**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 
| **(Mark  One)**                                                                                           |                                                                                          |
|-----------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| ý                                                                                                    | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|                                                                                                      | ** **                                                                                    |
| **For the quarterly period ended September 30, 2004**                                                     |
| **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.**

(Exactname of registrant as specified in its charter)

 
| **Ohio**                                                                            |   | **31-1458309**                         |
|-------------------------------------------------------------------------------------|--------|----------------------------------------|
| (State  or other jurisdiction  of incorporation or organization)                    |   | (I.R.S.  Employer  Identification No.) |
|                                                                                |
| **3939  International Gateway  Columbus, Ohio 43219**                               |
| (Address  of principal executive offices) (Zip Code)                                |
|                                                                                |
| **(614)  237-9777**                                                                 |
| (Registrant’s  telephone number, including area code)                          |
|                                                                                |
| **Not  Applicable**                                                                 |
| (Former  name, former address and former fiscal year, if changed since last report) |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act). Yes o No ý

 

As of November 4,2004, 10,109,883 of the registrant’s common shares, par value $0.01, wereoutstanding.

 

 

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**TABLEOF CONTENTS**

 
| **PART  I. FINANCIAL INFORMATION** |                                                                                                                    |
|------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
|                               |                                                                                                                    |   |
| Item 1.                       | Financial  Statements:                                                                                                  |   |
|                               |                                                                                                                    |   |
|                               | Condensed Consolidated Balance Sheets:   September 30, 2004 (Unaudited) and December 31, 2003                           |   |
|                               |                                                                                                                    |   |
|                               | Condensed  Consolidated Statements of Operations (Unaudited):   Three and Nine Months Ended September 30, 2004 and 2003 |   |
|                               |                                                                                                                    |   |
|                               | Condensed  Consolidated Statements of Cash Flows (Unaudited):   Nine Months Ended September 30, 2004 and 2003           |   |
|                               |                                                                                                                    |   |
|                               | Notes  to Condensed Consolidated Financial Statements (Unaudited)                                                       |   |
|                               |                                                                                                                    |   |
| Item 2.                       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                             |   |
|                               |                                                                                                                    |   |
| Item 3.                       | Quantitative and Qualitative  Disclosures about Market Risk                                                             |   |
|                               |                                                                                                                    |   |
| Item 4.                       | Controls and Procedures                                                                                                 |   |
|                               |                                                                                                                    |   |
| **PART II. OTHER INFORMATION**     |                                                                                                                    |
|                               |                                                                                                                    |
| Item 1.                            | Legal Proceedings                                                                                                       |   |
|                               |                                                                                                                    |   |
| Item 2.                            | Unregistered Sales of Equity  Securities and Use of Proceeds                                                            |   |
|                               |                                                                                                                    |   |
| Item 3.                            | Defaults Upon Senior Securities                                                                                         |   |
|                               |                                                                                                                    |   |
| Item 4.                            | Submission of Matters to a Vote of  Security Holders                                                                    |   |
|                               |                                                                                                                    |   |
| Item 5.                            | Other Information                                                                                                       |   |
|                               |                                                                                                                    |   |
| Item 6.                            | Exhibits                                                                                                                |   |
|                               |                                                                                                                    |   |
| SIGNATURES                         |                                                                                                                    |
|                               |                                                                                                                    |
| INDEX TO  EXHIBITS                 |                                                                                                                    |

 

2

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**AIRNET SYSTEMS, INC.**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| **In thousands, except par value**                                                                                             | ** ** | **September 30,  2004** | ** **  | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|------------------------|------------|
| ** **                                                                                                                     | ** ** | **(unaudited)**         | ** **  | ** **             | ** ** |
| **ASSETS**                                                                                                                     |       |                    |        |                   |       |
| Current assets:                                                                                                                |       |                    |        |                   |       |
| Cash and cash equivalents                                                                                                      | ** ** | **$**                   | **926**     |                   | $          | 125 |   |
| Accounts receivable, less allowances                                                                                           | ** ** | **22,248**              |        | 18,647                 |       |
| Inventory                                                                                                                      | ** ** | **292**                 |        | 286                    |       |
| Taxes receivable                                                                                                               | ** ** | **1,012**               |        | 1,401                  |       |
| Deposits and prepaids                                                                                                          | ** ** | **4,384**               |        | 3,246                  |       |
| Total current assets                                                                                                           | ** ** | **28,862**              |        | 23,705                 |       |
|                                                                                                                           |       |                    |        |                   |       |
| Net property and equipment                                                                                                     | ** ** | **106,863**             |        | 125,102                |       |
| Other assets:                                                                                                                  |       |                    |        |                   |       |
| Goodwill, net of accumulated amortization                                                                                      | ** ** | **—**              |        | 4,018                  |       |
| Other                                                                                                                          | ** ** | **313**                 |        | 448                    |       |
|                                                                                                                           |       |                    |        |                   |       |
| **Total assets**                                                                                                               | ** ** | **$**                   | **136,038** |                   | $          | 153,273 |   |
|                                                                                                                           |       |                    |        |                   |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                  |       |                    |        |                   |       |
| Current liabilities:                                                                                                           |       |                    |        |                   |       |
| Accounts payable                                                                                                               | ** ** | **$**                   | **13,265**  |                   | $          | 7,442 |   |
| Salaries and related liabilities                                                                                               | ** ** | **4,307**               |        | 4,955                  |       |
| Deferred revenues                                                                                                              | ** ** | **1,286**               |        | 184                    |       |
| Accrued expenses                                                                                                               | ** ** | **1,102**               |        | 887                    |       |
| Taxes payable                                                                                                                  | ** ** | **—**              |        | 76                     |       |
| Deferred income taxes                                                                                                          | ** ** | **4**                   |        | 4                      |       |
| Current portion of notes payable                                                                                               | ** ** | **21,933**              |        | 5,256                  |       |
| Total current liabilities                                                                                                      | ** ** | **41,897**              |        | 18,804                 |       |
|                                                                                                                           |       |                    |        |                   |       |
| Other liabilities                                                                                                              | ** ** | **862**                 |        | 1,280                  |       |
| Notes payable, less current portion                                                                                            | ** ** | **38,301**              |        | 32,520                 |       |
| Deferred tax liability                                                                                                         | ** ** | **408**                 |        | 16,389                 |       |
|                                                                                                                           |       |                    |        |                   |       |
| Shareholders’ equity:                                                                                                     |       |                    |        |                   |       |
| Preferred shares, $.01 par value; 10,000  shares authorized; no shares issued and outstanding                                  | ** ** | **—**              |        | —                 |       |
| Common shares, $.01 par value; 40,000  shares authorized; 12,763 shares issued at September 30, 2004 and at December  31, 2003 | ** ** | **128**                 |        | 128                    |       |
| Additional paid-in-capital                                                                                                     | ** ** | **76,963**              |        | 77,759                 |       |
| Retained earnings                                                                                                              | ** ** | **1,959**               |        | 31,938                 |       |
| Accumulated other comprehensive loss                                                                                           | ** ** | **(35**                 | **)**       | (35                    | )          |
| Treasury shares, 2,654 and 2,720 shares held  at cost at September 30, 2004 and December 31, 2003, respectively                | ** ** | **(24,445**             | **)**       | (25,510                | )          |
| Total shareholders’ equity                                                                                                | ** ** | **54,570**              |        | 84,280                 |       |
|                                                                                                                           |       |                    |        |                   |       |
| **Total liabilities and shareholders’ equity**                                                                            | ** ** | **$**                   | **136,038** |                   | $          | 153,273 |   |

 

See notes to condensedconsolidated financial statements

 

3

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**AIRNET SYSTEMS, INC.**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS** - Unaudited

 
| ** **                                                    | ** ** | **Three Months Ended  September 30,** | ** **  | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|-------------|--------------------------------------|------------|
| **In thousands, except per share  data**                      | ** ** | **2004**                              | ** **  | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                          |       |                                  |        |                                 |       |   | ** ** |   |   |
| **NET REVENUES**                                              |       |                                  |        |                                 |       |   | ** ** |   |   |
| Delivery services, net of excise tax:                         |       |                                  |        |                                 |       |   | ** ** |   |   |
| Bank services                                                 | ** ** | **$**                                 | **26,616**  |                                 | $          | 25,996 | ** ** | **$** | **78,678** | ** ** | $ | 78,000 |   |
| Express services                                              | ** ** | **12,844**                            |        | 9,265                                | ** ** | **35,725** | ** ** | 26,906 |   |
| Total delivery services revenues                              | ** ** | **39,460**                            |        | 35,261                               | ** ** | **114,403** | ** ** | 104,906 |   |
|                                                          |       |                                  |        |                                 |       |   | ** ** |   |   |
| Passenger charter services                                    | ** ** | **4,266**                             |        | 2,334                                | ** ** | **11,532** | ** ** | 5,550 |   |
| Aviation services and other operations                        | ** ** | **211**                               |        | 425                                  | ** ** | **613** | ** ** | 1,223 |   |
| **Total net revenues**                                        | ** ** | **43,937**                            |        | 38,020                               | ** ** | **126,548** | ** ** | 111,679 |   |
|                                                          |       |                                  |        |                                 |       |   | ** ** |   |   |
| **COSTS AND EXPENSES**                                        |       |                                  |        |                                 |       |   | ** ** |   |   |
| Wages and benefits                                            | ** ** | **6,519**                             |        | 6,464                                | ** ** | **19,521** | ** ** | 18,823 |   |
| Aircraft fuel                                                 | ** ** | **7,140**                             |        | 4,655                                | ** ** | **18,862** | ** ** | 14,548 |   |
| Aircraft maintenance                                          | ** ** | **3,567**                             |        | 2,750                                | ** ** | **10,448** | ** ** | 9,085 |   |
| Contracted air costs                                          | ** ** | **3,540**                             |        | 2,411                                | ** ** | **9,738** | ** ** | 7,596 |   |
| Ground courier                                                | ** ** | **7,465**                             |        | 6,443                                | ** ** | **22,494** | ** ** | 18,884 |   |
| Depreciation                                                  | ** ** | **5,638**                             |        | 4,549                                | ** ** | **15,577** | ** ** | 13,060 |   |
| Insurance, rent and landing fees                              | ** ** | **2,230**                             |        | 2,565                                | ** ** | **7,432** | ** ** | 7,193 |   |
| Travel, training and other                                    | ** ** | **2,276**                             |        | 2,115                                | ** ** | **7,488** | ** ** | 6,457 |   |
| Selling, general and administrative                           | ** ** | **3,559**                             |        | 3,846                                | ** ** | **11,566** | ** ** | 11,400 |   |
| Net (gain) loss on disposition of assets                      | ** ** | **—**                            |        | (24                                  | )          | **289** | ** ** | (6 | ) |
| Impairment of assets                                          | ** ** | **42,991**                            | ** **  | —                               | ** ** | **42,991** | ** ** | — |   |
| Impairment of goodwill                                        | ** ** | **4,018**                             | ** **  | —                               | ** ** | **4,018** | ** ** | — |   |
| **Total costs and expenses**                                  | ** ** | **88,943**                            | ** **  | 35,774                               | ** ** | **170,424** | ** ** | 107,040 |   |
| Income (loss) from continuing operations                      | ** ** | **(45,006**                           | **)**       | 2,246                                | ** ** | **(43,876** | **)** | 4,639 |   |
| Interest expense                                              | ** ** | **777**                               | ** **  | 312                                  | ** ** | **1,552** | ** ** | 1,060 |   |
|                                                          |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Income (loss) from continuing operations  before income taxes | ** ** | **(45,783**                           | **)**       | 1,934                                | ** ** | **(45,428** | **)** | 3,579 |   |
| Provision (benefit) for income taxes                          | ** ** | **(15,599**                           | **)**       | 862                                  | ** ** | **(15,446** | **)** | 1,503 |   |
|                                                          |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| **Income(loss) from continuing operations**                   | ** ** | **$**                                 | **(30,184** | **)**                                | $          | 1,072 | ** ** | **$** | **(29,982** | **)** | $ | 2,076 |   |
|                                                          |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| **Income(loss) from discontinued operations, net  of taxes**  | ** ** | **—**                            | ** **  | $                                    | (25        | ) | **—** | ** ** | $ | (8 | ) |
|                                                          |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| **Net income (loss)**                                         | ** ** | **$**                                 | **(30,184** | **)**                                | $          | 1,047 | ** ** | **$** | **(29,982** | **)** | $ | 2,068 |   |
|                                                          |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Income (loss) per share - basic and diluted                   |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Continuing operations                                         | ** ** | **$**                                 | **(2.99**   | **)**                                | $          | 0.11 | ** ** | **$** | **(2.98** | **)** | $ | 0.21 |   |
| Discontinued operations                                       | ** ** | **—**                            | ** **  | $                                    | (0.01      | ) | **—** | ** ** | $ | (0.01 | ) |
| Net income (loss) per share - basic and  diluted              | ** ** | **$**                                 | **(2.99**   | **)**                                | $          | 0.10 | ** ** | **$** | **(2.98** | **)** | $ | 0.20 |   |

 

See notes to condensedconsolidated financial statements

 

4

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**AIRNET SYSTEMS, INC.**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS** - Unaudited

 
| ** **                                                                                          | ** ** | **Nine Months Ended  September 30,** | ** **  |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------|-------------|
| **In thousands**                                                                                    | ** ** | **2004**                             | ** **  | **2003** | ** ** |
|                                                                                                |       |                                 |        |   |   |
| **Operating activities:**                                                                           |       |                                 |        |   |   |
| Net income (loss)                                                                                   | ** ** | **$**                                | **(29,982** | **)** | $ | 2,068 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |       |                                 | ** **  |   |   |
| Depreciation                                                                                        | ** ** | **15,577**                           | ** **  | 13,060 |   |
| Impairment of assets and goodwill                                                                   | ** ** | **47,009**                           | ** **  | — |   |
| Deferred taxes                                                                                      | ** ** | **(15,986**                          | **)**       | 1,450 |   |
| Provision for losses on accounts receivable                                                         | ** ** | **117**                              | ** **  | 347 |   |
| (Gain) loss on disposition of assets                                                                | ** ** | **289**                              | ** **  | (93 | ) |
| Cash provided by (used in) operating assets  and liabilities:                                       |       |                                 | ** **  |   |   |
| Accounts receivable                                                                                 | ** ** | **(3,717**                           | **)**       | (86 | ) |
| Inventory                                                                                           | ** ** | **(6**                               | **)**       | (215 | ) |
| Prepaid expenses                                                                                    | ** ** | **(1,138**                           | **)**       | (759 | ) |
| Accounts payable                                                                                    | ** ** | **5,471**                            | ** **  | 2,093 |   |
| Deferred revenues and accrued expenses                                                              | ** ** | **1,251**                            | ** **  | 1,817 |   |
| Taxes payable                                                                                       | ** ** | **315**                              | ** **  | (232 | ) |
| Salaries and related liabilities                                                                    | ** ** | **(647**                             | **)**       | (180 | ) |
| Other, net                                                                                          | ** ** | **137**                              | ** **  | (26 | ) |
| Net assets of discontinued operations                                                               | ** ** | **—**                           | ** **  | 1,188 |   |
| **Net cash provided by operating activities**                                                       | ** ** | **18,690**                           | ** **  | 20,432 |   |
| ** **                                                                                          | ** ** | ** **                           | ** **  | ** ** | ** ** |
| **Investing activities:**                                                                           |       |                                 | ** **  |   |   |
| Purchases of property and equipment                                                                 | ** ** | **(43,721**                          | **)**       | (13,418 | ) |
| Proceeds from sales of property and  equipment                                                      | ** ** | **3,104**                            | ** **  | 17 |   |
| Proceeds from sale of Mercury Business  Services                                                    | ** ** | **—**                           | ** **  | 122 |   |
| **Net cash used in investing activities**                                                           | ** ** | **(40,617**                          | **)**       | (13,279 | ) |
|                                                                                                |       |                                 | ** **  |   |   |
| **Financing activities:**                                                                           |       |                                 | ** **  |   |   |
| Proceeds from incentive stock plan programs                                                         | ** ** | **119**                              | ** **  | 141 |   |
| Net repayments under the revolving credit  facility                                                 | ** ** | **(2,800**                           | **)**       | (5,700 | ) |
| Net borrowings (repayments) of long-term  debt                                                      | ** ** | **25,258**                           | ** **  | (894 | ) |
| Issuance (purchase) of treasury shares                                                              | ** ** | **151**                              | ** **  | (236 | ) |
| **Net cash provided by (used in) financing  activities**                                            | ** ** | **22,728**                           | ** **  | (6,689 | ) |
|                                                                                                |       |                                 | ** **  |   |   |
| Net increase in cash                                                                                | ** ** | **801**                              | ** **  | 464 |   |
| Cash and cash equivalents at beginning of  period                                                   | ** ** | **125**                              | ** **  | 1,055 |   |
| **Cash and cash equivalents at end of period**                                                      | ** ** | **$**                                | **926**     |   | $ | 1,519 |   |

 

See notes to condensedconsolidated financial statements

 

5

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**AIRNET SYSTEMS, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.             Basis of Presentation**

 

AirNetSystems, Inc. and its subsidiaries (“AirNet” or the “Company”) operate a fullyintegrated national air transportation network which provides delivery servicefor time-critical shipments for customers in the U.S. banking industry andother industries requiring the express delivery of packages.  AirNet also offers passenger charter servicesand retail aviation fuel sales and related ground services.

 

Theaccompanying condensed consolidated financial statements include the accountsof AirNet Systems, Inc. and its subsidiaries. These financial statements are unaudited and have been prepared inaccordance with the instructions for Form 10-Q. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted as permitted by the instructions for Form 10-Q.  These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto included in AirNet Systems, Inc.’s Annual Reporton Form 10-K for the fiscal year ended December 31, 2003. The results ofoperations for the quarterly and nine month periods ended September 30, 2004are not necessarily indicative of the results for the full year.

 

Thefinancial information included herein reflects all adjustments (consisting ofnormal recurring adjustments), which are, in the opinion of management,necessary for a fair presentation of the results of interim periods.

 

Thepreparation of the condensed consolidated financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the amountsreported in those financial statements and accompanying notes thereto.  Actual results could differ from thoseestimates.

 

Certainreclassifications have been made in the prior year’s financial statements toconform to the presentation for the three and nine month periods endedSeptember 30, 2004.

 

**2.   Impairment of Assets and Goodwill**

 

AirNet recognizes impairment losses on long-lived assets used in operations in accordance with SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144).  AirNet recognizes impairment losses on long-lived assets used in operations, when events or changes in circumstances indicate, in management’s judgment, that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying value of those assets.  The net carrying value of the assets not recoverable is reduced to fair market value if lower than carrying value.  In determining the fair market value of the assets, AirNet considers market trends, published market data, and recent transactions involving sales of similar assets.

 

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 recent industry trends in the adoption of electronic payment alternatives and evolving electronic alternatives to the physical movement of cancelled checks at a more rapid pace than previously accepted by the industry.  AirNet believes that enactment of the Check 21 Act in October 2004 will contribute to this trend.  Furthermore, recent 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 as of September 30, 2004, using estimated aircraft fair values.  The aircraft fair values used for this purpose are based upon published market sources as of September 30, 2004, which are also used under AirNet’s Amended Credit Agreement (See Note 7).

 

Under SFAS No. 142, “Goodwill and Other Intangible Assets”, AirNet evaluates its goodwill for impairment annually, or more frequently if changes in circumstances indicate impairment may have occurred sooner.  AirNet determined that as a result of the impairment of its long-lived assets used in its cargo operations, the remaining goodwill assigned to the cargo operations should be evaluated for potential impairment.  AirNet evaluates the fair value of its goodwill related to its cargo operations based upon a discounted future cash flow analysis.  As a result of the impairment test AirNet determined that its goodwill was impaired and, accordingly, a non-cash impairment charge of $4.0 million was recorded.

 

6

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**3.             Stock Plans and Awards**

 

SFASNo. 148, *Accounting for Stock-Based Compensation-Transitionand Disclosure*, requires prominent disclosures in both annual andinterim financial statements regarding the method of accounting for stock-basedemployee compensation and the effect of the method used on reported results.

 

TheCompany accounts for its employee and director stock-based compensation plansunder the recognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees,* and relatedinterpretations.  No stock-based employeecompensation cost is reflected in net income, as all options granted have anexercise price equal to the market value of the underlying common shares on thedate of grant.  Pro forma informationregarding net income (loss) and net income (loss) per share, as required bySFAS No. 148, has been determined as if the Company had accounted for itsemployee stock options under the fair value method of SFAS No. 123, *Accounting for Stock-Based Compensation*. The fair value ofthese options was estimated at the date of grant using the Black-Scholes optionpricing model.

 

Thefollowing table illustrates the effect on net income (loss) and net income(loss) per share as if the Company had applied the fair value recognitionprovisions of SFAS No. 123 to stock-based employee compensation (in thousands,except per share data):

 
| ** **                                                                                                                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Net income (loss), as reported                                                                                                               |       | $                                     | (30,184    | )                                    | $          | 1,047 |   | $ | (29,982 | ) | $ | 2,068 |   |
|                                                                                                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value method for all awards, net  of related tax effects |       | (34                                   | )          | (23                                  | )          | (154 | ) | (108 | ) |
|                                                                                                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Pro forma net income (loss)                                                                                                                  |       | $                                     | (30,218    | )                                    | $          | 1,024 |   | $ | (30,136 | ) | $ | 1,960 |   |
|                                                                                                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Net income (loss) per share                                                                                                                  |       |                                  |       |                                 |       |   |   |   |   |
| As reported                                                                                                                                  |       |                                  |       |                                 |       |   |   |   |   |
| Basic and diluted                                                                                                                            |       | $                                     | (2.99      | )                                    | $          | .10 |   | $ | (2.98 | ) | $ | .20 |   |
| Pro forma                                                                                                                                    |       |                                  |       |                                 |       |   |   |   |   |
| Basic and diluted                                                                                                                            |       | $                                     | (2.99      | )                                    | $          | .10 |   | $ | (2.99 | ) | $ | .19 |   |
|                                                                                                                                              |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |

 

**4.             Income (Loss) Per Share FromContinuing Operations**

 

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

** **
| ** **                                             | ** ** | **Three Months Ended  September 30,** | ** **  | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|-------------|--------------------------------------|------------|
| ** **                                             | ** ** | **2004**                              | ** **  | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Numerator:                                             |       |                                  |        |                                 |       |   |   |   |   |
| Income (loss) from continuing operations               |       | $                                     | (30,184     | )                                    | $          | 1,072 |   | $ |  (29,982 | ) | $ | 2,076 |   |
|                                                   |       |                                  |        |                                 |       |   |   |   |   |
| Denominator:                                           |       |                                  |        |                                 |       |   |   |   |   |
| Basic – weighted average shares outstanding       |       | 10,100                                |        | 10,070                               |       | 10,070 |   | 10,106 |   |
|                                                   |       |                                  |        |                                 |       |   |   |   |   |
| Diluted                                                |       |                                  |        |                                 |       |   |   |   |   |
| Stock options–employees, officers, and  directors |       | —                                |        | 19                                   |       | — |   | 20 |   |
| Adjusted weighted average shares  outstanding          |       | 10,100                                |        | 10,089                               |       | 10,070 |   | 10,126 |   |
|                                                   |       |                                  |        |                                 |       |   |   |   |   |
| Income (loss) per share from continuing  operations    |       |                                  |        |                                 |       |   |   |   |   |
| Basic and diluted                                      |       | $                                     |  (2.99 | )                                    | $          | 0.11 |   | $ |  (2.98 | ) | $ | 0.21 |   |

 

7

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Commonshares subject to outstanding stock options excluded from the diluted adjustedweighted average shares outstanding calculation were 771,207 and 742,927 forthe three and nine month periods ended September 30, 2004, respectively.  These options were antidilutive and excludedfrom the calculation because (1) the exercise price of these options wasgreater than the average fair market value of the underlying common shares inthe respective periods or (2) the losses for the three and nine month periodsended September 30, 2004 caused the options to be antidilutive.

 

**5.  Comprehensive Income**

 

Comprehensiveincome is comprised of net income of the Company and the change in the fairvalue of interest rate swap agreements, net of income taxes. Comprehensive income (loss) for the nine months ended September 30, 2004 andSeptember 30, 2003 was ($29,642,000) and $2,081,000, respectively.Comprehensive income (loss) for the three months ended September 30, 2004 and2003 was ($30,184,000) and $1,060,000, respectively.

 

**6.   Discontinued Operations**

 

On August 11, 2003, AirNet Systems, Inc.completed the sale of substantially all of the assets of its Mercury BusinessServices unit to Mercury Business Services, Inc., a Delaware corporation ownedby a group that include the original owners of the Mercury business.

 

Thesales price of the transaction was approximately $1.1 million.  MercuryBusiness Services, Inc. paid approximately $455,000 of the sales price throughthe issuance of a ninety day promissory note secured by the assets being soldand guaranteed by each of the shareholders of Mercury Business Services,Inc.  Under the terms of the Asset Purchase Agreement, approximately$536,000 of the purchase price was paid with AirNet Systems, Inc. common sharesowned by the shareholders of Mercury Business Services, Inc., including 56,000common shares tendered to AirNet Systems, Inc. prior to closing at $4.30 pershare (the closing price of the AirNet Systems, Inc. common shares on the NYSEon July 25, 2003) and 68,494 common shares tendered to AirNet Systems, Inc. onthe closing date at $4.31 per share (the average closing price of the AirNetSystems, Inc. common shares on the NYSE on August 4-6, 2003).  The balanceof the sales price was paid in cash.

 

AirNet accounted for these operations asdiscontinued operations.

 

TheMercury Business Services unit had revenues of $1.0 million and $5.9 millionfor the three and nine month periods ended September 30, 2003, respectively.

 

Pre-taxloss for AirNet’s Mercury Business Services unit was $41,000 and $13,000 forthe three and nine month periods ended September 30, 2003, respectively.

 

**7.   Bank Financing Matters**

 

InJune 2004, AirNet entered into an amended and restated term loan and revolvingloan credit facility (collectively, the “Amended Credit Agreement”) with itsbanks. The Amended Credit Agreement provides AirNet with a secured revolvingcredit facility with up to $35.0 million available and a secured term loan inthe aggregate amount of $14.0 million. The amount of revolving loans available under the Amended CreditAgreement is further limited to a borrowing base equal to the aggregate of 80%of eligible accounts receivable, plus 50% of eligible inventory, plus 70% ofthe market value of certain fixed assets, reduced by the aggregate amount ofAirNet’s outstanding letters of credit. As of September 30, 2004, $16.0 millionand $12.0 million were outstanding under the secured revolving credit facilityand secured term loan, respectively.  Asof September 30, 2004, AirNet had approximately $19.0 million available toborrow on its secured revolving loan facility.

 

Therevolving credit facility under the Amended Credit Agreement expires onSeptember 30, 2005 and the secured term loan matures on September 30,2007.  As of September 30, 2004,approximately $16.0 million of the revolving credit facility was reclassifiedon AirNet's Condensed Consolidated Balance Sheet as current liabilities.  Quarterly principal payments of $1.0 millionare required for the secured term loan beginning in June 2004 and continuingthrough September 30, 2007. The Amended Credit Agreement is secured by a firstlien on all of the property of AirNet and its subsidiaries, other than any interestin real estate and certain excluded fixed assets.  The Amended Credit Agreement permits AirNetand its subsidiaries to incur other indebtedness for the purpose of purchasingor refinancing aircraft and related tangible fixed assets, subject to certainannual limitations.  AirNet has alsopledged the interests in its subsidiaries, and each of AirNet’s

 

8

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subsidiarieshas guaranteed AirNet’s obligations under the Amended Credit Agreement.  The Amended Credit Agreement containslimitations on operating leases, indebtedness, significant corporate changesincluding mergers and sales of assets, investments in subsidiaries andacquisitions, liens, capital expenditures, transactions with affiliates, salesof accounts receivable, sale and leaseback transactions and other off-balancesheet liabilities, contingent obligations and hedging transactions.  The Amended Credit Agreement also containsfinancial covenants that require AirNet to maintain a minimum consolidatedtangible net worth and to not exceed fixed charge coverage and leverage ratiosspecified in the Amended Credit Agreement. As a result of the impairment chargetaken in September 2004 as described in Note 2, AirNet was not in compliancewith the fixed charge coverage ratio and the leverage ratio calculated as ofSeptember 30, 2004, and AirNet would not be in compliance with the minimumconsolidated tangible net worth requirement to be calculated as of December 31,2004 (pursuant to the Amended Credit Agreement, this ratio is calculatedannually as of December 31, AirNet’s fiscal year-end).  Effective as of November 12, 2004, AirNet andits lenders under the Amended Credit Agreement executed a waiver of anydefaults or potential defaults under the Amended Credit Agreement whichresulted or may have resulted from the non-compliance with the foregoingfinancial covenants caused by the impairment charge.  Additionally, effective as of November 12,2004, AirNet and its lenders under the Amended Credit Agreement executed aChange in Terms Agreement which modified the foregoing financial covenants sothat, on a going-forward basis, the impairment charge does not cause a defaultor potential default of these financial covenants in the future.

 

TheAmended Credit Agreement bears interest, at AirNet’s option, at (a) a fixedrate equal to LIBOR plus a margin determined by AirNet’s leverage ratio asdefined in the Amended Credit Agreement, or (b) a floating rate based on thegreater of the sum of (i) the prime rate established by The Huntington NationalBank from time to time plus a margin determined by AirNet’s leverage ratio and(ii) the sum of 0.5% plus the federal funds rate in effect from time totime.  After the effective date of theAmended Credit Agreement, AirNet paid off its three five-year term loanstotaling approximately $3.4 million incurred during first quarter 2002.

 

Duringthe second quarter 2004, AirNet entered into four seven-year term loanstotaling $22.5 million with fixed interest rates of approximately 6.7%. As ofSeptember 30, 2004, there was $22.3 million outstanding on these secured termloans, and the net book value of the aircraft securing the loans totaledapproximately $28.5 million.  In July2004, AirNet financed two additional passenger charter Learjet 60’s for thePassenger Charter fleet at $5.0 million each with fixed rates of approximately6.5%, for a total of $32.5 million in financing related to AirNet’s PassengerCharter services.  AirNet has pledged theinterests in its subsidiaries, and each of AirNet’s subsidiaries has guaranteedAirNet’s obligations under the term loans. Each of the term loans is secured by aircraft used in the PassengerCharter fleet.

 

9

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**AIRNET SYSTEMS, INC.**

 

**ITEM 2****- MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**SafeHarbor Statement**

 

Exceptfor the historical information contained in this Form 10-Q, the mattersdiscussed, including, but not limited to, information regarding future economicperformance and plans and objectives of AirNet’s management, areforward-looking statements that involve risks and uncertainties. When used inthis document, the words “believe”, “anticipate”, “estimate”, “expect”, “intend”,“may”, “plan”, “project” and similar expressions are intended to be amongstatements that identify forward-looking statements.  Such statements involve risks anduncertainties including, but not limited to, the following which could cause actualresults to differ materially from any forward-looking statement: potentialregulatory changes by the Federal Aviation Administration (“FAA”), which couldincrease the regulation of AirNet’s business, or potential regulatory changesby the Federal Reserve which could change the competitive environment oftransporting cancelled checks; changes in check processing and shipmentpatterns of bank customers; the continued acceleration of migration of AirNet’sBank customers to electronic alternatives to the physical movement of cancelledchecks; adverse weather conditions; declines in the values of aircraft inAirNet’s fleet and any related asset impairment charges; the ability tosuccessfully market the passenger charter business in light of global changesin the commercial airline industry; potential changes in locally and federallymandated security requirements; increases in aviation fuel costs not fullyoffset by AirNet’s fuel surcharge program; potential cost overruns associatedwith the construction of a new facility at Rickenbacker International Airport;acts of war and terrorist activities; the acceptance of AirNet’s time-criticalservice offerings within targeted Express markets; technological advances andincreases in the use of electronic funds transfers; the availability and costof financing required for operations; the impact of unusual items resultingfrom ongoing evaluations of our business strategies; as well as other economic,competitive and domestic and foreign governmental factors affecting AirNet’smarkets, prices and other facets of its operations.  Should one or more of these risks oruncertainties materialize, or should underlying assumptions prove incorrect,actual outcomes may vary materially from those indicated.  Please refer to the sections captioned “Forward-lookingstatements” and “Risk Factors” in Item 7 of the Annual Report on Form 10-K forthe fiscal year ended December 31, 2003 of AirNet Systems, Inc. (File No.1-13025) for additional details relating to risk factors that could affectAirNet’s results and cause those results to differ materially from thoseexpressed in forward-looking statements.

 

**General**

 

CriticalAccounting Policies and Estimates

 

Thepreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States of America requires management to adoptaccounting policies and make significant judgments and estimates to developamounts 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 accountingpolicies and to evaluate the appropriateness of the estimates; however, evenunder optimal circumstances, estimates routinely require adjustment based on changingcircumstances and the receipt of new or better information.

 

Managementhas discussed the development and selection of AirNet’s critical accountingpolicies and estimates with the Audit Committee of AirNet Systems, Inc.’s Boardof Directors and with its independent auditors. AirNet’s critical accounting policies have not changed significantlyfrom the policies disclosed in Item 7 of AirNet Systems, Inc.’s Annual Reporton Form 10-K for the fiscal year ended December 31, 2003.

 

AirNet’saudited consolidated financial statements for the fiscal year ended December31, 2003, included in Item 8 of AirNet Systems, Inc.’s Annual Report on Form10-K for the fiscal year ended December 31, 2003, contain

 

10

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additionaldisclosures regarding AirNet’s significant accounting policies and Item 7 ofthat Annual Report on Form 10-K includes a summary of AirNet’s criticalaccounting policies. The information appearing therein may be useful whenreading this discussion and analysis of financial condition and results ofoperations.

 

**Resultsof Operations**

 

*NetRevenues*

* *
| **In ‘000’s  Revenues** | ** ** | **3 months  ending  September 30,  2004** | ** ** | **3 months  ending  September 30,  2003** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **%  Increase  (Decrease)  2003 to 2004** | ** ** | **9 months  ending  September 30,  2004** | ** ** | **9 months  ending  September 30,  2003** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **%  Increase  (Decrease)  2003 to 2004** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|
| Package Delivery  Services:       |       |                                      |       |                                      |       |                                          |       |                                      |       |                                      |       |                                      |       |                                          |       |                                      |       |
| Bank Services                     |       | $                                         | 26,616     |                                      | $          | 25,996                                        |       | $                                         | 620        |                                      | 2%         |                                      | $          | 78,678                                        |       | $                                         | 78,000     |   | $ | 678 |   | 1% |   |
| Express Services                  |       | 12,844                                    |       | 9,265                                     |       | 3,579                                         |       | 39%                                       |       | 35,725                                    |       | 26,906                                    |       | 8,819                                         |       | 33%                                       |       |
| Total Package  Delivery Services  |       | 39,460                                    |       | 35,261                                    |       | 4,199                                         |       | 12%                                       |       | 114,403                                   |       | 104,906                                   |       | 9,497                                         |       | 9%                                        |       |
| Passenger Charter  Services       |       | 4,266                                     |       | 2,334                                     |       | 1,932                                         |       | 83%                                       |       | 11,532                                    |       | 5,550                                     |       | 5,982                                         |       | 108%                                      |       |
| Aviation Services                 |       | 211                                       |       | 425                                       |       | (214                                          | )          | (50)%                                     |       | 613                                       |       | 1,223                                     |       | (610                                          | )          | (50)%                                     |       |
|                              |       |                                      |       |                                      |       |                                          |       |                                      |       |                                      |       |                                      |       |                                          |       |                                      |       |
| **Total  Net Revenues**           |       | $                                         | 43,937     |                                      | $          | 38,020                                        |       | $                                         | 5,917      |                                      | 16%        |                                      | $          | 126,548                                       |       | $                                         | 111,679    |   | $ | 14,869 |   | 13% |   |

 

AirNethas experienced overall net revenue growth for the three months and nine monthsended September 30, 2004 over the same periods of the prior year.  This can be attributed to several factorsincluding increased Express shipment volume and growth in Passenger Charter servicesas well as additional fuel surcharge revenues.

 

*BankServices Revenues*

* *
| **In ‘000’s  Revenues** | ** ** | **3 months  ending  September 30,  2004** | ** ** | **3 months  ending  September 30,  2003** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **%  Increase  (Decrease)  2003 to 2004** | ** ** | **9 months  ending  September 30,  2004** | ** ** | **9 months  ending  September 30,  2003** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **%  Increase  (Decrease)  2003 to 2004** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|
|                              |       |                                      |       |                                      |       |                                          |       |                                      |       |                                      |       |                                      |       |                                          |       |                                      |       |
| Bank Weekday                      |       | $                                         | 23,600     |                                      | $          | 23,845                                        |       | $                                         | (245       | )                                         | (1)%       |                                      | $          | 70,956                                        |       | $                                         | 71,333     |   | $ | (377 | ) | (1)% |   |
| Bank Weekend                      |       | 1,948                                     |       | 1,890                                     |       | 58                                            |       | 3%                                        |       | 5,826                                     |       | 5,533                                     |       | 293                                           |       | 5%                                        |       |
| Fuel Surcharge                    |       | 1,688                                     |       | 841                                       |       | 847                                           |       | 101%                                      |       | 3,792                                     |       | 2,972                                     |       | 820                                           |       | 28%                                       |       |
| Federal Excise  Tax               |       | (620                                      | )          | (580                                      | )          | (40                                           | )          | 7%                                        |       | (1,896                                    | )          | (1,838                                    | )          | (58                                           | )          | 3%                                        |       |
| **Net  Revenues**                 |       | $                                         | 26,616     |                                      | $          | 25,996                                        |       | $                                         | 620        |                                      | 2%         |                                      | $          | 78,678                                        |       | $                                         | 78,000     |   | $ | 678 |   | 1% |   |

 

Bankweekday revenues decreased in the quarter and year-to-date 2004 as compared tothe same periods of the prior year.  Thethird quarter decrease was primarily due to a decrease in the total number ofshipments as well as the number of pounds per shipment by the Company’s bankcustomers, while the year-to-date decrease was primarily due to a decrease inthe number of pounds per shipment. Increased fuel prices in the third quarter and year-to-date 2004resulted in significantly higher fuel surcharge revenues compared to the samequarter and year-to-date 2003.  AirNetbelieves that lower check delivery volume as a result of historically lowinterest rates, the declining use of checks, and the Check 21 Act which becameeffective in October 2004, will contribute to a significant reduction in bankrevenues in future periods, as will increased competitive factors from regionalcarriers and transportation cost reduction initiatives by AirNet’s Bankcustomers.

 

11

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*ExpressServices Revenues*

 
| **In ‘000’s  Revenues** | ** ** | **3 months  ending  September 30,  2004** | ** ** | **3 months  ending  September 30,  2003** | ** ** | **$Increase  (Decrease)  2003 to 2004** | ** ** | **%  Increase  (Decrease)  2003 to 2004** | ** ** | **9 months  ending  September 30,  2004** | ** ** | **9 months  ending  September 30,  2003** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **%  Increase  (Decrease)  2003 to 2004** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|
|                              |       |                                      |       |                                      |       |                                    |       |                                      |       |                                      |       |                                      |       |                                          |       |                                      |       |
| Express services                  |       | $                                         | 12,723     |                                      | $          | 9,339                                   |       | $                                         | 3,384      |                                      | 36%        |                                      | $          | 35,553                                        |       | $                                         | 26,978     |   | $ | 8,575 |   | 32% |   |
| Fuel Surcharge                    |       | 508                                       |       | 209                                       |       | 299                                     |       | 143%                                      |       | 1,269                                     |       | 742                                       |       | 527                                           |       | 71%                                       |       |
| Federal Excise  Tax               |       | (387                                      | )          | (283                                      | )          | (104                                    | )          | 37%                                       |       | (1,097                                    | )          | (814                                      | )          | (283                                          | )          | 35%                                       |       |
| **Net  Revenues**                 |       | $                                         | 12,844     |                                      | $          | 9,265                                   |       | $                                         | 3,579      |                                      | 39%        |                                      | $          | 35,725                                        |       | $                                         | 26,906     |   | $ | 8,819 |   | 33% |   |

 

Express services revenues continue toincrease as a percentage of total revenues, increasing from 24.4% to 29.2% oftotal revenue for the quarter and from 24.1% to 28.2% year-to-date compared tothe same periods of the prior year. Shipments using AirNet’s air transportation network were up 4% and 5%for the quarter and year-to-date, respectively. Shipments sent via commercialairlines increased 23% and 36% for the quarter and year-to-date, respectively,and point to point surface shipments increased 34% and 38% for the quarter andyear-to-date, respectively.  Commercialair and point to point surface shipments generally incur higher courier costscompared to shipments using AirNet’s airline. The increase in shipments sent via commercial airlines is principallydue to an increase in shipments outside the AirNet airline’s scheduled deliverytimes and locations, which generally results in lower gross margins pershipment than shipments carried on AirNet’s airline.

 

*Passenger Charter ServicesRevenues*

 
| **In ‘000’s  Revenues** | ** ** | **3 months  ending  September 30,  2004** | ** ** | **3 months  ending  September 30,  2003** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **%  Increase  (Decrease)  2003 to 2004** | ** ** | **9 months  ending  September 30,  2004** | ** ** | **9 months  ending  September 30,  2003** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **%  Increase  (Decrease)  2003 to 2004** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | ** **                                | ** ** | ** **                                | ** ** | ** **                                    | ** ** | ** **                                | ** ** | ** **                                | ** ** | ** **                                | ** ** | ** **                                    | ** ** | ** **                                | ** ** |
| Passenger Charter  Services       |       | $                                         | 4,266      |                                      | $          | 2,334                                         |       | $                                         | 1,932      |                                      | 83%        |                                      | $          | 11,532                                        |       | $                                         | 5,550      |   | $ | 5,982 |   | 108% |   |
|                                   |            |                                           |            |                                           |            |                                               |            |                                           |            |                                           |            |                                           |            |                                               |            |                                           |            |  |  |  |  |  |  |

 

Passenger Charter services revenuescontinue to grow as a percentage of total revenues, as AirNet has invested inadditional aircraft to support additional passenger charter demand.  Revenues increased from 6.1% to 9.7% of totalrevenue for the quarter and from 5.0% to 9.1% year-to-date compared to the sameperiods of the prior year.  AirNetincreased the number of passenger charter aircraft it operates from sevenaircraft (two Learjet 60’s and five Learjet 35’s) at September 30, 2003 tofourteen (ten Learjet 60’s and four Learjet 35’s) at September 30, 2004.

 

12

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***Costs and Expenses***

 
| **In ‘000’s  Costs and Expenses** | ** ** | **3 months  ending  September 30,  2004** | ** ** | **3 months  ending  September 30,  2003** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** | **%  Increase  (Decrease)  2003 to 2004** | ** ** | **9 months  ending  September 30,  2004** | ** ** | **9 months  ending  September 30,  2003** | ** ** | **$ Increase (Decrease) 2003 to 2004** | ** ** | **$ Increase  (Decrease)  2003 to 2004** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------|------------|
|                                        |       |                                      |       |                                      |       |                                          |       |                                      |       |                                      |       |                                      |       |                                        |       |                                          |       |
| Wages and  benefits                         |       | $                                         | 6,519      |                                      | $          | 6,464                                         |       | $                                         | 55         |                                      | 1%         |                                      | $          | 19,521                                      |       | $                                             | 18,823     |   | $ | 698 |   | 4% |   |
| Aircraft fuel                               |       | 7,140                                     |       | 4,655                                     |       | 2,485                                         |       | 53%                                       |       | 18,862                                    |       | 14,548                                    |       | 4,314                                       |       | 30%                                           |       |
| Aircraft  maintenance                       |       | 3,567                                     |       | 2,750                                     |       | 817                                           |       | 30%                                       |       | 10,448                                    |       | 9,085                                     |       | 1,363                                       |       | 15%                                           |       |
| Contracted air  costs                       |       | 3,540                                     |       | 2,411                                     |       | 1,129                                         |       | 47%                                       |       | 9,738                                     |       | 7,596                                     |       | 2,142                                       |       | 28%                                           |       |
| Ground courier                              |       | 7,465                                     |       | 6,443                                     |       | 1,022                                         |       | 16%                                       |       | 22,494                                    |       | 18,884                                    |       | 3,610                                       |       | 19%                                           |       |
| Depreciation                                |       | 5,638                                     |       | 4,549                                     |       | 1,089                                         |       | 24%                                       |       | 15,577                                    |       | 13,060                                    |       | 2,517                                       |       | 19%                                           |       |
| Insurance, rent  and landing fees           |       | 2,230                                     |       | 2,565                                     |       | (335                                          | )          | (13)%                                     |       | 7,432                                     |       | 7,193                                     |       | 239                                         |       | 3%                                            |       |
| Travel, training  and other                 |       | 2,276                                     |       | 2,115                                     |       | 161                                           |       | 8%                                        |       | 7,488                                     |       | 6,457                                     |       | 1,031                                       |       | 16%                                           |       |
| Selling, general  and administrative        |       | 3,559                                     |       | 3,846                                     |       | (287                                          | )          | (8)%                                      |       | 11,566                                    |       | 11,400                                    |       | 166                                         |       | 2%                                            |       |
| Net (gain) loss  on disposition of assets   |       | 0                                         |       | (24                                       | )          | 24                                            |       |                                      |       | 289                                       |       | (6                                        | )          | 295                                         |       |                                          |       |
|                                        |       | 41,934                                    |       | 35,774                                    |       | 6,160                                         |       | 17%                                       |       | 123,415                                   |       | 107,040                                   |       | 16,375                                      |       | 15%                                           |       |
| Impairment of  assets                       |       | 42,991                                    |       | 0                                         |       | 42,991                                        |       |                                      |       | 42,991                                    |       | 0                                         |       | 42,991                                      |       |                                          |       |
| Impairment of  goodwill                     |       | 4,018                                     |       | 0                                         |       | 4,018                                         |       |                                      |       | 4,018                                     |       | 0                                         |       | 4,018                                       |       |                                          |       |
| **Total  costs and expenses**               |       | $                                         | 88,943     |                                      | $          | 35,774                                        |       | $                                         | 53,169     |                                      |       |                                      | $          | 170,424                                     |       | $                                             | 107,040    |   | $ | 63,384 |   |   |   |

 

As operating activities for AirNet’sExpress and Passenger Charter services continue to increase, total operatingcosts and expenses increased for both the quarter and year-to-date compared tothe same periods of the prior year.

 

Increases in fuel costs, wages,maintenance and depreciation are attributable, in part, to the expansion ofAirNet’s Passenger Charter Services. Five aircraft, two of which are managed aircraft, have been added toAirNet’s Passenger Charter fleet in the first nine months of 2004.  An additional 16 pilots were hired duringthis nine month period compared to the prior year to support Passenger CharterServices.

 

Fuel costs increased for both the quarterand year-to-date as a result of increasing fuel prices, additional fuelpurchased at higher retail rates at FBO locations outside of the Port Columbusfacility, and additional fuel purchases related to the increase in PassengerCharter Services.  Fuel costs related toPassenger Charter Services increased by $615,000 and $1,305,000, respectively,for the quarter and year-to-date.  Theincrease in fuel costs, net of fuel surcharge, related to AirNet’s cargo fleetwas approximately $723,000 and $1,662,000 for the quarter and year-to-date.

 

Ground courier costs continue to increaseas AirNet serves a broader group of customers outside of AirNet’s traditionalbank customer.  AirNet’s growing numberof Express customers are more costly to serve than the traditional bankcustomer due to more unscheduled pickup and delivery services and moregeographically dispersed locations. Ground courier costs have risen as Express shipments continue toincrease as a proportion of total shipments. The growth rate in shipments transported either exclusively via point topoint surface or commercial airlines is increasing as AirNet expands the numberof Express customers; a trend Management believes will continue.

 

Depreciation increased as a result of theaddition of five Learjet 60’s (acquired in December 2003, January, May and June2004) to the Passenger Charter fleet since the end of the 2003 fiscal year andcontinuing reductions to AirNet’s estimates of aircraft and engine salvagevalues.

 

AirNet recognizes impairment losses on long-lived assets used in operations in accordance with SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144).  AirNet recognizes impairment losses on long-lived assets used in operations, when events or changes in circumstances indicate, in management’s judgment, that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying value of those assets.  The net carrying value of the assets not recoverable is reduced to fair market value if lower than carrying value.  In determining the fair market value of the assets, AirNet considers market trends, published market data, and recent transactions involving sales of similar assets.

 

13

 

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 recent industry trends in the adoption of electronic payment alternatives and evolving electronic alternatives to the physical movement of cancelled checks at a more rapid pace than previously accepted by the industry.  AirNet believes that enactment of the Check 21 Act in October 2004 will contribute to this trend.  Furthermore, recent 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 as of September 30, 2004, using estimated aircraft fair values.  The aircraft fair values used for this purpose are based upon published market sources as of September 30, 2004, which are also used under AirNet’s Amended Credit Agreement (See Note 7).

 

Under SFAS No. 142, “Goodwill and Other Intangible Assets”, AirNet evaluates its goodwill for impairment annually, or more frequently if changes in circumstances indicate impairment may have occurred sooner.  AirNet determined that as a result of the impairment of its long-lived assets used in its cargo operations, the remaining goodwill assigned to the cargo operations should be evaluated for potential impairment.  AirNet evaluates the fair value of its goodwill related to its cargo operations based upon a discounted future cash flow analysis.  As a result of the impairment test AirNet determined that its goodwill was impaired and, accordingly, a non-cash impairment charge of $4.0 million was recorded.

 

AirNetrecognized a net loss on disposition of assets during the nine months endedSeptember 30, 2004.  This amount includeda loss of approximately $584,000 related to an accident involving one of itscargo aircraft (net of insurance proceeds of $2,300,000).  In addition, as AirNet continues to adjustits aircraft fleet in response to changing customer needs, AirNet sold sevenpiston aircraft during the nine months ended September 30, 2004 resulting in aloss on sale of approximately $114,000. Offsetting these losses was a gain on the sale of an aircraft ofapproximately $400,000.

 

**Liquidityand Capital Resources**

 

*Cash flow from operatingactivities.* Net cash provided by operating activities was $14.9 million for the ninemonths ended September 30, 2004, compared to $20.4 million for the same periodin 2003.

 

*FinancingMatters*

 

InJune 2004, AirNet entered into an amended and restated term loan and revolvingloan facility (collectively, the “Amended Credit Agreement”) with its banks.The Amended Credit Agreement provides AirNet with a secured revolving creditfacility with up to $35.0 million available and a secured term loan in theaggregate amount of $14.0 million.  Theamount of revolving loans available under the Amended Credit Agreement isfurther limited to a borrowing base equal to the aggregate of 80% of eligibleaccounts receivable, plus 50% of eligible inventory, plus 70% of the marketvalue of certain fixed assets, reduced by the aggregate amount of AirNet’soutstanding letters of credit. As of September 30, 2004, $16.0 million and$12.0 million were outstanding under the secured revolving credit facility and securedterm loan, respectively. As of September 30, 2004, AirNet had approximately$19.0 million available to borrow on its secured revolving loan facility.

 

Therevolving credit facility under the Amended Credit Agreement expires onSeptember 30, 2005 and the secured term loan matures on September 30,2007.  Quarterly principal payments of$1.0 million are required for the secured term loan beginning in June 2004 andcontinuing through September 30, 2007. The Amended Credit Agreement is securedby a first lien on all of the property of AirNet and its subsidiaries, otherthan any interest in real estate and certain excluded fixed assets.  The Amended Credit Agreement permits AirNetand its subsidiaries to incur other indebtedness for the purpose of purchasingor refinancing aircraft and related tangible fixed assets, subject to certainannual limitations.  AirNet has alsopledged the interests in its subsidiaries, and each of AirNet’s subsidiarieshas guaranteed AirNet’s obligations under the Amended Credit Agreement.  The Amended Credit Agreement containslimitations on operating leases, indebtedness, significant corporate changesincluding mergers and sales of assets, investments in subsidiaries andacquisitions, liens, capital expenditures, transactions with affiliates, salesof accounts receivable, sale and leaseback transactions and other off-balancesheet liabilities, contingent obligations and hedging transactions.  The Amended Credit Agreement also containsfinancial covenants that require AirNet to maintain a minimum consolidatedtangible net worth and to not exceed fixed charge coverage and leverage ratiosspecified in the Amended Credit Agreement. As a result of the impairment chargetaken in September 2004 as described in Note 2, AirNet was not in compliancewith the fixed charge coverage ratio and the leverage ratio calculated as ofSeptember 30, 2004, and AirNet would not be in compliance with the minimumconsolidated tangible net worth requirement to be calculated as of December 31,2004 (pursuant to the Amended Credit Agreement, this ratio is calculatedannually as of December 31, AirNet’s fiscal year-end).  Effective as of November 12, 2004, AirNet andits lenders under the Amended Credit Agreement executed a waiver of anydefaults or potential defaults under the Amended Credit Agreement whichresulted or may have resulted from the non-compliance with the foregoingfinancial covenants caused by the impairment charge.  Additionally, effective as of November 12,2004, AirNet and its lenders under the Amended Credit Agreement executed aChange in Terms Agreement which modified the foregoing financial covenants sothat, on a going-forward basis, the impairment charge does not cause a defaultor potential default of these financial covenants in the future.

 

14

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TheAmended Credit Agreement bears interest, at AirNet’s option, at (a) a fixedrate equal to LIBOR plus a margin determined by AirNet’s leverage ratio asdefined in the Amended Credit Agreement, or (b) a floating rate based on thegreater of the sum of (i) the prime rate established by The Huntington NationalBank from time to time plus a margin determined by AirNet’s leverage ratio and(ii) the sum of 0.5% plus the federal funds rate in effect from time totime.  After the effective date of theAmended Credit Agreement, AirNet paid off its three five-year term loanstotaling approximately $3.4 million incurred during first quarter 2002.

 

AirNetis negotiating with its banks for the extension of its revolving creditfacility.  However, there can be noassurance that AirNet will be able to reach agreement with the banks as to suchan extension.  Management is addressing,and has addressed, its short-term liquidity requirements.  AirNet has signed a letter of intent withanother lender to finance $8.5 million of its Rickenbacker facility, which issubject to credit, appraisal and environmental review which are acceptable tothe lender.

 

AirNetcontinues to aggressively pursue growth and diversification opportunities inseveral markets.  AirNet will continue toanalyze strategic alternatives and will consider the use of an investmentbanker in the development and evaluation of those alternatives.

 

Duringthe second quarter 2004, AirNet entered into four seven-year term loanstotaling $22.5 million with fixed interest rates of approximately 6.7%. As ofSeptember 30, 2004, there was $22.3 million outstanding on these secured termloans, and the net book value of the aircraft securing the loans totaled approximately$28.5 million.  In July 2004, AirNetfinanced two additional passenger charter Learjet 60’s for the PassengerCharter fleet at $5.0 million each with fixed rates of approximately 6.5%, fora total of $32.5 million in financing related to AirNet’s Passenger Charterservices.  Each of the term loans issecured by aircraft used in the Passenger Charter fleet.

 

*Investingactivities.*  Capital expenditures totaled $43.7 millionfor the nine months ended September 30, 2004 versus $13.4 million for the sameperiod in 2003.  Of the 2004expenditures, $34.2 million was for the purchase of four Learjet 60’s dedicatedto Passenger Charter services, major periodic aircraft inspections, and majorengine overhauls and related flight equipment. AirNet anticipates it will spend between $48.0 million and $52.0 millionin total capital expenditures in 2004. AirNet anticipates it will continue to acquire aircraft and flightequipment as necessary to maintain growth and continue offering quality serviceto its customers and will evaluate whether future asset acquisitions should bepurchases or leases.

 

AirNetSystems, Inc. announced a stock repurchase plan in February 2000 allowingAirNet Systems, Inc., to purchase up to $3.0 million of its common shares.  As of the end of the 2001 fiscal year, $2.4million of common shares had been repurchased, and there has been no repurchaseactivity under the plan since. As such, purchases of approximately $0.6 millionof the common shares of AirNet Systems, Inc., may still be made over time inthe open market or through privately negotiated transactions.  Such future purchases would be consideredbased on current market conditions, the stock price and funds available forrepurchase. AirNet Systems, Inc., acquired 52,410 common shares, outside therepurchase plan, for $249,996 on January 2, 2003 from former Chairman GeraldMercer under the terms of his retirement agreement.

 

AirNet anticipates that operating cashand capital expenditure requirements will continue to be funded by cash flowfrom operations, cash on hand, borrowings in conjunction with the AmendedCredit Agreement or other sources, including leasing.   There were no material capital commitmentsat September 30, 2004, other than the Company’s construction of its new officeand hangar facility described below.

 

Inanticipation of  AirNet’s move to itsnew  facility within the RickenbackerInternational Airport (“Rickenbacker”), on January 20, 2004, AirNet enteredinto an agreement to sell its current facility at 3939 International Gateway inColumbus, Ohio (the “Port Columbus Facility”) to the Columbus Regional AirportAuthority for $3.9 million.  AirNet hasretained the right to continue to occupy the Port Columbus Facility untilconstruction and relocation to the new the Rickenbacker site (the “RickenbackerFacility”) is complete, which is expected to be the second quarter of 2005.

 

OnJanuary 20, 2004, AirNet entered into a Land Lease with the Columbus RegionalAirport Authority to lease approximately 8 acres located within Rickenbacker.  Rickenbacker is located in Franklin andPickaway Counties, Ohio, southeast of Columbus, Ohio, approximately fifteenmiles from AirNet’s Port Columbus Facility. AirNet is constructing a new corporate and operational headquarters atthe Rickenbacker Facility.  Constructionof the Rickenbacker Facility is anticipated to be completed in the summer of2005. As of September 30, 2004, $5.7 million financed using AirNet’s revolving credit facility has been invested inthe construction of the Rickenbacker facility, with a total estimated cost of$12.5 million.  Upon completion of theRickenbacker Facility, AirNet’s current corporate and operational functionsthat are conducted at the Port Columbus Facility, and the administrativefunctions being conducted at 555 Morrison Avenue, will be consolidated at thenew Rickenbacker Facility.

 

Therehave been no material changes in AirNet’s contractual obligations from thosedisclosed in AirNet System Inc.’s Annual Report on Form 10-K for the fiscalyear ended December 31, 2003, except for new debt as disclosed above.

 

15

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**Off-BalanceSheet Arrangements**

 

AirNet has no “off-balance sheet”arrangements as of September 30, 2004, as that term is described by theSecurities and Exchange Commission.

 

**Seasonality and Variability inQuarterly Results**

 

AirNet’s operations historically havebeen somewhat seasonal and somewhat dependent on the number of banking holidaysfalling during the week.  Becausefinancial institutions are currently AirNet’s principal customers, AirNet’s airsystem is scheduled primarily around the needs of financial institutioncustomers.  When financial institutionsare closed, AirNet does not operate a full system.  AirNet’s fiscal quarter ending December 31 isoften 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 revenuesand net income are adversely affected. AirNet’s annual results fluctuate aswell based on when holidays fall during the week over the course of the year. Operatingresults are also affected by the weather. AirNet generally experiences higher maintenance costs during its fiscalquarter ending March 31.  Winter weatheroften requires additional costs for de-icing, hangar rental and other aircraftservices.

** **

**Item 3.    Quantitative andQualitative Disclosures About Market Risk**

 

### **Inflationand Interest Rates**

 

AirNetis exposed to certain market risks from transactions that are entered intoduring the normal course of business. AirNet’s primary market risk exposure relates to interest raterisk.  At September 30, 2004, AirNet hada $28.0 million outstanding balance under its Amended Credit Agreement(described above in “Item 2 — Management’s Discussion and Analysis of FinancialCondition and Results of Operations”) subject to market rate changes ininterest. 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 leverageratio as defined in the Amended Credit Agreement, or (b) a floating rate basedon the greater of the sum of (i) the prime rate established by The HuntingtonNational Bank from time to time plus a margin determined by AirNet’s leverageratio as definded in the Amended Credit Agreement and  (ii) the sum of 0.5% plus the federal fundsrate in effect from time to time. Assuming borrowing levels at September 30, 2004, a one hundred basispoint change in interest rates would impact net interest expense byapproximately $280,000 per year.

 

Followingthe effectiveness of the Amended Credit Agreement, AirNet paid off threesecured term loans which had been secured by aircraft. One of those loans hadan interest rate swap agreement associated with it.  This interest rate swap agreement with anotional amount of $3.0 million and a fixed rate of 4.25% plus a margin basedon AirNet’s funded debt ratio remains in place. At September 30, 2004, the aggregate fair value of the interest rateswap was approximately ($28,000).

** **

**FuelSurcharge**

 

AirNetassesses its customers a fuel surcharge which is based on the Oil Price IndexSummary — Columbus, Ohio (OPIS-CMH index). As index rates increase above a set threshold, surcharge ratesincrease.  AirNet’s fuel surchargeprogram helps offset timing differences between market prices and the OPIS-CHMindex used to determine surcharge rates.

 

**Item**4.    Controls and Procedures

 

**Evaluationof Disclosure Controls and Procedures**

 

Withthe participation of the Chairman of the Board, Chief Executive Officer andPresident (the principal executive officer) and the Chief Financial Officer,Treasurer and Secretary (the principal financial officer) of AirNet Systems,Inc. (the “Registrant”), the Registrant’s management has evaluated theeffectiveness of the Registrant’s disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “ExchangeAct”)) as of the end of the period covered by this Quarterly Report on Form10-Q. Based upon that evaluation, the Registrant’s Chairman of the Board, ChiefExecutive Officer and President and the Registrant’s Chief Financial Officer,Treasurer and Secretary have concluded that:

 

•                  information required to be disclosed by theRegistrant in this Quarterly Report on Form 10-Q  and the other reports which the Registrantfiles or submits under the Exchange Act would be

 

16

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accumulatedand communicated to the Registrant’s management, including its principalexecutive officer and principal financial officer, as appropriate to allowtimely decisions regarding required disclosure;

 

•                  information required to be disclosed by theRegistrant in this Quarterly Report on Form 10-Q and the otherreports which the Registrant files or submits under the Exchange Act would berecorded, processed, summarized and reported within the time period specifiedin the SEC’s rules and forms; and

 

•                  the Registrant’s disclosure controls andprocedures are effective as of the end of the period covered by this QuarterlyReport on Form 10-Q to ensure that material information relating to

 

•                  the Registrant and its consolidatedsubsidiaries is made known to them, particularly during the period during whichthis Quarterly Report on Form 10-Q is being prepared.

** **

**Changesin Internal Control Over Financial Reporting**

 

Inaddition, there were no changes that occurred during the fiscal quarter coveredby this Quarterly Report on Form 10-Q in the Registrant’s internal control overfinancial reporting (as defined in Rule 13a -15(f) under the Exchange Act) thathave materially affected, or are reasonably likely to materially affect, theRegistrant’s internal control over financial reporting.

 

17

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**AIRNET SYSTEMS, INC.**

 

**PART II****- OTHER INFORMATION**

 

Item 1.            LegalProceedings**.**

 

AirNet is currentlyinvolved in a compliance audit with the State of California EmploymentDevelopment Department.    AirNetreceived notification from this department of unreported wages and/or taxes foran audited period.  At this time, AirNetis uncertain of the estimated liability related to this audit, but hasrecognized certain costs associated with this audit.

 

Other than noted abovethere are no pending legal proceedings involving AirNet other than routinelitigation 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’sresults of operations or financial condition.

 

Item 2.                                    Unregistered Sales of Equity Securities andUse of Proceeds and Issuer Purchases of Equity  Securities.

 

(a)           Not applicable.

 

(b)           Not applicable.

 

(c)                                  AirNet Systems, Inc. did not purchase anycommon shares during the fiscal quarter ended September 30, 2004.  On February 18, 2000, AirNet Systems,Inc. announced a stock repurchase plan under which up to $3.0 million of itscommon shares may be repurchased from time to time.  These repurchases may be made in open markettransactions or through privately negotiated transactions.  As of September 30, 2004, AirNet Systems,Inc. had the authority to still repurchase approximately $0.6 million of itscommon shares under this stock repurchase plan.

 

Item 3.            DefaultsUpon Senior Securities.

 

Asa result of the impairment charge taken in September 2004 as described in Note2 of the Notes to Condensed Consolidated Financial Statements, AirNet was notin compliance with the fixed charge coverage ratio and the leverage ratiocovenants contained in the Amended Credit Agreement with its banks calculatedas of September 30, 2004, and AirNet would not be in compliance with theminimum consolidated tangible net worth requirement to be calculated as ofDecember 31, 2004 (pursuant to the Amended Credit Agreement, this ratio iscalculated annually as of December 31, AirNet’s fiscal year-end).  Effective as of November 12, 2004, AirNet andits lenders under the Amended Credit Agreement executed a waiver of anydefaults or potential defaults under the Amended Credit Agreement whichresulted or may have resulted from the non-compliance with the foregoingfinancial covenants caused by the impairment charge.  Additionally, effective as of November 12,2004, AirNet and its lenders under the Amended Credit Agreement executed aChange in Terms Agreement which modified the foregoing financial covenants sothat, on a going-forward basis, the impairment charge does not cause a defaultor potential default of these financial covenants in the future.

 

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

 

Item 5.            OtherInformation.

 

InJuly 2004 AirNet became aware that some of its employees had received a letterfrom a union regarding potential union representation.  Airnet believes that its relationship withemployees is good.

 

InJune 2004 AirNet underwent a Regional Aviation Safety Inspection (RASIP) by ateam of FAA inspectors to determine compliance with Federal AviationRegulations.  AirNet filed a responsewith the FAA, and has recently received a reply to that response noting nocertificate action will be taken against AirNet.  AirNet is currently evaluatingthe captial expenditures and labor costs related to compliance with this inspectionand working with the FAA to implement the required changes to AirNet’s operating procedures.

 

Item6.            Exhibits

 

(a)  Exhibits:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                           |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                                      |
| 4.1             |       | Loan and Security Agreement (aircraft) [Loan  Number: 1000119495], dated June 15, 2004, between Banc One Leasing  Corporation and Jetride, Inc. [Filed herewith]                                                                                                                                          |
| 4.2             |       | Business Purpose Promissory Note (fixed  rate//principal and interest) [Loan Number: 1000119495], issued on June 15,  2004, by Jetride, Inc. in favor of Banc One Leasing Corporation in the amount  of $7,500,000 [Filed herewith]                                                                       |
| 4.3             |       | Corporate Guaranty [Loan Number: 1000119495],  dated as of June 15, 2004, from AirNet Systems, Inc. in favor of Banc  One Leasing Corporation [Filed herewith]                                                                                                                                       |
| 4.4             |       | Loan and Security Agreement (aircraft) [Loan  Number: 1000119641], dated as of June 30, 2004, between Banc One Leasing  Corporation and Jetride, Inc. [Filed herewith]                                                                                                                                    |
| 4.5             |       | Business Purpose Promissory Note (fixed  rate//principal and interest) [Loan Number: 1000119641], issued on  June 30, 2004, by Jetride, Inc. in favor of Banc One Leasing Corporation  in the amount of $5,000,000 [Filed herewith]                                                                  |
| 4.6             |       | Corporate Guaranty [Loan Number: 1000119641],  dated as of June 30, 2004, from AirNet Systems, Inc. in favor of Banc  One Leasing Corporation [Filed herewith]                                                                                                                                       |
| 4.7             |       | Acknowledgment of Borrower [Loan Number: 1000119641],  dated as of June 30, 2004, by Jetride, Inc. in favor of Banc One Leasing  Corporation acknowledging sale and assignment by Banc One Leasing Corporation  to First Union Commercial Corporation of “Loan Documents” [Filed herewith] |
| 4.8             |       | Loan and Security Agreement (aircraft) [Loan  Number: 1000119649], dated as of June 29, 2004, between Banc One Leasing  Corporation and Jetride, Inc. [Filed herewith]                                                                                                                               |
| 4.9             |       | Business Purpose Promissory Note (fixed  rate//principal and interest) [Loan Number: 1000119649], issued on June 29,  2004, by Jetride, Inc. in favor of Banc One Leasing Corporation in the amount  of $5,000,000 [Filed herewith]                                                                       |

 

18

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| 4.10 |   | Corporate Guaranty [Loan Number: 1000119649],  dated as of June 29, 2004, from AirNet Systems, Inc. in favor of Banc  One Leasing Corporation [Filed herewith]                                                                                                                                            |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.11 |   | Acknowledgment of Borrower [Loan Number:  1000119649], dated as of June 29, 2004, by Jetride, Inc. in favor of  Banc One Leasing Corporation acknowledging sale and assignment by Banc One  Leasing Corporation to PNC Leasing, LLC of “Loan Documents” [Filed herewith]                        |
| 4.12 |   | Loan  and Security Agreement (aircraft) [Loan Number: 1000119650], dated as of June  30, 2004, between Banc One Leasing Corporation and Jetride, Inc. [Filed  herewith]                                                                                                                                        |
| 4.13 |   | Business  Purpose Promissory Note (fixed rate//principal and interest) [Loan Number:  1000119650], issued on June 30, 2004, by Jetride, Inc. in favor of Banc One  Leasing Corporation in the amount of $5,000,000 [Filed herewith]                                                                            |
| 4.14 |   | Corporate  Guaranty [Loan Number: 1000119650], dated as of June 30, 2004, from  AirNet Systems, Inc. in favor of Banc One Leasing Corporation [Filed  herewith]                                                                                                                                           |
| 4.15 |   | Acknowledgment  of Borrower [Loan Number: 1000119650], dated as of June 30, 2004, by  Jetride, Inc. in favor of Banc One Leasing Corporation acknowledging sale and  assignment by Banc One Leasing Corporation to First Union Commercial  Corporation of “Loan Documents” [Filed herewith]     |
| 4.16 |   | Loan  and Security Agreement (aircraft) [Loan Number: 1000119771], dated as of July  12, 2004, between Banc One Leasing Corporation and Jetride, Inc. [Filed  herewith]                                                                                                                                        |
| 4.17 |   | Business  Purpose Promissory Note (fixed rate//principal and interest) [Loan Number:  1000119771], issued on July 12, 2004, by Jetride, Inc. in favor of Banc One  Leasing Corporation in the amount of $5,000,000 [Filed herewith]                                                                            |
| 4.18 |   | Corporate  Guaranty [Loan Number: 1000119771], dated as of July 12, 2004, from AirNet  Systems, Inc. in favor of Banc One Leasing Corporation [Filed herewith]                                                                                                                                                 |
| 4.19 |   | Acknowledgment  of Borrower [Loan Number: 1000119771], dated as of July 12, 2004, by Jetride,  Inc. in favor of Banc One Leasing Corporation acknowledging sale and  assignment by Banc One Leasing Corporation to First Union Commercial  Corporation of “Loan Documents” [Filed herewith]          |
| 4.20 |   | Loan  and Security Agreement (aircraft) [Loan Number: 1000119774], dated as of July  12, 2004, between Banc One Leasing Corporation and Jetride, Inc. [Filed  herewith]                                                                                                                                        |
| 4.21 |   | Business  Purpose Promissory Note (fixed rate//principal and interest) [Loan Number:  1000119774], issued on July 12, 2004, by Jetride, Inc. in favor of Banc One  Leasing Corporation in the amount of $5,000,000 [Filed herewith]                                                                            |
| 4.22 |   | Corporate  Guaranty [Loan Number: 1000119774], dated as of July 12, 2004, from  AirNet Systems, Inc. in favor of Banc One Leasing Corporation [Filed  herewith]                                                                                                                                           |
| 4.23 |   | Acknowledgment  of Borrower [Loan Number: 1000119774], dated as of July 12, 2004, by Jetride,  Inc. in favor of Banc One Leasing Corporation acknowledging sale and  assignment by Banc One Leasing Corporation to PNC Leasing, LLC of “Loan  Documents” [Filed herewith]                            |
| 4.24 |   | Waiver  Letter, dated as of November 12, 2004, by and among AirNet Systems, Inc., The  Huntington National Bank, as agent for and on behalf of the lenders from time  to time party thereto, Bank One, N.A., Fifth Third Bank and The Huntington  National Bank as a lender and the LC Issuer [Filed herewith] |
| 4.25 |   | Change  in Terms Agreement, dated as of November 12, 2004, by and between AirNet  Systems Inc., and The Huntington National Bank, in its capacity as administrative  agent for and on behalf of the Lenders from time to time party to the Amended  Credit Agreement dated May 28, 2004 [Filed herewith]       |
| 31.1 |   | Rule  13a-14(a)/15d-14(a) Certification (Principal Executive Officer) [Filed  herewith]                                                                                                                                                                                                                        |
| 31.2 |   | Rule  13a-14(a)/15d-14(a) Certification (Principal Financial Officer) [Filed  herewith]                                                                                                                                                                                                                        |
| 32.1 |   | Section  1350 Certification (Principal Executive Officer) [Filed herewith]                                                                                                                                                                                                                                     |
| 32.2 |   | Section  1350 Certification (Principal Financial Officer) [Filed herewith]                                                                                                                                                                                                                                     |

 

19

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(b)         Reportson Form 8-K:

 

OnNovember 5, 2004, AirNet Systems Inc. (the “Registrant”) filed a Current Reporton Form 8-K, dated November 5, 2004, reporting under Item 2.06  Material Impairments, that due tochanging conditions in AirNet’s Bank services business and recent industrytrends, AirNet believes those factors will cause its cargo airline capacity toexceed future demand, creating an impairment of aircraft and relatedassets.  In response, AirNet has incurreda non-cash impairment charge of $47.0 million (pretax) which will be reportedin the third quarter of 2004.  A copy ofthe press release was attached to the filing.

 

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** **

**AIRNET SYSTEMS, INC.**

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
| Dated:  November 15, 2004 | By:    |                            | /s/  Gary W. Qualmann                             |   |
|---------------------------|--------|---------------------------------|---------------------------------------------------|--------|
|                      |   | Gary  W. Qualmann,              |
|                      |   |                            | Chief  Financial Officer, Treasurer and Secretary |
|                      |   | (Duly  Authorized Officer)      |
|                      |   | (Principal  Financial Officer)  |
|                      |   |                            |
| Dated:  November 15, 2004 | By:    |                            | /s/  Denise D. Brown                              |   |
|                      |   | Denise  D. Brown,               |
|                      |   |                            | Controller                                        |
|                      |   | (Duly  Authorized Officer)      |
|                      |   | (Principal  Accounting Officer) |

 

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**AIRNET SYSTEMS, INC.**

 

**INDEXTO EXHIBITS**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                 |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                                            |
| 4.1             |       | Loan and Security Agreement (aircraft) [Loan Number:  1000119495], dated June 15, 2004, between  Banc One Leasing Corporation and Jetride, Inc. [Filed herewith]                                                                                                                                           |
| 4.2             |       | Business Purpose Promissory Note (fixed rate//principal and interest)  [Loan Number: 1000119495], issued on June 15, 2004, by Jetride, Inc. in favor  of Banc One Leasing Corporation in the amount of $7,500,000 [Filed herewith]                                                                              |
| 4.3             |       | Corporate Guaranty [Loan Number:   1000119495], dated as of June 15, 2004, from AirNet Systems, Inc.  in favor of Banc One Leasing Corporation [Filed herewith]                                                                                                                                       |
| 4.4             |       | Loan and Security Agreement (aircraft) [Loan Number:  1000119641], dated as of June 30, 2004,  between Banc One Leasing Corporation and Jetride, Inc. [Filed herewith]                                                                                                                                     |
| 4.5             |       | Business Purpose Promissory Note (fixed rate//principal and interest)  [Loan Number:  1000119641], issued on  June 30, 2004, by Jetride, Inc. in favor of Banc One Leasing Corporation  in the amount of $5,000,000 [Filed herewith]                                                                  |
| 4.6             |       | Corporate Guaranty [Loan Number:   1000119641], dated as of June 30, 2004, from AirNet Systems, Inc.  in favor of Banc One Leasing Corporation [Filed herewith]                                                                                                                                       |
| 4.7             |       | Acknowledgment of Borrower [Loan Number:  1000119641], dated as of June 30,  2004, by Jetride, Inc. in favor of Banc One Leasing Corporation acknowledging  sale and assignment by Banc One Leasing Corporation to First Union Commercial  Corporation of “Loan Documents” [Filed herewith] |
| 4.8             |       | Loan and Security Agreement (aircraft) [Loan Number:  1000119649], dated as of June 29,  2004, between Banc One Leasing Corporation and Jetride, Inc. [Filed herewith]                                                                                                                                |
| 4.9             |       | Business Purpose Promissory Note (fixed rate//principal and interest)  [Loan Number:  1000119649], issued on  June 29, 2004, by Jetride, Inc. in favor of Banc One Leasing Corporation in  the amount of $5,000,000 [Filed herewith]                                                                       |
| 4.10            |       | Corporate Guaranty [Loan Number:   1000119649], dated as of June 29, 2004, from AirNet Systems, Inc.  in favor of Banc One Leasing Corporation [Filed herewith]                                                                                                                                       |
| 4.11            |       | Acknowledgment of Borrower [Loan Number:  1000119649], dated as of June 29,  2004, by Jetride, Inc. in favor of Banc One Leasing Corporation acknowledging  sale and assignment by Banc One Leasing Corporation to PNC Leasing, LLC of  “Loan Documents” [Filed herewith]                   |
| 4.12            |       | Loan and Security Agreement (aircraft) [Loan Number:  1000119650], dated as of June 30, 2004,  between Banc One Leasing Corporation and Jetride, Inc. [Filed herewith]                                                                                                                                     |
| 4.13            |       | Business Purpose Promissory Note (fixed rate//principal and interest)  [Loan Number:  1000119650], issued on  June 30, 2004, by Jetride, Inc. in favor of Banc One Leasing Corporation in  the amount of $5,000,000 [Filed herewith]                                                                       |
| 4.14            |       | Corporate Guaranty [Loan Number:   1000119650], dated as of June 30, 2004, from AirNet Systems, Inc.  in favor of Banc One Leasing Corporation [Filed herewith]                                                                                                                                       |
| 4.15            |       | Acknowledgment of Borrower [Loan Number:  1000119650], dated as of June 30,  2004, by Jetride, Inc. in favor of Banc One Leasing Corporation acknowledging  sale and assignment by Banc One Leasing Corporation to First Union Commercial  Corporation of “Loan Documents” [Filed herewith] |
| 4.16            |       | Loan and Security Agreement (aircraft) [Loan Number:  1000119771], dated as of July 12, 2004,  between Banc One Leasing Corporation and Jetride, Inc. [Filed herewith]                                                                                                                                     |
| 4.17            |       | Business Purpose Promissory Note (fixed rate//principal and interest)  [Loan Number:  1000119771], issued on  July 12, 2004, by Jetride, Inc. in favor of Banc One Leasing Corporation in  the amount of $5,000,000 [Filed herewith]                                                                       |
| 4.18            |       | Corporate Guaranty [Loan Number:   1000119771], dated as of July 12, 2004, from AirNet Systems, Inc. in  favor of Banc One Leasing Corporation [Filed herewith]                                                                                                                                            |
| 4.19            |       | Acknowledgment of Borrower [Loan Number:  1000119771], dated as of July 12, 2004, by  Jetride, Inc. in favor of Banc One Leasing Corporation acknowledging sale and  assignment by Banc One Leasing Corporation to First Union Commercial Corporation  of “Loan Documents” [Filed herewith]      |

 

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| 4.20 |   | Loan and Security Agreement (aircraft) [Loan Number:  1000119774], dated as of July 12, 2004,  between Banc One Leasing Corporation and Jetride, Inc. [Filed herewith]                                                                                                                                    |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.21 |   | Business Purpose Promissory Note (fixed rate//principal and interest)  [Loan Number:  1000119774], issued on  July 12, 2004, by Jetride, Inc. in favor of Banc One Leasing Corporation in  the amount of $5,000,000 [Filed herewith]                                                                      |
| 4.22 |   | Corporate Guaranty [Loan Number:   1000119774], dated as of July 12, 2004, from AirNet Systems, Inc.  in favor of Banc One Leasing Corporation [Filed herewith]                                                                                                                                      |
| 4.23 |   | Acknowledgment of Borrower [Loan Number:  1000119774], dated as of July 12, 2004, by  Jetride, Inc. in favor of Banc One Leasing Corporation acknowledging sale and  assignment by Banc One Leasing Corporation to PNC Leasing, LLC of “Loan  Documents” [Filed herewith]                       |
| 4.24 |   | Waiver  Letter, dated as of November 12, 2004, by and among AirNet Systems, Inc., The  Huntington National Bank, as agent for and on behalf of the lenders from time  to time party thereto, Bank One, N.A., Fifth Third Bank and The Huntington  National Bank as a lender and the LC Issuer [Filed herewith] |
| 4.25 |   | Change  in Terms Agreement, dated as of November 12, 2004, by and between AirNet  Systems Inc., and The Huntington National Bank, in its capacity as  administrative agent for and on behalf of the Lenders from time to time party  to the Amended Credit Agreement dated May 28, 2004 [Filed herewith]       |
| 31.1 |   | Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)  [Filed herewith]                                                                                                                                                                                                                         |
| 31.2 |   | Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)  [Filed herewith]                                                                                                                                                                                                                         |
| 32.1 |   | Section 1350 Certification (Principal Executive Officer) [Filed  herewith]                                                                                                                                                                                                                                     |
| 32.2 |   | Section 1350 Certification (Principal Financial Officer) [Filed  herewith]                                                                                                                                                                                                                                     |

 

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