##### Table of Contents



UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 1-13025
 AirNet Systems, Inc.
  Ohio
    
    31-1458309(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)7250 Star Check Drive, Columbus, Ohio
    
    43217(Address of principal executive offices)
    
    (Zip Code)
 (614) 409-4900
 Not Applicable
 þ o
  Large accelerated filer
o

 

    Accelerated filer o

 

Non-accelerated filer   o
(Do not check if a smaller reporting company)

    

 Smaller reporting company
þ
 o þ




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##### 



TABLE OF CONTENTS
 PAGEPART I. FINANCIAL INFORMATIONItem 1.
    
    Financial
Statements:Condensed Consolidated Balance Sheets:March 31, 2008 (Unaudited) and December 31, 2007
    
    
    3Condensed Consolidated Statements of Operations:Three Months Ended March 31, 2008 and 2007 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows:Three Months Ended March 31, 2008 and 2007 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and
Qualitative Disclosures About Market Risk
    
    
    24Item 4T.
    
    Controls and
Procedures
    
    
    24PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    24Item 1A.
    
    Risk Factors
    
    
    24Item 2.
    
    Unregistered Sales
of Equity Securities and Use of Proceeds
    
    
    25Item 3.
    
    Defaults Upon Senior
Securities
    
    
    25Item 4.
    
    Submission of
Matters to a Vote of Security Holders
    
    
    25Item 5.
    
    Other Information
    
    
    25Item 6.
    
    Exhibits
    
    
    26SIGNATURES
    
    
    27INDEX TO EXHIBITS
    
    
    28EX-31.1EX-31.2EX-32
  2




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 AIRNET SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,In thousands, except par value data
    
    2008
    
    
    2007(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,375
    
    
    $
    4,500Accounts receivable, less allowances
    
    
    18,409
    
    
    
    18,681Taxes receivable
    
    
    2,283
    
    
    
    Deposits and prepaids
    
    
    1,941
    
    
    
    2,402Total current assets
    
    
    33,008
    
    
    
    25,583Net property and equipment
    
    
    24,233
    
    
    
    24,731Federal taxes receivable
    
    
    5,550
    
    
    
    Deposits and other assets
    
    
    181
    
    
    
    60Total assets
    
    $
    62,972
    
    
    $
    50,374LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    8,121
    
    
    $
    8,056Salaries and related liabilities
    
    
    2,423
    
    
    
    4,036Current portion of notes payable
    
    
    
    
    
    
    Taxes payable
    
    
    
    
    
    
    478Total current liabilities
    
    
    10,544
    
    
    
    12,570Notes payable, less current portion
    
    
    
    
    
    
    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
issued at March 31, 2008 and December 31, 2007, respectively
    
    
    128
    
    
    
    128Additional paid-in-capital
    
    
    65,118
    
    
    
    77,035Retained deficit
    
    
    (7,076
    )
    
    
    (16,339
    )Accumulated other comprehensive income
    
    
    46
    
    
    
    46Treasury shares, 650 and 2,587 common shares held at cost at
March 31, 2008 and December 31, 2007, respectively
    
    
    (5,788
    )
    
    
    (23,066
    )Total shareholders equity
    
    
    52,428
    
    
    
    37,804Total liabilities and shareholders equity
    
    $
    62,972
    
    
    $
    50,374
  3




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AIRNET SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months EndedMarch 31,In thousands, except per share data
    
    2008
    
    
    2007NET REVENUES, NET OF EXCISE TAXBank services
    
    $
    22,549
    
    
    $
    26,494Express services
    
    
    15,381
    
    
    
    14,214Aviation services
    
    
    234
    
    
    
    804Total net revenues
    
    
    38,164
    
    
    
    41,512COSTS AND EXPENSESAircraft fuel
    
    
    7,053
    
    
    
    6,123Aircraft maintenance
    
    
    4,838
    
    
    
    7,328Operating wages and benefits
    
    
    5,135
    
    
    
    4,932Contracted air costs
    
    
    4,111
    
    
    
    3,783Ground courier
    
    
    7,244
    
    
    
    8,906Depreciation
    
    
    1,066
    
    
    
    1,246Insurance, rent and landing fees
    
    
    1,858
    
    
    
    2,138Travel, training and other operating
    
    
    1,740
    
    
    
    1,584Selling, general and administrative
    
    
    3,965
    
    
    
    4,262Acquisition related costs
    
    
    601
    
    
    
    Net (gain) on disposition of assets
    
    
    (394
    )
    
    
    (880
    )Total costs and expenses
    
    
    37,217
    
    
    
    39,422Income from operations before interest and income taxes
    
    
    947
    
    
    
    2,090Interest expense (income)
    
    
    (36
    )
    
    
    132Income from operations before income taxes
    
    
    983
    
    
    
    1,958Provision (benefit) for income taxes
    
    
    (8,280
    )
    
    
    100Net income
    
    $
    9,263
    
    
    $
    1,858Net income per common share  basic and diluted
    
    $
    0.90
    
    
    $
    0.18
  4




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AIRNET SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedMarch 31,In thousands
    
    2008
    
    
    2007Operating activities:Net income
    
    $
    9,263
    
    
    $
    1,858Adjustments to reconcile net income to net cash provided
by (used in) operating activities:Depreciation
    
    
    1,066
    
    
    
    1,246Gain on disposition of assets
    
    
    (394
    )
    
    
    (880
    )Federal taxes receivable
    
    
    (5,550
    )
    
    
    Stock-based compensation expense
    
    
    18
    
    
    
    55Cash provided by (used in) operating assets and liabilities:Accounts receivable
    
    
    272
    
    
    
    1,386Taxes receivable or payable
    
    
    (2,761
    )
    
    
    (964
    )Deposits and prepaids
    
    
    340
    
    
    
    221Accounts payable and accrued expenses
    
    
    (27
    )
    
    
    (1,302
    )Salaries and related liabilities
    
    
    (1,613
    )
    
    
    (2,279
    )Deferred income taxes
    
    
    
    
    
    
    Net cash provided by (used in) continuing operations
    
    
    614
    
    
    
    (659
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    458Net cash provided by (used in) operating activities
    
    
    614
    
    
    
    (201
    )Investing activities:Purchases of property and equipment
    
    
    (824
    )
    
    
    (1,341
    )Proceeds from sales of property and equipment
    
    
    650
    
    
    
    404Net cash used in continuing operations
    
    
    (174
    )
    
    
    (937
    )Net cash provided by (used in) discontinued operations
    
    
    
    
    
    
    500Net cash provided by (used in) investing activities
    
    
    (174
    )
    
    
    (437
    )Financing activities:Proceeds from sale of treasury stock
    
    
    5,435
    
    
    
    Net borrowings (repayments) of debt
    
    
    
    
    
    
    (471
    )Net cash provided by (used in) continuing operations
    
    
    5,435
    
    
    
    (471
    )Net cash provided by (used in) discontinued operations
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    5,435
    
    
    
    (471
    )Net increase (decrease) in cash
    
    
    5,875
    
    
    
    (1,109
    )Cash and cash equivalents at beginning of period
    
    
    4,500
    
    
    
    2,244Cash and cash equivalents at end of period
    
    $
    10,375
    
    
    $
    1,135
  5




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AIRNET SYSTEMS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Basis of Presentation
     Fair
Value Measurements Effective Date of FASB Statement No. 157
 2. Merger Agreement
   6




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3. Major Bank Services Customers
    4. Stock Plans and Awards
 Share-Based Payment
    7




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5. Net Income Per Common Share
  Three Months EndedMarch 31,2008
    
    
    2007Numerator:Net income
    
    $
    9,263
    
    
    $
    1,858Denominator:Basic  weighted average common shares outstanding
    
    
    10,299
    
    
    
    10,166DilutedDilutive effect of stock options  employees, officers and directors
    
    
    
    
    
    
    Adjusted weighted average common shares outstanding
    
    
    10,299
    
    
    
    10,166Net income per common share  basic and diluted
    
    $
    0.90
    
    
    $
    0.18
  6. Bank Financing Matters
 Revolving Credit Facility
   8




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Other Term Loan
  7. Income Taxes
 Accounting
for Income Taxes
    9




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8. Aircraft Dispositions
    9. Contingencies
  10




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AIRNET SYSTEMS, INC.
 
 ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
 CONDITION AND RESULTS OF OPERATIONS
 Safe Harbor Statement
  Merger Agreement
  11




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Business Strategy
      12




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Results of Operations
 Financial Overview
 Net Revenues
 Dollars
in 000s
    
    Three Months Ended
    
    
    
    
    
    
    Increase (Decrease)March 31,
    
    
    
    
    
    
    2008 to 2007% of
    
    
    
    
    
    
    % ofNet Revenues
    
    2008
    
    
    Total
    
    
    2007
    
    
    Total
    
    
    Dollars ($)
    
    
    Percentage (%)Revenues Net of Excise Tax:Bank Services
    
    $
    22,549
    
    
    
    59
    %
    
    $
    26,494
    
    
    
    64
    %
    
    $
    (3,945
    )
    
    
    (15
    )%Express Services
    
    
    15,381
    
    
    
    40
    %
    
    
    14,214
    
    
    
    34
    %
    
    
    1,167
    
    
    
    8
    %Aviation Services
    
    
    234
    
    
    
    1
    %
    
    
    804
    
    
    
    2
    %
    
    
    (570
    )
    
    
    (71
    )%Total Net Revenues
    
    $
    38,164
    
    
    
    100
    %
    
    $
    41,512
    
    
    
    100
    %
    
    $
    (3,348
    )
    
    
    (8
    )%
      13




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Bank Services Revenues
 Dollars in 000s
    
    Three Months Ended
    
    
    Increase (Decrease)March 31,
    
    
    2008 to 2007Bank Services Revenues
    
    2008
    
    
    2007
    
    
    Dollars ($)
    
    
    Percentage (%)Bank Services Revenues
    
    $
    17,928
    
    
    $
    23,110
    
    
    $
    (5,182
    )
    
    
    (22
    )%Fuel Surcharge
    
    
    4,621
    
    
    
    3,384
    
    
    
    1,237
    
    
    
    37
    %Total Net Bank Services Revenues
    
    $
    22,549
    
    
    $
    26,494
    
    
    $
    (3,945
    )
    
    
    (15
    )%Revenues before fuel surcharge:Weekday Revenues Per Flying Day
    
    $
    338
    
    
    $
    446
    
    
    $
    (108
    )
    
    
    (24
    )%Weekend Revenues Per Weekend
    
    $
    106
    
    
    $
    130
    
    
    $
    (24
    )
    
    
    (18
    )%
    Bank Services Cancellations
  14




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Express Services Revenues
 Dollars in 000s
    
    Three Months Ended
    
    
    Increase (Decrease)March 31,
    
    
    2008 to 2007Express Services Revenues
    
    2008
    
    
    2007
    
    
    Dollars ($)
    
    
    Percentage (%)Express Revenues  Non Charter
    
    $
    8,115
    
    
    $
    9,222
    
    
    $
    (1,107
    )
    
    
    (12
    )%Express Revenues  Charter
    
    
    4,388
    
    
    
    3,404
    
    
    
    984
    
    
    
    29
    %Fuel Surcharge
    
    
    2,878
    
    
    
    1,588
    
    
    
    1,290
    
    
    
    81
    %Total Net Express Services Revenues
    
    $
    15,381
    
    
    $
    14,214
    
    
    $
    1,167
    
    
    
    8
    %
  Express Revenues  Non Charter
    15




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Express Revenues  Charter
   Aviation Services
  16




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Costs and Expenses
 Dollars in 000s
    
    Three Months Ended
    
    
    Increase (Decrease)March 31,
    
    
    2008 to 2007Costs and Expenses
    
    2008
    
    
    2007
    
    
    Dollars ($)
    
    
    Percentage (%)Aircraft fuel
    
    $
    7,053
    
    
    $
    6,123
    
    
    $
    930
    
    
    
    15
    %Aircraft maintenance
    
    
    4,838
    
    
    
    7,328
    
    
    
    (2,490
    )
    
    
    (34
    )%Operating wages and benefits
    
    
    5,135
    
    
    
    4,932
    
    
    
    203
    
    
    
    4
    %Contracted air costs
    
    
    4,111
    
    
    
    3,783
    
    
    
    328
    
    
    
    9
    %Ground courier
    
    
    7,244
    
    
    
    8,906
    
    
    
    (1,662
    )
    
    
    (19
    )%Depreciation
    
    
    1,066
    
    
    
    1,246
    
    
    
    (180
    )
    
    
    (14
    )%Insurance, rent and landing fees
    
    
    1,858
    
    
    
    2,138
    
    
    
    (280
    )
    
    
    (13
    )%Travel, training and other
    
    
    1,740
    
    
    
    1,584
    
    
    
    156
    
    
    
    10
    %Selling, general and administrative
    
    
    3,965
    
    
    
    4,262
    
    
    
    (297
    )
    
    
    (7
    )%Acquisition related costs
    
    
    601
    
    
    
    
    
    
    
    601
    
    
    
    *Net gain on disposition of assets
    
    
    (394
    )
    
    
    (880
    )
    
    
    486
    
    
    
    *Total Costs and Expenses
    
    $
    37,217
    
    
    $
    39,422
    
    
    $
    (2,205
    )
    
    
    (6
    )%
 
 *      The
percentage increase (decrease) is not meaningful.
       17




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18




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19




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Liquidity and Capital Resources
 Cash flow from operating activities  Continuing Operations
  Cash flow from operating activities  Discontinued Operations
  Financing Activities  Continuing Operations
  Revolving Credit Facility
   20




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Other Term Loan
  Investing Activities  Continuing Operations
  Investing Activities  Discontinued Operations
  Future Liquidity
   21




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General
 Critical Accounting Policies and Estimates
    Fair
Value Measurements Effective Date of FASB Statement No. 157
 Regulation
   22




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The Next Generation Air Transportation System Financing Reform Act of 2007" The Next Generation Air Transportation System Financing Reform
Act of 2007" Aviation Investment and Modernization Act of 2007 FAA Reauthorization Act of 2007"
 Improving Americas Security Act of 2007
 Off-Balance Sheet Arrangements
  23




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Seasonality and Variability in Quarterly Results
  
 ITEM 3  Quantitative and Qualitative Disclosures About Market Risk
  
 ITEM 4T  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  
    
    information required to be disclosed by AirNet in this Quarterly Report on Form
10-Q and the other reports that AirNet files or submits under the Exchange Act would
be accumulated and communicated to AirNets management, including its principal
executive officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure;
    
    information required to be disclosed by AirNet in this Quarterly Report on Form
10-Q and the other reports that AirNet files or submits under the Exchange Act would
be recorded, processed, summarized and reported within the time periods specified in
the rules and forms of the Securities and Exchange Commission (the SEC); and
    
    AirNets disclosure controls and procedures were effective as of the end of the
fiscal quarter covered by this Quarterly Report on Form 10-Q.
 Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 ITEM 1  Legal Proceedings
  
 ITEM 1A  Risk Factors
  24




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ITEM 2  Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    The information required by Item 701 of SEC Regulation S-K as
to the sale by AirNet of 1,934,137 common shares to AirNet Holdings, Inc., on
March 31, 2008, was previously disclosed in Item 3.02. Unregistered Sales of
Equity Securities of the Current Report on Form 8-K filed by AirNet with the
SEC on March 31, 2008.(b)
    
    Not applicable.(c)
    
    Neither AirNet nor any affiliated purchaser, as defined in
Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended,
purchased any common shares of AirNet during the quarterly period ended March
31, 2008. On February 18, 2000, AirNet announced a stock repurchase plan under
which up to $3.0 million of its common shares
may be repurchased from time to time. These repurchases may be made in open
market transactions or through privately negotiated transactions. As of
March 31, 2008, AirNet had the authority to repurchase approximately $0.6
million of its common shares under this stock repurchase plan.
 
 ITEM 3  Defaults Upon Senior Securities.
  
 ITEM 4  Submission of Matters to a Vote of Security Holders.
  
 ITEM 5  Other Information
      25




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ITEM 6  Exhibits
  Exhibit No.
    
    Description
    
    Location2.1
    
    Agreement and Plan of Merger,
dated as of March 31, 2008,
among AirNet Systems, Inc.,
AirNet Holdings, Inc. and
AirNet Acquisition, Inc.*
    
    Incorporated herein by
reference from Exhibit 2.1 to
AirNet Systems, Inc.s Current
Report on Form 8-K dated and
filed on April 3, 2008 (File
No. 001-13025) (AirNet
Systems, Inc.s April 3, 2008
Form 8-K)4.1
    
    Subscription Agreement, dated
March 31, 2008, between AirNet
Systems, Inc. and AirNet
Holdings, Inc.
    
    Incorporated herein by
reference from Exhibit 4.1 to
AirNet Systems, Inc.s April 3,
2008 Form 8-K4.2
    
    Registration Rights Agreement
dated as of March 31, 2008,
between AirNet Systems, Inc.
and AirNet Holdings, Inc.
    
    Incorporated herein by
reference from Exhibit 4.2 to
AirNet Systems, Inc.s April 3,
2008 Form 8-K10.1
    
    Summary of Compensation for
Directors of AirNet Systems,
Inc.
    
    Incorporated herein by
reference from Exhibit 10.21 to
AirNet Systems, Inc.s Annual
Report on Form 10-K for the
fiscal year ended December 31,
2007 (File No. 001-13025)
(AirNet Systems, Inc.s 2007
Form 10-K)10.2
    
    Summary of AirNet Systems, Inc.
2008 Incentive Compensation
Plan
    
    Incorporated herein by
reference from Exhibit 10.29 to
AirNet Systems, Inc.s 2007
Form 10-K31.1
    
    Rule 13a-14(a)/15d-14(a)
Certification (Principal
Executive Officer)
    
    Filed herewith31.2
    
    Rule 13a-14(a)/15d-14(a)
Certification (Principal
Financial Officer)
    
    Filed herewith32
    
    Section 1350 Certification
(Principal Executive Officer
and Principal Financial
Officer)
    
    Filed herewith
 
 *
    
    The disclosure schedules referenced in the Agreement and Plan of Merger have been omitted
pursuant to Item 601(B)(2) of SEC Regulation S-K. AirNet Systems, Inc. hereby undertakes to
furnish supplementally a copy of the disclosure schedules referenced in the Agreement and Plan of
Merger upon request by the SEC. 26




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AIRNET SYSTEMS, INC.
 
 SIGNATURES
   Dated:  May 12, 2008
    By:
    /s/ Ray L. DruseikisRay L. Druseikis,Vice President of Finance and Controller;
Interim Chief Financial Officer, Treasurer and Secretary
(Duly Authorized Officer)
(Principal Financial Officer) 27




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AIRNET SYSTEMS, INC.
 
 INDEX TO EXHIBITS
 Exhibit No.
    
    Description
    
    Location2.1
    
    Agreement and Plan of Merger,
dated as of March 31, 2008,
among AirNet Systems, Inc.,
AirNet Holdings, Inc. and
AirNet Acquisition, Inc.*
    
    Incorporated herein by
reference from Exhibit 2.1 to
AirNet Systems, Inc.s Current
Report on Form 8-K dated and
filed on April 3, 2008 (File
No. 001-13025) (AirNet
Systems, Inc.s April 3, 2008
Form 8-K)4.1
    
    Subscription Agreement, dated
March 31, 2008, between AirNet
Systems, Inc. and AirNet
Holdings, Inc.
    
    Incorporated herein by
reference from Exhibit 4.1 to
AirNet Systems, Inc.s April 3,
2008 Form 8-K4.2
    
    Registration Rights Agreement
dated as of March 31, 2008,
between AirNet Systems, Inc.
and AirNet Holdings, Inc.
    
    Incorporated herein by
reference from Exhibit 4.2 to
AirNet Systems, Inc.s April 3,
2008 Form 8-K10.1
    
    Summary of Compensation for
Directors of AirNet Systems,
Inc.
    
    Incorporated herein by
reference from Exhibit 10.21 to
AirNet Systems, Inc.s Annual
Report on Form 10-K for the
fiscal year ended December 31,
2007 (File No. 001-13025)
(AirNet Systems, Inc.s 2007
Form 10-K)10.2
    
    Summary of AirNet Systems, Inc.
2008 Incentive Compensation
Plan
    
    Incorporated herein by
reference from Exhibit 10.29 to
AirNet Systems, Inc.s 2007
Form 10-K31.1
    
    Rule 13a-14(a)/15d-14(a)
Certification (Principal
Executive Officer)
    
    Filed herewith31.2
    
    Rule 13a-14(a)/15d-14(a)
Certification (Principal
Financial Officer)
    
    Filed herewith32
    
    Section 1350 Certification
(Principal Executive Officer
and Principal Financial
Officer)
    
    Filed herewith
 
 *
    
    The disclosure schedules referenced in the Agreement and Plan of Merger have been omitted
pursuant to Item 601(B)(2) of SEC Regulation S-K. AirNet Systems, Inc. hereby undertakes to
furnish supplementally a copy of the disclosure schedules referenced in the Agreement and Plan of
Merger upon request by the SEC. 28