##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 1-13025
 AirNet Systems, Inc.
  Ohio
    
    31-1458309(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 7250 Star Check Drive
Columbus, Ohio 43217
 (614) 409-4900
 Not Applicable
 þ o
 o þ
 o þ




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TABLE OF CONTENTS
 PAGEPART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed
Consolidated Balance Sheets: 
September 30, 2005 (Unaudited) and December 31, 2004
    
    
    3Condensed
Consolidated Statements of Operations (Unaudited):
 Three and Nine Months Ended September 30, 2005 and 2004
    
    
    4Condensed
Consolidated Statements of Cash Flows (Unaudited):
 Nine Months Ended September 30, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and
Qualitative Disclosures About Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    23Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3.
    
    Defaults Upon Senior Securities
    
    
    24Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    24Item 5.
    
    Other Information
    
    
    24Item 6.
    
    Exhibits
    
    
    24SIGNATURES
    
    
    25INDEX TO EXHIBITS
    
    
    26EX-10.1 Stock Option Agreement, Dated July 20, 2005EX-31.1 Rule 13A-14(A)/15D-14(A) Certification (PEO)EX-31.2 Rule 13A-14(A)/15D-14(A) Certification (PFO)EX-32 Section 1350 Certification
  2




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##### Table of Contents



AIRNET SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 In thousands, except par value
    
    September 30,
    
    
    December 31,2005
    
    
    2004(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,528
    
    
    $
    1,086Accounts receivable, less allowances
    
    
    25,239
    
    
    
    24,591Taxes receivable
    
    
    1,306
    
    
    
    1,137Deferred income taxes
    
    
    
    
    
    
    187Deposits and prepaids
    
    
    3,800
    
    
    
    3,322Total current assets
    
    
    33,873
    
    
    
    30,323Net property and equipment
    
    
    96,689
    
    
    
    106,816Deposits and other assets
    
    
    293
    
    
    
    331Total assets
    
    $
    130,855
    
    
    $
    137,470LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    11,020
    
    
    $
    12,223Salaries and related liabilities
    
    
    4,673
    
    
    
    4,496Current portion of notes payable
    
    
    3,174
    
    
    
    3,076Deferred income taxes
    
    
    322
    
    
    
    Other revenue
    
    
    
    
    
    
    102Total current liabilities
    
    
    19,189
    
    
    
    19,897Other liabilities
    
    
    191
    
    
    
    670Notes payable, less current portion
    
    
    61,104
    
    
    
    59,169Deferred income taxes
    
    
    4,188
    
    
    
    7,268Shareholders equity:Preferred shares, $.01 par value; 10,000 shares authorized; no
shares issued and outstanding
    
    
    
    
    
    
    Common shares, $.01 par value; 40,000 shares authorized; 12,763
shares issued at September 30, 2005 and at December 31, 2004
    
    
    128
    
    
    
    128Additional paid-in-capital
    
    
    76,537
    
    
    
    76,835Retained deficit
    
    
    (6,570
    )
    
    
    (2,208
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (13
    )Treasury shares, 2,614and 2,644 common shares held at cost at
September 30, 2005 and December 31, 2004, respectively
    
    
    (23,882
    )
    
    
    (24,276
    )Total shareholders equity
    
    
    46,213
    
    
    
    50,466Total liabilities and shareholders equity
    
    $
    130,885
    
    
    $
    137,470
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##### Table of Contents



AIRNET SYSTEMS, INC.
 
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 In thousands, except per share data
    
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004NET REVENUESDelivery services, net of excise tax:Bank services
    
    $
    29,126
    
    
    $
    26,616
    
    
    $
    85,264
    
    
    $
    78,678Express services
    
    
    13,569
    
    
    
    12,844
    
    
    
    39,102
    
    
    
    35,725Total delivery services revenues
    
    
    42,695
    
    
    
    39,460
    
    
    
    124,366
    
    
    
    114,403Passenger charter services
    
    
    5,243
    
    
    
    4,266
    
    
    
    23,070
    
    
    
    11,532Aviation services and other operations
    
    
    153
    
    
    
    211
    
    
    
    437
    
    
    
    613Total net revenues
    
    
    48,091
    
    
    
    43,937
    
    
    
    147,873
    
    
    
    126,548COSTS AND EXPENSESWages and benefits
    
    
    5,973
    
    
    
    6,187
    
    
    
    18,371
    
    
    
    18,310Aircraft fuel
    
    
    8,624
    
    
    
    7,140
    
    
    
    25,799
    
    
    
    18,862Aircraft maintenance
    
    
    5,023
    
    
    
    3,567
    
    
    
    15,192
    
    
    
    10,448Contracted air costs
    
    
    3,552
    
    
    
    3,540
    
    
    
    10,646
    
    
    
    9,738Ground courier
    
    
    7,901
    
    
    
    7,465
    
    
    
    23,432
    
    
    
    22,494Depreciation
    
    
    3,818
    
    
    
    5,638
    
    
    
    11,088
    
    
    
    15,577Insurance, rent and landing fees
    
    
    2,476
    
    
    
    2,230
    
    
    
    7,612
    
    
    
    7,432Travel, training and other
    
    
    1,784
    
    
    
    2,021
    
    
    
    8,725
    
    
    
    6,557Selling, general and administrative
    
    
    4,584
    
    
    
    4,146
    
    
    
    15,045
    
    
    
    13,708Net (gain) loss on disposition of assets
    
    
    18
    
    
    
    
    
    
    
    (34
    )
    
    
    289Impairment of assets
    
    
    16,073
    
    
    
    42,991
    
    
    
    16,073
    
    
    
    42,991Impairment of goodwill
    
    
    
    
    
    
    4,018
    
    
    
    
    
    
    
    4,018Total costs and expenses
    
    
    59,826
    
    
    
    88,943
    
    
    
    151,949
    
    
    
    170,424Loss from operations
    
    
    (11,735
    )
    
    
    (45,006
    )
    
    
    (4,076
    )
    
    
    (43,876
    )Interest expense
    
    
    1,007
    
    
    
    777
    
    
    
    2,886
    
    
    
    1,552Loss before income taxes
    
    
    (12,742
    )
    
    
    (45,783
    )
    
    
    (6,962
    )
    
    
    (45,428
    )Benefit for income taxes
    
    
    (4,809
    )
    
    
    (15,599
    )
    
    
    (2,600
    )
    
    
    (15,446
    )Net loss
    
    ($
    7,933
    )
    
    ($
    30,184
    )
    
    ($
    4,362
    )
    
    ($
    29,982
    )Net loss per share  basic and diluted
    
    ($
    0.78
    )
    
    ($
    2.99
    )
    
    ($
    0.43
    )
    
    ($
    2.98
    )
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AIRNET SYSTEMS, INC.
 
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 In thousands
    
    Nine Months EndedSeptember 30,2005
    
    
    2004Operating activities:Net loss
    
    ($
    4,362
    )
    
    ($
    29,982
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation
    
    
    11,088
    
    
    
    15,577Impairment of assets and goodwill
    
    
    16,073
    
    
    
    47,009Deferred taxes
    
    
    (3,080
    )
    
    
    (15,986
    )Other  net
    
    
    159
    
    
    
    406Cash provided by (used in) operating assets and liabilities:Accounts receivable
    
    
    (841
    )
    
    
    (3,717
    )Deposits and prepaids
    
    
    (478
    )
    
    
    (1,144
    )Accounts payable and accrued expenses
    
    
    (1,305
    )
    
    
    6,722Taxes receivable
    
    
    (169
    )
    
    
    315Deferred taxes
    
    
    509
    
    
    
    Salaries and related liabilities
    
    
    177
    
    
    
    (647
    )Other, net
    
    
    
    
    
    
    137Net cash provided by operating activities
    
    
    17,771
    
    
    
    18,690Investing activities:Purchases of property and equipment
    
    
    (17,138
    )
    
    
    (43,721
    )Proceeds from sales of property and equipment
    
    
    137
    
    
    
    3,104Net cash used in investing activities
    
    
    (17,001
    )
    
    
    (40,617
    )Financing activities:Net borrowings (repayments) under revolving credit facilities
    
    
    4,500
    
    
    
    (2,800
    )(Repayments) borrowings under term loans
    
    
    (2,950
    )
    
    
    25,258Other  net
    
    
    122
    
    
    
    270Net cash provided by financing activities
    
    
    1,672
    
    
    
    22,458Net increase in cash
    
    
    2,442
    
    
    
    531Cash and cash equivalents at beginning of period
    
    
    1,086
    
    
    
    125Cash and cash equivalents at end of period
    
    $
    3,528
    
    
    $
    656
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AIRNET SYSTEMS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Basis of Presentation
      2. Impairment of Assets and Goodwill
     6




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3. Segment Reporting
  (in thousands):
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net RevenuesDelivery Services
    
    $
    42,695
    
    
    $
    39,460
    
    
    $
    124,366
    
    
    $
    114,403Passenger Charter Services
    
    
    5,243
    
    
    
    4,266
    
    
    
    23,070
    
    
    
    11,532Total net revenues
    
    $
    47,938
    
    
    $
    43,726
    
    
    $
    147,436
    
    
    $
    125,935Contribution Margin (Shortfall)Delivery Services
    
    ($
    7,763
    )
    
    ($
    42,192
    )
    
    $
    5,379
    
    
    ($
    35,367
    )Passenger Charter Services
    
    
    110
    
    
    
    377
    
    
    
    2,918
    
    
    
    1,593Total contribution margin (shortfall)
    
    ($
    7,653
    )
    
    ($
    41,815
    )
    
    $
    8,297
    
    
    ($
    33,774
    )Depreciation ExpenseDelivery Services
    
    $
    2,773
    
    
    $
    4,604
    
    
    $
    8,531
    
    
    $
    13,344Passenger Charter Services
    
    
    702
    
    
    
    756
    
    
    
    1,720
    
    
    
    1,399Total depreciation expense
    
    $
    3,475
    
    
    $
    5,360
    
    
    $
    10,251
    
    
    $
    14,743
 (in thousands):
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Reportable segment net revenues
    
    $
    47,938
    
    
    $
    43,726
    
    
    $
    147,436
    
    
    $
    125,935Aviation services and other
    
    
    153
    
    
    
    211
    
    
    
    437
    
    
    
    613Total net revenues
    
    $
    48,091
    
    
    $
    43,937
    
    
    $
    147,873
    
    
    $
    126,548
 7




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(in thousands):
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Reportable segment contribution margin (shortfall)
    
    ($
    7,653
    )
    
    ($
    41,815
    )
    
    $
    8,297
    
    
    ($
    33,774
    )Net selling and administrative expenses
excluded from reportable segment contribution
margin
    
    
    (4,082
    )
    
    
    (3,191
    )
    
    
    (12,373
    )
    
    
    (10,102
    )Loss from operations
    
    ($
    11,735
    )
    
    ($
    45,006
    )
    
    ($
    4,076
    )
    
    ($
    43,876
    )
 (in thousands):
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Reportable segment depreciation
    
    $
    3,475
    
    
    $
    5,360
    
    
    $
    10,251
    
    
    $
    14,743Corporate depreciation
    
    
    343
    
    
    
    278
    
    
    
    837
    
    
    
    834Total depreciation expense
    
    $
    3,818
    
    
    $
    5,638
    
    
    $
    11,088
    
    
    $
    15,577
 4. Stock Plans and Awards
 Accounting for Stock
Issued to Employees, Accounting for Stock-Based Compensation  Transition and
Disclosure Accounting for Stock-Based
Compensation
 Share-Based Payment Accounting for Stock Issued to Employees Statement of Cash Flows 
  1.
    
    A modified prospective method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based
payments granted after the effective date and (b) based on the requirements of SFAS No. 123
for all awards granted to employees prior to the effective date of SFAS No. 123(R) that
remain unvested on the effective date.2.
    
    A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate financial
statements based on the amounts previously recognized under SFAS No. 123 for purposes of
pro forma disclosures either (a) for all prior periods presented or (b) for prior interim
periods of the year of adoption.
  8




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss, as reported
    
    $
    (7,933
    )
    
    $
    (30,184
    )
    
    $
    (4,362
    )
    
    $
    (29,982
    )Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards, net
of related tax effects
    
    
    (39
    )
    
    
    (34
    )
    
    
    (93
    )
    
    
    (154
    )Pro forma net loss
    
    $
    (7,972
    )
    
    $
    (30,218
    )
    
    $
    (4,455
    )
    
    $
    (30,136
    )Net loss per
share  basic and diluted:As reported
    
    $
    (0.78
    )
    
    $
    (2.99
    )
    
    $
    (0.43
    )
    
    $
    (2.98
    )Pro forma
    
    $
    (0.79
    )
    
    $
    (2.99
    )
    
    $
    (0.44
    )
    
    $
    (2.99
    )
 5. Loss Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator:Net loss
    
    $
    (7,933
    )
    
    $
    (30,184
    )
    
    $
    (4,362
    )
    
    $
    (29,982
    )Denominator:Basic  weighted average shares outstanding
    
    
    10,132
    
    
    
    10,100
    
    
    
    10,144
    
    
    
    10,070DilutedStock
optionsemployees, officers, and directors
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjusted weighted average shares outstanding
    
    
    10,132
    
    
    
    10,100
    
    
    
    10,144
    
    
    
    10,070Net loss per
share Basic and diluted
    
    $
    (0.78
    )
    
    $
    (2.99
    )
    
    $
    (0.43
    )
    
    $
    (2.98
    )
  9




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6. Comprehensive Loss
  7. Bank Financing Matters
 Term Notes and Revolving Credit Facility
      10




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Other Term Notes
   8. Income Taxes
  9. Contingencies
  11




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10. Subsequent Events
      12




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AIRNET SYSTEMS, INC.
 
 ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 Safe Harbor Statement
  General
     13




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Results of Operations
 Financial Overview  Third Quarter
   Financial Overview  Year-to-Date
    Net Revenues
 Three Months Ended
    
    
    
    
    
    
    Increase (Decrease)
    
    
    Nine Months Ended
    
    
    
    
    
    
    Increase (Decrease)September 30,
    
    
    
    
    
    
    2005 to 2004
    
    
    September 30,
    
    
    
    
    
    
    2005 to 2004Dollars
in 000s
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofNet Revenues
    
    2005
    
    
    Total
    
    
    2004
    
    
    Total
    
    
    $
    
    
    %
    
    
    2005
    
    
    Total
    
    
    2004
    
    
    Total
    
    
    $
    
    
    %Delivery Services Revenues, Net of Excise Tax:Bank Services
    
    $
    29,126
    
    
    
    60.6
    %
    
    $
    26,616
    
    
    
    60.6
    %
    
    $
    2,510
    
    
    
    9.4
    %
    
    $
    85,264
    
    
    
    57.7
    %
    
    $
    78,678
    
    
    
    62.2
    %
    
    $
    6,586
    
    
    
    8.4
    %Express Services
    
    
    13,569
    
    
    
    28.2
    %
    
    
    12,844
    
    
    
    29.2
    %
    
    
    725
    
    
    
    5.6
    %
    
    
    39,102
    
    
    
    26.4
    %
    
    
    35,725
    
    
    
    28.2
    %
    
    
    3,377
    
    
    
    9.5
    %Total Delivery Services Revenues
    
    
    42,695
    
    
    
    88.8
    %
    
    
    39,460
    
    
    
    89.8
    %
    
    
    3,235
    
    
    
    8.2
    %
    
    
    124,366
    
    
    
    84.1
    %
    
    
    114,403
    
    
    
    90.4
    %
    
    
    9,963
    
    
    
    8.7
    %Passenger Charter Services Revenues
    
    
    5,243
    
    
    
    10.9
    %
    
    
    4,266
    
    
    
    9.7
    %
    
    
    977
    
    
    
    22.9
    %
    
    
    23,070
    
    
    
    15.6
    %
    
    
    11,532
    
    
    
    9.1
    %
    
    
    11,538
    
    
    
    100.1
    %Aviation Services and Other Revenues
    
    
    153
    
    
    
    0.3
    %
    
    
    211
    
    
    
    0.5
    %
    
    
    (58
    )
    
    
    (27.5
    )%
    
    
    437
    
    
    
    0.3
    %
    
    
    613
    
    
    
    0.5
    %
    
    
    (176
    )
    
    
    (28.7
    )%Total Net Revenues
    
    $
    48,091
    
    
    
    100.0
    %
    
    $
    43,937
    
    
    
    100.0
    %
    
    $
    4,154
    
    
    
    9.5
    %
    
    $
    147,873
    
    
    
    100.0
    %
    
    $
    126,548
    
    
    
    100.0
    %
    
    $
    21,325
    
    
    
    16.9
    %
   Bank Services Revenues
 Dollars in 000s
    
    Three Months Ended
    
    
    Increase (Decrease)
    
    
    Nine Months Ended
    
    
    Increase (Decrease)September 30,
    
    
    2005 to 2004
    
    
    September 30,
    
    
    2005 to 2004Bank Services Revenues
    
    2005
    
    
    2004
    
    
    $
    
    
    %
    
    
    2005
    
    
    2004
    
    
    $
    
    
    %Bank Services Revenues, Net of
Federal Excise Tax Fees
    
    $
    25,382
    
    
    $
    24,928
    
    
    $
    454
    
    
    
    1.8
    %
    
    $
    76,567
    
    
    $
    74,886
    
    
    $
    1,681
    
    
    
    2.2
    %Fuel Surcharge
    
    
    3,744
    
    
    
    1,688
    
    
    
    2,056
    
    
    
    121.8
    %
    
    
    8,697
    
    
    
    3,792
    
    
    
    4,905
    
    
    
    129.4
    %Total Net Bank Services Revenues
    
    $
    29,126
    
    
    $
    26,616
    
    
    $
    2,510
    
    
    
    9.4
    %
    
    $
    85,264
    
    
    $
    78,678
    
    
    $
    6,586
    
    
    
    8.4
    %
   14




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##### Table of Contents



Express Services Revenues
 Dollars in 000s
    
    Three Months Ended
    
    
    Increase (Decrease)
    
    
    Nine Months Ended
    
    
    Increase (Decrease)September 30,
    
    
    2005 to 2004
    
    
    September 30,
    
    
    2005 to 2004Express Services Revenues
    
    2005
    
    
    2004
    
    
    $
    
    
    %
    
    
    2005
    
    
    2004
    
    
    $
    
    
    %Express Revenues  Non Charter
    
    $
    8,730
    
    
    $
    8,886
    
    
    $
    (156
    )
    
    
    (1.8
    )%
    
    $
    25,570
    
    
    $
    26,024
    
    
    $
    (454
    )
    
    
    (1.7
    )%Express Revenues  Charters
    
    
    3,489
    
    
    
    3,837
    
    
    
    (348
    )
    
    
    (9.1
    )%
    
    
    10,697
    
    
    
    9,529
    
    
    
    1,168
    
    
    
    12.3
    %Fuel Surcharge
    
    
    1,732
    
    
    
    508
    
    
    
    1,224
    
    
    
    240.9
    %
    
    
    4,024
    
    
    
    1,269
    
    
    
    2,755
    
    
    
    217.1
    %Federal Excise Tax Fee
    
    
    (382
    )
    
    
    (387
    )
    
    
    5
    
    
    
    (1.3
    )%
    
    
    (1,189
    )
    
    
    (1,097
    )
    
    
    (92
    )
    
    
    (8.4
    )%Net Express Services Revenues
    
    $
    13,569
    
    
    $
    12,844
    
    
    $
    725
    
    
    
    5.6
    %
    
    $
    39,102
    
    
    $
    35,725
    
    
    $
    3,377
    
    
    
    9.5
    %
    Passenger Charter Services Revenues
 Dollars in 000s
    
    Three Months Ended
    
    
    Increase (Decrease)
    
    
    Nine Months Ended
    
    
    Increase (Decrease)September 30,
    
    
    2005 to 2004
    
    
    September 30,
    
    
    2005 to 2004Passenger Charter Services Revenues
    
    2005
    
    
    2004
    
    
    $
    
    
    %
    
    
    2005
    
    
    2004
    
    
    $
    
    
    %Passenger Charter Services Revenues
    
    $
    4,714
    
    
    $
    3,956
    
    
    $
    758
    
    
    
    19.2
    %
    
    $
    20,798
    
    
    $
    10,734
    
    
    $
    10,064
    
    
    
    93.8
    %Management Fee Revenues
    
    
    141
    
    
    
    178
    
    
    
    (37
    )
    
    
    (20.8
    )%
    
    
    925
    
    
    
    430
    
    
    
    495
    
    
    
    115.1
    %Fuel Surcharge
    
    
    388
    
    
    
    132
    
    
    
    256
    
    
    
    193.9
    %
    
    
    1,347
    
    
    
    368
    
    
    
    979
    
    
    
    266.0
    %Total Passenger Charter Services Revenues
    
    $
    5,243
    
    
    $
    4,266
    
    
    $
    977
    
    
    
    22.9
    %
    
    $
    23,070
    
    
    $
    11,532
    
    
    $
    11,538
    
    
    
    100.1
    %
  15




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##### Table of Contents



%
 Costs and Expenses
 Dollars in 000s
    
    Three Months Ended
    
    
    Increase (Decrease)
    
    
    Nine Months Ended
    
    
    Increase (Decrease)September 30,
    
    
    2005 to 2004
    
    
    September 30,
    
    
    2005 to 2004Costs and Expenses
    
    2005
    
    
    2004
    
    
    $
    
    
    %
    
    
    2005
    
    
    2004
    
    
    $
    
    
    %Wages and benefits
    
    $
    5,973
    
    
    $
    6,187
    
    
    $
    (214
    )
    
    
    (3.5
    )%
    
    $
    18,371
    
    
    $
    18,310
    
    
    $
    61
    
    
    
    0.3
    %Aircraft fuel
    
    
    8,624
    
    
    
    7,140
    
    
    
    1,484
    
    
    
    20.8
    %
    
    
    25,799
    
    
    
    18,862
    
    
    
    6,937
    
    
    
    36.8
    %Aircraft maintenance
    
    
    5,023
    
    
    
    3,567
    
    
    
    1,456
    
    
    
    40.8
    %
    
    
    15,192
    
    
    
    10,448
    
    
    
    4,744
    
    
    
    45.4
    %Contracted air costs
    
    
    3,552
    
    
    
    3,540
    
    
    
    12
    
    
    
    0.3
    %
    
    
    10,646
    
    
    
    9,738
    
    
    
    908
    
    
    
    9.3
    %Ground courier
    
    
    7,901
    
    
    
    7,465
    
    
    
    436
    
    
    
    5.8
    %
    
    
    23,432
    
    
    
    22,494
    
    
    
    938
    
    
    
    4.2
    %Depreciation
    
    
    3,818
    
    
    
    5,638
    
    
    
    (1,820
    )
    
    
    (32.3
    )%
    
    
    11,088
    
    
    
    15,577
    
    
    
    (4,489
    )
    
    
    (28.8
    )%Insurance, rent and landing fees
    
    
    2,476
    
    
    
    2,230
    
    
    
    246
    
    
    
    11.0
    %
    
    
    7,612
    
    
    
    7,432
    
    
    
    180
    
    
    
    2.4
    %Travel, training and other
    
    
    1,784
    
    
    
    2,021
    
    
    
    (237
    )
    
    
    (11.7
    )%
    
    
    8,725
    
    
    
    6,557
    
    
    
    2,168
    
    
    
    33.1
    %Selling, general and administrative
    
    
    4,584
    
    
    
    4,146
    
    
    
    438
    
    
    
    10.6
    %
    
    
    15,045
    
    
    
    13,708
    
    
    
    1,337
    
    
    
    9.8
    %Net (gain) loss on disposition of assets
    
    
    18
    
    
    
    
    
    
    
    18
    
    
    
    *
    
    
    
    (34
    )
    
    
    289
    
    
    
    (323
    )
    
    
    *Subtotal
    
    
    43,753
    
    
    
    41,934
    
    
    
    1,819
    
    
    
    4.3
    %
    
    
    135,876
    
    
    
    123,415
    
    
    
    12,461
    
    
    
    10.1
    %Impairment of assets
    
    
    16,073
    
    
    
    42,991
    
    
    
    (26,918
    )
    
    
    *
    
    
    
    16,073
    
    
    
    42,991
    
    
    
    (26,918
    )
    
    
    *Impairment of goodwill
    
    
    
    
    
    
    4,018
    
    
    
    (4,018
    )
    
    
    *
    
    
    
    
    
    
    
    4,018
    
    
    
    (4,018
    )
    
    
    *Total costs and expenses
    
    $
    59,826
    
    
    $
    88,943
    
    
    $
    (29,117
    )
    
    
    *
    
    
    $
    151,949
    
    
    $
    170,424
    
    
    $
    (18,475
    )
    
    
    *
 
 *
    
    The percentage increase (decrease) from 2004 to 2005 is not meaningful.  16




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##### Table of Contents



Dollars in 000s
    
    Three Months Ended
    
    
    Increase (Decrease)
    
    
    Nine Months Ended
    
    
    Increase (Decrease)September 30,
    
    
    2005 to 2004
    
    
    September 30,
    
    
    2005 to 2004Aircraft Fuel
    
    2005
    
    
    2004
    
    
    $
    
    
    %
    
    
    2005
    
    
    2004
    
    
    $
    
    
    %Aircraft fuel
    
    $
    8,624
    
    
    $
    7,140
    
    
    $
    1,484
    
    
    
    20.8
    %
    
    $
    25,799
    
    
    $
    18,862
    
    
    $
    6,937
    
    
    
    36.8
    %Less  Fuel
surcharge
revenues related
to AirNet
operated aircraft
    
    
    (5,188
    )
    
    
    (2,089
    )
    
    
    (3,099
    )
    
    
    (148.3
    )%
    
    
    (12,255
    )
    
    
    (4,918
    )
    
    
    (7,337
    )
    
    
    (149.2
    )%Net
    
    $
    3,436
    
    
    $
    5,051
    
    
    $
    (1,161
    )
    
    
    (23.0
    )%
    
    $
    13,544
    
    
    $
    13,944
    
    
    $
    (400
    )
    
    
    (2.9
    )%
       17




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##### Table of Contents



Liquidity and Capital Resources
 Cash flow from operating activities.
 Financing Matters
   18




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##### Table of Contents



19




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##### Table of Contents



Investing activities.
      20




---



##### Table of Contents



Regulation
    Brown Gibbons Lang & Company  Letter of Intent for Sale of AirNet
  21




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##### Table of Contents



Off-Balance Sheet Arrangements
  Seasonality and Variability in Quarterly Results
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Inflation and Interest Rates
   Fuel Surcharge
  22




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  
    
    information required to be disclosed by AirNet in this Quarterly Report on
Form 10-Q and the other reports that AirNet files or submits under the
Exchange Act would be accumulated and communicated to AirNets management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure;
    
    information required to be disclosed by AirNet in this Quarterly Report on
Form 10-Q and the other reports that AirNet files or submits under the Exchange
Act would be recorded, processed, summarized and reported within the time
period specified in the SECs rules and forms; and
    
    AirNets disclosure controls and procedures are effective as of the end of
the period covered by this Quarterly Report on Form 10-Q to ensure that
material information relating to AirNet and its consolidated subsidiaries is
made known to them by others within those entities, particularly during the
period in which this Quarterly Report on Form 10-Q is being prepared.
 Changes in Internal Control Over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 .
   23




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##### Table of Contents



(a)
    
    Not applicable.(b)
    
    Not applicable.(c)
    
    Neither AirNet Systems, Inc. nor any affiliated purchaser, as
defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as
amended, purchased any common shares of AirNet Systems, Inc. during the fiscal
quarter ended September 30, 2005. On February 18, 2000, AirNet Systems, Inc.
announced a stock repurchase plan under which up to $3.0 million
of its common shares may be repurchased from time to time. These repurchases may be made in
open market transactions or through privately negotiated transactions. As of
September 30, 2005, AirNet Systems, Inc. had the authority to still repurchase
approximately $0.6 million of its common shares under this stock repurchase
plan.
 
  
  
      
   Exhibit No.
    
    Description10.1
    
    Form of Stock Option Agreement, dated July 20,
2005 (Director Option-2004 Stock Incentive Plan)31.1
    
    Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)31.2
    
    Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)32
    
    Section 1350 Certification (Principal Executive Officer and Principal
Financial Officer)
 24




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##### Table of Contents



AIRNET SYSTEMS, INC.
 
 SIGNATURES
  AIRNET SYSTEMS, INC.Dated:
November 21, 2005
    
    By:
    
    /s/ Gary W. QualmannGary W. Qualmann,Chief Financial Officer, Treasurer and Secretary(Duly Authorized Officer)(Principal Financial Officer)Dated:
November 21, 2005
    
    By:
    
    /s/ Ray L. DruseikisRay L. Druseikis,Controller(Duly Authorized Officer)(Principal Accounting Officer)
 25




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##### Table of Contents



AIRNET SYSTEMS, INC.
 
 INDEX TO EXHIBITS
 Exhibit No.
    
    Description10.1
    
    Form of Stock Option Agreement,
dated July 20, 2005 (Director Option- 2004 Stock Incentive Plan31.1
    
    Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)31.2
    
    Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)32
    
    Section 1350 Certification (Principal Executive Officer and Principal Financial Officer)
 26