institution customers.  Whenfinancial institutions are closed, there is no need for AirNet to operate afull system.  AirNet’s fiscal quarterending December 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 affectedby the weather.  AirNet generallyexperiences higher maintenance costs during its fiscal quarter endingMarch 31.  Winter weather oftenrequires additional costs for de-icing, hangar rental and other aircraftservices.

 

**Item 3**.           Quantitative and QualitativeDisclosures About Market Risk

** **

### **Inflationand Interest Rates**

### ** **

AirNet is exposed to certain marketrisks from transactions that are entered into during the normal course ofbusiness.  AirNet’s primary market riskexposure relates to interest rate risk. At September 30, 2003, AirNet had a $31.0 million outstandingbalance under its credit agreement subject to market rate changes in interest.The credit agreement bears interest, at the Company’s option, at a fixed ratebased upon LIBOR plus a margin determined by the Company’s leverage ratio asdefined in the credit agreement, or a floating rate based on the greater of theprime rate and the sum of 0.5% plus the federal funds rate in effect from timeto time.  Assuming borrowing levels atSeptember 30, 2003, a one hundred basis point change in interest rateswould impact net interest expense by approximately $310,000 per year.

 

During first quarter 2002, AirNetentered into two five-year term loans totaling approximately $3.0 million withfixed interest rates of 5.77%, each secured by an aircraft, and a $3.0 millionterm loan with a floating interest rate based upon LIBOR, secured by twoaircraft. However, in February 2002, AirNet entered into an interest rateswap agreement with a bank relative to a $3.0 million term loan, with anotional amount of $3.0 million and a fixed rate of 4.25% plus a margin basedon AirNet’s funded debt ratio.  AtSeptember 30, 2003, the aggregate fair value of the interest rate swap wasapproximately ($84,000).

 

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**Fuel Surcharge**

 

AirNet has historically maintaineda fuel surcharge/rebate program for its Bank customers.  Under this program, as the OPIS-CMH (OhioPrice Information Service – Columbus, Ohio Station) price of jet fuel exceeds aceiling amount per gallon, Bank customers are surcharged.  In turn, if the OPIS-CMH price falls below afloor amount per gallon, the same customers receive a rebate.  In August 2002, AirNet increased thefuel surcharge rate to better match its cost structure with the OPIS-CMH index.

 

In February 2002, AirNetrescinded its 4% fuel surcharge on Express services and implemented a surchargeprogram using the OPIS-CMH index.

 

**Item4****.****          ****Controls and Procedures**

** **

With the participation ofmanagement of AirNet Systems, Inc. (the “Registrant”), including theRegistrant’s principal executive officer and principal financial officer, theRegistrant has evaluated the effectiveness of its disclosure controls andprocedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934(the “Exchange Act”)) as of the end of the period covered by this QuarterlyReport on Form 10-Q. Based upon that evaluation, the Registrant’s principalexecutive officer and the Registrant’s principal financial officer haveconcluded that such disclosure controls and procedures are effective as of theend of the period covered by this Quarterly Report on Form 10-Q to ensure thatmaterial information relating to the Registrant and its consolidatedsubsidiaries is made known to them, particularly during the period for whichthe Registrant’s periodic reports, including this Quarterly Report on Form10-Q, are being prepared.

 

In addition, there were nosignificant changes during the period covered by this Quarterly Report on Form10-Q in the Registrant’s internal control over financial reporting (as definedin Rule 13a -15 under the Exchange Act) that have materially affected, or arereasonably likely to materially affect, the Registrant’s internal control overfinancial reporting.

 

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**AIRNETSYSTEMS, INC.**

 

**PART II****- OTHERINFORMATION**

 

Item 1.             LegalProceedings**.**

 

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

 

Item 2.             Changes in Securities and Use of Proceeds. NotApplicable

 

Item 3.             Defaults Upon Senior Securities.  Not Applicable

 

Item 4.             Submission of Matters to a Vote of SecurityHolders.  Not Applicable

 

Item 5.             OtherInformation.  Not applicable.

 

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

 

(a)          Exhibits:

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                       |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1             |   | Asset Purchase Agreement, dated  July 11, 2003, by and among AirNet Systems, Inc., AirNet Management,  Inc., Mercury Business Services, Inc., Andrew R. Cooke, Peter G. Salisbury  and Christopher F. Valente [ incorporated herein by reference to Exhibit 2.1  to the Current Report on Form 8-K of AirNet Systems, Inc., dated  July 15, 2003, and filed on that day (File No. 1-13025)] |
| 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)         Reportson Form 8-K:

 

On July 15, 2003, AirNetSystems, Inc. filed a Current Report on Form 8-K dated that same day reportingunder Item 5. Other Events and Regulation FD Disclosure, the executionof the Asset Purchase Agreement by and among AirNet Systems, Inc., AirNetManagement, Inc., and Mercury Business Services, Inc.

 

On August 13, 2003, AirNetSystems, Inc. filed a Current Report on Form 8-K dated August 11, 2003,reporting under Item 5. Other Events and Regulation FD Disclosure theresignation of its Chief Financial Officer and the appointment of a new ChiefFinancial Officer effective September 1, 2003.

 

On August 13, 2003, AirNetSystems, Inc. filed a Current Report on Form 8-K dated that same day reportingunder Item 5. Other Events and Regulation FD Disclosure, the completionof the sale of certain assets of its Mercury Business Services unit to MercuryBusiness, Inc.

 

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**AIRNETSYSTEMS, INC.**

 

**SIGNATURE**

** **

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
| Dated:  November 13, 2003 | By:                                                | /s/ Gary W. Qualmann |   |
|-------------------------------------|----------------------------------------------------|----------------------|--------|
|                                | Gary W. Qualmann,                                  |
|                                | Chief Financial Officer,  Treasurer and  Secretary |
|                                | (Duly Authorized Officer)                          |
|                                | (Principal Financial Officer)                      |

 

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**AIRNETSYSTEMS, INC.**

 

**INDEX TO EXHIBITS**

** **
| **Exhibit No.** |   | **Description_**                                                                                                                                                                                                                                                                                                                                                                                      |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1             |   | Asset Purchase Agreement, dated  July 11, 2003, by and among AirNet Systems, Inc., AirNet Management,  Inc., Mercury Business Services, Inc., Andrew R. Cooke, Peter G. Salisbury  and Christopher F. Valente [ incorporated herein by reference to Exhibit 2.1  to the Current Report on Form 8-K of AirNet Systems, Inc., dated  July 15, 2003, and filed on that day (File No. 1-13025)] |
| 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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