AIRNET SYSTEMS INC (Form: 10-Q)

Ohio		31-1458309
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

7250 Star Check Drive
Columbus, Ohio 43217
(Address of principal executive offices) (Zip Code)

(614) 409-4900
(Registrant’s telephone number, including area code)

3939 International Gateway
Columbus, Ohio 43219

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

As of May 2, 2005, 10,126,824 of the registrant’s common shares, par value $0.01, were outstanding.

TABLE OF CONTENTS


	PAGE
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets:March 31, 2005 (Unaudited) and December 31, 2004		3

Condensed Consolidated Statements of Operations (Unaudited):Three Months Ended March 31, 2005 and 2004		4

Condensed Consolidated Statements of Cash Flows (Unaudited):Three Months Ended March 31, 2005 and 2004		5

Notes to Condensed Consolidated Financial Statements (Unaudited)		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12

Item 3. Quantitative and Qualitative Disclosures about Market Risk		20

Item 4. Controls and Procedures		20

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		21

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		21

Item 3. Defaults Upon Senior Securities		21

Item 4. Submission of Matters to a Vote of Security Holders		21

Item 5. Other Information		21

Item 6. Exhibits		22

SIGNATURES		23

INDEX TO EXHIBITS		24

AIRNET SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31,			December 31,
	2005			2004
In thousands, except par value	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	850		$	1,086
Accounts receivable, less allowances		25,833			24,591
Inventory		404			502
Taxes receivable		1,201			1,137
Deferred income taxes		365			187
Deposits and prepaids		2,722			2,820

Total current assets		31,375			30,323

Net property and equipment		111,025			106,816

Deposits and other assets		331			331


Total assets	$	142,731		$	137,470


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11,553		$	11,311
Salaries and related liabilities		4,331			4,496
Deferred revenue		—			102
Accrued expenses		661			912
Current portion of notes payable		3,108			3,076

Total current liabilities		19,653			19,897

Other liabilities		520			670
Notes payable, less current portion		61,658			59,169
Deferred income taxes		8,883			7,268

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 March 31, 2005 and at December 31, 2004		128			128
Additional paid-in-capital		76,719			76,835
Retained earnings (deficit)		(691	)		(2,208	)
Accumulated other comprehensive loss		(10	)		(13	)
Treasury shares, 2,635 and 2,644 shares held at cost at March 31, 2005 and December 31, 2004, respectively		(24,129	)		(24,276	)

Total shareholders’ equity		52,017			50,466


Total liabilities and shareholders’ equity	$	142,731		$	137,470

See notes to condensed consolidated financial statements

AIRNET SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited


	Three Months Ended
	March 31,
In thousands, except per share data	2005			2004
NET REVENUES
Delivery services, net of excise tax:
Bank services	$	27,293		$	25,832
Express services		13,105			10,798

Total delivery services revenues		40,398			36,630

Passenger charter services		9,328			3,650
Aviation services and other operations		167			191

Total net revenues		49,893			40,471

COSTS AND EXPENSES
Wages and benefits		6,204			5,872
Aircraft fuel		8,254			5,536
Aircraft maintenance		5,387			3,191
Contracted air costs		3,268			3,071
Ground courier		7,889			7,142
Depreciation		3,642			4,889
Insurance, rent and landing fees		2,810			2,564
Travel, training and other		3,195			2,272
Selling, general and administrative		5,487			4,720
Net (gain) loss on disposition of assets		(50	)		292

Total costs and expenses		46,086			39,549


Income from operations		3,807			922
Interest expense		855			367


Income before income taxes		2,952			555
Provision for income taxes		1,435			239


Net income	$	1,517		$	316


Net income per share — basic and diluted	$	0.15		$	0.03

See notes to condensed consolidated financial statements

AIRNET SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited


	Three Months Ended
	March 31,
In thousands	2005			2004
Operating activities:
Net income	$	1,517		$	316
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		3,642			4,889
Deferred taxes		1,437			(4	)
Provision for losses on accounts receivable		18			89
(Gain) loss on disposition of assets		(50	)		292
Cash provided by (used in) operating assets and liabilities:
Accounts receivable		(1,260	)		(1,444	)
Inventory		98			(858	)
Deposits and prepaids		98			425
Accounts payable		91			1,347
Deferred revenues and accrued expenses		(353	)		2,192
Taxes receivable		(63	)		181
Salaries and related liabilities		(165	)		(1,163	)
Other, net		2			81

Net cash provided by operating activities		5,012			6,343

Investing activities:
Purchases of property and equipment		(7,900	)		(9,803	)
Proceeds from sales of property and equipment		100			798

Net cash used in investing activities		(7,800	)		(9,005	)

Financing activities:
Proceeds from incentive stock plan programs		30			112
Net borrowings (repayments) under revolving credit facilities		3,000			(1,318	)
Borrowings under term loans		—			6,000
Repayments of term loans		(478	)		—

Net cash provided by financing activities		2,552			4,794


Net increase (decrease) in cash		(236	)		2,132
Cash and cash equivalents at beginning of period		1,086			125

Cash and cash equivalents at end of period	$	850		$	2,257

See notes to condensed consolidated financial statements

AIRNET SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

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

The accompanying condensed consolidated financial statements include the accounts of AirNet Systems, Inc. and its subsidiaries. These financial statements are unaudited and have been prepared in accordance with the instructions for Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by the instructions for Form 10-Q. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in AirNet Systems, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results for the full year.

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

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in those financial statements and accompanying notes thereto. Actual results could differ from those estimates.

Certain reclassifications have been made in the prior year’s financial statements to conform to the presentation for the three months ended March 31, 2005.

2. Segment Reporting

AirNet operates a fully integrated national air transportation network and has determined that its reportable segments are based on AirNet’s methods of internal reporting and management structure. AirNet’s reportable segments are Delivery Services, which provides delivery service of time-critical shipments for Bank customers and other Express customers, and Passenger Charter Services (provided by Jetride, Inc., a wholly-owned subsidiary of AirNet). AirNet evaluates segment performance based on several factors, of which the primary financial measure is contribution margin. Contribution margin represents the net revenues of the reporting segment less costs and expenses directly associated with the reporting segment, but does not include interest and income taxes and certain selling, general and administrative costs. The accounting policies used for segment reporting are the same as those used for consolidated reporting described in the summary of Significant Accounting Policies included in Note 1 of the Notes to Consolidated Financial Statements in “Item 8 – Financial Statements and Supplementary Data” of AirNet Systems, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. There were no material amounts of revenues or transfers between reportable segments.

Financial information for the three months ended March 31 by business segment follows (in thousands):


	2005		2004
Net Revenues
Delivery Services	$	40,398	$	36,630
Passenger Charter Services		9,328		3,650

Total Net Revenues	$	49,726	$	40,280


Contribution Margin
Delivery Services	$	6,396	$	3,518
Passenger Charter Services		1,509		809

Total Contribution Margin	$	7,905	$	4,327


Depreciation Expense
Delivery Services	$	2,927	$	4,339
Passenger Charter Services		526		298

Total Depreciation Expense	$	3,453	$	4,637

A reconciliation of reportable segment net revenues to total net revenues follows (in thousands):


	2005		2004
Reportable segment net revenues	$	49,726	$	40,280
Aviation services and other		167		191

Total net revenues	$	49,893	$	40,471

A reconciliation of reportable segment contribution margin to income from operations follows (in thousands):


	2005			2004
Reportable segment contribution margin	$	7,905		$	4,327
Total selling, general and administrative costs, net of (gain) loss on disposition of assets of ($50) and $292 at March 31, 2005 and 2004, respectively		(5,437	)		(5,012	)
Direct selling and administrative expenses included in segment contribution margin		1,339			1,607

Income from operations	$	3,807		$	922

A reconciliation of reportable segment depreciation expense to total depreciation expense follows (in thousands):


	2005		2004
Reportable segment depreciation	$	3,453	$	4,637
Corporate depreciation		189		252

Total depreciation expense	$	3,642	$	4,889

3. Stock Plans and Awards

At March 31, 2005, AirNet had two stock-based employee compensation plans, the Amended and Restated 1996 Incentive Stock Plan and the 2004 Stock Incentive Plan. AirNet has accounted for the plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plans have an exercise price equal to the market value of the underlying common shares on the date of grant. Pro forma information regarding net income and net income per share is required by Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (SFAS No. 148), and has been determined as if AirNet had accounted for its employee stock options under the fair value method of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123).

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), “ Share-Based Payment” (SFAS No. 123(R)), which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes

APB Opinion No. 25, “Accounting for Stock Issued to Employees” , and amends SFAS No. 95, “Statement of Cash Flows . ” Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized as expense in the income statement based on their fair values. Pro forma disclosure will no longer be an alternative.

SFAS No. 123(R) must be adopted no later than the first annual period beginning after June 15, 2005. AirNet expects to adopt SFAS No. 123(R) on January 1, 2006. SFAS No. 123(R) permits companies to adopt its requirements using one of two methods:

1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.

2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate financial statements based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

AirNet plans to adopt SFAS No. 123(R) using the modified prospective method. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had AirNet adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and net income per share below. AirNet does not anticipate that adoption of SFAS No. 123(R) will have a material impact on its results of operations or its financial position. However, SFAS No. 123(R) also requires that the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. While AirNet cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were not material.

AirNet adopted the fair-value-based method of accounting for share-based payments effective January 1, 2003 using the “modified prospective method” described in SFAS No. 148. Currently, AirNet uses the Black-Scholes option pricing model to estimate the value of stock options granted to employees for purposes of computing the pro forma disclosures required by SFAS No. 123.

The following table illustrates the effect on net income and net income per share if AirNet had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share data):


	Three Months Ended
	March 31,
	2005			2004
Net income, as reported	$	1,517		$	316

Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(15	)		(80	)


Pro forma net income	$	1,502		$	236


Net income per share – basic and diluted:
As reported	$	.15		$	.03
Pro forma	$	.15		$	.02

4. Income Per Share

The following table sets forth the computation of basic and diluted net income per common share (in thousands, except per share data):


	Three Months Ended
	March 31,
	2005		2004
Numerator:
Net income	$	1,517	$	316

Denominator:
Basic – weighted average shares outstanding		10,089		10,049

Diluted
Stock options–employees, officers, and directors		5		32

Adjusted weighted average shares outstanding		10,094		10,081

Net income per share from operations – Basic and diluted	$	.15	$	.03

Common shares subject to outstanding stock options excluded from the diluted adjusted weighted average shares outstanding calculation were 851,970 and 740,120 for the three months ended March 31, 2005 and 2004, respectively. These options were antidilutive and excluded from the calculation because the exercise price of these options was greater than the average fair market value of the underlying common shares in the respective periods.

5. Comprehensive Income

Comprehensive income is comprised of net income of AirNet and the change in the fair value of interest rate swap agreements and foreign currency translation adjustment, net of income taxes. Comprehensive income for the three months ended March 31, 2005 and 2004 was $1,514,000 and $316,000, respectively.

6. Bank Financing Matters


þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	1.	A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.

	2.	A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate financial statements based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.