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, 2001 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. 2,711,953 Common Shares, par value of $.25 per share were outstanding as of August 10, 2001 This filing contains 38 pages. AIR T, INC. AND SUBSIDIARIES INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Earnings for the three-month periods ended June 30, 2001 and 2000 (Unaudited) 3 Consolidated Balance Sheets at June 30, 2001 (Unaudited) and March 31, 2001 4 Consolidated Statements of Cash Flows for the three-month periods ended June 30, 2001 and 2000 (Unaudited) 5 Notes to Consolidated Financial Statements (Unaudited) 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-13 Item 3. Quantitative and Qualitative Disclosure About Market Risk 14 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 Exhibit Index 17 Exhibits 18-38 2 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) Three Months Ended June 30, 2001 2000 Operating Revenues: Cargo $ 4,736,789 $ 4,254,410 Maintenance 2,240,761 2,579,679 Ground equipment 9,037,732 5,723,587 Aircraft services and other 1,558,113 1,854,696 17,573,395 14,412,372 Operating Expenses: Flight operations 3,451,649 3,001,972 Maintenance and brokering 3,750,548 3,882,556 Ground equipment 7,394,771 4,903,427 General and administrative 2,100,307 1,998,932 Depreciation and amortization 175,416 219,623 16,872,691 14,006,510 Operating Income 700,704 405,862 Non-operating Expense (Income): Interest 141,612 159,981 Deferred retirement expense 6,249 6,249 Investment income and other (18,520) (40,472) 129,341 125,758 Earnings Before Income Taxes 571,363 280,104 Income Taxes 228,596 114,648 Net Earnings $ 342,767 $ 165,456 Net Earnings Per Share: Basic $ 0.13 $ 0.06 Diluted $ 0.12 $ 0.06 Weighted Average Shares Outstanding: Basic 2,712,353 2,748,586 Diluted 2,772,926 2,799,604 See notes to consolidated financial statements. 3 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2001 March 31,2001 ASSETS (Unaudited) Current Assets: Cash and cash equivalents $ 649,512 $ 97,799 Marketable securities 975,257 875,836 Accounts receivable, net 10,445,371 11,089,528 Costs and estimated earnings in excess of billings on uncompleted contracts 213,022 194,067 Inventories 11,538,500 10,783,686 Deferred tax asset, net 444,764 444,764 Prepaid expenses and other 598,397 203,765 Total Current Assets 24,864,823 23,689,445 Property and Equipment 7,826,296 7,625,404 Less accumulated depreciation (4,534,004) (4,371,232) Property and Equipment, net 3,292,292 3,254,172 Deferred Tax Asset 567,282 567,282 Intangible Pension Asset 361,631 361,631 Other Assets 677,463 660,682 Total Assets $ 29,763,492 $ 28,533,212 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 7,785,844 $ 8,879,628 Accrued expenses 1,645,410 1,573,468 Income taxes payable 422,422 287,846 Current portion of long-term obligations 678,703 699,719 Total Current Liabilities 10,532,379 11,440,661 Capital Lease Obligation (less current portion) 117,286 105,007 Long-term Debt (less current portion) 7,180,865 5,163,829 Deferred Retirement Obligations (less current portion) 1,719,898 1,653,400 Stockholders' Equity: Preferred stock, $1 par value, authorized 10,000,000 shares, none issued - - Common stock, par value $.25; authorized 4,000,000 shares; 2,711,953 and 2,705,153 shares issued 677,988 676,288 Additional paid in capital 6,833,021 6,828,640 Retained Earnings 3,143,889 3,206,642 Accumulated other comprehensive loss (441,834) (541,255) Total Stockholders' Equity 10,213,064 10,170,315 Total Liabilities & Stockholders' Equity $ 29,763,492 $ 28,533,212 See notes to consolidated financial statements. 4 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended June 30, 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 342,767 $ 165,456 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 175,416 219,623 Change in retirement obligation 66,498 66,498 Loss on sale of assets - 2,149 Change in assets and liabilities: Accounts receivable, net 644,157 2,048,831 Inventories (754,814) (1,587,510) Prepaid expenses and other (430,368) 39,664 Accounts payable (1,093,784) (1,548,344) Accrued expenses 63,204 133,940 Income taxes payable 134,576 (60,710) Total adjustments (1,195,115) (685,859) Net cash used in operating activities (852,348) (520,403) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (213,537) (218,672) Net cash used in investing activities (213,537) (218,672) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit, net 2,017,036 1,323,225 Payment of cash dividend (405,519) (274,858) Repurchase of common stock (3,919) (39,451) Proceeds from exercise of stock options 10,000 22,500 Net cash provided by financing activities 1,617,598 1,031,416 NET INCREASE IN CASH & CASH EQUIVALENTS 551,713 292,341 CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 97,799 144,513 CASH & CASH EQUIVALENTS AT END OF PERIOD $ 649,512 $ 436,854 SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES: Equipment capital lease $ - $ 19,894 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 145,779 $ 194,979 Income taxes 86,692 17,596 See notes to consolidated financial statements. 5 AIR T, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. Financial Statements The Consolidated Balance Sheet as of June 30, 2001, the Consolidated Statements of Earnings for the three-month periods ended June 30, 2001 and 2000 and the Consolidated Statements of Cash Flows for the three-month periods ended June 30, 2001 and 2000 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, 2001, 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, 2001. 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, 2001 and March 31, 2001 consolidated balance sheets. The income tax provisions for the three-months ended June 30, 2001 and 2000 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 common share equivalents and were included in the weighted average common shares. D. Inventories Inventories consist of the following: June 30, 2001 March 31, 2001 Aircraft parts and supplies $ 5,340,852 $ 5,458,684 Aircraft equipment manufacturing: Raw materials 4,471,068 2,666,270 Work in process 1,152,574 1,131,565 Finished goods 574,006 1,527,170 Total $11,538,500 $10,783,686 6 E. Recent Accounting Pronouncements On June 29, 2001, the Financial Accounting Standards Board approved Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and No.142, "Goodwill and Other Intangible Assets". SFAS No. 141 will require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and that the use of the pooling-of- interest method is no longer allowed. SFAS No.142 requires that upon adoption, amortization of goodwill will cease and instead the carrying value of goodwill will be evaluated for impairment on an annual basis. Identifiable intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No.142 is effective for fiscal years beginning after December 15, 2001. The Company has determined that neither of these recently accounting standards will impact the Company's financial position and results of operations. F. Derivative Financial Instruments On April 1, 2001, we adopted Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, FAS 133 established 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 FAS 133 at April 1, 2001 had no material effect on the Company's financial position or results of operations. We are 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. We do not utilize derivative financial instruments for trading or speculative purposes. During the first quarter, we entered into two interest rate swaps with a notional amount of $3 million, and $2 million respectively. These agreements were entered into 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 at June 30, 2001 was insignificant. 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 which was due to expire in August 2001. The remaining $3,000,000 of the credit facility was set up as a five-year term loan which expires on May 31, 2006 and is scheduled to be repaid in quarterly principal payments of $150,000, plus accrued interest, beginning August 31, 2001. 7 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 June 30, 2001, 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, 2001 was 4.06%. At June 30, 2001 and 2000, the amounts outstanding against the line were $7,781,000 and $5,764,000, respectively. At June 30, 2001, $2,219,000 was available under the entire credit facility. H. 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, 2001 2000 Operating Revenues Overnight Air Cargo $ 6,990,131 $ 6,862,554 Ground Equipment 9,037,732 5,723,588 Aviation Services 1,539,532 1,820,230 Corporate 6,000 6,000 Total $ 17,573,395 $ 14,412,372 Operating Income Overnight Air Cargo $ 476,690 $ 604,285 Ground Equipment 963,321 203,914 Aviation Services (112,882) 127,554 Corporate (1) (626,425) (529,891) Total $ 700,704 $ 405,862 Depreciation and Amortization Overnight Air Cargo $ 70,005 $ 78,164 Ground Equipment 46,517 69,378 Aviation Services 38,892 30,071 Corporate 20,002 42,010 Total $ 175,416 $ 219,623 Capital expenditures, net Overnight Air Cargo $ 102,909 $ 15,580 Ground Equipment 72,092 59,405 Aviation Services 14,260 142,702 Corporate 24,276 985 Total $ 213,537 $ 218,672 8 As of June 30, 2001 March 31, 2001 Identifiable Assets Overnight Air Cargo $ 10,813,931 $ 11,635,258 Ground Equipment 6,812,562 5,902,969 Aviation Services 415,171 1,760,016 Corporate 11,721,828 9,234,969 Total $ 29,763,492 $ 28,533,212 (1) Includes income from inter-segment transactions. The computation of basic and diluted earnings per common share is as follows: Three months ended June 30, 2001 2000 Net earnings $ 342,767 $ 165,456 Weighted average common shares: Shares outstanding-basic 2,712,353 2,748,586 Dilutive stock options 60,573 51,018 Shares outstanding-diluted 2,772,926 2,799,604 Net earnings per common share: Basic $ 0.13 $ 0.06 Diluted $ 0.12 $ 0.06 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview The Company's two most significant components of revenue, which accounted for 51.4% and 39.7% of revenue, respectively, were generated through its ground support equipment subsidiary, Global Ground Support, LLC (Global), and its air cargo subsidiaries, Mountain Air Cargo, Inc. (MAC) and CSA Air, Inc. (CSA). Global, manufactures, services and supports aircraft deicers and other ground support equipment on a worldwide basis. Global's revenue contributed approximately $9,037,000 and $5,724,000 to the Company's revenues for the three- month periods ended June 30, 2001 and 2000, respectively. The significant increase in revenues in 2001 was primarily related to a four-year, $25,000,000 contract to supply deicing equipment to the United States Air Force and a large scale airport deicer contract, which commenced in February 2001. MAC and CSA are short-haul express air freight carriers. MAC and CSA's revenue contributed approximately $6,990,000 and $6,863,000 to the Company's revenues for the three-month periods ended June 30, 2001 and 2000, respectively. Under the terms of the dry-lease service agreements, which currently cover approximately 98% of the revenue 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, 2001) are owned by and dry-leased from a major air express company (Customer), and Short Brothers SD3- 30 aircraft (two aircraft at June 30, 2001) 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. Mountain Aircraft Services, LLC's (MAS) aircraft component repair services contributed approximately $1,540,000 and $1,820,000 to the Company's revenues for the three-month periods ended June 30, 2001 and 2000, respectively, and are included in Aircraft Services and Other in the accompanying consolidated statement of earnings. 10 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 financial statements. 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. The Company expended exceptional effort in fiscal 1999 and 2000 to design and produce prototype equipment to expand its product line to include additional deicer models and three models of scissor-lift equipment for catering, cabin service and maintenance service of aircraft. These costs were expensed as incurred. As indicated above, 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, expected to be completed in the third quarter of fiscal 2002. The Company anticipates that revenue from these contracts will contribute to management's plan to reduce Global's seasonal fluctuation in revenues. The remainder of the Company's business is not materially seasonal. Results of Operations Consolidated revenue increased $3,161,000 (21.9%) to $17,573,000 for the three-month period ended June 30, 2001 compared to its equivalent 2000 period. The increase in revenue primarily resulted from an increase in operations of Global, partially offset by decreases in component repair services. Operating expenses increased $2,866,000 (20.5%) to $16,873,000 for the three-month period ended June 30, 2001 compared to its equivalent 2000 period. The increase in operating expenses consisted of the following: cost of flight operations increased $450,000 (15.0%) primarily as a result of increases in costs associated with pilot salaries and travel; maintenance expense decreased $132,000 (3.4%) primarily as a result of decreases associated with cost of parts, contract labor and outside maintenance related to the overhaul and repair operations of MAC and MAS; ground equipment increased $2,491,000 (50.8%), as a result of cost of parts and labor associated with increased Global sales; depreciation decreased $44,000 (20.1%), primarily related to the completion of certain assets' depreciable lives; and general and administrative expense increased $101,000 (5.1%) primarily as a result of increased wages, benefits and staff expense, particularly related to the expansion of Global. 11 Results of Operations (cont'd) The current period's increased revenue and operating income resulted primarily from increased production related to the above mentioned Air Force and airport contracts at Global, offset, 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, 2001 Global's revenue and operating income increased $3,314,000 (57.9%) and $785,000, respectively, to $9,038,000 and $769,000 compared to the quarter ended June 30, 2000. The $3,000 increase in non-operating expense was principally due to a decrease in investment income partially offset by a decrease in credit line interest related to lower levels of borrowing in the first quarter of 2001 compared to 2000. Pretax earnings increased $291,000 for the three-month period ended June 30, 2001 compared to 2000, principally due to the above stated increase in Global earnings, partially offset by a decrease in current period earnings for the air cargo and aircraft services sectors. The provision for income taxes for the three-month period ended June 30, 2001 increased $114,000 compared to the 2000 period, primarily due to increased taxable income, partially offset by a lower effective tax rate. The effective tax rate for the three-month period ended June 30, 2001 compared to the 2000 period was 40.0% and 40.9%, respectively. Liquidity and Capital Resources As of June 30, 2001 the Company's working capital amounted to $14,332,000, an increase of $2,084,000 compared to March 31, 2001. The net increase primarily resulted from increased cash from operations, decreased accounts payable and accrued expenses and increased inventories, partly offset by decreased accounts receivable. 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 which was due to expire in August 2001. The remaining $3,000,000 of the credit facility was set up as a five-year term loan which expires on May 31, 2006 and is scheduled to be repaid in quarterly principal payments of $150,000, plus accrued interest, beginning August 31, 2001. 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 June 30, 2001, 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. 12 Amounts advanced under the credit facility bear interest at the 30-day "LIBOR" rate plus 137 basis points. The LIBOR rate at June 30, 2001 was 4.06%. At June 30, 2001 and 2000, the amounts outstanding against the line were $7,781,000 and $5,764,000, respectively. At June 30, 2001, $2,219,000 was available under the entire credit facility. The respective three-month periods ended June 30, 2001 and 2000 resulted in the following changes in cash flow: operating activities used $852,000 in 2001 and $520,000 in 2000, investing activities used $214,000 in 2001 and $219,000 in 2000 and financing activities provided $1,618,000 in 2001 and $1,031,000 in 2000. Net cash increased $552,000 and $292,000 during the three months ended June 30, 2001 and 2000, respectively. Cash used in operating activities was $332,000 higher for the three-months ended June 30, 2001 compared to the similar 2000 period, principally due to increased accounts receivable, partly offset by increased income, accounts payable and accrued expenses. Cash used in investing activities for the three-months ended June 30, 2001 was approximately $5,000 less than the comparable period in 2000 due to decreased capital expenditures. Cash provided by financing activities was $586,000 more in the 2001 three- month period than in the corresponding 2000 period due to an increase in borrowings under the line of credit in 2001, partially offset by an increase in cash dividends. 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 $.15 per share cash dividend in June 2001. Deferred Retirement Obligation The Company's former Chairman and Chief Executive Officer passed away on April 18, 1997. In addition to amounts previously expensed, under the terms of his supplemental retirement agreement, death benefits with a present value of approximately $420,000 were expensed in the first quarter 1998. The death benefits are payable in the amount of $75,000 per year for 10 years. 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. 13 Recent Accounting Pronouncements On June 29, 2001, the Financial Accounting Standards Board approved Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 will require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and that the use of the pooling-of- interest method is no longer allowed. SFAS No. 142 requires that upon adoption, amortization of goodwill will cease and instead the carrying value of goodwill will be evaluated for impairment on an annual basis. Identifiable intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The Company has determined that neither of these recently accounting standards will impact the Company's financial position and results of operations. Derivative Financial Instruments On April 1, 2001, we adopted Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, FAS 133 established 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 FAS 133 at April 1, 2001 had no material effect on the Company's financial position or results of operations. We are 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. We do not utilize derivative financial instruments for trading or speculative purposes. During the first quarter, we entered into two interest rate swaps with a notional amount of $3 million, and $2 million respectively. These agreements were entered into 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 at June 30, 2001 was insignificant. 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 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 $58,000. 14 PART II -- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits No. Description 3.1 Certificate of Incorporation, as amended, incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994 3.2 By-laws of the Company, 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 10.1 Loan agreement between Bank of America, N.A. and Air t, Inc., dated May 23, 2001 10.2 ISDA Schedule to the Master Agreement between Bank of America, N.A. and Air t, Inc, dated May 23, 2001. 21.1 List of subsidiaries of the Company, incorporated by reference to Exhibit 21.1 of the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997 27.1 Financial Data Schedule (For SEC use only) _______________________ b. Reports on Form 8-K No Current Reports on Form 8-K were filed in the first quarter of fiscal 2002. 15 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 10, 2001 /s/ Walter Clark Walter Clark, Chief Executive Officer Date: August 10, 2001 /s/ John Gioffre John J. Gioffre, Chief Financial Officer 16 AIR T, INC EXHIBIT INDEX PAGE 10.2 Loan agreement between Bank of America, N.A. and Air t, Inc., dated May 23, 2001 18-28 10.3 ISDA Schedule to the Master Agreement between Bank of America,N.A. and Air t, Inc, dated May 23, 2001. 29-38 17