##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 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 of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 7250 Star Check Drive, Columbus, Ohio
    
    43217(Address of principal executive offices)
    
    (Zip Code)
 (614) 409-4900
 Not Applicable
  þ o
  o o þ
  o þ




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##### 



TABLE OF CONTENTS
 PAGEPART I. FINANCIAL INFORMATIONItem 1.
    Financial Statements:Condensed Consolidated Balance Sheets: March 31, 2006 (Unaudited) and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations (Unaudited): Three Months Ended March 31, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited): Three Months Ended March 31, 2006 and 2005
    
    
    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
    
    
    21Item 4.
    Controls and Procedures
    
    
    22PART II. OTHER INFORMATIONItem 1.
    Legal Proceedings
    
    
    22Item 1A.
    Risk Factors
    
    
    23Item 2.
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3.
    Defaults Upon Senior Securities
    
    
    23Item 4.
    Submission of Matters to a Vote of Security Holders
    
    
    23Item 5.
    Other Information
    
    
    23Item 6.
    Exhibits
    
    
    23SIGNATURES
    
    
    24INDEX TO EXHIBITS
    
    
    25EX-31.1EX-31.2EX-32
  2




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##### Table of Contents



AIRNET SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2006
    
    
    2005In thousands, except par value data
    
    (unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,881
    
    
    $
    1,590Accounts receivable, less allowances
    
    
    24,313
    
    
    
    23,475Taxes receivable
    
    
    1,811
    
    
    
    1,787Deposits and prepaids
    
    
    2,292
    
    
    
    2,638Total current assets
    
    
    30,297
    
    
    
    29,490Net property and equipment
    
    
    92,625
    
    
    
    93,643Deposits and other assets
    
    
    550
    
    
    
    160Total assets
    
    $
    123,472
    
    
    $
    123,293LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    11,040
    
    
    $
    10,280Salaries and related liabilities
    
    
    3,340
    
    
    
    5,180Current portion of notes payable
    
    
    3,923
    
    
    
    3,852Deferred income taxes
    
    
    40
    
    
    
    124Total current liabilities
    
    
    18,343
    
    
    
    19,436Notes payable, less current portion
    
    
    50,671
    
    
    
    52,167Deferred income taxes
    
    
    6,365
    
    
    
    5,311Shareholders equity:Preferred shares, $.01 par value; 10,000 shares authorized; no
shares issued and outstanding
    
    
    
    
    
    
    Common shares, $.01 par value; 40,000 shares authorized; 12,753
shares issued at March 31, 2006 and at December 31, 2005
    
    
    128
    
    
    
    128Additional paid-in-capital
    
    
    76,288
    
    
    
    76,318Retained deficit
    
    
    (4,767
    )
    
    
    (6,454
    )Accumulated other comprehensive loss  currency translation
    
    
    (13
    )
    
    
    (13
    )Treasury shares, 2,609and 2,614 shares held at cost at
March 31, 2006 and December 31, 2005, respectively
    
    
    (23,543
    )
    
    
    (23,600
    )Total shareholders equity
    
    
    48,093
    
    
    
    46,379Total liabilities and shareholders equity
    
    $
    123,472
    
    
    $
    123,293
  3




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##### Table of Contents



AIRNET SYSTEMS, INC.
 
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months EndedMarch 31,In thousands, except per share data
    
    2006
    
    
    2005NET REVENUESDelivery services, net of excise tax:Bank services
    
    $
    28,284
    
    
    $
    27,293Express services
    
    
    14,044
    
    
    
    13,105Total delivery services revenues
    
    
    42,328
    
    
    
    40,398Passenger charter services
    
    
    6,749
    
    
    
    9,328Aviation services and other operations
    
    
    377
    
    
    
    167Total net revenues
    
    
    49,454
    
    
    
    49,893COSTS AND EXPENSESWages and benefits
    
    
    6,243
    
    
    
    6,204Aircraft fuel
    
    
    8,701
    
    
    
    8,254Aircraft maintenance
    
    
    5,069
    
    
    
    5,387Contracted air costs
    
    
    4,169
    
    
    
    3,268Ground courier
    
    
    8,179
    
    
    
    7,889Depreciation
    
    
    3,700
    
    
    
    3,642Insurance, rent and landing fees
    
    
    2,164
    
    
    
    2,562Travel, training and other
    
    
    3,013
    
    
    
    3,443Selling, general and administrative
    
    
    4,512
    
    
    
    5,487Net gain on disposition of assets
    
    
    (8
    )
    
    
    (50
    )Total costs and expenses
    
    
    45,742
    
    
    
    46,086Income from operations
    
    
    3,712
    
    
    
    3,807Interest expense
    
    
    1,025
    
    
    
    855Income before income taxes
    
    
    2,687
    
    
    
    2,952Provision for income taxes
    
    
    1,000
    
    
    
    1,435Net income
    
    $
    1,687
    
    
    $
    1,517Net income per share  basic and diluted
    
    $
    0.17
    
    
    $
    0.15
  4




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AIRNET SYSTEMS, INC.
 
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedMarch 31,In thousands
    
    2006
    
    
    2005Operating activities:Net income
    
    $
    1,687
    
    
    $
    1,517Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    3,700
    
    
    
    3,642Deferred taxes
    
    
    1,054
    
    
    
    1,437Provision for losses on accounts receivable
    
    
    13
    
    
    
    18Stock based compensation expense
    
    
    30
    
    
    
    Gain on disposition of assets
    
    
    (8
    )
    
    
    (50
    )Cash provided by (used in) operating assets and liabilities:Accounts receivable
    
    
    (851
    )
    
    
    (1,260
    )Taxes receivable
    
    
    (24
    )
    
    
    (63
    )Accounts payable and accrued expenses
    
    
    760
    
    
    
    (262
    )Salaries and related liabilities
    
    
    (1,840
    )
    
    
    (165
    )Other, net
    
    
    232
    
    
    
    198Net cash provided by operating activities
    
    
    4,753
    
    
    
    5,012Investing activities:Purchases of property and equipment  net
    
    
    (3,072
    )
    
    
    (7,900
    )Proceeds from sales of property and equipment
    
    
    8
    
    
    
    100Net cash used in investing activities
    
    
    (3,064
    )
    
    
    (7,800
    )Financing activities:Proceeds from incentive stock plan programs
    
    
    27
    
    
    
    30Net borrowings (repayments) of debt
    
    
    (1,425
    )
    
    
    2,522Net cash (used in) provided by financing activities
    
    
    (1,398
    )
    
    
    2,552Net increase (decrease) in cash
    
    
    291
    
    
    
    (236
    )Cash and cash equivalents at beginning of period
    
    
    1,590
    
    
    
    1,086Cash and cash equivalents at end of period
    
    $
    1,881
    
    
    $
    850
  5




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AIRNET SYSTEMS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Basis of Presentation
      2. Segment Reporting
  (in thousands):
 Three Months EndedMarch 31,2006
    
    
    2005Net RevenuesDelivery Services
    
    $
    42,328
    
    
    $
    40,398Passenger Charter Services
    
    
    6,749
    
    
    
    9,328Total net revenues
    
    $
    49,077
    
    
    $
    49,726
 6




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##### Table of Contents



Three Months EndedMarch 31,2006
    
    
    2005Contribution MarginDelivery Services
    
    $
    4,589
    
    
    $
    3,469Passenger Charter Services
    
    
    156
    
    
    
    1,509Total contribution margin
    
    $
    4,745
    
    
    $
    4,978Depreciation ExpenseDelivery Services
    
    $
    2,532
    
    
    $
    2,927Passenger Charter Services
    
    
    818
    
    
    
    526Total depreciation expense
    
    $
    3,350
    
    
    $
    3,453
 (in thousands):
 Three Months EndedMarch 31,2006
    
    
    2005Reportable segment net revenues
    
    $
    49,077
    
    
    $
    49,726Aviation services and other
    
    
    377
    
    
    
    167Total net revenues
    
    $
    49,454
    
    
    $
    49,893
 (in
thousands):
 Three Months EndedMarch 31,2006
    
    
    2005Reportable segment contribution margin
    
    $
    4,745
    
    
    $
    4,978Net selling and administrative
expenses excluded from reportable
segment contribution margin
    
    
    (1,033
    )
    
    
    (1,171
    )Income from operations
    
    $
    3,712
    
    
    $
    3,807
 (in thousands):
 Three Months EndedMarch 31,2006
    
    
    2005Reportable segment depreciation
    
    $
    3,350
    
    
    $
    3,453Corporate depreciation
    
    
    350
    
    
    
    189Total depreciation expense
    
    $
    3,700
    
    
    $
    3,642
 3. Stock Plans and Awards
 Accounting for Stock Issued to Employees, Accountnig for Stock-Based Compensation
 7




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Impact of the Adoption of FAS 123(R)
   Three Months EndedMarch 31, 2005Net income, as reported
    
    $
    1,517Deduct: Total stock-based employee compensation
expense determined under fair value method for all
awards, net of related tax effects
    
    
    (45
    )Pro forma net income
    
    $
    1,472Net income
per share  basic and diluted:As reported
    
    $
    0.15Pro forma
    
    $
    0.15
  8




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##### Table of Contents



4. Net Income Per Common Share
  Three Months EndedMarch 31,2006
    
    
    2005Numerator:Net income
    
    $
    1,687
    
    
    $
    1,517Denominator:Basic  weighted average common shares outstanding
    
    
    10,137
    
    
    
    10,089DilutedDilutive effect of stock optionsemployees, officers, and directors
    
    
    
    
    
    
    5Adjusted weighted average common shares outstanding
    
    
    10,137
    
    
    
    10,094Net income per common share Basic and diluted
    
    $
    0.17
    
    
    $
    0.15
  5. Bank Financing Matters
 Term Notes and Revolving Credit Facility
    9




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Other Term Notes
  10




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##### Table of Contents



6. Income Taxes
  7. Contingencies
   8. Assets Held for Sale
 Accounting for Impairment or Disposal of
Long-Lived Assets
 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
  General
     12




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Results of Operations
 Financial
Overview  First Quarter 2006
    Net Revenues
 Dollars in 000s
    
    Three Months Ended
    
    
    Increase (Decrease)March 31,
    
    
    2006 to 2005% of
    
    
    
    
    
    
    % ofNet Revenues
    
    2006
    
    
    Total
    
    
    2005
    
    
    Total
    
    
    Dollars ($)
    
    
    Percentage (%)Delivery Services Revenues, Net of
Excise Tax:Bank Services
    
    $
    28,284
    
    
    
    57
    %
    
    $
    27,293
    
    
    
    55
    %
    
    $
    991
    
    
    
    4
    %Express Services
    
    
    14,044
    
    
    
    28
    %
    
    
    13,105
    
    
    
    26
    %
    
    
    939
    
    
    
    7
    %Total Delivery Services Revenues
    
    
    42,328
    
    
    
    85
    %
    
    
    40,398
    
    
    
    81
    %
    
    
    1,930
    
    
    
    5
    %Passenger Charter Services Revenues
    
    
    6,749
    
    
    
    14
    %
    
    
    9,328
    
    
    
    19
    %
    
    
    (2,579
    )
    
    
    (28
    )%Aviation Services and Other Revenues
    
    
    377
    
    
    
    1
    %
    
    
    167
    
    
    
    0
    %
    
    
    210
    
    
    
    126
    %Total Net Revenues
    
    $
    49,454
    
    
    
    100
    %
    
    $
    49,893
    
    
    
    100
    %
    
    $
    (439
    )
    
    
    (1
    )%
   13




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Bank Services Revenues
 Dollars in 000s
    
    Three Months Ended
    
    
    Increase (Decrease)March 31,
    
    
    2006 to 2005Bank Services Revenues
    
    2006
    
    
    2005
    
    
    Dollars ($)
    
    
    Percentage (%)Bank Services Revenues
    
    $
    25,336
    
    
    $
    25,665
    
    
    $
    (329
    )
    
    
    (1
    )%Fuel Surcharge
    
    
    3,538
    
    
    
    2,111
    
    
    
    1,427
    
    
    
    68
    %Federal Excise Tax
    
    
    (590
    )
    
    
    (483
    )
    
    
    (107
    )
    
    
    (22
    )%Total Net Bank Services Revenues
    
    $
    28,284
    
    
    $
    27,293
    
    
    $
    991
    
    
    
    4
    %
      Express Services Revenues
 Dollars in 000s
    
    Three Months Ended
    
    
    Increase (Decrease)March 31,
    
    
    2006 to 2005Express Services Revenues
    
    2006
    
    
    2005
    
    
    Dollars ($)
    
    
    Percentage (%)Express Revenues  Non Charter
    
    $
    8,931
    
    
    $
    9,031
    
    
    $
    (100
    )
    
    
    (1
    )%Express Revenues  Charters
    
    
    3,610
    
    
    
    3,587
    
    
    
    23
    
    
    
    1
    %Fuel Surcharge
    
    
    1,942
    
    
    
    876
    
    
    
    1,066
    
    
    
    122
    %Federal Excise Tax
    
    
    (439
    )
    
    
    (389
    )
    
    
    (50
    )
    
    
    (13
    )%Total Net Express Services Revenues
    
    $
    14,044
    
    
    $
    13,105
    
    
    $
    939
    
    
    
    7
    %
  14




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Passenger Charter Services Revenues
 Dollars in 000s
    
    Three Months Ended
    
    
    Increase (Decrease)March 31,
    
    
    2006 to 2005Passenger Charter Services Revenues
    
    2006
    
    
    2005
    
    
    Dollars ($)
    
    
    Percentage (%)Passenger Charter Services revenues
    
    $
    5,850
    
    
    $
    8,559
    
    
    $
    (2,709
    )
    
    
    (32
    )%Management fee revenues
    
    
    214
    
    
    
    363
    
    
    
    (149
    )
    
    
    (41
    )%Fuel Surcharge
    
    
    685
    
    
    
    406
    
    
    
    279
    
    
    
    69
    %Total Passenger Charter Services Revenues
    
    $
    6,749
    
    
    $
    9,328
    
    
    $
    (2,579
    )
    
    
    (28
    )%
  %
  Aviation Services and Other Revenues
  15




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Costs and Expenses
 Dollars in 000s
    
    Three Months Ended
    
    
    Increase (Decrease)March 31,
    
    
    2006 to 2005Costs and Expenses
    
    2006
    
    
    2005
    
    
    Dollars ($)
    
    
    Percentage (%)Wages and benefits
    
    $
    6,243
    
    
    $
    6,204
    
    
    $
    39
    
    
    
    1
    %Aircraft fuel
    
    
    8,701
    
    
    
    8,254
    
    
    
    447
    
    
    
    5
    %Aircraft maintenance
    
    
    5,069
    
    
    
    5,387
    
    
    
    (318
    )
    
    
    (6
    )%Contracted air costs
    
    
    4,169
    
    
    
    3,268
    
    
    
    901
    
    
    
    28
    %Ground courier
    
    
    8,179
    
    
    
    7,889
    
    
    
    290
    
    
    
    4
    %Depreciation
    
    
    3,700
    
    
    
    3,642
    
    
    
    58
    
    
    
    2
    %Insurance, rent and landing fees
    
    
    2,164
    
    
    
    2,562
    
    
    
    (398
    )
    
    
    (16
    )%Travel, training and other
    
    
    3,013
    
    
    
    3,443
    
    
    
    (430
    )
    
    
    (12
    )%Selling, general and administrative
    
    
    4,512
    
    
    
    5,487
    
    
    
    (975
    )
    
    
    (18
    )%Net gain on disposition of assets
    
    
    (8
    )
    
    
    (50
    )
    
    
    42
    
    
    
    84
    %Total Costs and Expenses
    
    $
    45,742
    
    
    $
    46,086
    
    
    $
    (344
    )
    
    
    (1
    )%
  Dollars in 000s
    
    Three Months Ended
    
    
    Increase (Decrease)March 31,
    
    
    2006 to 2005Aircraft Fuel
    
    2006
    
    
    2005
    
    
    Dollars ($)
    
    
    Percentage (%)Delivery Services aircraft fuel
    
    $
    6,992
    
    
    $
    6,209
    
    
    $
    783
    
    
    
    13
    %Passenger Charter Services aircraft fuel
    
    
    1,709
    
    
    
    2,045
    
    
    
    (336
    )
    
    
    (16
    )%Total Aircraft Fuel
    
    $
    8,701
    
    
    $
    8,254
    
    
    $
    447
    
    
    
    5
    %
  16




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Dollars in 000s
    
    Three Months Ended
    
    
    Increase (Decrease)March 31,
    
    
    2006 to 2005Aircraft Maintenance
    
    2006
    
    
    2005
    
    
    Dollars ($)
    
    
    Percentage (%)Delivery Services aircraft maintenance
    
    $
    4,094
    
    
    $
    3,879
    
    
    $
    215
    
    
    
    6
    %Passenger Charter Services:Owned aircraft
    
    
    604
    
    
    
    373
    
    
    
    231
    
    
    
    62
    %Managed aircraft
    
    
    371
    
    
    
    1,135
    
    
    
    (764
    )
    
    
    (67
    )%Total Passenger Charter Services
aircraft maintenance
    
    
    975
    
    
    
    1,508
    
    
    
    (533
    )
    
    
    (35
    )%Total Aircraft Maintenance
    
    $
    5,069
    
    
    $
    5,387
    
    
    $
    (318
    )
    
    
    (6
    )%
          17




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




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##### Table of Contents



Investing activities.
  19




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##### Table of Contents



Regulation
      Continuation of Brown Gibbons Lang & Company Engagement and Establishment of Strategy Committee
  20




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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
  21




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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
 
 .
   22




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(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, 2006. 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, 2006, AirNet Systems, Inc. had the authority to still repurchase
approximately $0.6 million of its common shares under this stock repurchase
plan.
 
  
  
  Appointment of Chairman of Strategy Committee:
  Resignation of Director:
  
   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)
 23




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AIRNET SYSTEMS, INC.
 
 SIGNATURES
  AIRNET SYSTEMS, INC.Dated: May 15, 2006
    
    By:
    
    /s/ Gary W. Qualmann

Gary W. Qualmann,Chief Financial Officer, Treasurer and Secretary(Duly Authorized Officer)(Principal Financial Officer)Dated: May 15, 2006
    
    By:
    
    /s/ Ray L. Druseikis

Ray L. Druseikis,Controller(Duly Authorized Officer)(Principal Accounting Officer)
 24




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##### Table of Contents



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)
 25