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 September 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 October 25, 2002
This filing contains 31 pages.
AIR T, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations
for the three and six-month periods ended
September 30, 2002 and 2001 (Unaudited) 3
Consolidated Balance Sheets at
September 30, 2002 (Unaudited)
and March 31, 2002 4
Consolidated Statements of Cash
Flows for the six-month periods
ended September 30, 2002 and 2001 (Unaudited) 5
Consolidated Statement of Stockholders'
Equity at September 30, 2002 (Unaudited) 6
Notes to Consolidated Financial
Statements (Unaudited) 7-12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13-21
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 22
Item 4. Controls and procedures 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
Signatures and Certifications 24-26
Exhibit Index 27
Exhibit 10.15- Bank of America Amendment
to Loan agreement 28-29
Exhibits 99.1 and 99.2- Officers' Certifications 30-31
2
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six months Ended
September 30, September 30,
2002 2001 2002 2001
Operating Revenues:
Cargo 4,985,091 5,108,544 9,511,929 9,845,334
Maintenance 2,565,446 2,564,808 4,549,754 4,805,569
Ground equipment 1,458,718 10,683,577 5,034,177 19,721,309
Aircraft services and
other 1,222,005 6,916,131 3,026,348 8,474,244
10,231,260 25,273,060 22,122,208 42,846,456
Operating Expenses:
Flight operations 3,635,309 3,668,240 6,844,718 7,119,890
Maintenance and
services 3,617,162 9,149,113 7,255,676 12,899,661
Ground equipment 1,365,975 8,485,309 4,250,948 15,880,080
General and
administrative 1,946,815 2,461,893 3,959,430 4,562,200
Depreciation and
amortization 176,619 177,483 354,331 352,899
10,741,880 23,942,038 22,665,103 40,814,730
Operating (Loss)
Income (510,620) 1,331,022 (542,895) 2,031,726
Non-operating Expense
(Income):
Interest 123,702 111,310 207,636 252,923
(Gain) loss on
impairment of marketable
securities and sale
of assets (13,810) - 161,197 -
Deferred retirement
expense 5,250 6,249 10,500 12,498
Investment income (21,766) (16,309) (43,884) (34,829)
Other (22,671) - (28,671) -
70,705 101,250 306,778 230,592
(Loss) Earnings Before
Income Taxes (581,325) 1,229,772 (849,673) 1,801,134
(Benefit) Provision For
Income Taxes (217,800) 483,648 (325,000) 712,244
Net (Loss) Earnings $ (363,525) 746,124 (524,673) 1,088,890
Net (Loss) Earnings Per
Share:
Basic $ (0.13) 0.27 (0.19) 0.40
Diluted $ (0.13) 0.27 (0.19) 0.39
Weighted Average Shares Outstanding:
Basic 2,726,320 2,713,853 2,726,320 2,713,103
Diluted 2,726,320 2,760,875 2,726,320 2,766,901
See Notes to Consolidated Financial Statements.
3
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,2002 MARCH 31, 2002
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 71,939 31,770
Marketable securities 1,015,294 982,028
Accounts receivable, net 5,440,211 5,875,754
Costs and estimated earnings
in excess of billings on
uncompleted contracts - 14,320
Inventories 9,300,540 9,907,430
Deferred tax asset 743,513 727,665
Prepaid expenses and other 171,223 188,245
Total Current Assets 16,742,720 17,727,212
Property and Equipment, net 2,989,726 3,519,048
Deferred Tax Asset 594,435 568,186
Intangible Pension Asset 290,862 290,862
Other Assets 819,975 797,454
Total Assets $ 21,437,718 22,902,762
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 2,980,768 3,543,568
Accrued expenses 1,780,597 1,915,605
Income taxes (receivable) payable (155,536) 355,195
Current portion of long-term
obligations 691,812 691,812
Total Current Liabilities 5,297,641 6,506,180
Capital Lease Obligations (less
current portion) 66,182 87,718
Long-term Debt (less current
portion) 3,770,541 3,378,934
Deferred Retirement Obligations
(less current portion) 1,883,203 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 3,229,094 4,079,621
Accumulated other comprehensive
loss (354,421) (519,874)
10,420,151 11,099,725
Total Liabilities and
Stockholders' Equity $ 21,437,718 22,902,762
See notes to consolidated financial statements.
4
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
September 30,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) earnings $ (524,673) 1,088,890
Items not involving cash:
Increase in accounts receivable
and inventory reserves 123,314 -
Loss on disposal of assets and
impairment of investments 130,716 -
Increase in deferred tax asset (42,097) -
Depreciation and amortization 354,331 352,899
Net periodic pension cost 42,498 136,040
Changes in assets and liabilities:
Accounts receivable 430,229 331,438
Inventories 768,378 157,547
Prepaid expenses and other 8,821 2,836
Accounts payable (562,800) (1,918,698)
Accrued expenses (124,508) (120,738)
Income taxes payable (510,731) 140,655
Total adjustments 618,151 (918,021)
Net cash provided by operating activities 93,478 170,869
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (192,490) (307,310)
Redemption of marketable securities - 13,497
Proceeds from sale of equipment 140,000 -
Net cash used in investing activities (52,490) (293,813)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit, net 319,535 563,659
Payment of cash dividend (325,854) (405,520)
Repurchase of common stock - (42,785)
Proceeds from exercise of stock options 5,500 26,500
Net cash (used in) provided by financing
activities (819) 141,854
NET INCREASE IN CASH & CASH EQUIVALENTS 40,169 18,910
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 31,770 97,799
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 71,939 116,709
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 212,763 262,192
Income/Franchise taxes 229,015 560,582
SUMMARY OF SIGNIFICANT NON-CASH INFORMATION:
Decrease in fair value of derivatives $ 29,000 194,000
Increase in fair value or marketable securities 33,256 68,499
See notes to consolidated financial statements.
5
AIR T, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated
Other
Compre- Total
Additional hensive Stock-
Common Stock Paid-In Retained Income holder's
Shares Amount Capital Earnings (Loss) Equity
Balance,
March 31,2002 2,724,320 $ 681,080 6,858,898 4,079,621 (519,874) 11,099,725
Comprehensive
Income (Loss):
Net loss (524,673) (524,673)
Other Comprehensive Income
(Loss):
Fair value
adjustment on
marketable securities 33,256 33,256
Other than temporary
impairment of
marketable securities 161,197 161,197
Change in fair value
of derivatives (29,000) (29,000)
Exercise of
stock
options 2,000 500 5,000 5,500
Cash dividend
($.12 per share) (325,854) (325,854)
Balance,
September
30, 2002 2,726,320 $ 681,580 6,863,898 3,229,094 (354,421) 10,420,151
See notes to consolidated financial statements.
6
AIR T, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
A. Financial Statements
The Consolidated Balance Sheet as of September 30, 2002, the
Consolidated Statements of Operations for the three and six-month periods
ended September 30, 2002 and 2001, the Consolidated Statements of Cash
Flows for the six-month periods ended September 30, 2002 and 2001 and the
Consolidated Statement of Stockholders' Equity 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, cash flows
and equity position as of September 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 periods ended September 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 September 30, 2002 and March 31, 2002 consolidated balance
sheets. Management has assessed the need for a valuation allowance to reduce
its deferred tax asset to an amount which, more likely than not, will be
realized.
The income tax provisions for the six-months ended September 30, 2002
and 2001 differ from the federal statutory rate primarily as a result of
state income taxes and permanent timing differences.
C. Net Earnings (Loss) Per Share
Basic earnings (loss) per share has been calculated by dividing net
earnings (loss) by the weighted average number of common shares outstanding
during each period. For purposes of calculating diluted earnings (loss)
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.
7
The computation of basic and diluted earnings (loss) per common share is as
follows:
Three Months Ended Six months Ended
September 30, September 30,
2002 2001 2002 2001
Net (loss) earnings $ (363,525) 746,124 (524,673) 1,088,890
Weighted average common shares:
Shares outstanding -
basic 2,726,320 2,713,853 2,726,320 2,713,103
Dilutive stock options - 47,022 - 53,798
Shares outstanding -
diluted 2,726,320 2,760,875 2,726,320 2,766,901
Net (loss) earnings per common share:
Basic $ (0.13) 0.27 (0.19) 0.40
Diluted $ (0.13) 0.27 (0.19) 0.39
D. Inventories
Inventories consist of the following:
September 30, 2002 March 31, 2002
Aircraft parts and supplies $ 5,270,794 5,373,398
Aircraft equipment manufacturing:
Raw materials 3,446,024 2,777,175
Work in process 304,174 914,730
Finished goods 987,753 1,432,332
Total Inventory 10,008,745 10,497,635
Reserves (708,205) (590,205)
Total, net of reserves $ 9,300,540 9,907,430
8
E. Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standard (SFAS) No. 143, "Accounting for Asset
Retirement Obligations" and SFAS 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. Upon adoption the Company does not expect it to have a
material effect on the Company's financial position and results of
operations. 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 "Reporting
the Results of operations-Discontinued Events and Extraordinary items".
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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". This statement requires gains and losses from the
extinguishment of debt to be classified as extraordinary only if they meet
the criteria for extraordinary treatment set forth in APB Opinion No. 30.
The statement also amends SFAS No. 13, Accounting for Leases, to require
that certain lease modifications that have economic effects similar to sale-
leaseback transactions be accounted for in the same manner as such
transactions. Finally, the statement makes certain technical corrections,
which the FASB deemed to be nonsubstantive, to a number of existing
accounting pronouncements. The rescission of SFAS No. 4, 44, and 64 is
effective for the Company in fiscal 2004. The amendments of SFAS No. 13 is
effective for transactions occurring after May 15, 2002, and all other
provisions of the statement are effective for financial statements issued
on or after May 15, 2002. The Company is evaluating the effect of this
statement.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement is effective
for exit or disposal activities initiated after December 31, 2002.
Liabilities for costs associated with an exit activity should be initially
measured at fair value, when incurred. This statement applies to costs
associated with an exit activity that does not involve an entity newly
acquired in a business combination, or a disposal activity covered by SFAS
No. 144. The Company is evaluating the effect of this statement.
9
F. Derivative Financial Instruments
The Company follows SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which 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, the
Company 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 at
respective interest rates of 6.97% and 6.5% respectively. On July 31, 2002
the Company elected to undo its $2,000,000 (6.5%) revolving credit line
swap in consideration of $58,750, the fair-market-value termination fee as
of that date. The $58,750 swap termination fee was charged to interest
expense during the quarter ended September 30, 2002. The fair value of the
remaining swap decreased by $40,000 to $148,000 as of September 30, 2002.
The Company assessed the effectiveness of the swap using the hypothetical
derivative method.
G. Financing Arrangements
On August 31, 2002 the Company amended its bank financing line to a
$7,000,000 credit facility. Under the terms of the agreement, the
$7,000,000 secured long-term revolving credit line expires on August 31,
2004.
The revolving credit line contains customary events of default and
restrictive covenants that, among other matters, require the Company to
maintain certain financial ratios. As of September 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 September 30, 2002
was 1.82%. At September 30, 2002 and 2001, the amounts outstanding against
the line were $4,223,000 and $6,327,000, respectively. At September 30,
2002, $2,777,000 was available under the entire credit facility.
10
H. Segment Information
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 aviation ground equipment.
11
Segment data is summarized as follows:
Three months ended Six months ended
September 30, September 30,
2002 2001 2002 2001
Operating Revenues
Overnight Air Cargo $ 7,715,802 7,654,772 14,338,485 14,650,903
Ground Equipment 1,458,718 10,683,577 5,034,177 19,721,309
Aviation Services 1,056,740 6,934,711 2,749,546 8,474,244
Corporate - - - -
Total $10,231,260 25,273,060 22,122,208 42,846,456
Operating (Loss) Income
Overnight Air Cargo $ 694,879 709,421 1,309,510 1,186,111
Ground Equipment (552,603) 1,352,888 (569,257) 2,316,209
Aviation Services (120,900) 37,320 (193,965) (75,562)
Corporate (1) (531,996) (768,607) (1,089,183) (1,395,032)
Total $ (510,620) 1,331,022 (542,895) 2,031,726
Depreciation and Amortization
Overnight Air Cargo $ 64,808 66,910 129,743 136,915
Ground Equipment 46,123 52,143 94,184 98,660
Aviation Services 30,021 38,445 60,310 77,337
Corporate 35,667 19,985 70,094 39,987
Total $ 176,619 177,483 354,331 352,899
Capital
Expenditures, net
Overnight Air Cargo $ 21,138 75,045 17,752 177,954
Ground Equipment 90,467 (10,210) 94,884 61,882
Aviation Services 1,426 4,734 3,566 18,994
Corporate 65,631 24,204 76,288 48,480
Total $ 178,662 93,773 192,490 307,310
As of
September March 31,
30, 2002 2002
Identifiable
Assets
Overnight Air Cargo $ 3,914,223 3,852,042
Ground Equipment 7,923,278 10,051,691
Aviation Services 5,694,622 6,142,237
Corporate 3,905,595 2,856,792
Total $21,437,718 22,902,762
(1) Excludes income from inter-segment transactions, included as non-
operating income.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Air T's management's discussion and analysis, which describes the
principal factors affecting the results of operations of the Company,
should be read in conjunction with the accompanying financial statements
and our Annual Report on Form 10-K for the year ended March 31, 2002, which
include additional information about our significant accounting policies.
Overview
The Company's most significant component of revenue for the six-month
period ended September 30, 2002, which accounted for 64.8% 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 $14,338,000 and $14,651,000 to the
Company's revenues for the six-month periods ended September 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 September 30,
2002) are owned by and dry-leased from a major air express company
(Customer), and Short Brothers SD3-30 aircraft (two aircraft at September
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 $5,034,000 and $19,721,000 to the Company's revenues for the
six-month periods ended September 30, 2002 and 2001, respectively. The
significant decrease in revenues in 2002 was primarily related to
reductions in commercial ground support equipment and military aircraft
deicer orders and the April 2002 completion of a large scale airport
contract, which commenced in February 2001.
13
Mountain Aircraft Services, LLC's (MAS) aircraft brokerage and repair
services contributed approximately $2,750,000 and $8,474,000 to the
Company's revenues for the six-month periods ended September 30, 2002 and
2001, respectively, and are included in Aircraft Services and Other in the
accompanying consolidated statements of operations. The 2002 decrease was
due to a $4,700,000 engine sale in 2001 and lower levels of brokering and
repair activity in 2002.
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: air cargo, aviation
services and aviation ground equipment in the accompanying consolidated
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, calculation of
retirement benefit obligations, revenue recognized under the percentage of
completion method and valuation of long-lived assets. 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.
14
Retirement Benefits Obligation. The Company determines the value of
retirement benefits assets and liabilities on an actuarial basis. Values
are affected by management's 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 7.0 discount rate currently used could affect the amount
of pension gain or loss recognized in other comprehensive income.
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 fair value.
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 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, 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 2002 and
2001, however, as these contracts are completed, seasonal trends for
Global's business may resume. The remainder of the Company's business is
not materially seasonal.
15
Results of Operations
Consolidated revenue decreased $20,724,000 (48.4%) to $22,122,000 and
$15,042,000 (59.5%) to $10,231,000, respectively, for the six and three-
month periods ended September 30, 2002 compared to their equivalent 2001
periods. The six and three-month current period net decrease in revenue
primarily resulted from decreased revenue at Global and MAS, as described
in the Overview section of Item 2.
Operating expenses decreased $18,150,000 (44.5%) to $22,665,000 for
the six-month period ended September 30, 2002 and $13,200,000 (55.1%) to
$10,742,000 for the three-month period ended September 30, 2002 compared to
their equivalent 2001 periods. The change in operating expenses for the
six-month period consisted of the following: cost of flight operations
decreased $275,000 (3.9%), 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 and brokerage expense
decreased $5,644,000 (43.8%), primarily as a result of decreases associated
with cost of parts, outside maintenance and maintenance salaries, partially
offset by increases in contract services related to the operations of MAC;
ground equipment decreased $11,629,000 (73.2%), as a result of lower cost
of parts and labor associated with decreased Global sales; and general and
administrative expense decreased $603,000 (13.2%) primarily as a result of
decreased profit sharing accrual, staffing, contract labor, rent and
related facilities cost, partially offset by increases in professional
fees.
The change in operating expenses for the three-month period consisted
of the following: cost of flight operations decreased $33,000 (0.9%),
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 and brokerage expense decreased $5,532,000 (60.5%),
primarily as a result of decreases associated with cost of parts, outside
maintenance and maintenance salaries, partially offset by increases in
contract services; ground equipment decreased $7,119,000 (83.9%), as a
result of lower cost of parts and labor associated with decreased Global
sales; and general and administrative expense decreased $515,000 (20.9%)
primarily as a result of decreased profit sharing accrual, staffing, rent
and contract labor, partially offset by increases in professional fees.
The current six month period's decreased revenue and the related
operating loss resulted primarily from decreased production related to the
above mentioned commercial orders and Air Force and Philadelphia airport
contracts at Global and decreased maintenance and brokerage parts revenue
and operating income in the aviation services sector. During the six month
period ended September 30, 2002 Global's revenue and operating income
decreased $14,687,000 (74.5%) and $2,885,000 (124.6%), respectively, to
$5,034,000 and an operating loss of $569,000 compared to the six months
ended September 30, 2001. MAS's revenue and operating loss, respectively,
decreased and increased by $5,696,000 (67.4%) and $118,000 (156.7%) for the
similar periods.
16
Results of Operations (Cont'd)
The business of Global and MAS has been significantly adversely
affected by reduced orders from commercial airlines, due principally to the
severe downturn in the commercial aviation industry. Although both of
these businesses also derive a significant portion of their revenue from
sale of products for military applications, the military programs that use
the Company's products have not been fully funded and the Company is
uncertain as to the timing of such funding.
Non-operating expense increased $76,000 and decreased $31,000,
respectively, for the six and three-month periods ended September 30, 2002
and September 30, 2001. The six-month 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. The three-month decrease
was principally due to a sale of assets and increases in
investment and other income during the 2002 period.
Pretax earnings decreased $2,651,000 and $1,811,000, respectively, for
the six and three-month periods ended September 30, 2002, compared to their
respective September 30, 2001 periods. The six-month decrease was
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 decreased $1,037,000 and $701,000 for
the six and three-month periods ended September 30, 2002, respectively
compared to their respective 2001 periods, primarily due to the net loss
for the periods ended September 30, 2002. The effective tax rate for the
three and six-month periods ended September 30, 2002 and 2001 was
approximately 38%.
Liquidity and Capital Resources
As of September 30, 2002 the Company's working capital amounted to
$11,445,000, an increase of $224,000 compared to March 31, 2002. The net
increase primarily resulted from decreased accounts and income taxes
payable and accrued expenses, partially offset by decreased accounts
receivables and inventory.
On August 31, 2002 the Company amended its bank financing line to a
$7,000,000 credit facility. Under the terms of the agreement, the
$7,000,000 secured long-term revolving credit line expires on August 31,
2004.
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 September 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
17
Liquidity and Capital Resources (Cont'd)
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 September 30, 2002
was 1.82%. At September 30, 2002 and 2001, the amounts outstanding against
the line were $4,223,000 and $6,327,000, respectively. At September 30,
2002, an additional $2,777,000 was available under the entire credit
facility.
The Company has not currently, nor in the past, engaged in the use of
structured finance arrangements, known as off-balance sheet financing
transactions, with unconsolidated entities or other persons.
The respective six-month periods ended September 30, 2002 and 2001
resulted in the following changes in cash flow: operating activities
provided $93,000 and $171,000, investing activities used $52,000 and
$294,000 and financing activities used $1,000 and provided $142,000. Net
cash increased $40,000 and $19,000 for the respective six-month periods
ended September 30, 2002 and 2001.
Cash provided by operating activities was $77,000 less for the six-
months ended September 30, 2002 compared to the similar 2001 period,
principally due to decreased earnings, a smaller decrease in accounts
payable and a larger decrease in inventory, partially offset by decreased
income tax payable.
Cash used in investing activities for the six-months ended September
30, 2002 was approximately $241,000 less than the comparable period in
2001, principally due to decreased capital expenditures and $140,000
proceeds on an asset sale in the period ended September 30, 2002.
Cash provided by financing activities for the six-months ended
September 30, 2002 was approximately $143,000 less than the comparable 2001
period, principally due to a decrease in net borrowings under the line of
credit in 2002 partially offset by a decrease in cash dividend.
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 $0.12 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.
18
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.
Outlook
The Company believes its ground support equipment and aircraft
services order declines were largely the result of the economic downturn
and effects of the September 11, 2001 terrorist attacks which particularly
impacted the aviation sector of the economy. The Company's current
forecast for the remainder of fiscal 2003 suggests that the commercial
aviation market for Company related products and services will grow at a
rate that is substantially less than that of the U.S. gross domestic
product. Due to the increased military and Homeland Security budgets, this
area may help offset the expected lower than normal order levels from
commercial customers.
Given the uncertainties associated with the above factors, the Company
continues to operate in a highly unpredictable environment. Based on the
current general economic and industry outlook, the Company believes its
existing cash and cash equivalents, cash flow from operations, and funds
available from current and renewed credit facilities will be adequate to
meet its current and anticipated working capital requirements through 2003.
If these sources are inadequate or become unavailable, then the Company may
pursue additional funds through the financing of unencumbered assets,
although there is no assurance these additional funds will be sufficient to
replace the sources that are inadequate or become unavailable.
Actual results for 2003 will depend upon a number of factors beyond
the Company's control, including, in part, the timing, speed and magnitude
of the economic recovery, military funding and commercial aviation capital
spending.
FORWARD LOOKING STATEMENTS
Certain statements in this Report, including those contained in
"Outlook," are "forward-looking" statements within the meaning of the
Private Securities Litigation Reform Act of 1995 with respect to the
Company's financial condition, results of operations, plans, objectives,
future performance and business. Forward-looking statements include those
preceded by, followed by or that include the words "believes," "expects,"
"anticipates," "estimates," or similar expressions. These forward-looking
statements involve risks and uncertainties. Actual results may differ
materially from those contemplated by such forward-looking statements,
because of, among other things, potential risks and uncertainties, such as:
19
Economic conditions in the Company's markets;
The continuing impact of the events of September 11, 2001,
or any subsequent terrorist activities;
The Company's ability to manage its cost structure for capital
expenditures and operating expenses and match them to shifting
customer volume levels;
Market acceptance of the Company's new commercial and military
equipment and services. Competition from other providers of
similar equipment, parts brokerage and overhaul services;
Changes in government regulation, weather and technology
A forward-looking statement is neither a prediction nor a guarantee of
future events or circumstances, and those future events or circumstances
may not occur. We are under no obligation, and we expressly disclaim any
obligation, to update or alter any forward-looking statements, whether as a
result of new information, future events or otherwise.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued 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. Upon adoption the Company does not expect it
to have a material effect on the Company's financial position and results of
operations. 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 "Reporting the
Results of Operations-Discontinued Events and Extraordinary Items".
Along with establishing a single accounting model, based on the framework
established in SFAS No. 121, for long-lived assets to be disposedof 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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". This statement requires gains and losses from the
extinguishment of debt to be classified as extraordinary only if they meet
20
the criteria for extraordinary treatment set forth in APB Opinion No. 30.
The statement also amends SFAS No. 13, Accounting for Leases, to require
that certain lease modifications that have economic effects similar to sale-
leaseback transactions be accounted for in the same manner as such
transactions. Finally, the statement makes certain technical corrections,
which the FASB deemed to be nonsubstantive, to a number of existing
accounting pronouncements. The rescission of SFAS No. 4, 44, and 64 is
effective for the Company in fiscal 2004. The amendments of SFAS No. 13 is
effective for transactions occurring after May 15, 2002, and all other
provisions of the statement are effective for financial statements issued
on or after May 15, 2002. The Company is evaluating the effect of this
statement.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement is effective
for exit or disposal activities initiated after December 31, 2002.
Liabilities for costs associated with an exit activity should be initially
measured at fair value, when incurred. This statement applies to costs
associated with an exit activity that does not involve an entity newly
acquired in a business combination, or a disposal activity covered by SFAS
No. 144. The Company is evaluating the effect of this statement.
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, the
Company 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 at
respective interest rates of 6.97% and 6.5% respectively. On July 31, 2002
the Company elected to undo its $2,000,000 (6.5%) revolving credit line
swap in consideration of $58,750, the Mark to Market swap shortfall as of
that date. The $58,750 swap termination fee was charged to interest
expense during the quarter ended September 30, 2002. The fair value of the
remaining swap decreased by $40,000 to $148,000 as of September 30, 2002.
The Company assessed the effectiveness of the swap using the hypothetical
derivative method.
21
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not hold or issue derivative financial instruments for
trading purposes. On May 31, 2001 the Company entered into swap agreements
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 $42,000.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures within 90 days
of the filing date of this report, and they concluded that these controls
and procedures are effective in providing material information relating to
the Company and its subsidiaries.
(b) Changes in Internal Controls.
There are no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to the
date of their evaluation.
22
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, 2002
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
10.15 Amendment No 1. to Loan Agreement among Bank of America N.A. the
Company and its subsidiaries, dated August 31, 2002.
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
September 30, 2002.
23
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: October 30, 2002 /s/ Walter Clark
Walter Clark, Chief Executive Officer
Date: October 30, 2002 /s/ John Gioffre
John J. Gioffre, Chief Financial Officer
24
CERTIFICATION
I, Walter Clark, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Air T, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 12a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6.The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: October 30, 2002 /s/ Walter Clark
Walter Clark, Chief Executive Officer
25
CERTIFICATION
I, John Gioffre, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Air T, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 12a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: October 30, 2002 /s/ John Gioffre
John J. Gioffre, Chief Financial Officer
26
AIR T, INC
EXHIBIT INDEX
PAGE
10.15 Amendment No. 1 to Loan Agreement
among Bank of America N.A. the company
and its subsidiaries, dated August 31, 2002. 28-29
99.1 Certification of Walter Clark 30
99.2 Certification of John J. Gioffre 31
27
AMENDMENT NO. 1 TO LOAN AGREEMENT
This Amendment No. 1 (the "Amendment") dated as of August 31, 2002, is
between Bank of America, N.A. ("Lender") and Air T, Inc. and Affiliates:
CSA Air, Inc., Mountain Air Cargo, Inc., Mountain Aircraft Services, LLC,
and Global Ground Support, LLC (individually and collectively, the
"Borrower").
RECITALS
A. Borrower has executed various documents concerning credit extended
by the Lender, including, a certain Loan Agreement and Exhibit "A"
Borrowing Base Agreement dated as of May 23, 2001 (together with any
previous amendments, the "Loan Agreement").
B. Lender and Borrower desire to amend the Loan Agreement.
AGREEMENT
1. Definitions. Capitalized terms used but not defined in this
Amendment shall have the meaning given to them in the Loan Agreement.
2. Amendments to Loan Agreement. The Loan Agreement is hereby
amended as follows:
(A.) Total Liabilities to Tangible Net Worth Ratio. Existing paragraph
4(A.)(i) is deleted in its entirety and replaced to read as follows:
Maintain on a consolidated basis a ratio of Total Liabilities
(excluding the non-current portion of Subordinated Liabilities) to Tangible
Net Worth not exceeding 1.50:1.0.
(B.) Debt Service Coverage Ratio. Existing paragraph 4(A.)(ii) is deleted
in its entirety.
(C.) Funded Debt to EBITDA Ratio. Existing paragraph 4(A.)(iii) is
deleted in its entirety, renumbered as paragraph 4(A.)(ii), and
replaced to read as follows:
Maintain on a consolidated basis a ratio of Funded Debt to EBITDA
not exceeding 3.50:1.0. "Funded Debt" means all outstanding
liabilities for borrowed money and other interest-bearing
liabilities, including current and long-term debt, less the non-
current portion of Subordinated Liabilities. "EBITDA" means net
income, less income or plus loss from discontinued operations and
extraordinary items, plus income taxes, plus interest expense,
plus depreciation, depletion, amortization and other non-cash
charges. This ratio will be calculated at the end of each fiscal
year, using the results of the twelve-month period ending with
that reporting period. "Subordinated Liabilities" means
liabilities subordinated to Borrower's obligations to Bank in a
manner acceptable to Bank in its sole discretion.
(D.) Modification of Borrowing Base Agreement. The Borrowing Base
Agreement is hereby amended by deleting the existing Maximum Amount
paragraph and replacing it with the following new paragraph:
"Maximum Amount" shall mean the lesser of $10,000,000.00
$7,000,000 or the Borrowing Base. The "Borrowing Base" at any
time, shall be equal to (i) 85% of Eligible Accounts Receivable
plus (ii) 50% of Eligible Accounts Receivable - Accruals plus
(iii) 75% of the value of Eligible Inventory (up to the period
ending August 31, 2003) and 50% of the value of Eligible
Inventory, limited to 75% of the outstanding balance on the Line
and beginning on September 1, 2003, reducing to a limitation of
50% of the outstanding balance on the Line(for the period
commencing September 1, 2003), plus (iv) 50% of adjusted book
value of Property, Plant and Equipment.
As used herein, "Eligible Accounts Receivable-Accruals" shall
mean all accounts receivable of Borrower which represent
Borrower's right to receive payment, which are absolute and not
contingent upon the fulfillment of any condition whatsoever, but
have not yet been invoiced, due to an existing agreement with the
Customer.
28
4. Representations and Warranties. When Borrower signs this
Amendment, Borrower represents and warrants to Lender that: (a) there is
no event which is, or with notice or lapse of time or both would be, a
default under the Loan Agreement except those events, if any, that have
been disclosed in writing to Lender or waived in writing by Lender, (b) the
representations and warranties in the Loan Agreement are true as of the
date of this Amendment as if made on the date of this Amendment, (c) this
Amendment does not conflict with any law, agreement, or obligation by which
Borrower is bound, and (d) this Amendment is within Borrower's powers, has
been duly authorized, and does not conflict with any of Borrower's
organizational papers.
5. Effect of Amendment. Except as provided in this Amendment, all of
the terms and conditions of the Loan Agreement shall remain in full force
and effect.
6. Counterparts. This Amendment may be executed in counterparts,
each of which when so executed shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument.
7. FINAL AGREEMENT. THIS WRITTEN AMENDMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN AND AMONG THE PARTIES HERETO AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS
BETWEEN OR AMONG THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
BETWEEN OR AMONG THE PARTIES.
This Amendment is executed as of the date stated at the beginning of
this Amendment.
Bank of America, N.A.
By
Typed Name
Title
Air T, Inc. CSA Air, Inc. [Borrower:]
By (Seal) By (Seal)
Typed Name Typed Name
Title Title
[Corporate Seal] [Corporate Seal]
Mountain Air Cargo, Inc. Mountain Aircraft Services, LLC
[Borrower:]
By (Seal) By (Seal)
Typed Name Typed Name
Title Title
[Corporate Seal] [Corporate Seal]
Global Ground Support, LLC[Borrower:]
By (Seal)
Typed Name
Title
[Corporate Seal]
29
CERTIFICATION
The undersigned hereby certifies in his capacity as an officer of Air T,
Inc. (the "Company") that the Quarterly Report of the Company on Form 10-Q
for the period ended September 30, 2002 fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 and
that the information contained in such report fairly presents, in all
material respects, the financial condition of the Company at the end of
such period and the results of operations of the Company for such period.
Date: October 30, 2002 /s/ Walter Clark
Walter Clark, Chief Executive Officer
30
CERTIFICATION
The undersigned hereby certifies in his capacity as an officer of Air T,
Inc. (the "Company") that the Quarterly Report of the Company on Form 10-Q
for the period ended September 30, 2002 fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 and
that the information contained in such report fairly presents, in all
material respects, the financial condition of the Company at the end of
such period and the results of operations of the Company for such period.
Date: October 30, 2002 /s/ John Gioffre
John J. Gioffre, Chief Financial Officer
31