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221-8427   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 March 31, 2005 or  o
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from  to Commission File Number 1-13025 AirNet Systems, Inc.  Ohio
    
    31-1458309(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 7250 Star Check Drive
Columbus, Ohio 43217
(Address of principal executive offices) (Zip Code) (614) 409-4900
(Registrants telephone number, including area code) 3939 International Gateway
Columbus, Ohio 43219  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 (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).
 Yes o No þ As of May 2, 2005, 10,126,824 of the registrants common shares, par value $0.01, were
outstanding.




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TABLE OF CONTENTS PAGEPART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Consolidated Balance Sheets:March 31, 2005 (Unaudited) and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations (Unaudited):Three Months Ended March 31, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited):Three Months Ended March 31, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3. Defaults Upon Senior Securities
    
    
    21Item 4. Submission of Matters to a Vote of Security Holders
    
    
    21Item 5. Other Information
    
    
    21Item 6. Exhibits
    
    
    22SIGNATURES
    
    
    23INDEX TO EXHIBITS
    
    
    24
 2




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AIRNET SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS March 31,
    
    
    December 31,2005
    
    
    2004In thousands, except par value
    
    (unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    850
    
    
    $
    1,086Accounts receivable, less allowances
    
    
    25,833
    
    
    
    24,591Inventory
    
    
    404
    
    
    
    502Taxes receivable
    
    
    1,201
    
    
    
    1,137Deferred income taxes
    
    
    365
    
    
    
    187Deposits and prepaids
    
    
    2,722
    
    
    
    2,820Total current assets
    
    
    31,375
    
    
    
    30,323Net property and equipment
    
    
    111,025
    
    
    
    106,816Deposits and other assets
    
    
    331
    
    
    
    331Total assets
    
    $
    142,731
    
    
    $
    137,470LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    11,553
    
    
    $
    11,311Salaries and related liabilities
    
    
    4,331
    
    
    
    4,496Deferred revenue
    
    
    
    
    
    
    102Accrued expenses
    
    
    661
    
    
    
    912Current portion of notes payable
    
    
    3,108
    
    
    
    3,076Total current liabilities
    
    
    19,653
    
    
    
    19,897Other liabilities
    
    
    520
    
    
    
    670Notes payable, less current portion
    
    
    61,658
    
    
    
    59,169Deferred income taxes
    
    
    8,883
    
    
    
    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 March 31, 2005 and at December 31, 2004
    
    
    128
    
    
    
    128Additional paid-in-capital
    
    
    76,719
    
    
    
    76,835Retained earnings (deficit)
    
    
    (691
    )
    
    
    (2,208
    )Accumulated other comprehensive loss
    
    
    (10
    )
    
    
    (13
    )Treasury shares, 2,635and 2,644 shares held at cost at
March 31, 2005 and December 31, 2004, respectively
    
    
    (24,129
    )
    
    
    (24,276
    )Total shareholders equity
    
    
    52,017
    
    
    
    50,466Total liabilities and shareholders equity
    
    $
    142,731
    
    
    $
    137,470
 See notes to condensed consolidated financial statements 3




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AIRNET SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS- Unaudited Three Months EndedMarch 31,In thousands, except per share data
    
    2005
    
    
    2004NET REVENUESDelivery services, net of excise tax:Bank services
    
    $
    27,293
    
    
    $
    25,832Express services
    
    
    13,105
    
    
    
    10,798Total delivery services revenues
    
    
    40,398
    
    
    
    36,630Passenger charter services
    
    
    9,328
    
    
    
    3,650Aviation services and other operations
    
    
    167
    
    
    
    191Total net revenues
    
    
    49,893
    
    
    
    40,471COSTS AND EXPENSESWages and benefits
    
    
    6,204
    
    
    
    5,872Aircraft fuel
    
    
    8,254
    
    
    
    5,536Aircraft maintenance
    
    
    5,387
    
    
    
    3,191Contracted air costs
    
    
    3,268
    
    
    
    3,071Ground courier
    
    
    7,889
    
    
    
    7,142Depreciation
    
    
    3,642
    
    
    
    4,889Insurance, rent and landing fees
    
    
    2,810
    
    
    
    2,564Travel, training and other
    
    
    3,195
    
    
    
    2,272Selling, general and administrative
    
    
    5,487
    
    
    
    4,720Net (gain) loss on disposition of assets
    
    
    (50
    )
    
    
    292Total costs and expenses
    
    
    46,086
    
    
    
    39,549Income from operations
    
    
    3,807
    
    
    
    922Interest expense
    
    
    855
    
    
    
    367Income before income taxes
    
    
    2,952
    
    
    
    555Provision for income taxes
    
    
    1,435
    
    
    
    239Net income
    
    $
    1,517
    
    
    $
    316Net income per share  basic and diluted
    
    $
    0.15
    
    
    $
    0.03
 See notes to condensed consolidated financial statements 4




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AIRNET SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS- Unaudited Three Months EndedMarch 31,In thousands
    
    2005
    
    
    2004Operating activities:Net income
    
    $
    1,517
    
    
    $
    316Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    3,642
    
    
    
    4,889Deferred taxes
    
    
    1,437
    
    
    
    (4
    )Provision for losses on accounts receivable
    
    
    18
    
    
    
    89(Gain) loss on disposition of assets
    
    
    (50
    )
    
    
    292Cash provided by (used in) operating assets and liabilities:Accounts receivable
    
    
    (1,260
    )
    
    
    (1,444
    )Inventory
    
    
    98
    
    
    
    (858
    )Deposits and prepaids
    
    
    98
    
    
    
    425Accounts payable
    
    
    91
    
    
    
    1,347Deferred revenues and accrued expenses
    
    
    (353
    )
    
    
    2,192Taxes receivable
    
    
    (63
    )
    
    
    181Salaries and related liabilities
    
    
    (165
    )
    
    
    (1,163
    )Other, net
    
    
    2
    
    
    
    81Net cash provided by operating activities
    
    
    5,012
    
    
    
    6,343Investing activities:Purchases of property and equipment
    
    
    (7,900
    )
    
    
    (9,803
    )Proceeds from sales of property and equipment
    
    
    100
    
    
    
    798Net cash used in investing activities
    
    
    (7,800
    )
    
    
    (9,005
    )Financing activities:Proceeds from incentive stock plan programs
    
    
    30
    
    
    
    112Net borrowings (repayments) under revolving credit facilities
    
    
    3,000
    
    
    
    (1,318
    )Borrowings under term loans
    
    
    
    
    
    
    6,000Repayments of term loans
    
    
    (478
    )
    
    
    Net cash provided by financing activities
    
    
    2,552
    
    
    
    4,794Net increase (decrease) in cash
    
    
    (236
    )
    
    
    2,132Cash and cash equivalents at beginning of period
    
    
    1,086
    
    
    
    125Cash and cash equivalents at end of period
    
    $
    850
    
    
    $
    2,257
 See notes to condensed consolidated financial statements 5




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AIRNET SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 1. Basis of Presentation AirNet Systems, Inc. and its subsidiaries (AirNet or the Company) operate a fully integrated
national air transportation network which provides delivery service for time-critical shipments for
customers in the U.S. banking industry and other industries requiring the express delivery of
packages. AirNet also offers passenger charter services and retail aviation fuel sales and related
ground services. The accompanying condensed consolidated financial statements include the accounts of AirNet
Systems, Inc. and its subsidiaries. These financial statements are unaudited and have been
prepared in accordance with the instructions for Form 10-Q. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been condensed or omitted as
permitted by the instructions for Form 10-Q. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and notes thereto included
in AirNet Systems, Inc.s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
The results of operations for the three months ended March 31, 2005 are not necessarily indicative
of the results for the full year. The financial information included herein reflects all adjustments (consisting of normal recurring
adjustments), which are, in the opinion of management, necessary for a fair presentation of the
results of interim periods. The preparation of the condensed consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the amounts reported in those financial statements and accompanying
notes thereto. Actual results could differ from those estimates. Certain reclassifications have been made in the prior years financial statements to conform to the
presentation for the three months ended March 31, 2005. 2. Segment Reporting AirNet operates a fully integrated national air transportation network and has determined that its
reportable segments are based on AirNets methods of internal reporting and management structure.
AirNets reportable segments are Delivery Services, which provides delivery service of
time-critical shipments for Bank customers and other Express customers, and Passenger Charter
Services (provided by Jetride, Inc., a wholly-owned subsidiary of AirNet). AirNet evaluates segment
performance based on several factors, of which the primary financial measure is contribution
margin. Contribution margin represents the net revenues of the reporting segment less costs and
expenses directly associated with the reporting segment, but does not
include interest and income taxes and certain selling, general and administrative costs. The accounting policies used for segment
reporting are the same as those used for consolidated reporting described in the summary of
Significant Accounting Policies included in Note 1 of the Notes to Consolidated Financial
Statements in Item 8  Financial Statements and Supplementary Data of AirNet Systems, Inc.s
Annual Report on Form 10-K for the fiscal year ended December 31, 2004. There were no material
amounts of revenues or transfers between reportable segments. 6




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Financial information for the three months ended March 31 by business segment follows (in
thousands): 2005
    
    
    2004Net RevenuesDelivery Services
    
    $
    40,398
    
    
    $
    36,630Passenger Charter Services
    
    
    9,328
    
    
    
    3,650Total Net Revenues
    
    $
    49,726
    
    
    $
    40,280Contribution MarginDelivery Services
    
    $
    6,396
    
    
    $
    3,518Passenger Charter Services
    
    
    1,509
    
    
    
    809Total Contribution Margin
    
    $
    7,905
    
    
    $
    4,327Depreciation ExpenseDelivery Services
    
    $
    2,927
    
    
    $
    4,339Passenger Charter Services
    
    
    526
    
    
    
    298Total Depreciation Expense
    
    $
    3,453
    
    
    $
    4,637
 A reconciliation of reportable segment net revenues to total net revenues follows (in thousands): 2005
    
    
    2004Reportable segment net revenues
    
    $
    49,726
    
    
    $
    40,280Aviation services and other
    
    
    167
    
    
    
    191Total net revenues
    
    $
    49,893
    
    
    $
    40,471
 A reconciliation of reportable segment contribution margin to income from operations follows (in
thousands): 2005
    
    
    2004Reportable segment contribution margin
    
    $
    7,905
    
    
    $
    4,327Total selling, general and administrative
costs, net of (gain) loss on
disposition of assets of ($50) and $292 at
March 31, 2005 and 2004, respectively
    
    
    (5,437
    )
    
    
    (5,012
    )Direct selling and administrative expenses
included in segment contribution margin
    
    
    1,339
    
    
    
    1,607Income from operations
    
    $
    3,807
    
    
    $
    922
 A reconciliation of reportable segment depreciation expense to total depreciation expense follows
(in thousands): 2005
    
    
    2004Reportable segment depreciation
    
    $
    3,453
    
    
    $
    4,637Corporate depreciation
    
    
    189
    
    
    
    252Total depreciation expense
    
    $
    3,642
    
    
    $
    4,889
 3. Stock Plans and Awards At March 31, 2005,
AirNet had two stock-based employee compensation plans, the Amended
and Restated 1996 Incentive Stock
Plan and the 2004 Stock Incentive Plan. AirNet has accounted for the plans under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees,and
related interpretations. No stock-based employee compensation cost is reflected in net income, as
all options granted under the plans have an exercise price equal to the market value of the
underlying common shares on the date of grant. Pro forma information regarding net income and net
income per share is required by Statement of Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure(SFAS No. 148), and has been
determined as if AirNet had accounted for its employee stock options under the fair value method of
SFAS No. 123, Accounting for Stock-Based Compensation(SFAS No. 123). On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised
2004), Share-Based Payment(SFAS No. 123(R)), which is a revision of SFAS No. 123. SFAS No.
123(R) supersedes 7




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APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement
of Cash Flows.Generally, the approach in SFAS No. 123(R) is similar to the approach described in
SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized as expense in the income statement based on
their fair values. Pro forma disclosure will no longer be an alternative. SFAS No. 123(R) must be adopted no later than the first annual period beginning after June 15,
2005. AirNet expects to adopt SFAS No. 123(R) on January 1, 2006. SFAS No. 123(R) permits
companies to adopt its requirements using one of two methods:  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) all prior periods presented or (b) prior interim periods
of the year of adoption. AirNet plans to adopt SFAS No. 123(R) using the modified prospective method. The impact of
adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had AirNet adopted SFAS No. 123(R) in prior
periods, the impact of that standard would have approximated the impact of SFAS No. 123 as
described in the disclosure of pro forma net income and net income per share below.
AirNet does not anticipate that adoption of SFAS No. 123(R) will have a material impact on its
results of operations or its financial position. However, SFAS No. 123(R) also requires that the
benefits of tax deductions in excess of recognized compensation cost be reported as a financing
cash flow, rather than as an operating cash flow. This requirement will reduce net operating cash
flows and increase net financing cash flows in periods after the effective date. While AirNet
cannot estimate what those amounts will be in the future (because they depend on, among other
things, when employees exercise stock options), the amount of operating cash flows recognized in
prior periods for such excess tax deductions were not material. AirNet adopted the fair-value-based method of accounting for share-based payments effective January
1, 2003 using the modified prospective method described in SFAS No. 148. Currently, AirNet uses
the Black-Scholes option pricing model to estimate the value of stock options granted to employees
for purposes of computing the pro forma disclosures required by SFAS No. 123. The following table illustrates the effect on net income and net income per share if AirNet had
applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation
(in thousands, except per share data): Three Months EndedMarch 31,2005
    
    
    2004Net income, as reported
    
    $
    1,517
    
    
    $
    316Deduct: Total stock-based employee compensation
expense determined under fair value method for
all awards, net of related tax effects
    
    
    (15
    )
    
    
    (80
    )Pro forma net income
    
    $
    1,502
    
    
    $
    236Net income per share  basic and diluted:As reported
    
    $
    .15
    
    
    $
    .03Pro forma
    
    $
    .15
    
    
    $
    .02
 8




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4. Income Per Share The
following table sets forth the computation of basic and diluted net income per common share (in
thousands, except per share data): Three Months EndedMarch 31,2005
    
    
    2004Numerator:Net income
    
    $
    1,517
    
    
    $
    316Denominator:Basic  weighted average shares outstanding
    
    
    10,089
    
    
    
    10,049DilutedStock optionsemployees, officers, and directors
    
    
    5
    
    
    
    32Adjusted weighted average shares outstanding
    
    
    10,094
    
    
    
    10,081Net income per share from operations 
Basic and diluted
    
    $
    .15
    
    
    $
    .03
 Common shares subject to outstanding stock options excluded from the diluted adjusted weighted
average shares outstanding calculation were 851,970 and 740,120 for the three months ended March
31, 2005 and 2004, respectively. These options were antidilutive and excluded from the calculation
because the exercise price of these options was greater than the average fair market value of the
underlying common shares in the respective periods. 5. Comprehensive Income Comprehensive income is comprised of net income of AirNet and the change in the fair value of
interest rate swap agreements and foreign currency translation adjustment, net of income taxes.
Comprehensive income for the three months ended March 31, 2005 and 2004 was $1,514,000 and
$316,000, respectively. 6. Bank Financing Matters Term Notes and Revolving Credit Facility In September 2002, AirNet entered into a $35.0 million unsecured revolving credit facility and a
five-year $20.0 million unsecured term loan (collectively, the Credit Agreement). The term loan
required quarterly installments of $1.0 million beginning in December 2002 and continuing through
September 30, 2007. The revolving credit facility under the Credit Agreement was originally
scheduled to expire on September 30, 2005 and the secured term loan was to mature on September 30,
2007. On May 28, 2004, AirNet and its lenders amended the terms and conditions of the Credit Agreement
(the Amended Credit Agreement). The Amended Credit Agreement was further amended by the First
Change in Terms Agreement and the Second Change in Terms Agreement as described below. The Amended
Credit Agreement is secured by a first lien on all of the property of AirNet and its subsidiaries,
other than any interest in real estate and certain excluded fixed assets. AirNet also pledged the
stock and interests of its subsidiaries to secure the loans under the Amended Credit Agreement, and
each of AirNets subsidiaries guaranteed AirNets obligations under the Amended Credit Agreement.
The Amended Credit Agreement permits AirNet and its subsidiaries to incur other indebtedness for
the purpose of purchasing or refinancing aircraft and related tangible fixed assets, subject to
certain annual limitations. The Amended Credit Agreement contains limitations on operating leases,
indebtedness, significant corporate changes including mergers and sales of assets, investments in
subsidiaries and acquisitions, liens, capital expenditures, transactions with affiliates, sales of
accounts receivable, sale and leaseback transactions and other off-balance sheet liabilities,
contingent obligations and hedging transactions. The Amended Credit Agreement also contains certain
financial covenants that require AirNet to maintain a minimum consolidated tangible net worth and
to not exceed certain fixed charge coverage and leverage ratios specified in the Amended Credit
Agreement. 9




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The Amended Credit Agreement provides for a secured revolving credit facility of up to $35.0
million and a secured term loan in the aggregate amount of $14.0 million. The amount of revolving
loans available under the Amended Credit Agreement is limited to a borrowing base equal to the
aggregate of 80% of eligible accounts receivable, plus 50% of eligible inventory, plus 70% of the
market value of certain fixed assets, reduced by the aggregate amount of AirNets outstanding
letters of credit. The Amended Credit Agreement bears interest, at AirNets option, at (a) a fixed
rate equal to LIBOR plus a margin determined by AirNets leverage ratio as defined in the Amended
Credit Agreement, or (b) a floating rate based on the greater of (i) the prime rate
established by The Huntington National Bank from time to time plus a margin determined by AirNets
leverage ratio or (ii) the sum of 0.5% plus the federal funds
rate in effect from time to time plus a margin determined by
AirNets leverage ratio.
At March 31, 2005, as a result of the various timing and duration of short-term debt maturities,
the interest rate was between 4.0% and 5.0%. As of March 31, 2005, $22.5 million was outstanding under the secured revolving credit facility
which is included in Notes payable, less current portion in the Condensed Consolidated Balance
Sheet. In addition, AirNet had $1.7 million in letters of credit outstanding as of such date
related to insurance programs, which reduced the amount available under the revolving credit
facility. After giving effect to the Second Change in Terms Agreement discussed below, AirNet had
approximately $7.5 million available to borrow on its secured revolving credit facility under the
Amended Credit Agreement as of March 31, 2005. As a result of the impairment charge recorded in September 2004 as described in Note 2 of AirNet
Systems, Inc.s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, AirNet was
not in compliance with the fixed charge coverage ratio and the leverage ratio calculated as of
September 30, 2004, and AirNet would not have been in compliance with the minimum consolidated
tangible net worth requirement as of December 31, 2004. On November 12, 2004, AirNet and its
lenders under the Amended Credit Agreement agreed to modify the terms and conditions of the Amended
Credit Agreement (the First Change in Terms Agreement). The First Change in Terms Agreement
modified the fixed charge coverage ratio, the leverage ratio, and the minimum consolidated tangible
net worth financial covenants in such a manner that, on a going-forward basis, the impairment
charge, in and of itself, would not cause a default of these financial covenants in the future. At
the same time as the First Change of Terms Agreement was entered into, AirNet and its lenders
executed a waiver of any defaults or potential defaults under the Amended Credit Agreement which
occurred, or may have occurred, as a result of AirNets failure to comply with the foregoing
financial covenants due to the impairment charge. On March 24, 2005, AirNet and its lenders entered into a Second Change in Terms Agreement that
further modified the terms and conditions of the Amended Credit Agreement. In accordance with the
Second Change in Terms Agreement, AirNet prepaid in full the remaining $11.0 million balance
outstanding on its secured term loan. Upon the prepayment of the term loan, the term loan portion
of the Amended Credit Agreement was terminated. In addition, the revolving credit facility under
the Amended Credit Agreement was reduced from $35.0 million to $30.0 million. In the event AirNet
secures permanent financing on all or a portion of its Rickenbacker Facility, the revolving credit
facility will be reduced from $30.0 million to
$25.0 million. Under the Second Change in Terms
Agreement, the term of the revolving credit facility was extended from September 30, 2005 to
October 15, 2006. The December 31, 2004 Condensed Consolidated Balance Sheet gives effect to the
Second Change in Terms Agreement entered into on March 24, 2005. The Second Change in Terms
Agreement also provided for the release of certain fixed assets that were securing the loans under
the Amended Credit Facility and modified certain other financial covenants. Other Term Notes On March 24, 2005, AirNet entered into a three-year term loan totaling $11.0 million with a fixed
interest rate of 8.12%. This term loan is secured by seven Cessna Caravans and nine Learjet 35s
from AirNets cargo aircraft fleet with a combined net book value as of March 31, 2005 of
approximately $19.9 million. The aircraft securing this loan were released from the collateral
securing the loans under Amended Credit Agreement in accordance with the Second Change in Terms
Agreement. The proceeds from this term loan were used to prepay in full AirNets term loan under
the Amended Credit Facility as described above. The December 31, 2004 Condensed Consolidated
Balance Sheet reflects the reclassification of approximately $22.4 million from current to
long-term notes payable as a result of the extension of the Amended Credit Facility under the
Second Change in Terms Agreement and the financing of the cargo aircraft described above. During the second quarter of 2004, Jetride entered into four seven-year term loans totaling $22.5
million with fixed interest rates of approximately 6.7%. In July 2004, Jetride financed two
additional passenger charter Learjet 60s for the Passenger Charter fleet at $5.0 million each with
seven year terms and fixed rates of approximately 6.5%, for a total of $32.5 million in financing
related to AirNets Passenger Charter services. As of March 31, 2005, there was $31.2 million
outstanding under all six loans. These term loans are secured by aircraft used in the Passenger
Charter fleet with a total book value of $40.2 million at March 31, 2005. Each of the term loans
is guaranteed by AirNet. AirNet incurred $0.5 million in interest expense in the first quarter of
2005 related to the financing of the nine Passenger Charter aircraft under all six loans. 10




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7. Income Taxes The effective income tax rate for the three months ended March 31, 2005 varies from the statutory
rates due to a valuation allowance for anticipated increases in net operating loss carryforwards
and Alternative Minimum Tax Credit carryforwards. 8. Subsequent Events AirNet has received written notice from The Clearing House (TCH) that TCH and its participating
member institutions intend to terminate, effective Tuesday, May 31, 2005, the air transportation
services provided by AirNet on West Coast routes for TCH and its participating member institutions,
due to the availability of electronic collection alternatives. During AirNets fiscal year ended
December 31, 2004 and first quarter ended March 31, 2005, these air transportation services
accounted for approximately $4.5 million and $1.2 million, respectively, of AirNets Bank services
revenues (including $200,000 and $85,000, respectively, in fuel surcharge revenues). In addition, AirNet was notified by an individual bank customer, by letter dated April 26, 2005,
that the bank was terminating AirNets transportation services for a route out of a city in the
southwestern U.S. AirNet has been negotiating potential pricing and volume changes with three
other bank customers who also dispatch from this city; however,
AirNet was unable to
reach an agreement on terms for continuing service. Accordingly, service for these banks on this
route was discontinued on April 28, 2005. During AirNets fiscal year ended December 31, 2004 and
first quarter ended March 31, 2005, the air transportation services to these four banks related to
this route accounted for approximately $2.1 million and $0.4 million, respectively, of AirNets
Bank services revenues (including $100,000 and $35,000, respectively in fuel surcharge revenues). In response to these notifications, AirNet has been planning changes in its route schedule and
other cost reduction strategies to reduce the financial impact of these revenue losses. To date,
AirNet has been able to identify direct cost reductions related to eliminating these routes of
approximately forty percent of the revenue loss. In addition, AirNet is negotiating rate increases
with bank customers which would become effective June 1, 2005 and is seeking to provide other
transportation services on other routes to mitigate the revenue decreases described above. No
assurance can be given that the rate increases will become effective or will be sufficient,
together with the cost reductions, to replace the margin contributed by the discontinued
transportation services. On May 4, 2005, AirNet announced that the Board of Directors (the Board) had unanimously
authorized Brown Gibbons Lang & Company (BGL) to solicit potential offers to acquire AirNet. BGL
was previously engaged to serve as AirNets exclusive financial advisor and investment banker to
review, develop and evaluate various strategic alternatives to enhance shareholder value. The
Boards decision comes after careful consideration of and is consistent with the recommendations
provided by BGL. AirNets Board also established a Special Committee consisting solely of the independent directors
to oversee the marketing process. AirNet, through the Special Committee and Board, reserves the
right to alter or terminate the marketing process at any time. At this point in time, the Board
has not authorized the sale of AirNet. By taking these steps, AirNets Board is seeking to increase shareholder value while addressing the
resource needs in its growing businesses amid the challenges arising from the evolution of
electronic settlement alternatives in the Bank marketplace. AirNet anticipates that initial indications of interest will be received within approximately
ninety days. AirNet does not expect to comment further publicly with respect to the marketing
process until AirNet deems it appropriate to do so. In view of the marketing process, the AirNets
Annual Meeting of Shareholders will be postponed until later in the year. 11




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##### 



AIRNET SYSTEMS, INC. ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Safe Harbor Statement Except for the historical information contained in this Form 10-Q, the matters discussed,
including, but not limited to, information regarding future economic performance and plans and
objectives of AirNets management, are forward-looking statements that involve risks and
uncertainties. When used in this document, the words believe, anticipate, estimate, expect,
intend, may, plan, project and similar expressions are intended to be among statements that
identify forward-looking statements. Such statements involve risks and uncertainties including,
but not limited to, the following which could cause actual results to differ materially from any
forward-looking statement: potential regulatory changes by the Federal Aviation Administration
(FAA), Department of Transportation (DOT) and Transportation Security Administration (TSA),
which could increase the regulation of AirNets business, or the Federal Reserve, which could
change the competitive environment of transporting cancelled checks; changes in check processing
and shipment patterns of bank customers; the continued acceleration of migration of AirNets Bank
customers to electronic alternatives to the physical movement of cancelled checks; disruptions to
operations due to adverse weather conditions, air traffic-control related constraints or aircraft
accidents; potential further declines in the values of aircraft in AirNets fleet and any related
asset impairment charges; the ability to successfully market the Passenger Charter business in
light of global changes in the commercial airline industry; potential changes in locally and
federally mandated security requirements; increases in aviation fuel costs not fully offset by
AirNets fuel surcharge program; acts of war and terrorist activities; the acceptance of AirNets
time-critical service offerings within targeted Express markets; technological advances and
increases in the use of electronic funds transfers; the availability and cost of financing required
for operations; the impact of unusual items resulting from ongoing evaluations of our business
strategies; as well as other economic, competitive and domestic and foreign governmental factors
affecting AirNets markets, prices and other facets of its operations. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual
outcomes may vary materially from those indicated. Please refer to the sections captioned
Forward-looking statements and Risk Factors in Item 7 of the Annual Report on Form 10-K for the
fiscal year ended December 31, 2004 of AirNet Systems, Inc. (File No. 1-13025) for additional
details relating to risk factors that could affect AirNets results and cause those results to
differ materially from those expressed in forward-looking statements. General Critical Accounting Policies and Estimates The preparation of financial statements in accordance with accounting principles generally accepted
in the United States of America requires management to adopt accounting policies and make
significant judgments and estimates to develop amounts reflected and disclosed in the financial
statements. In many cases, there are alternative policies or estimation techniques that could be
used. AirNet maintains a thorough process to review the application of its accounting policies and
to evaluate the appropriateness of the estimates; however, even under optimal circumstances,
estimates routinely require adjustment based on changing circumstances and the receipt of new or
better information. Certain estimates that have a significant effect on quarterly results, such as
incentive compensation expense and the effective income tax rates, could require substantial
adjustments from quarter to quarter due to changes in estimates of net income for the year. Management has discussed the development and selection of AirNets critical accounting policies and
estimates with the Audit Committee of AirNet Systems, Inc.s Board of Directors and with its
independent registered public accounting firm. AirNets critical accounting policies have not
changed significantly from the policies disclosed in Item 7 of AirNet Systems, Inc.s Annual Report
on Form 10-K for the fiscal year ended December 31, 2004. AirNets audited consolidated financial statements for the fiscal year ended December 31, 2004,
included in Item 8 of AirNet Systems, Inc.s Annual Report on Form 10-K for the fiscal year ended
December 31, 2004, contain additional disclosures regarding AirNets significant accounting
policies and Item 7 of that Annual Report on Form 10-K includes a summary of AirNets critical
accounting policies. The information appearing therein may be useful when reading this discussion
and analysis of financial condition and results of operations. 12




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##### 



Results of Operations Net Revenues Three Months Ending
    
    
    
    
    
    
    Increase (Decrease)March 31,
    
    
    
    
    
    
    2005 to 2004Dollars in '000's
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofNet Revenues
    
    2005
    
    
    Total
    
    
    2004
    
    
    Total
    
    
    Dollars ($)
    
    
    Percentage (%)Delivery Services Revenues:Bank Services
    
    $
    27,293
    
    
    
    54.7
    %
    
    $
    25,832
    
    
    
    63.8
    %
    
    $
    1,461
    
    
    
    5.7
    %Express Services
    
    
    13,105
    
    
    
    26.3
    %
    
    
    10,798
    
    
    
    26.7
    %
    
    
    2,307
    
    
    
    21.4
    %Total Delivery Services Revenues
    
    
    40,398
    
    
    
    81.0
    %
    
    
    36,630
    
    
    
    90.5
    %
    
    
    3,768
    
    
    
    10.3
    %Passenger Charter Services Revenues
    
    
    9,328
    
    
    
    18.7
    %
    
    
    3,650
    
    
    
    9.0
    %
    
    
    5,678
    
    
    
    155.6
    %Aviation Services and Other Revenues
    
    
    167
    
    
    
    0.3
    %
    
    
    191
    
    
    
    0.5
    %
    
    
    (24
    )
    
    
    (12.6
    )%Total Net Revenues
    
    $
    49,893
    
    
    
    100.0
    %
    
    $
    40,471
    
    
    
    100.0
    %
    
    $
    9,422
    
    
    
    23.3
    %
 AirNet has experienced overall net revenue growth for the three months ended March 31, 2005 over
the same period of the prior year. This can be attributed to several factors including significant
growth in Passenger Charter services as well as additional fuel surcharge revenues. AirNet assesses its customers a fuel surcharge which is based on the Oil Price Index Summary 
Columbus, Ohio (OPIS-CMH index). As index rates increase above a set threshold, surcharge rates
increase. The first quarter 2005 average annual price on the OPIS index increased approximately
36% from the first quarter 2004 average annual price. Bank Services Revenues Three Months Ending
    
    
    Increase (Decrease)Dollars in '000's
    
    March 31,
    
    
    2005 to 2004Bank Services Revenues
    
    2005
    
    
    2004
    
    
    Dollars ($)
    
    
    Percentage (%)Bank Services Revenues, Net of
Federal Excise Tax
    
    $
    25,182
    
    
    $
    24,878
    
    
    $
    304
    
    
    
    1.2
    %Fuel Surcharge
    
    
    2,111
    
    
    
    954
    
    
    
    1,157
    
    
    
    121.3
    %Total Net Bank Services Revenues
    
    $
    27,293
    
    
    $
    25,832
    
    
    $
    1,461
    
    
    
    5.7
    %
 Bank services revenues (excluding the impact of the fuel surcharge and federal excise taxes)
increased slightly in the quarter as AirNet continues to focus on additional services for banks
beyond cancelled check transportation, such as proof of deposit and interoffice mail delivery
services. Because the density of cancelled check shipments is much greater than the typical
Express shipment, profit margins on Bank shipments are substantially higher than Express shipments
after considering cubic dimensions. Increased fuel prices during the first quarter 2005 resulted
in significantly higher fuel surcharge revenues compared to the same quarter in 2004. AirNet believes that lower check delivery volume as a result of the declining use of checks and
electronic alternatives to the physical movement of cancelled checks will contribute to a
significant reduction in Bank services revenues and the contribution margin from Delivery Services
in future periods. During the first quarter of 2005, AirNet received written notice,by letter dated February 25,
2005, from The Clearing House (TCH) that TCH and its participating member institutions intended
to terminate, effective Tuesday, May 31, 2005, the air transportation services provided by AirNet
on West Coast routes for TCH and its participating member institutions, due to the availability of
electronic collection alternatives. During AirNets fiscal year ended December 31, 2004 and first
quarter ended March 31, 2005, these air transportation services accounted for approximately $4.5
million and $1.2 million, respectively, of AirNets Bank services revenues (including $200,000 and
$85,000, respectively, in fuel surcharge revenues). In addition, AirNet was notified by an individual bank customer, by letter dated April 26,
2005, that the bank was terminating AirNets transportation services for a route out of a city in
the southwestern U.S. This bank had notified 13




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##### 



AirNet orally in February 2005 that the bank was
considering eliminating this route. Since that time, AirNet has been negotiating potential pricing
and volume changes with three other bank customers who also dispatch
from this city; however, AirNet was unable to reach an agreement on terms for continuing service. Accordingly,
service for these banks on this route was discontinued on April 28, 2005. During AirNets fiscal
year ended December 31, 2004 and first quarter ended March 31, 2005, the air transportation
services to these four banks related to this route accounted for approximately $2.1 million and
$0.4 million, respectively, of AirNets Bank services revenues (including $100,000 and $35,000,
respectively in fuel surcharge revenues). In response to these notifications, AirNet has been planning changes in its route schedule and
other cost reduction strategies to reduce the financial impact of these revenue losses. To date,
AirNet has been able to identify direct cost reductions related to eliminating these routes of
approximately forty percent of the revenue loss. In addition, AirNet is negotiating rate increases
with bank customers which would become effective June 1, 2005 and is seeking to provide other
transportation services on other routes to mitigate the revenue decreases described above. No
assurance can be given that the rate increases will become effective or will be sufficient,
together with the cost reductions, to replace the margin contributed by the discontinued
transportation services. Express Services Revenues Dollars in 000s
    
    Three Months Ending
    
    
    Increase (Decrease)March 31,
    
    
    2005 to 2004Express Services Revenues
    
    2005
    
    
    2004
    
    
    Dollars ($)
    
    
    Percentage (%)Express Revenues  Non Charter
    
    $
    9,031
    
    
    $
    8,067
    
    
    $
    964
    
    
    
    12.0
    %Express Revenues  Charters
    
    
    3,587
    
    
    
    2,732
    
    
    
    855
    
    
    
    31.3
    %Fuel Surcharge
    
    
    876
    
    
    
    323
    
    
    
    553
    
    
    
    171.2
    %Federal Excise Tax
    
    
    (389
    )
    
    
    (324
    )
    
    
    (65
    )
    
    
    (20.1
    )%Net Express Services Revenues
    
    $
    13,105
    
    
    $
    10,798
    
    
    $
    2,307
    
    
    
    21.4
    %
 Express Revenues  Non Charter, represent revenues AirNet derives from shipments on AirNets
airline, commercial airlines and point-to-point surface (ground only) shipments. Revenues from
point-to-point surface shipments increased approximately $1.0 million for the first quarter 2005
compared to the first quarter 2004. Point to point surface shipments generally incur higher
courier costs compared to any other Express Services shipments. For the first quarter of 2005
compared to the same period in the prior year, the increase in revenues related to point-to-point
surface shipments is partially offset by a decrease in revenues related to shipments on AirNets
airline and those on commercial airlines. Charter revenues have increased primarily due to a
significant increase in the number of scheduled and unscheduled charters. Higher fuel
prices during the first quarter 2005 and changes to the fuel surcharge program instituted in
October 2004 resulted in significantly higher fuel surcharge revenues compared to the same quarter
in 2004. Passenger Charter Services Revenues Dollars in 000s
    
    Three Months Ending
    
    
    Increase (Decrease)March 31,
    
    
    2005 to 2004Passenger Charter Services Revenues
    
    2005
    
    
    2004
    
    
    Dollars ($)
    
    
    Percentage (%)Passenger Charter services revenues
    
    $
    8,559
    
    
    $
    3,402
    
    
    $
    5,157
    
    
    
    151.6
    %Management fee revenues
    
    
    363
    
    
    
    126
    
    
    
    237
    
    
    
    188.1
    %Fuel Surcharge
    
    
    406
    
    
    
    122
    
    
    
    284
    
    
    
    232.8
    %Total Passenger Charter services revenues
    
    $
    9,328
    

    
    $
    3,650
    
    
    $
    5,678
    
    
    
    155.6
    %
 Passenger Charter Services derives its revenues primarily from passenger charter brokers and backup
charters for fractional aircraft ownership programs. In 2004, AirNet invested in additional
aircraft to support passenger charter demand. AirNet increased its Passenger Charter fleet from
eleven aircraft at March 31, 2004 to sixteen, which included two large-cabin Challenger aircraft,
at March 31, 2005. Flight hours for Passenger Charter services increased approximately 116% from
first quarter 2004 to first quarter 2005. AirNets Passenger Charter services revenues include
revenue from both owned and managed aircraft. Management fee revenues include a monthly fee and a
specific percentage of revenues earned under each managed aircraft agreement. 14




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##### 



Costs and Expenses Dollars in 000s
    
    Three Months Ending
    
    
    Increase (Decrease)March 31,
    
    
    2005 to 2004Costs and Expenses
    
    2005
    
    
    2004
    
    
    Dollars ($)
    
    
    Percentage (%)Wages and benefits
    
    $
    6,204
    
    
    $
    5,872
    
    
    $
    332
    
    
    
    5.7
    %Aircraft fuel
    
    
    8,254
    
    
    
    5,536
    
    
    
    2,718
    
    
    
    49.1
    %Aircraft maintenance
    
    
    5,387
    
    
    
    3,191
    
    
    
    2,196
    
    
    
    68.8
    %Contracted air costs
    
    
    3,268
    
    
    
    3,071
    
    
    
    197
    
    
    
    6.4
    %Ground courier
    
    
    7,889
    
    
    
    7,142
    
    
    
    747
    
    
    
    10.5
    %Depreciation
    
    
    3,642
    
    
    
    4,889
    
    
    
    (1,247
    )
    
    
    (25.5
    )%Insurance, rent and landing fees
    
    
    2,810
    
    
    
    2,564
    
    
    
    246
    
    
    
    9.6
    %Travel, training and other
    
    
    3,195
    
    
    
    2,272
    
    
    
    923
    
    
    
    40.6
    %Selling, general and administrative
    
    
    5,487
    
    
    
    4,720
    
    
    
    767
    
    
    
    2.4
    %Net (gain) loss on disposition of assets
    
    
    (50
    )
    
    
    292
    
    
    
    (342
    )
    
    
    (117.1
    )%Total costs and expenses
    
    $
    46,086
    
    
    $
    39,549
    
    
    $
    6,537
    
    
    
    14.9
    %Hours flown  Total
    
    
    28,733
    
    
    
    25,764
    
    
    
    2,969
    
    
    
    11.5
    %
 As operating activities for AirNets Passenger Charter services continued to increase, total costs
and expenses increased for the quarter ended March 31, 2005 compared to the same period in the
prior year. The increase in the use of Passenger Charter services from first quarter 2004 to first
quarter 2005 accounted for approximately $5.0 million, or 76%, of the overall increase in operating
costs and expenses. The Passenger Charter fleet increased by five aircraft in the first quarter
2005 compared to the same period a year ago. Flight hours for Passenger Charter services increased
approximately 116% from first quarter 2004 to first quarter 2005. In addition, costs and expenses
increased due to increased hours flown, increased service and support costs associated with the
increase in the use of Express services and additional aircraft fuel, maintenance and contracted
air costs to support AirNets Bank customers. Dollars in 000s
    
    Three Months Ending
    
    
    Increase (Decrease)March 31,
    
    
    2005 to 2004Aircraft Fuel
    
    2005
    
    
    2004
    
    
    Dollars ($)
    
    
    Percentage (%)Aircraft fuel
    
    $
    8,254
    
    
    $
    5,536
    
    
    $
    2,718
    
    
    
    49.1
    %Less  Fuel surcharge revenues
    
    
    (3,393
    )
    
    
    (1,399
    )
    
    
    (1,994
    )
    
    
    (142.5
    )%Net
    
    $
    4,861
    
    
    $
    4,137
    
    
    $
    724
    
    
    
    17.5
    %
 Aircraft fuel expense increased quarter-over-quarter as a result of the significant increase in
fuel prices as well as the increase in the number of hours flown by the Passenger Charter services.
Approximately 25% of the total aircraft fuel expense in the first quarter 2005 relates to
Passenger Charter services. AirNet continues to maintain its fuel surcharge program to offset
increases in fuel expense. The billed amounts related to the fuel surcharge program are classified
as revenue. Maintenance expense increased during the quarter ended March 31, 2005 primarily due to the
expansion of the Passenger Charter fleet, including managed aircraft, and an increase in related
flight hours for the Passenger Charter fleet and cargo fleet Learjets. The increase in travel, training and other expenses from first quarter 2004 to 2005 is primarily a
result of the related increase in fees paid by AirNet to managed aircraft owners as a result of the
significant increase in the number and use of managed aircraft by AirNets Passenger Charter
services. The fees paid to managed aircraft owners represent the payments made by AirNet under
managed aircraft agreements for the use of the owners aircraft. At March 31, 2005, AirNet managed
seven aircraft, including two large-cabin Challenger aircraft, compared to three aircraft at March
31, 2004. Ground courier costs continue to increase as AirNet serves a broader group of customers outside of
AirNets traditional bank customer. AirNets Express customers are more costly to serve than the
traditional Bank customer 15




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##### 



due to more unscheduled pickup and delivery services and more
geographically dispersed locations. The growth rate in point to point surface shipments, which
typically have a substantially higher ground courier cost per shipment, is increasing as AirNet
expands the number of Express customers. The increase in wages and benefits from first quarter 2004 to 2005 was substantially due to the
increase in the number of Passenger Charter pilots and support staff. There were an additional 26
pilots in the first quarter of 2005 compared to the first quarter of 2004 to support the Passenger
Charter operation. Aircraft depreciation decreased $1.4 million in the first quarter of 2005 compared to 2004 due to a
reduction in AirNets aircraft values as a result of the impairment charge recorded on September
30, 2004 as discussed below. This decline was partially offset by $0.2 million of additional
depreciation related to the increase in the number of aircraft in the Passenger Charter fleet. AirNet continually reviews
the remaining useful life and expected salvage value of its aircraft in connection with its
depreciation calculation. Aircraft and engines are depreciated based on the number of hours flown.
Other depreciation includes depreciation related to building and leasehold improvements, computer
hardware and software and vehicles. The amount of the reduction in depreciation expense incurred
is expected to decrease over the remainder of fiscal year 2005 as a result of additional Passenger
Charter aircraft added throughout fiscal year 2004. AirNets long-lived assets used in its cargo operations, consisting primarily of aircraft and spare
parts, were determined to be impaired as of September 30, 2004. This determination was made as a
result of industry trends in the adoption of electronic payment alternatives and evolving
alternatives to the physical movement of cancelled checks at a more rapid pace than previously
anticipated by the industry. AirNet believes that enactment of the Check 21 Act in October 2004
contributes to this trend. Furthermore, market data and other disclosures by the Federal Reserve
confirm the accelerating decline in cancelled check volume. AirNets cargo airline was originally
designed, and continues to operate, primarily to meet the needs of Bank services customers. AirNet
believes that its airline capacity will exceed future demand, creating an impairment of the
aircraft and related assets. The impairment also reflects the overall decline in the market values
of the aircraft in its cargo fleet which have not recovered as in previous economic cycles. AirNet
determined that the expected future undiscounted cash flows from its assets used in its cargo
operations were less than the carrying value of those assets and were impaired. Accordingly, a
non-cash impairment charge of $43.0 million was recorded on September 30, 2004, using estimated
aircraft fair values. The
aircraft fair values used for this purpose were based upon published market sources at September
30, 2004, which are also used under AirNets Amended Credit Agreement. The increase in selling, general and administrative costs is primarily due to approximately $0.9
million of incentive compensation expense accrued under the 2005 Incentive Compensation Plan in the first quarter of 2005, whereas
no incentive compensation was recorded in the same period of the prior year. No incentive
compensation will be paid to executive officers under the 2005 Incentive Compensation Plan unless AirNet achieves a
designated threshold level of pre-tax income for Fiscal 2005. AirNet recognized a net gain on disposition of assets during the three months ended March 31, 2005.
This amount represents a gain on the sale of an aircraft of approximately $50,000. AirNet
recognized a net loss on disposition of assets of $292,000 during the quarter ended March 31, 2004.
This amount included a loss of approximately $584,000 related to an accident involving one of its
cargo aircraft (net of insurance proceeds of $2.3 million). In addition, AirNet sold seven piston
aircraft during the quarter ended March 31, 2004 resulting in a loss on sale of approximately
$114,000. Offsetting these losses at March 31, 2004 was a gain on the sale of an aircraft of
approximately $400,000. The effective income tax rate for the three months ended March 31, 2005 varies from the statutory
rates due to a valuation allowance for anticipated increases in net operating loss carryforwards
and Alternative Minimum Tax Credit carryforwards. Liquidity and Capital Resources Cash flow from operating activities.Net cash provided by operating activities was $5.0 million
for the three months ended March 31, 2005, compared to
$6.3 million for the same period in 2004. The decrease in cash
flow from operating activities was primarily due to the elimination
in January 2005 of the prepayment options for certain Bank customers. Financing Matters In September 2002, AirNet entered into a $35.0 million unsecured revolving credit facility and a
five-year $20.0 million unsecured term loan (collectively, the Credit Agreement). The term loan
required quarterly installments of $1.0 million beginning in December 2002 and continuing through
September 30, 2007. The revolving credit facility under the Credit Agreement was originally
scheduled to expire on September 30, 2005 and the secured term loan was to mature on September 30,
2007. 16




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##### 



On May 28, 2004, AirNet and its lenders amended the terms and conditions of the Credit Agreement
(the Amended Credit Agreement). The Amended Credit Agreement was further amended by the First
Change in Terms Agreement and the Second Change in Terms Agreement as described below. The Amended
Credit Agreement is secured by a first lien on all of the property of AirNet and its subsidiaries,
other than any interest in real estate and certain excluded fixed assets. AirNet also pledged the
stock and interests of its subsidiaries to secure the loans under the Amended Credit Agreement, and
each of AirNets subsidiaries guaranteed AirNets obligations under the Amended Credit Agreement.
The Amended Credit Agreement permits AirNet and its subsidiaries to incur other indebtedness for
the purpose of purchasing or refinancing aircraft and related tangible fixed assets, subject to
certain annual limitations. The Amended Credit Agreement contains limitations on operating leases,
indebtedness, significant corporate changes including mergers and sales of assets, investments in
subsidiaries and acquisitions, liens, capital expenditures, transactions with affiliates, sales of
accounts receivable, sale and leaseback transactions and other off-balance sheet liabilities,
contingent obligations and hedging transactions. The Amended Credit Agreement also contains certain
financial covenants that require AirNet to maintain a minimum consolidated tangible net worth and
to not exceed certain fixed charge coverage and leverage ratios specified in the Amended Credit
Agreement. The Amended Credit Agreement provides for a secured revolving credit facility of up to $35.0
million and a secured term loan in the aggregate amount of $14.0 million. The amount of revolving
loans available under the Amended Credit Agreement is limited to a borrowing base equal to the
aggregate of 80% of eligible accounts receivable, plus 50% of eligible inventory, plus 70% of the
market value of certain fixed assets, reduced by the aggregate amount of AirNets outstanding
letters of credit. The Amended Credit Agreement bears interest, at AirNets option, at (a) a fixed
rate equal to LIBOR plus a margin determined by AirNets leverage ratio as defined in the Amended
Credit Agreement, or (b) a floating rate based on the greater of (i) the prime rate
established by The Huntington National Bank from time to time plus a margin determined by AirNets
leverage ratio or (ii) the sum of 0.5% plus the federal funds
rate in effect from time to time plus a margin determined by
AirNets leverage ratio.
At March 31, 2005, as a result of the various timing and duration of short-term debt maturities,
the interest rate was between 4.0% and 5.0%. As of March 31, 2005, $22.5 million was outstanding under the secured revolving credit facility
which is included in Notes Payable, less current portion in the Condensed Consolidated Balance
Sheet. In addition, AirNet had $1.7 million in letters of credit outstanding as of such date
related to insurance programs, which reduced the amount available under the revolving credit
facility. After giving effect to the Second Change in Terms Agreement discussed below, AirNet had
approximately $7.5 million available to borrow on its secured revolving credit facility under the
Amended Credit Agreement as of March 31, 2005. As a result of the impairment charge recorded in September 2004 as described in Note 2 of AirNet
Systems, Inc.s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, AirNet was
not in compliance with the fixed charge coverage ratio and the leverage ratio calculated as of
September 30, 2004, and AirNet would not have been in compliance with the minimum consolidated
tangible net worth requirement as of December 31, 2004. On November 12, 2004, AirNet and its
lenders under the Amended Credit Agreement agreed to modify the terms and conditions of the Amended
Credit Agreement (the First Change in Terms Agreement). The First Change in Terms Agreement
modified the fixed charge coverage ratio, the leverage ratio, and the minimum consolidated tangible
net worth financial covenants in such a manner that, on a going-forward basis, the impairment
charge, in and of itself, would not cause a default of these financial covenants in the future. At
the same time as the First Change of Terms Agreement was entered into, AirNet and its lenders
executed a waiver of any defaults or potential defaults under the Amended Credit Agreement which
occurred, or may have occurred, as a result of AirNets failure to comply with the foregoing
financial covenants due to the impairment charge. On March 24, 2005, AirNet and its lenders entered into a Second Change in Terms Agreement that
further modified the terms and conditions of the Amended Credit Agreement. In accordance with the
Second Change in Terms Agreement, AirNet prepaid in full the remaining $11.0 million balance
outstanding on its secured term loan. Upon the prepayment of the term loan, the term loan portion
of the Amended Credit Agreement was terminated. In addition, the revolving credit facility under
the Amended Credit Agreement was reduced from $35.0 million to $30.0 million. In the event AirNet
secures permanent financing on all or a portion of its Rickenbacker Facility, the revolving credit
facility will be reduced from $30.0 million to
$25.0 million. Under the Second Change in Terms
Agreement, the term of the revolving credit facility was extended from September 30, 2005 to
October 15, 2006. The December 31, 2004 Condensed Consolidated Balance Sheet gives effect to the
Second Change in Terms Agreement entered into on March 24, 2005. The Second Change in Terms
Agreement also provided for the release of certain fixed assets that were securing the loans under
the Amended Credit Facility and modified certain other financial covenants. On March 24, 2005, AirNet entered into a three-year term loan totaling $11.0 million with a fixed
interest rate of 8.12%. This term loan is secured by seven Cessna Caravans and nine Learjet 35s
from AirNets cargo aircraft fleet with a combined net book value as of March 31, 2005 of
approximately $19.9 million. The aircraft securing this loan were released from the collateral
securing the loans under Amended Credit Agreement in accordance with the 17




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Second Change in Terms
Agreement. The proceeds from this term loan were used to prepay in full AirNets term loan under
the Amended Credit Facility as described above. The December 31, 2004 Condensed Consolidated
Balance Sheet reflects the reclassification of approximately $22.4 million from current to
long-term notes payable as a result of the extension of the Amended Credit Facility under the
Second Change in Terms Agreement and the financing of the cargo aircraft described above. During the second quarter of 2004, Jetride entered into four seven-year term loans totaling $22.5
million with fixed interest rates of approximately 6.7%. In July 2004, Jetride financed two
additional passenger charter Learjet 60s for the Passenger Charter fleet at $5.0 million each with
seven year terms and fixed rates of approximately 6.5%, for a total of $32.5 million in financing
related to AirNets Passenger Charter services. As of March 31, 2005, there was $31.2 million
outstanding under all six loans. These term loans are secured by aircraft used in the Passenger
Charter fleet with a total book value of $40.2 million at March 31, 2005. Each of the term loans
is guaranteed by AirNet. AirNet incurred $0.5 million in interest expense in the first quarter of
2005 related to the financing of the nine Passenger Charter aircraft under all six loans. Investing activities.Capital expenditures totaled $7.9 million for the three months ended March
31, 2005 versus $9.8 million for the same period in 2004. Of the 2005 expenditures, $4.0 million
was for major periodic aircraft inspections and major engine overhauls and related flight
equipment. AirNet anticipates it will spend between $18.0 million and $25.0 million in total
capital expenditures in 2005. In February 2000, AirNet announced a stock repurchase plan allowing AirNet to purchase up to $3.0
million of its common shares. As of the end of the 2001 fiscal year, $2.4 million of common shares
had been
repurchased, and there has been no repurchase activity under the plan since. As such, purchases of
approximately $0.6 million of AirNets common shares may still be made in the open market or
through privately negotiated transactions. Such future purchases would be considered based on
availability of funds, current market conditions, the stock price and restrictions in AirNets
financing agreements. AirNet anticipates that operating cash and capital expenditure requirements will continue to be
funded by cash flow from operations, cash on hand, borrowings in conjunction with the Amended
Credit Agreement or other sources, including leasing. There were no material capital commitments
at March 31, 2005, other than the Companys construction of its new office and hangar facility
described below. On January 20, 2004, AirNet entered into a Land Lease with the Authority to lease approximately 8
acres located within the Rickenbacker International Airport (Rickenbacker). Rickenbacker is
located in Franklin and Pickaway Counties, Ohio, southeast of Columbus, Ohio, approximately fifteen
miles from AirNets current Port Columbus Facility. AirNet
completed construction of a new

corporate and
operational headquarters at Rickenbacker (the Rickenbacker
Facility) in May 2005.


Relocation to the Rickenbacker Facility is expected to be completed in
June 2005.

AirNets current corporate and operational
functions that are conducted at the Port Columbus Facility, and the administrative functions being
conducted at 555 Morrison Road, will be consolidated at the new Rickenbacker Facility. On January 20, 2004, in anticipation of AirNets move to its new Rickenbacker Facility, AirNet also
entered into an agreement to sell its Port Columbus Facility to the Authority for $3.9 million.
Closing of the sale of the Port Columbus Facility to the Authority took place on December 15, 2004.
Concurrently with the sale, AirNet entered into a new lease agreement with the Authority (the New
Port Columbus Lease). Pursuant to the New Port Columbus Lease, AirNet will lease the real
property associated with the Port Columbus Facility and the buildings and all other improvements
thereon pending completion of the construction of the Rickenbacker Facility. The term of the New
Port Columbus Lease commenced on December 15, 2004 and will terminate on the earlier to occur of
(i) the date AirNet moves into the Rickenbacker Facility or (ii) August 31, 2005. The New Port
Columbus Lease will be rent free until May 15, 2005 and commencing May 16, 2005, the rent will be
$30,000 per month. The New Port Columbus Lease is a net lease under which AirNet is responsible
for all costs of operating the Port Columbus Facility. AirNet intends to move its operations at
the Port Columbus Facility as well as its administrative functions to the Rickenbacker Facility
during the second quarter of 2005. AirNet is attempting to secure permanent financing of its Rickenbacker Facility. AirNet has signed
a letter of intent with a potential lender to finance $8.5 million of its Rickenbacker Facility,
which is subject to credit, appraisal and environmental review acceptable to the lender. In
addition, the potential lender has asked to review AirNets operating results for the fiscal year
ended 2004 and first quarter 2005. However, as a result of the marketing
process and potential sale of AirNet as
described below under Brown Gibbons Lang & Company, obtaining long-term financing of the
Rickenbacker Facility is unlikely during this marketing process. There have been no material changes in AirNets contractual obligations from those disclosed in
AirNet Systems, Inc.s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. 18




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Regulation The U. S. Department of Transportation has implemented new regulations regarding the transportation
of hazardous materials that became effective on April 1, 2005. These new regulations require that
certain information concerning hazardous material shipments be maintained by the pilot-in-command
of an aircraft and be readily accessible at the airport of departure and the intended airport of
arrival for the duration of each flight leg. AirNet is in the process of implementing new
operating procedures to comply with the regulations. Compliance with the new regulations will
likely increase AirNets cost of transporting hazardous materials. A significant portion of AirNets operations are conducted at night at airports where it maintains
no ground operations. In order to comply with the regulatory requirement that information
concerning hazardous material shipments be readily accessible at each airport of departure, AirNet
has made arrangements to deposit such information with ground vendors, fixed based operators, or in
drop boxes located at departing airports. The location of the deposited information is maintained
at AirNets control center in Columbus, Ohio. AirNets control center personnel can direct any
regulatory authorities or emergency response team to the location of the hazardous material
information in the event of an emergency. While AirNet continues to implement procedures to comply
with the new regulations, there can be no assurances that the TSA, DOT
or FAA would agree that AirNets operating procedures comply with all the requirements of the new
regulations. AirNet previously submitted a request for exemption from the new hazardous materials regulations
and proposed an alternative method of compliance. AirNet has decided not to pursue the request for
exemption and intends to formally withdraw such request. AirNet conducts a portion of its operations under an Indirect Air Carrier Standard Security Program
(IACSSP) approved by the Transportation Security Administration (TSA). The IACSSP permits
AirNet to tender shipments to commercial airlines. The TSA has informed AirNet that the TSA would
no longer approve AirNets IACSSP based upon the definition of an indirect air carrier provided
under 49 CFR §1540.5. The TSA has requested that AirNet submit an application for a new IACSSP
under the name of an affiliated company. By letter to the TSA dated February 18, 2005, AirNet had
proposed that it submit an application for a new IACSSP under the name of AirNet Management, Inc.,
a wholly-owned subsidiary of AirNet. The letter also set forth the steps AirNet intended to follow
to transition commercial airline shipments to the new IACSSP and requested certain guidance from
the TSA regarding the transition process. The TSA has indicated that it will not formally respond to AirNets request for guidance as set
forth in its February 18, 2005. AirNet is continuing to
cooperate with the TSA to transition AirNets
IACSSP to an affiliated company. AirNet Management, Inc. is
in the process of submitting an application to the TSA seeking approval of a new IACSSP. Upon
receipt of such approval, AirNet will begin processing its commercial airline shipments under the
new IACSSP. Once the new IACSSP is approved, AirNet and AirNet Management, Inc. may need to
institute operational changes to transition commercial shipment processing to the new IACSSP and to
comply with all TSA rules, regulations and directives. Brown Gibbons Lang & Company On January 2, 2005, upon the approval of the Board of Directors (the Board) of AirNet, AirNet
engaged Brown Gibbons Lang & Company (BGL) to serve as AirNets exclusive financial advisor and
investment banker to review, develop and evaluate various strategic alternatives to enhance
shareholder value. On May 4, 2005, AirNet announced that the Board had unanimously authorized BGL to solicit potential
offers to acquire AirNet. The Boards decision comes after careful consideration of and is
consistent with the recommendations provided by BGL. AirNets Board also established a Special Committee consisting solely of the independent directors
to oversee the marketing process. AirNet, through the Special Committee and Board, reserves the
right to alter or terminate the marketing process at any time. At this point in time, the Board
has not authorized the sale of AirNet. By taking these steps, AirNets Board is seeking to increase shareholder value while addressing the
resource needs in its growing businesses amid the challenges arising from the evolution of
electronic settlement alternatives in the Bank marketplace. AirNet anticipates that initial indications of interest will be received within approximately
ninety days. AirNet does not expect to comment further publicly with respect to the marketing
process until AirNet deems it appropriate to do so. In view of the marketing process, AirNets
Annual Meeting of Shareholders will be postponed until later in the year. 19




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Off-Balance Sheet Arrangements AirNet had no off-balance sheet arrangements as of March 31, 2005, as that term is described by
the Securities and Exchange Commission. Seasonality and Variability in Quarterly Results AirNets operations historically have been somewhat seasonal and somewhat dependent on the number
of banking holidays falling during the week. Because financial institutions are currently AirNets
principal customers, AirNets air system is scheduled primarily around the needs of financial
institution customers. When financial institutions are closed, AirNet does not operate a full
system. AirNets fiscal quarter ending December 31 is often the most impacted by bank holidays
(including Thanksgiving and Christmas) recognized by its primary customers. When these holidays
fall on Monday through Thursday, AirNets
revenues and net income are adversely affected. AirNets annual results fluctuate as well based on
when holidays fall during the week over the course of the year. Operating results are also affected
by the weather. AirNet generally experiences higher maintenance costs during its fiscal quarter
ending March 31. Winter weather often requires additional costs for de-icing, hangar rental and
other aircraft services. Item 3. Quantitative and Qualitative Disclosures About Market Risk Inflation and Interest Rates AirNet is exposed to certain market risks from transactions that are entered into during the normal
course of business. AirNets primary market risk exposure relates to interest rate risk. At March
31, 2005, AirNet had a $22.5 million outstanding balance under its Amended Credit Agreement
(described above in Item 2  Managements Discussion and Analysis of Financial Condition and
Results of Operation) subject to market rate changes in interest. The Amended Credit Agreement
bears interest, at AirNets option, at (a) a fixed rate equal to LIBOR plus a margin determined by
AirNets leverage ratio as defined in the Amended Credit Agreement, or (b) a floating rate based on
the greater of (i) the prime rate established by The Huntington National Bank from time
to time plus a margin determined by AirNets leverage ratio as defined in the Amended Credit
Agreement or (ii) the sum of 0.5% plus the federal funds rate in
effect from time to time plus a margin determined by AirNets
leverage ratio.
Assuming borrowing levels at March 31, 2005, a one hundred basis point change in interest rates
would impact net interest expense by approximately $225,000 per year. Following the effectiveness of the Amended Credit Agreement dated May 28, 2004, AirNet paid off three secured term loans which had been
secured by aircraft. One of those loans had an interest rate swap agreement associated with it. This interest rate swap agreement with a
notional amount of $3.0 million and a fixed rate of 4.25% plus a margin based on AirNets funded debt ratio remains in place. At March 31, 2005,
the aggregate fair value of the interest rate swap was approximately ($5,000). Fuel Surcharge AirNet assesses its customers a fuel surcharge which is based on the Oil Price Index Summary  Columbus, Ohio (OPIS-CMH index). As
index rates increase above a set threshold, surcharge rates increase. AirNets fuel surcharge program helps offset timing differences between
market prices and the OPIS-CHM index used to determine surcharge rates. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures With the participation of the Chairman of the Board, Chief Executive Officer and President (the principal executive officer) and the Chief Financial
Officer, Treasurer and Secretary (the principal financial officer) of AirNet Systems, Inc. (AirNet), AirNets management has evaluated the effectiveness
of AirNets disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)),
as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, AirNets Chairman of the Board, Chief Executive Officer
and President and AirNets Chief Financial Officer, Treasurer and Secretary have concluded that:  
    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; 20




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
    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, particularly during the period in which this Quarterly
Report on Form 10-Q is being prepared. Changes in Internal Control Over Financial Reporting There were no changes in AirNets internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) that occurred during AirNets fiscal quarter ended March 31,
2005, that have materially affected, or are reasonably likely to materially affect, AirNets
internal control over financial reporting. AIRNET SYSTEMS, INC. PART II  OTHER INFORMATION Item 1. Legal Proceedings. There are no pending legal proceedings involving AirNet other than routine litigation
incidental to its business. In the opinion of AirNets management, these proceedings
should not, individually or in the aggregate, have a material adverse effect on AirNets
results of operations or financial condition. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.  (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 March 31, 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
March 31, 2005, AirNet Systems, Inc. had the authority to still repurchase
approximately $0.6 million of its common shares under this stock repurchase
plan. Item 3. Defaults Upon Senior Securities. Not Applicable Item 4. Submission of Matters to a Vote of Security Holders. No response required Item 5. Other Information. In May 2005,
AirNet began relocating its corporate and operational headquarters to the new Rickenbacker
Facility located at 7250 Star Check Drive, Columbus, OH, 43217. AirNet expects the
relocation to be completed by early June 2005. 21




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Item 6. Exhibits Exhibits: Exhibit No.
    
    
    Description31.1
    
    
    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)
 22




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AIRNET SYSTEMS, INC. SIGNATURES 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 the undersigned thereunto duly authorized. AIRNET SYSTEMS, INC. Dated: May 12, 2005
    
    By:
    
    /s/ Gary W. QualmannGary W. Qualmann,Chief Financial Officer, Treasurer and Secretary(Duly Authorized Officer)(Principal Financial Officer)Dated: May 12, 2005
    
    By:
    
    /s/ Denise D. BrownDenise D. Brown,Controller(Duly Authorized Officer)(Principal Accounting Officer)
 23




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AIRNET SYSTEMS, INC. INDEX TO EXHIBITS Exhibit No.
    
    
    Description31.1
    
    
    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