**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 March 31, 2003**                                                                                                            |
|                                                                                                                                                               |   |   |
| **or**                                                                                                                                                             |
|                                                                                                                                                               |   |   |
| **o**                                                                                                                                                              |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                               |   |   |
| **For  the transition period from             to            ** |
|                                                                                                                                                               |   |   |
| **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 all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days. Yes ý No o

 

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

 

As of May 8, 2003, there were 10,131,978 shares of theregistrant’s common stock, par value $0.01, outstanding.

 

 

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**TABLE OFCONTENTS**

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

 

2

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**AIRNETSYSTEMS, INC.**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 

(In thousands, exceptshare data)

 
|                                                                                                                       |   | **March 31,  2003** |        | **December 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-------------|------------------------|--------|
|                                                                                                                       |   | **(unaudited)**     |        |                   |   |
| **ASSETS**                                                                                                                 |   |                |        |                   |   |
| Current assets:                                                                                                            |   |                |        |                   |   |
| Cash and cash equivalents                                                                                                  |   | **$**               | **2,372**   |                   | $      | 1,484 |   |
| Accounts receivable, less allowances                                                                                       |   | **18,928**          |        | 19,029                 |   |
| Inventory and spare parts                                                                                                  |   | **7,438**           |        | 6,926                  |   |
| Deferred income taxes                                                                                                      |   | **220**             |        | 220                    |   |
| Deposits and prepaids                                                                                                      |   | **3,145**           |        | 3,675                  |   |
| Total current assets                                                                                                       |   | **32,103**          |        | 31,334                 |   |
|                                                                                                                       |   |                |        |                   |   |
| Net property and equipment                                                                                                 |   | **112,275**         |        | 111,349                |   |
|                                                                                                                       |   |                |        |                   |   |
| Other assets:                                                                                                              |   |                |        |                   |   |
| Goodwill, net of accumulated amortization                                                                                  |   | **4,018**           |        | 4,018                  |   |
| Other                                                                                                                      |   | **610**             |        | 1,002                  |   |
| **Total assets**                                                                                                           |   | **$**               | **149,006** |                   | $      | 147,703 |   |
|                                                                                                                       |   |                |        |                   |   |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                             |   |                |        |                   |   |
| Current liabilities:                                                                                                       |   |                |        |                   |   |
| Accounts payable                                                                                                           |   | **$**               | **7,198**   |                   | $      | 6,008 |   |
| Salaries and related liabilities                                                                                           |   | **3,977**           |        | 4,568                  |   |
| Accrued expenses                                                                                                           |   | **2,431**           |        | 897                    |   |
| Taxes payable                                                                                                              |   | **471**             |        | 499                    |   |
| Current portion of notes payable                                                                                           |   | **5,193**           |        | 5,193                  |   |
| Total current liabilities                                                                                                  |   | **19,270**          |        | 17,165                 |   |
|                                                                                                                       |   |                |        |                   |   |
| Other liabilities                                                                                                          |   | **103**             |        | 106                    |   |
| Notes payable, less current portion                                                                                        |   | **35,705**          |        | 36,601                 |   |
| Deferred income taxes                                                                                                      |   | **13,036**          |        | 13,035                 |   |
|                                                                                                                       |   |                |        |                   |   |
| Shareholders’ equity:                                                                                                 |   |                |        |                   |   |
| Preferred shares, $.01 par value; 10,000 shares  authorized; no shares issued and outstanding                              |   | **—**          |        | —                 |   |
| Common shares, $.01 par value; 40,000  shares authorized; 12,753 shares issued at March 31, 2003 and at December 31,  2002 |   | **128**             |        | 128                    |   |
| Additional paid-in-capital                                                                                                 |   | **77,046**          |        | 77,152                 |   |
| Retained earnings                                                                                                          |   | **29,456**          |        | 29,158                 |   |
| Accumulated other comprehensive loss                                                                                       |   | **(57**             | **)**       | (59                    | )      |
| Treasury shares, 2,641 and 2,599 shares  held at cost at March 31, 2003 and December 31, 2002, respectively                |   | **(25,681**         | **)**       | (25,583                | )      |
| Total shareholders’ equity                                                                                            |   | **80,892**          |        | 80,796                 |   |
|                                                                                                                       |   |                |        |                   |   |
| **Total liabilities and  shareholders’ equity**                                                                       |   | **$**               | **149,006** |                   | $      | 147,703 |   |

 

See notes to condensed consolidated financial statements

 

3

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**AIRNETSYSTEMS, INC.**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 

(Unaudited, in thousands,except per share data)

 
|                                                               |   | **Three Months Ended  March 31,** |       |
|--------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                               |   | **2003**                          |       | **2002** |   |
|                                                               |   |                              |       |   |   |
| **NET REVENUES**                                                   |   |                              |       |   |   |
| Air transportation, net of excise tax                              |   |                              |       |   |   |
| Bank services                                                      |   | **$**                             | **26,323** |   | $ | 24,792 |   |
| Express services                                                   |   | **11,442**                        |       | 9,706 |   |
| Aviation services and other operations                             |   | **1,743**                         |       | 1,099 |   |
| **Total net revenues**                                             |   | **$**                             | **39,508** |   | 35,597 |   |
|                                                               |   |                              |       |   |   |
| **COSTS AND EXPENSES**                                             |   |                              |       |   |   |
| Wages and benefits                                                 |   | **5,554**                         |       | 4,883 |   |
| Aircraft fuel                                                      |   | **4,942**                         |       | 3,565 |   |
| Aircraft maintenance                                               |   | **3,381**                         |       | 2,864 |   |
| Contracted air costs                                               |   | **4,261**                         |       | 3,630 |   |
| Ground courier                                                     |   | **6,415**                         |       | 5,921 |   |
| Depreciation                                                       |   | **4,209**                         |       | 4,353 |   |
| Other                                                              |   | **3,841**                         |       | 3,323 |   |
| Selling, general and administrative                                |   | **6,014**                         |       | 4,831 |   |
| **Total costs and expenses**                                       |   | **38,617**                        |       | 33,370 |   |
| Income from operations                                             |   | **891**                           |       | 2,227 |   |
| Interest expense                                                   |   | **405**                           |       | 354 |   |
| Income before income taxes                                         |   | **486**                           |       | 1,873 |   |
| Provision for income taxes                                         |   | **189**                           |       | 730 |   |
|                                                               |   |                              |       |   |   |
| **Income before cumulative  effect of accounting change**          |   | **297**                           |       | 1,143 |   |
|                                                               |   |                              |       |   |   |
| Cumulative effect of accounting change, net  of $1,194 tax benefit |   | —                            |       | (1,868 | ) |
|                                                               |   |                              |       |   |   |
| **Net Income (loss)**                                              |   | **$**                             | **297**    |   | $ | (725 | ) |
|                                                               |   |                              |       |   |   |
| Income (loss) per common share - basic and  diluted                |   |                              |       |   |   |
| Income before cumulative effect of  accounting change              |   | **$**                             | **0.03**   |   | $ | 0.11 |   |
| Cumulative effect of accounting change, net  of tax                |   | —                            |       | (0.18 | ) |
| Net income (loss)                                                  |   | **$**                             | **0.03**   |   | $ | (0.07 | ) |

 

See notes to condensed consolidated financial statements

 

4

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**AIRNETSYSTEMS, INC.**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 

(Unaudited, in thousands)

 
|                                                                                      |   | **Three Months ended  March 31,** |      |
|-------------------------------------------------------------------------------------------|--------|-----------------------------------|-----------|
|                                                                                      |   | **2003**                          |      | **2002** |   |
|                                                                                      |   |                              |      |   |   |
| **OPERATING ACTIVITIES**                                                                  |   |                              |      |   |   |
| Net income (loss)                                                                         |   | **$**                             | **297**   |   | $ | (725 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |   |                              |      |   |   |
| Cumulative effect of accounting change                                                    |   | **—**                        |      | 1,868 |   |
| Depreciation                                                                              |   | **4,209**                         |      | 4,353 |   |
| Amortization of intangibles                                                               |   | **—**                        |      | 7 |   |
| Provision for losses on accounts receivable                                               |   | **94**                            |      | 73 |   |
| Loss on disposition of assets                                                             |   | **36**                            |      | 11 |   |
| Cash provided by (used in) operating assets  and liabilities:                             |   |                              |      |   |   |
| Accounts receivable                                                                       |   | **7**                             |      | (2,064 | ) |
| Inventory and spare parts                                                                 |   | **(512**                          | **)**     | (1,021 | ) |
| Deposits and prepaids                                                                     |   | **530**                           |      | (20 | ) |
| Accounts payable                                                                          |   | **1,190**                         |      | (3 | ) |
| Salaries and related liabilities                                                          |   | **(591**                          | **)**     | (1,118 | ) |
| Accrued expenses                                                                          |   | **1,534**                         |      | 593 |   |
| Taxes payable                                                                             |   | **(28**                           | **)**     | 207 |   |
| Other, net                                                                                |   | **391**                           |      | (37 | ) |
| **Net cash provided by  operating activities**                                            |   | **7,157**                         |      | 2,124 |   |
|                                                                                      |   |                              |      |   |   |
| **INVESTING ACTIVITIES**                                                                  |   |                              |      |   |   |
| Purchases of property and equipment                                                       |   | **(5,272**                        | **)**     | (5,211 | ) |
| Proceeds from sales of property and  equipment                                            |   | **101**                           |      | 16 |   |
| **Net cash used in investing  activities**                                                |   | **(5,171**                        | **)**     | (5,195 | ) |
|                                                                                      |   |                              |      |   |   |
| **FINANCING ACTIVITIES**                                                                  |   |                              |      |   |   |
| Proceeds from 1996 Incentive Stock Plan  programs                                         |   | **48**                            |      | 72 |   |
| Net borrowings (repayments) under revolving  credit facilities                            |   | **400**                           |      | (1,150 | ) |
| Net borrowings (repayments) of long-term  debt                                            |   | **(1,296**                        | **)**     | 5,917 |   |
| Purchase of treasury stock                                                                |   | **(250**                          | **)**     | **—** | ** ** |
| **Net cash provided by (used  in) financing activities**                                  |   | **(1,098**                        | **)**     | 4,839 |   |
|                                                                                      |   |                              |      |   |   |
| Net increase in cash                                                                      |   | **888**                           |      | 1,768 |   |
| Cash and cash equivalents at beginning of  period                                         |   | **1,484**                         |      | 377 |   |
|                                                                                      |   |                              |      |   |   |
| **Cash and cash equivalents  at end of period**                                           |   | **$**                             | **2,372** |   | $ | 2,145 |   |

 

See notes tocondensed consolidated financial statements

 

5

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**AIRNETSYSTEMS, INC.**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMEN****TS**

**(Unaudited)**

 

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

 

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

 

The accompanying condensed consolidated financial statements includethe accounts of AirNet Systems, Inc. and its subsidiaries.  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 included herein reflects all adjustments(consisting of normal recurring adjustments), which are, in the opinion ofmanagement, necessary for a fair presentation of the results of interimperiods.  The results of operations forthe three-month periods presented are not necessarily indicative of the resultsto be expected for the year ending December 31, 2003.

 

The preparation of the condensed consolidated financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the amounts reported in thosefinancial statements and accompanying notes thereto.  Actual results could differ from those estimates.

 

Certain reclassifications have been made in the prior year’s financialstatements to conform to the presentation for the three months ended March 31,2003.

 

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

 

AirNet adopted Statement of Financial Accounting Standards (SFAS) No.142, *Goodwill and Other Intangible Assets*as of January 1, 2002.  The Companyperformed the transitional goodwill impairment test using the processprescribed in Statement 142 with a measurement date of January 1, 2002.  Under the Statement, an impairment chargeresulting from the transitional impairment tests is reflected as the cumulativeeffect of a change in accounting principle in the first quarter of 2002. Basedon the results of its transitional goodwill impairment test, the Companyrecognized an impairment loss, net of tax, of $1,868,000, for goodwill relatedto the Mercury Business Services reporting unit as a cumulative effect of achange in accounting principle in the first quarter of 2002.

 

6

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**3.****                       Stock Plansand Awards**

 

The Company accounts for its employee stock-based compensation planunder the recognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees,*and related interpretations.  Nostock-based employee compensation cost is reflected in net income, as alloptions granted under the plan have an exercise price equal to the market valueof the underlying common stock on the date of grant.  SFAS No. 148, *Accounting forStock-Based Compensation -Transition and Disclosure* requiresprominent disclosures in both annual and interim financial statements regardingthe method of accounting for stock-based employee compensation and the effectof the method used on reported results. Pro forma information regarding net income and earnings per share, asrequired by SFAS No. 148, has been determined as if the company had accountedfor its employee stock options under the fair value method of SFAS No. 123, *Accounting for Stock-Based Compensation*.The fair value of these options was estimated at the date of grant using theBlack-Scholes option-pricing model.

 

The following table illustrates the effect on net income and earningsper share if the Company had applied the fair value recognition provisions ofSFAS No. 123, *Accounting for Stock-BasedCompensation,* to stock-based employee compensation (in thousands,except per share data).

 
|                                                                                                                                                     |   | **Three  Months Ended  March 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                                                                                     |   | **2003**                           |   | **2002** |   |
|                                                                                                                                                     |   |                               |   |   |   |   |   |
| Net income  (loss), as reported                                                                                                                          |   | $                                  | 297    |   | $ | (725 | ) |
| Deduct:  Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |   | (60                                | )      | (100 | ) |
|                                                                                                                                                     |   |                               |   |   |   |
| Pro forma net  income                                                                                                                                    |   | $                                  | 237    |   | $ | 825 |   |
|                                                                                                                                                     |   |                               |   |   |   |
| Net income per  common share – basic and diluted:                                                                                                   |   |                               |   |   |   |
| As reported                                                                                                                                              |   | $                                  | .0.03  |   | $ | (0.07 | ) |
| Pro forma                                                                                                                                                |   | $                                  | .0.02  |   | $ | (0.08 | ) |

 

**4.****                       Net IncomePer Share**

 

The following table sets forth the computation of basic and diluted netincome (loss) per common share (in thousands, except per share data):

 
|                                                                    |   | **Three  Months Ended  March 31,** |   |
|-------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                    |   | **2003**                           |   | **2002** | ** ** |
| Numerator:                                                              |   |                               |   |   |   |
| Net income                                                              |   | $                                  | 297    |   | $ | (725 | ) |
|                                                                    |   |                               |   |   |   |
| Denominator:                                                            |   |                               |   |   |   |
| Basic – weighted  average shares outstanding                       |   | 10,117                             |   | 10,131 |   |
|                                                                    |   |                               |   |   |   |
| Diluted                                                                 |   |                               |   |   |   |
| Stock options –  associates, officers, and directors               |   | 3                                  |   | 173 |   |
| Adjusted  weighted average shares outstanding                           |   | 10,120                             |   | 10,304 |   |
|                                                                    |   |                               |   |   |   |
| Net income  (loss) per common share – basic and assuming dilution: |   | $                                  | 0.03   |   | $ | (0.07 | ) |

 

7

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Common shares subject to outstanding stock options excluded from thediluted weighted average shares outstanding calculation, as the exercise priceof the stock options exceeded the average fair market value of the underlyingcommon shares for the period, were 936,000 and 1,103,800 for the three monthsended March 31, 2003 and 2002, respectively.

 

**5.****                       AircraftLeases**

 

On February 1, 2003, AirNet entered into an operating lease for aCessna Caravan aircraft.  The lease termis for five years and the monthly lease payment is $10,000.

 

**6.****                       Comprehensiveincome (loss)**

 

Comprehensive income (loss) is comprised of net income (loss) of theCompany and the change in the fair value of interest rate swap agreements, netof income taxes.  Comprehensive income for the three months ended March31, 2003 was $299,000and comprehensive loss for the three months ended March 31, 2002 was $642,000.

 

8

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**AIRNET SYSTEMS, INC.**

 

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

**CONDITION AND RESULTS OF OPERATIONS**

 

**SafeHarbor Statement**

 

Except for the historical information contained in this Form 10-Q, thematters discussed, including, but not limited to, information regarding futureeconomic performance and plans and objectives of AirNet’s management, areforward-looking statements that involve risks and uncertainties. When used in thisdocument, 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 and uncertainties including, butnot limited to, the following which could cause actual results to differmaterially from any forward-looking statement: potential regulatory changes by the Federal Aviation Administration(“FAA”), which could increase the regulation of AirNet’s business, or theFederal Reserve, which could change the competitive environment of transportingcanceled checks; adverse weather conditions; potential changes in locally andfederally mandated security requirements; increases in aviation fuel costs notfully offset by AirNet’s fuel surcharge program; changes in check processingand shipment patterns of bank customers; acts of war and terrorist activities;the impact of a prolonged weakening U.S. economy on time-critical shipmentvolumes, the acceptance of AirNet’s time-critical service offerings withintargeted Express markets; technological advances and increases in the use ofelectronic funds transfers; as well as other economic, competitive and domesticand foreign governmental factors affecting AirNet’s markets, prices and otherfacets of its operations.  Should one ormore of these risks or uncertainties materialize, or should underlyingassumptions prove incorrect, actual outcomes may vary materially from thoseindicated.  Please refer to Item 7 ofthe Annual Report on Form 10-K for the fiscal year ended December 31, 2002 foradditional details relating to risk factors that could affect AirNet’s resultsand cause those results to differ materially from those expressed inforward-looking statements.

 

**General**

 

AirNet's 2002 audited consolidated financial statements, included inItem 8 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2002 (File No. 1-13025), contain additional disclosuresincluding a summary of AirNet's critical accounting policies.  The information appearing therein mayprovide useful when reading this discussion and analysis of financial conditionand results of operations.

 

**Resultsof Operations**

 

*Three months ended March 31, 2003compared to three months ended March 31, 2002*

 

Net revenues increased 11.0% to $39.5 million for first quarter 2003from $35.6 million in the first quarter last year.  Express services revenues increased to 29.0% of total revenuesfor first quarter 2003 from 27.3% for the same period last year.  Aviation services revenues improved to 4.4%of total revenues for the quarter versus 3.1% a year ago.

 

 

9

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Bank services revenues, excluding fuel surcharges of $1.4 millionin first quarter 2003 and less than $0.1 million last year, rose $0.1million, or 0.6%, to $24.9 million for first quarter 2003 compared to the samequarter last year.  The resultsbenefited from a 4.6% increase in revenue per shipment, partially due tosecurity and dispatch charges implemented during the past year, as well as theaddition of several new proof of delivery (POD) routes and other transportationservices added during the past year. These factors offset a 3.7% decline in the number of shipments versusfirst quarter 2002, which included elimination of shipments related to theFederal Reserve weekend program, the contract for which was not renewed infourth quarter 2002.  A new pricingstrategy is being implemented in 2003 and includes a minimum air system accesscharge for bank customers with a variable cost per pound charge.  Management believes this pricing strategyprovides benefits to both AirNet and its customers as the Company adapts tochanges in the banking industry.  AirNetexpects to regain some of the revenues previously removed from its system.  To date, customers have been receptive tothe change.

 

Express services achieved positive revenues comparisons in each of itskey product categories during first quarter 2003 versus a year ago.  Excluding fuel surcharges, Express servicesrevenues increased to $11.2 million for the quarter from $9.6 million lastyear, led by a 23.4% increase in Medical shipment revenues.

 

Aviation services revenues rose 58.6% to $1.7 million for first quarter2003 compared with $1.1 million for the same period last year.  Revenues from the passenger charter businesstotaled $1.4 million first quarter 2003, as current industry conditions favor acharter operator that offers high quality, flexible and cost effective charterservices, versus $0.9 million last year.

 

An index-based fuel surcharge program based on the OPIS-CMH (Ohio PriceInformation Service – Columbus, Ohio Station) price continued during 2003.  Approximately $1.7 million in revenuewas recorded in first quarter 2003 as a result of the fuel surcharge program,an increase of $1.6 million from the prior year due to significantlyhigher fuel prices and the modification of the fuel surcharge program in thirdquarter 2002.

 

Total costs and**expenses**were $38.6 million forfirst quarter 2003 versus $33.4 million the prior year.

 

Wages and benefit expenses rose $0.7 million for the quarter comparedto last year and were impacted by an increase in health care costs, which theCompany self-insures, due to higher claims. Additionally, pilot wages to support the growth of the passenger charterinitiative and call center staffing to support the growth of the Expressbusiness were higher than first quarter 2002.

 

Aircraft fuel expense increased $1.4 million to $4.9 million, despitean improved mix of hours flown by type of aircraft, due to higher fuel pricesand a 4.3% increase in the total number of system hours flown compared to firstquarter 2002.

 

Aircraft maintenance expense was $3.4 million or 18.1% higher than thesame period last year due to harsh winter weather conditions and increasedhours flown compared to the prior year.

 

Contracted air costs were $4.3 million, or 17.4% above first quarter2002, due to increases in cargo charter, higher Same Day shipments, and theutilization of third-party aircraft for certain routes during first quarter2003.  Ground courier costs rose 8.3% to$6.4 million for first quarter 2003 compared to a year ago, principally due toan 11.8% increase in Express volume quarter-over-quarter.

 

Other expenses for first quarter 2003 included a $0.2 million increasein insurance costs, principally for aircraft, as the result of a premiumincrease in August 2002 and the addition of aircraft to the fleet as well as a$0.2 million increase in aircraft lease expense.

 

 

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Selling, general and administrative expense increased $1.2 million forthe quarter compared to last year, of which $0.3 million was for one-timeseverance expenses.  The increase wasalso impacted by an increase in health care costs and outside servicesassociated with the development of the passenger charter business and marketingplan, growth of the government business and for work done in connection withthe Check Clearing Act of the 21st Century.

 

**Liquidity and Capital Resources**

 

*Cashflow from operating activities.*  Net cash provided by operating activities was $7.2 million forthe three months ended March 31, 2003, compared to $2.1 million for the sameperiod in 2002.  Positively impactingcash flow was a $0.3 million distribution from Float Control and $0.9 millionprepayment by a large bank customer under the new pricing and collectionstrategy implemented during first quarter 2003.

 

*Currentcredit arrangements.* In September 2002, the Company replaced its $50 million revolving creditagreement.  The new credit agreementprovides the Company with a three-year $35 million unsecured revolving creditfacility scheduled to expire on September 30, 2005 and a five-year $20.0million unsecured term loan.  The termloan 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 agreement, or a floating ratebased on the greater of the prime rate and the sum of .5% plus the federalfunds rate in effect from time to time. The new credit agreement requires the maintenance of certain minimumtangible net worth and cash flow levels, imposes certain limitations on capitalexpenditures and the sale of assets, and restricts the amount of additionaldebt.  As of March 31, 2003, there was$18.0 million outstanding on the unsecured term loan and $18.1 million outstandingand $16.9 million unused and available on the unsecured revolving creditfacility.

 

During first quarter 2002, AirNet entered into two five-year term loanstotaling approximately $3.0 million with fixed interest rates of 5.77%, eachsecured by an aircraft, and a $3.0 million term loan with a floating interest rate based upon LIBOR, securedby two aircraft. As of March 31, 2003 there was $4.8 million outstandingon these secured term loans, and the net book value of the aircraft securingthe loans totaled approximately $6.9 million.

 

*Investingactivities.*  Capitalexpenditures totaled $5.2 million for the three months ended March 31, 2003 and2002.  Of the 2003 expenditures, $1.5million was for the purchase of a Learjet 35 dedicated to passenger charterservices, and $3.5 million was for aircraft inspections, major engine overhaulsand related flight equipment.  AirNetanticipates it will spend between $20 million and $30 million in total capitalexpenditures in 2003.  AirNetanticipates it will continue to acquire aircraft and flight equipment asnecessary to maintain growth and continue offering quality service to itscustomers and will continue to consider whether future asset acquisitionsshould be in the form of purchases or leases.

 

AirNet announced a stock repurchase program in February 2000 allowingAirNet to purchase up to $3.0 million of its common shares.  As of the end of the 2001 fiscal year, $2.4million of AirNet’s common shares had been repurchased, and there has been norepurchase activity under the program since. As such, purchases of approximately $0.6 million of the Company’s commonshares may still be made over time in the open market or through privatelynegotiated transactions.  Such futurepurchases would be considered based on current market conditions and the stockprice.

 

AirNet anticipates that operating cash and capital expenditurerequirements will continue to be funded by cash flow from operations, cash onhand and bank borrowings in conjunction with the credit facility.

 

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**Seasonality and Variability inQuarterly Results**

 

AirNet’s operations historically have been somewhat seasonal andsomewhat dependent on the number of banking holidays falling during theweek.  Because financial institutionsare currently AirNet’s principal customers, AirNet’s air system is scheduledprimarily around the needs of financial institution customers.  When financial institutions are closed,there is no need for AirNet to operate a full system.  AirNet’s fiscal quarter ending December 31 is often the mostimpacted by bank holidays (including Thanksgiving and Christmas) recognized byits primary customers.  When theseholidays fall on Monday through Thursday, AirNet’s revenue and net income areadversely affected. AirNet’s annual results fluctuate as well based on whenholidays fall during the week over the course of the year.

 

Operating results are also affected by the weather.  AirNet generally experiences highermaintenance 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 and Qualitative DisclosuresAbout Market Risk**

 

**Inflation and Interest Rates**

 

AirNet is exposed to certain market risks from transactions that areentered into during the normal course of business.  AirNet’s primary market risk exposure relates to interest raterisk.  At March 31, 2003, AirNet had a$36.1 million outstanding balance under our credit agreement subject to marketrate changes in interest.  This facilitybears interest at AirNet’s option of a fixed rate based on the Eurodollar rateor a floating rate.  Assuming borrowinglevels at March 31, 2003, a one hundred basis point change in interest rateswould impact net interest expense by approximately $361,000 per year.

 

In February 2002, AirNet entered into an interest rate swap agreementwith a bank relative to a $3.0 million term loan, with a notional amount of$3.0 million and a fixed rate of 4.25% plus a margin based on AirNet’s fundeddebt ratio.  At March 31, 2003 theaggregate fair value of the interest rate swap was approximately ($103,000).

 

**Fuel Surcharge**

 

AirNet has historically maintained a fuel surcharge/rebate program forits Bank customers.  Under this program,as the OPIS-CMH (Ohio Price Information Service – Columbus, Ohio Station) priceof jet fuel exceeds $0.75 per gallon, Bank customers are surcharged.  In turn, if the OPIS-CMH price falls below$0.60 per gallon, the same customers receive a rebate.  In August 2002, AirNet increased the fuelsurcharge rate to better match its cost structure with the OPIS-CMH index.

 

During 2001 and through January 2002, AirNet’s Express customers paid a4% temporary fuel surcharge on most revenue under a separate program.  In February 2002, AirNet rescinded its 4%fuel surcharge on Express services and implemented a surcharge program usingthe OPIS-CMH index.

 

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**Item 4.    Controls and Procedures**

 

**Evaluation of Disclosure Controls andProcedures**

 

Within ninety days prior to the filing date of this quarterly report,an evaluation was performed by AirNet Systems, Inc. under the supervision andwith the participation of its management, including the Chief Executive Officer(the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness ofthe design and operation of AirNet Systems, Inc.’s disclosure controls andprocedures, as contemplated by Rule 13a-15 under the Securities Exchange Act of1934, as amended.  Based upon thatevaluation, AirNet Systems, Inc.’s management, including the CEO and CFO,concluded that the Company’s disclosure controls and procedures were effectiveto ensure that material information relating to AirNet Systems, Inc., includingits consolidated subsidiaries, is made known to them, particularly during theperiod for which the periodic reports, including this Form 10-Q, are beingprepared.

 

**Changes in Internal Controls**

 

There have been no significant changes in the Company’s internalcontrols or in other factors that could significantly affect these controlssubsequent to the date of the evaluation pursuant to Rule 13a-15 under theSecurities Exchange Act of 1934, as amended, referred to above.

 

 

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**AIRNETSYSTEMS, INC.**

 

**PARTII - OTHER INFORMATION**

 

Item 1.   Legal Proceedings**.**

 

There are no pending legal proceedings involvingAirNet 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 and Use of Proceeds.Not Applicable

 

Item 3.   DefaultsUpon Senior Securities.  NotApplicable

 

Item 4.   Submissionof Matters to a Vote of Security Holders.  Not Applicable

 

Item 5.   OtherInformation.  Not applicable.

 

Item 6.   Exhibitsand Reports on Form8-K.

 

(a)                                  Exhibits(filed herewith):

 
| **Exhibit No.** |   | **Description**                                                                                                                                                        |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                   |
| 99.1            |   | Certification Pursuant to Title 18, United States  Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 (Chief Executive Officer) |
|            |   |                                                                                                                                                                   |
| 99.2            |   | Certification Pursuant to Title 18, United States  Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 (Chief Financial Officer) |

 

(b)                                 Reportson Form 8-K:

 

On February 26, 2003, AirNet Systems, Inc. filed aCurrent Report on Form 8-K dated that same day reporting under Item 5. OtherEvents, the issuance of a press release on February 21, 2003  announcing fourth quarter and full year 2002results.

 

On January 15, 2003, AirNet Systems, Inc.furnished information to the Securities and Exchange Commission under Item9.  Regulation FD Disclosure of aCurrent Report on Form 8-K, dated January 14, 2003.  This information related to Stock PurchaseAgreements under which Gerald G. Mercer sold an aggregate of 733,200common shares of AirNet Systems, Inc. on December 26, 2002 to seven separateinvestors and Spring Hill Camps sold an aggregate of 256,800 common shares ofAirNet Systems, Inc. on January 9, 2003 to three separate investors.  AirNet Systems, Inc. was a party to each ofthe Stock Purchase Agreements for the limited purpose of granting registrationrights in respect of the common shares purchased by each investor fromMr. Mercer or Spring Hill Camps, as appropriate.

 

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**AIRNETSYSTEMS, INC.**

 

**SIGNATURE**

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 

 
| Dated:  May  15, 2003 | By:    | /s/ William R. Sumser                                                             |   |
|----------------------------|--------|-----------------------------------------------------------------------------------|--------|
|                       |   | William R. Sumser,                                                                |
|                       |   | Chief Financial Officer  (Duly Authorized Officer)  (Principal Financial Officer) |

 

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CERTIFICATIONS

 

I, Joel E. Biggerstaff, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of AirNet Systems, Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the  period in which this quarterly report isbeing prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officer and I******have disclosed, based on our most recent evaluation, tothe registrant’s auditors and the audit committee of the registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I******have indicated in this quarterly report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Dated:  May  15, 2003 |                                                                        |
|----------------------------|-----------------------------------------------------------------------------|
|                       | /s/ Joel E. Biggerstaff                                                     |   |
|                       | Printed Name:   Joel E. Biggerstaff                                    |
|                       | Title:   Chairman of the Board, President  and Chief Executive Officer |

 

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I, William R. Sumser, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of AirNet Systems, Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the  period in which this quarterly report isbeing prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officer and I******have disclosed, based on our most recent evaluation, tothe registrant’s auditors and the audit committee of the registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I******have indicated in this quarterly report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Dated:  May  15, 2003 |                                                                                     |
|----------------------------|------------------------------------------------------------------------------------------|
|                       | /s/ William R. Sumser                                                                    |   |
|                       | Printed Name:   William R. Sumser                                                   |
|                       | Title:  Chief  Financial Officer, Treasurer,  Secretary and Vice President, Finance |

 

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**AIRNETSYSTEMS, INC.**

 

**INDEX TO EXHIBITS**

 
| **Exhibit No.** |   | **Description**                                                                                                                                                         |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 99.1            |   | Certification Pursuant to Title 18, United States  Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 (Chief Executive Officer)* |
|            |   |                                                                                                                                                                    |
| 99.2            |   | Certification Pursuant to Title 18, United States  Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 (Chief Financial Officer)* |

 

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*Filed herewith.

 

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