FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 2002
Commission File Number 0-11720
Air T, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1206400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Post Office Box 488, Denver, North Carolina 28037
(Address of principal executive offices)
(704) 377-2109
(Registrant's telephone number, including area code)
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 X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
2,726,320 Common Shares, par value of $.25 per share were outstanding as of
August 09, 2002
This filing contains 21 pages.
AIR T, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations
for the three-month periods ended
June 30, 2002 and 2001 (Unaudited) 3
Consolidated Balance Sheets at
June 30, 2002 (Unaudited)
and March 31, 2002 4
Consolidated Statements of Cash
Flows for the three-month periods
ended June 30, 2002 and 2001 (Unaudited) 5
Consolidated Statements of Stockholders'
Equity at June 30, 2002 (unaudited) and March 31, 2002 6
Notes to Consolidated Financial
Statements (Unaudited) 7-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11-17
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
Officers' Certifications 21
2
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
June 30,
2002 2001
Operating Revenues:
Cargo $ 4,526,838 $ 4,736,789
Maintenance 1,984,308 2,240,761
Ground equipment 3,575,459 9,037,732
Aircraft services and other 1,804,343 1,558,113
11,890,948 17,573,395
Operating Expenses:
Flight operations 3,209,409 3,451,649
Maintenance and brokering 3,638,514 3,750,548
Ground equipment 2,884,973 7,394,771
General and administrative 2,012,615 2,100,307
Depreciation and amortization 177,712 175,416
11,923,223 16,872,691
Operating (Loss) Income (32,275) 700,704
Non-operating Expense (Income):
Interest 83,934 141,612
Loss on impairment of marketable
securities and sale of assets 175,007 -
Deferred retirement expense 5,250 6,249
Investment income and other (28,118) (18,520)
236,073 129,341
(Loss) Earnings Before Income Taxes (268,348) 571,363
(Benefit) Provision for Income Taxes (107,200) 228,596
Net (Loss) Earnings $ (161,148) $ 342,767
Net (Loss) Earnings Per Share:
Basic $ (0.06) $ 0.13
Diluted $ (0.06) $ 0.12
Weighted Average Shares Outstanding:
Basic 2,726,320 2,712,353
Diluted 2,726,320 2,772,926
See notes to consolidated financial statements.
3
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2002 March 31,2002
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 60,555 $ 31,770
Marketable securities 1,029,257 982,028
Accounts receivable, net 6,740,036 5,875,754
Costs and estimated earnings in excess
of billings on uncompleted contracts 10,884 14,320
Inventories, net 8,213,785 9,907,430
Deferred tax asset 727,665 727,665
Prepaid expenses and other 170,887 188,245
Total Current Assets 16,953,069 17,727,212
Property and Equipment 8,266,231 8,539,286
Less accumulated depreciation (4,981,371) (5,020,238)
Property and Equipment, net 3,284,860 3,519,048
Deferred Tax Asset 568,186 568,186
Intangible Pension Asset 296,862 290,862
Other Assets 816,019 797,454
Total Assets $ 21,918,996 $ 22,902,762
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,679,523 $ 3,543,568
Accrued expenses 1,841,606 1,915,605
Income taxes payable 71,821 355,195
Current portion of long-term obligations 691,812 691,812
Total Current Liabilities 5,284,762 6,506,180
Capital Lease Obligation (less current
portion) 76,471 87,718
Long-term Debt (less current
portion) 3,918,412 3,378,934
Deferred Retirement Obligations (less
current portion) 1,856,704 1,830,205
Stockholders' Equity:
Preferred stock, $1 par value, authorized
50,000 shares, none issued - -
Common stock, par value $.25; authorized
4,000,000 shares; 2,726,320 and
2,724,320 shares issued 681,580 681,080
Additional paid in capital 6,863,898 6,858,898
Retained Earnings 3,592,619 4,079,621
Accumulated other comprehensive loss (355,450) (519,874)
Total Stockholders' Equity 10,782,647 11,099,725
Total Liabilities & Stockholders' Equity $ 21,918,996 $ 22,902,762
See notes to consolidated financial statements.
4
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
June 30,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $ (161,148) $ 342,767
Adjustments to reconcile net (loss) earnings
to net cash used in operating activities:
Increase in accounts receivable
and inventory reserves, net 3,936 44,653
Loss on disposal of assets and
impairment of investments 175,007 -
Depreciation and amortization 177,712 175,416
Net periodic pension cost 15,249 66,498
Change in assets and liabilities:
Accounts receivable, net (853,218) 629,907
Inventories 1,735,138 (785,217)
Prepaid expenses and other 2,228 (430,368)
Accounts payable (864,046) (1,093,784)
Accrued expenses (68,748) 63,204
Income taxes payable (283,374) 134,576
Total adjustments 39,884 (1,195,115)
Net cash used in operating activities (121,264) (852,348)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,828) (213,537)
Net cash used in
investing activities (13,828) (213,537)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit, net 484,232 2,017,036
Payment of cash dividend (325,854) (405,519)
Repurchase of common stock - (3,919)
Proceeds from exercise of stock options 5,500 10,000
Net cash provided by financing activities 163,878 1,617,598
NET INCREASE IN CASH & CASH EQUIVALENTS 28,785 551,713
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 31,770 97,799
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 60,555 $ 649,512
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 90,007 $ 145,779
Income taxes 179,330 86,692
SUMMARY OF SIGNIFICANT NON-CASH INFORMATION:
Decrease in fair value of derivatives $ 44,000 $ -
See notes to consolidated financial statements.
5
AIR T, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated
Other
Common Stock Additional Retained Comprehensive Total
Paid_In Earnings Income Stockholder's
Shares Amount Capital (Loss) (Loss) Equity
Balance, March 31, 2002
2,724,320 $ 681,080 $6,858,898 $4,079,621 $(519,874) $11,099,725
Comprehensive Income:
Net loss (161,148) (161,148)
Other Comprehensive
Income:
Fair value adjustment on
available-for-sale
securities 208,424 208,424
Change in fair value of
derivatives (44,000) (44,000)
Repurchases and
retirement
of common stock
Exercise of
stock
options 2,000 500 5,000 5,500
Cash dividend
($.12 per
share) (325,854) (325,854)
Balance, June 30, 2002
2,726,320 $ 681,580 $6,863,898 $3,592,619 $(355,450) $10,782,647
6
AIR T, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. Financial Statements
The Consolidated Balance Sheet as of June 30, 2002, the Consolidated
Statements of Operations for the three-month periods ended June 30, 2002 and
2001 and the Consolidated Statements of Cash Flows for the three-month periods
ended June 30, 2002 and 2001 have been prepared by Air T, Inc. (the Company)
without audit. In the opinion of management, all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows as of June 30, 2002, and for
prior periods presented, have been made.
It is suggested that these financial statements be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended March 31, 2002. The results of
operations for the period ended June 30 are not necessarily indicative of the
operating results for the full year.
B. Income Taxes
The tax effect of temporary differences, primarily asset reserves and
accrued liabilities, gave rise to the Company's deferred tax asset in the
accompanying June 30, 2002 and March 31, 2002 consolidated balance sheets.
The income tax (benefit) provision for the respective three-months ended
June 30, 2002 and 2001 differ from the federal statutory rate primarily as a
result of state income taxes and permanent tax timing differences.
C. Net Earnings Per Share
Basic earnings per share has been calculated by dividing net earnings by
the weighted average number of common shares outstanding during each period.
For purposes of calculating diluted earnings per share, shares issuable under
employee stock options were considered potential common shares and were included
in the weighted average common shares unless they were anti-dilutive.
The computation of basic and diluted (loss) earnings per common share is as
follows:
Three months ended June 30,
2002 2001
Net (loss) earnings $ (161,148) $ 342,767
Weighted average common shares:
Shares outstanding-basic 2,726,320 2,712,353
Dilutive stock options - 60,573
Shares outstanding-diluted 2,726,320 2,772,926
Net (loss) earnings per common share:
Basic $ (0.06) $ 0.13
Diluted $ (0.06) $ 0.12
7
D. Inventories
Inventories consist of the following:
June 30, 2002 March 31, 2002
Aircraft parts and supplies $ 5,409,719 $ 5,461,398
Aircraft equipment manufacturing:
Raw materials 2,520,445 2,777,175
Work in process 65,068 914,730
Finished goods 911,757 1,432,332
Total Inventory 8,906,989 10,585,635
Reserves (693,204) (678,205)
Total, net of reserves $ 8,213,785 $ 9,907,430
E. Recent Accounting Pronouncements
The Financial Accounting Standards Board has approved Statement of
Financial Accounting Standard (SFAS) No. 143, "Accounting for Asset
Retirement Obligations" and SFAS No. 144, "Accounting forthe Impairment
or Disposal of Long-lived Assets". SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. It
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002, upon adoption
the Company does not expect it to have a material effect. SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" and amends, Accounting Principles
Bulletin (APB) No. 30. Along with establishing a single accounting model, based
on the framework established in SFAS No. 121, for long-lived assets to be
disposed of by sale, this standard retains the basic provisions of APB No. 30
for the presentation of discontinued operations in the income statement but
broadens that presentation to include a component of an entity. SFAS No. 144 is
effective for the current fiscal year. The adoption of SFAS No. 144 did not
have a material effect on the Company's financial position and results of
operations.
F. Derivative Financial Instruments
On April 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that entities recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The implementation of SFAS No. 133
at April 1, 2001 had no material effect on the Company's financial position
or results of operations.
8
The Company is exposed to market risk, such as changes in interest rates.
To manage the volatility relating to interest rate risk, we may enter into
interest rate hedging arrangements from time to time. The Company does not
utilize derivative financial instruments for trading or speculative purposes.
During the first quarter of fiscal 2003, the Company had outstanding two
interest rate swaps with a notional amount of $2.4 million, and $2 million
respectively. These agreements were originally entered into in fiscal 2002 as
fair value hedges to fix the interest rates on the $3 million term portion and
$2 million of the revolving portion of the credit facility at respective
interest rates of 6.97% and 6.5% respectively. The fair value of these swaps
had decreased by $44,000 for the quarter ended June 30, 2002, from $120,000 as
of March 31, 2002. The Company assumes the effectiveness of the swaps using the
hypothetical derivative method.
G. Financing Arrangements
In May 2001 the Company expanded its bank financing line to a $10,000,000
credit facility. Under the terms of the agreement, a $7,000,000 secured long-
term revolving credit line which expires on August 31, 2003 replaced the
Company's existing $8,500,000 unsecured short-term revolving credit line. The
remaining $3,000,000 of the credit facility is a five-year term loan which
matures on May 31, 2006 and is scheduled to be repaid in quarterly principal
payments of $150,000, plus accrued interest. As of June 30, 2002 $2,400,000 in
principal remained outstanding under the term loan.
Both the revolving credit line and the term loan contain customary events
of default and restrictive covenants that, among other matters, require the
Company to maintain certain financial ratios. As of June 30, 2002, the Company
was in compliance with all of the restrictive covenants. The amount of credit
available to the Company under the agreement at any given time is determined by
an availability calculation, based on the eligible borrowing base, as defined in
the credit agreement, which includes the Company's outstanding receivables,
inventories and equipment, with certain exclusions. The credit facility is
secured by substantially all of the Company's assets.
Amounts advanced under the credit facility bear interest at the 30-day
"LIBOR" rate plus 137 basis points. The LIBOR rate at June 30, 2002 was 1.81%.
At June 30, 2002 and 2001, the amounts outstanding against the line were
$4,355,000 and $7,781,000, respectively. At June 30, 2002, $5,045,000 was
available under the entire credit facility.
9
Segment Information
The Company's four subsidiaries operate in three business segments. Each b
usiness segment has separate management teams and infrastructures that offer
different products and services. The subsidiaries have been combined into the
following reportable segments: overnight air cargo, aviation services and
aviation ground equipment.
Segment data is summarized as follows:
Three months ended June 30,
2002 2001
Operating Revenues
Overnight Air Cargo $ 6,622,683 $ 6,996,131
Ground Equipment 3,575,459 9,037,732
Aviation Services 1,692,806 1,539,532
Total $ 11,890,948 $ 17,573,395
Operating(Loss) Income
Overnight Air Cargo $ 614,631 $ 476,690
Ground Equipment (16,654) 963,321
Aviation Services (73,065) (112,882)
Corporate (1) (557,185) (626,425)
Total $ (32,275) $ 700,704
Depreciation and Amortization
Overnight Air Cargo $ 64,935 $ 70,005
Ground Equipment 48,061 46,517
Aviation Services 30,289 38,892
Corporate 34,427 20,002
Total $ 177,712 $ 175,416
Capital expenditures, net
Overnight Air Cargo $ (3,386) $ 102,909
Ground Equipment 4,417 72,092
Aviation Services 2,140 14,260
Corporate 10,657 24,276
Total $ 13,828 $ 213,537
As of,
June 30, 2002 March 31, 2002
Identifiable Assets
Overnight Air Cargo $ 3,111,446 $ 3,852,042
Ground Equipment 8,368,278 10,051,691
Aviation Services 6,587,049 6,142,237
Corporate 3,852,223 2,856,792
Total $ 21,918,996 $ 22,902,762
(1) Includes income from inter-segment transactions.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company's most significant component of revenue, which accounted for
55.7% of revenue, was generated by its air cargo subsidiaries, Mountain Air
Cargo, Inc.(MAC) and CSA Air, Inc.(CSA).
MAC and CSA are short-haul express air freight carriers. MAC and CSA's
revenue contributed approximately $6,623,000 and $6,990,000 to the Company's
revenues for the three-month periods ended June 30, 2002 and 2001, respectively.
Under the terms of the dry-lease service agreements, which currently cover
approximately 98% of the revenue generating aircraft operated, the Company
passes through to its customer certain cost components of its operations without
markup. The cost of fuel, flight crews, landing fees, outside maintenance,
parts and certain other direct operating costs are included in operating
expenses and billed to the customer as cargo and maintenance revenue, at cost.
Separate agreements cover the three types of aircraft operated by MAC and
CSA-Cessna Caravan, Fokker F-27, and Short Brothers SD3-30. Cessna Caravan and
Fokker F-27 aircraft (a total of 93 aircraft at June 30, 2002) are owned by and
dry-leased from a major air express company (Customer), and Short Brothers SD3-
30 aircraft (two aircraft at June 30, 2002) are owned by the Company and
operated under wet-lease arrangements with the Customer. Pursuant to such
agreements, the Customer determines the type of aircraft and schedule of routes
to be flown by MAC and CSA, with all other operational decisions made by the
Company.
Agreements are renewable annually and may be terminated by the Customer at
any time upon 15 to 30 days' notice. The Company believes that the short term
and other provisions of its agreements with the Customer are standard within the
air freight contract delivery service industry. The Company is not
contractually precluded from providing such services to other firms, and has
done so in the past. Loss of its contracts with the Customer would have a
material adverse effect on the Company.
Global Ground Support, LLC (Global), another subsidiary of the Company,
manufactures, services and supports aircraft deicers and other ground support
equipment on a worldwide basis. Global's revenue contributed approximately
$3,575,000 and $9,037,000 to the Company's revenues for the three-month periods
ended June 30, 2002 and 2001, respectively. The significant decrease in
revenues in 2002 was primarily related to a first quarter reduction in orders
under Global's four-year, $25,000,000 contract to supply deicing equipment to
the United States Air Force and the April 2002 completion of a large scale
airport deicer contract, which commenced in February 2001.
Mountain Aircraft Services, LLC's (MAS) aircraft component repair services
contributed approximately $1,693,000 and $1,540,000 to the Company's revenues
for the three-month periods ended June 30, 2002 and 2001, respectively, and are
included in Aircraft Services and Other in the accompanying consolidated
statements of operations.
11
The Company's four subsidiaries operate in three business segments. Each
business segment has separate management teams and infrastructures that offer
different products and services. The subsidiaries have been combined into the
following reportable segments: overnight air cargo, aviation services and ground
equipment in the accompanying financial statements.
Critical Accounting Policies and Estimates
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the U.S. requires the use of
estimates and assumptions to determine certain assets, liabilities, revenues and
expenses. Management bases these estimates and assumptions upon the best
information available at the time of the estimates or assumptions. The
Company's estimates and assumptions could change materially as conditions within
and beyond our control change. Accordingly, actual results could differ
materially from estimates. The most significant estimates made by management
include allowances for doubtful accounts receivables, reserves for excess and
obsolete inventories, valuation allowances for deferred tax assets, retirement
benefit obligations and revenue recognized under the percentage of completion
method. Following is a discussion of critical accounting policies and related
management estimates and assumptions necessary in determining the value of
related assets or liabilities.
Allowance for Doubtful Accounts. An allowance for doubtful accounts
receivable is established based on management's estimates of the collectability
of accounts receivables. The required allowance is determined using information
such as the age of the account receivable, customer credit history, industry
information, credit reports and customer financial condition. The estimates can
be affected by changes in the age of the receivable, aviation industry, customer
credit issues or general economic conditions.
Inventories. The Company's parts inventories are valued at the lower of
cost or market. Provisions for excess and obsolete inventories are based on
assessment of slow-moving and obsolete inventories. Historical part usage and
estimated future demand provide the basis for estimates. Estimates are subject
to volatility and can be affected by reduced equipment utilization, the
retirement of aircraft or ground equipment and changes in the aviation industry.
Deferred Taxes. Deferred tax assets net of valuation allowances, if any,
reflect the likelihood of the recoverability of these assets. Company judgement
of the recoverability of these assets is based primarily on estimates of current
and expected future earnings and tax planning.
Retirement Benefits Obligation. The Company determines the value of
retirement benefits assets and liabilities on an actuarial basis. Values are
affected by managements estimates, based upon the Company's independent
actuary's calculation, of the expected return on plan assets, insurance policies
and the discount rates used. Actual changes in the fair market value of plan
assets, differences between the actual return and the expected return on plan
assets and changes in the discount rate used could affect the amount of pension
gain or loss recognized in other comprehensive income.
12
Revenue Recognition. Cargo revenue is recognized upon completion of
contract terms and maintenance revenue is recognized when the service has been
performed. Revenue from product sales is recognized when contract terms are
completed and title has passed to customers. Revenues from overhaul contracts
on customer owned parts and long term fixed price manufacturing projects are
recognized on the percentage-of-completion method. Revenues for contracts under
percentage of completion are measured by the percentage of cost incurred to
date, to estimated total cost for each contract or workorder. Unanticipated
changes in job performance, job conditions and estimated profitability may
result in revisions to costs and income, and are recognized prospectively
beginning in the period in which the revisions are determined.
Valuation of Long-Lived Assets. The Company adopted Financial Accounting
Standards Board Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets" on April 1, 2002.
The Company will record impairment charges on long-lived assets used in
operations when events and circumstances indicate the assets may be impaired and
the undiscounted cash flows estimated to be generated by those assets are less
than their carrying amount. In the event it is determined that the carrying
values of long-lived assets are in excess of estimated gross future cash flows
for those assets, the Company then will write-down the value of the assets to a
level commensurate with the discounted cash flows.
Seasonality
Global's business has historically been highly seasonal. Due to the nature
of its product line, the bulk of Global's revenues and earnings have typically
occurred during the second and third fiscal quarters in anticipation of the
winter season, and comparatively little has occurred during the first and fourth
fiscal quarters. The Company has continued its efforts, started in fiscal 1999,
to reduce Global's seasonal fluctuation in revenues and earnings by broadening
its product line to increase revenues and earnings in the first and fourth
fiscal quarters. In June 1999, Global was awarded a four-year contract to
supply deicing equipment to the United States Air Force for a total amount of
approximately $25 million, and in January 2001 Global received a $7.1 million
pedestal-mounted deicer contract with the Philadelphia International Airport,
which was completed in the first quarter of fiscal 2003. The Company believes
that revenue from these contracts contributed to management's plan to reduce
Global's seasonal fluctuation in revenues during fiscal 2001 and 2002. The
remainder of the Company's business is not materially seasonal.
Results of Operations
Consolidated revenue decreased $5,682,000 (32.3%) to $11,891,000 for the
three-month period ended June 30, 2002 compared to its equivalent 2001 period.
The decrease in revenue primarily resulted from a decrease in sales by Global,
as described in the Overview section of Item 2.
13
Results of Operations (cont'd)
Operating expenses decreased $4,949,000 (29.3%) to $11,923,000 for the
three-month period ended June 30, 2002 compared to its equivalent 2001 period.
The decrease in operating expenses consisted of the following: cost of flight
operations decreased $242,000 (7.0%) primarily as a result of schedule changes
which decreased costs associated with airport fees, pilot salaries and travel
partially offset by increased fuel costs; maintenance expense decreased $112,000
(3.0%) primarily as a result of decreases associated with outside maintenance,
inventory purchases and maintenance salaries, partially offset by increases in
cost of parts related to the overhaul and repair operations of MAC and MAS;
ground equipment decreased $4,510,000 (61.0%), as a result of lower cost of
parts and labor associated with decreased Global sales; and general and
administrative expense decreased $88,000 (4.2%) primarily as a result of
decreased profit sharing accrual and contract labor, partially offset by
increases in professional fees and telephone costs.
The current period's decreased revenue and the related first quarter 2003
operating loss resulted primarily from decreased production related to the above
mentioned Air Force and Philadelphia airport contracts at Global and, in part,
by decreased maintenance and brokerage parts revenue and operating income in the
air cargo and aviation services sectors. During the quarter ended June 30, 2002
Global's revenue and operating income decreased $5,462,000 (60.4%) and $980,000
(101.8%), respectively, to $3,575,000 and $(17,000) compared to the quarter
ended June 30, 2001.
The $107,000 increase in non-operating expense was principally due to a
$161,000 other-than-temporary loss on impairment of marketable securities,
partially offset by a decrease in credit line interest related to lower levels
of borrowing.
Pretax earnings decreased $840,000 for the three-month period ended June 30,
2002 compared to 2001, principally due to the above stated decrease in Global
earnings and loss on securities, partially offset by an increase in current
period earnings for the air cargo segment.
The provision for income taxes for the three-month period ended June 30,
2002 decreased $336,000 compared to the 2001 period, primarily due to the net
loss for the quarter ended June 30, 2002. The effective tax rate for the three-
month periods ended June 30, 2002 and 2001 was 40.0%.
Liquidity and Capital Resources
As of June 30, 2002 the Company's working capital amounted to $11,668,000,
an increase of $447,000 compared to March 31, 2002. The net increase primarily
resulted from increased accounts receivables and decreased accounts payables,
partially offset by decreased inventory.
On May 23, 2001 the Company expanded its bank financing line to a
$10,000,000 credit facility. Under the terms of the agreement, a $7,000,000
secured long-term revolving credit line which expires on August 31, 2003
replaced the Company's $8,500,000 unsecured short-term revolving credit line.
The remaining $3,000,000 of the credit facility is a five-year term loan which
matures on May 31, 2006; with quarterly payments of $150,000, plus accrued
interest.
14
The credit facility contains customary events of default and restrictive
covenants that, among other matters, require the Company to maintain certain
financial ratios. As of March 31, 2002, the Company was in compliance with all
of the restrictive covenants. The amount of credit available to the Company
under the agreement at any given time is determined by an availability
calculation, based on the eligible borrowing base, as defined in the credit
agreement, which includes the Company's outstanding receivables, inventories and
equipment, with certain exclusions. The credit facility is secured by
substantially all of the Company's assets.
Amounts advanced under the credit facility bear interest at the 30-day
"LIBOR" rate plus 137 basis points. The LIBOR rate at June 30, 2002 was 1.81%.
At June 30, 2002 and 2001, the amounts outstanding against the line were
$4,355,000 and $7,781,000, respectively. At June 30, 2002, $5,045,000 was
available under the entire credit facility.
The Company has classified $3,755,000 of its outstanding balance on the
credit line as of June 30, 2002 as long-term to reflect the terms included under
the agreement signed on May 31, 2001. The Company entered into two swap
agreements on May 31, 2001 to fix the interest rate on the $2,400,000 term
portion and $2,000,000 of the revolving portion of the credit facility at
respective interest rates of 6.97% and 6.50%.
The respective three-month periods ended June 30, 2002 and 2001 resulted in
the following changes in cash flow: operating activities used $121,000 in 2002
and $852,000 in 2001, investing activities used $14,000 in 2002 and $214,000 in
2001 and financing activities provided $164,000 in 2002 and $1,618,000 in 2001.
Net cash increased $29,000 and $552,000 during the three months ended June 30,
2002 and 2001, respectively.
Cash used in operating activities was $731,000 lower for the three-months
ended June 30, 2002 compared to the similar 2001 period, principally due to
decreased inventories, partly offset by increased accounts receivable and
prepaid expenses, and decreased net income and income taxes payable.
Cash used in investing activities for the three-months ended June 30, 2002
was approximately $200,000 less than the comparable period in 2001 due to
decreased capital expenditures.
Cash provided by financing activities was $1,454,000 less in the 2002 three-
month period than in the corresponding 2001 period due to decreased borrowings
under the line of credit in 2002.
There are currently no commitments for significant capital expenditures.
The Company's Board of Directors on August 7, 1998 adopted the policy to pay an
annual cash dividend in the first quarter of each fiscal year, in an amount to
be determined by the Board. The Company paid a $.12 per share cash dividend in
June 2002.
Deferred Retirement Obligation
The Company's former Chairman and Chief Executive Officer passed away on
April 18, 1997. The death benefits are payable in the amount of $75,000 per
year for 10 years.
15
Impact of Inflation
The Company believes the impact of inflation and changing prices on its
revenues and net earnings will not have a material effect on its manufacturing
operations because increased costs due to the currently low level of inflation
could be passed on to its customers, or on to its air cargo business since the
major cost components of its operations, consisting principally of fuel, crew
and certain maintenance costs are reimbursed, without markup, under current
contract terms.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has approved SFAS No. 143,
"Accounting for Asset Retirement Obligations" and No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets". SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. It
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized
as part of the carrying amount of the long-lived asset. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" and amends Accounting Principles
Bulletin (APB) No. 30. Along with establishing a single accounting model, based
on the framework established in SFAS No. 121, for long-lived assets to be
disposed of by sale, this standard retains the basic provisions of APB No. 30
for the presentation of discontinued operations in the income statement but
broadens that presentation to include a component of an entity. SFAS No. 144 is
effective for the Company for the current fiscal year. The adoption of
SFAS No. 144 did not have a material effect on the Company's financial position
and results of operations.
Derivative Financial Instruments
On April 1, 2001, the Company adopted Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended. SFAS 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that entities
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
The Company is exposed to market risk, such as changes in interest rates.
To manage the volatility relating to interest rate risk, we may enter into
interest rate hedging arrangements from time to time. The Company does not
utilize derivative financial instruments for trading or speculative purposes.
16
During the first quarter of fiscal 2003, the Company had outstanding two
interest rate swaps with a notional amount of $2.4 million, and $2 million
respectively. These agreements were originally entered into as cash flow hedges
to fix the interest rates on the $3 million term portion and $2 million of the
revolving portion of the credit facility at interest rates of 6.97% and 6.50%,
respectively; the maturity dates of the swaps vested the respective maturity
dates of the underlying debt instruments. The fair value of these swaps had
decreased by $44,000 for the quarter ended June 30, 2002, compared to $120,000
at March 31, 2002. The Company assumes the effectiveness of the swaps using the
hypothetical derivative method. Because the swaps are considered completely
effective the changes in fair market value of the swaps are recorded in other
comprehensive loss and long-term debt on the balance sheet.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not hold or issue derivative financial instruments for trading
purposes. As noted above, on May 31, 2001 the Company entered into swap
agreements to fix the interest rates on the $3 million term portion and $2
million of the revolving portion of its credit facility at respective interest
rates of 6.97% and 6.50% to reduce its exposure to the fluctuations of LIBOR-
based variable interest rates. The Company is exposed to changes in interest
rates on certain portions of its line of credit, which bears interest based on
the 30-day LIBOR rate plus 137 basis points. If the LIBOR interest rate had
been increased by one percentage point, based on the year-end balance of the
line of credit, annual interest expense would have increased by approximately
$44,000.
17
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
No. Description
3.1 Restated Certificate of Incorporation, incorporated by reference to
Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the
period ended
September 30, 2001
3.2 By-laws of the Company, as amended, incorporated by reference to
Exhibit 3.2 of the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1996
4.1 Specimen Common Stock Certificate, incorporated by reference to
Exhibit 4.1 of the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994
21.2 List of subsidiaries of the Company, incorporated by reference to
Exhibit 21.1 to the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1997
99.1 Certification of Walter Clark
99.2 Certification of John J. Gioffre
_______________________
b. Reports on Form 8-K
No Current Reports on Form 8-K were filed in the three months ended June
30, 2002.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AIR T, INC.
(Registrant)
Date: August 09, 2002 /s/ Walter Clark
Walter Clark, Chief Executive Officer
Date: August 09, 2002 /s/ John Gioffre
John J. Gioffre, Chief Financial Officer
19
AIR T, INC
EXHIBIT INDEX
PAGE
99.1 Certification of Walter Clark 21
99.2 Certification of John J. Gioffre 21
20