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 December 31, 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. 2,724,320 Common Shares, par value of $.25 per share were outstanding as of January 31, 2002. This filing contains 18 pages. AIR T, INC. AND SUBSIDIARIES INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Earnings (Loss) for the three and nine-month periods ended December 31, 2001 and 2000 (Unaudited) 3 Consolidated Balance Sheets at December 31, 2001 (Unaudited) and March 31, 2001 4 Consolidated Statements of Cash Flows for the nine-month periods ended December 31, 2001 and 2000 (Unaudited) 5 Notes to Consolidated Financial Statements (Unaudited) 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 18 Signatures 18 2 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) Three Months Ended Nine months Ended December 31, December 31, 2001 2000 2001 2000 Operating Revenues: Cargo $ 4,887,585 $ 5,092,020 $14,732,919 $14,071,350 Maintenance 2,368,391 2,288,298 7,173,960 7,129,545 Ground equipment 6,758,345 11,133,140 26,479,654 23,369,693 Aircraft services and other 1,754,582 2,068,899 10,228,826 5,533,680 15,768,903 20,582,357 58,615,359 50,104,268 Operating Expenses: Flight operations 3,477,843 3,691,669 10,597,732 10,018,156 Maintenance and services 4,271,437 3,969,676 17,171,098 11,505,174 Ground equipment 5,198,062 9,375,995 21,078,142 19,867,998 General and administrative 2,263,049 2,279,638 6,825,249 6,136,572 Depreciation and amortization 176,056 214,573 528,955 661,244 15,386,447 19,531,551 56,201,176 48,189,144 Operating Income 382,457 1,050,806 2,414,183 1,915,124 Non-operating Expense (Income): Interest 121,377 197,548 374,299 556,658 Deferred retirement expense 6,249 6,249 18,747 18,747 Investment income (22,879) (13,967) (57,707) (84,576) Other - 39,438 - 41,047 104,747 229,268 335,339 531,876 Earnings Before Income Taxes 277,709 821,537 2,078,844 1,383,248 Income Tax 121,477 323,537 833,721 552,996 Net Earnings $ 156,232 $ 498,000 $ 1,245,123 $ 830,252 Net Earnings Per Share: Basic $ 0.06 $ 0.18 $ 0.46 $ 0.30 Diluted $ 0.06 $ 0.18 $ 0.45 $ 0.30 Weighted Average Shares Outstanding: Basic 2,716,764 2,731,220 2,714,323 2,742,853 Diluted 2,776,076 2,780,372 2,769,960 2,774,473 See Notes to Consolidated Financial Statements. 3 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 MARCH 31, 2001 ASSETS (Unaudited) Current Assets: Cash and cash equivalents $ 202,681 $ 97,799 Marketable securities 982,851 875,836 Accounts receivable, net 8,063,014 11,089,528 Costs and estimated earnings in excess of billings on uncompleted contracts 142,194 194,067 Inventories, net 10,479,638 10,783,686 Deferred tax asset 666,023 444,764 Prepaid expenses and other 149,139 203,765 Total Current Assets 20,685,540 23,689,445 Property and Equipment, net 3,147,144 3,254,172 Deferred Tax Asset 493,581 567,282 Intangible Pension Asset 451,631 361,631 Other Assets 636,857 660,682 Total Assets $25,414,753 $ 28,533,212 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 5,241,982 $ 8,879,628 Accrued expenses 1,990,776 1,573,468 Income taxes payable 469,886 287,846 Current portion of long-term obligations 678,703 699,719 Total Current Liabilities 8,381,347 11,440,661 Capital Lease Obligation (less current portion) 116,268 105,007 Long-term Debt (less current portion) 4,098,266 5,163,829 Deferred Retirement Obligation (less current portion 1,852,894 1,653,400 Stockholders' Equity: Preferred stock, $1 par value, authorized 50,000 shares, none issued - - Common stock, par value $.25; authorized 4,000,000 shares; 2,722,320 and 2,705,153 shares issued 680,580 676,288 Additional paid in capital 6,853,898 6,828,640 Retained earnings 4,046,246 3,206,642 Accumulated other comprehensive loss (614,746) (541,255) 10,965,978 10,170,315 Total Liabilities and Stockholders' Equity $25,414,753 $ 28,533,212 See Notes to Consolidated Financial Statements. 4 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended December 31, 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $1,245,123 $ 830,252 Adjustments to reconcile net earnings to net cash provided by (used in) operations: Depreciation and amortization 528,955 661,244 Change in deferred tax asset (147,558) (97,000) Change in retirement obligation 199,494 120,495 Gain on sale of asset - 41,047 Changes in assets and liabilities: Accounts receivable 3,026,514 (3,583,531) Cost and estimated earnings in excess of billings on uncompleted contracts 51,873 (60,603) Inventories 304,048 (2,556,532) Prepaid expenses and other (11,549) 72,842 Accounts payable (3,637,646) 1,126,500 Accrued expenses 396,294 335,897 Income taxes payable 182,040 (18,222) Total adjustments 892,465 (3,957,863) Net cash provided by (used in) operating activities 2,137,588 (3,127,611) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (397,172) (618,795) Sale of marketable securities - 570,164 Net cash used in investing activities (397,172) (48,631) CASH FLOWS FROM FINANCING ACTIVITIES: (Repayments of) proceeds from line of credit , net (1,259,563) 3,551,003 Payment of cash dividend (405,520) (274,858) Repurchase of common stock (42,785) (189,377) Proceeds from exercise of stock options 72,334 30,500 Net cash (used in) provided by financing activities (1,635,534) 3,117,268 NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 104,882 (58,974) CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 97,799 144,513 CASH & CASH EQUIVALENTS AT END OF PERIOD $ 202,681 $ 85,539 SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES: Other comprehensive gain $ 120,509 $ 2,776 Equipment capital lease - 19,894 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 379,601 $ 526,320 Income/Franchise taxes 791,902 669,192 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 December 31, 2001, the Consolidated Statements of Earnings for the three and nine-month periods ended December 31, 2001 and 2000 and the Consolidated Statements of Cash Flows for the nine-month periods ended December 31, 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 December 31, 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 December 31 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 December 31, 2001 and March 31, 2001 consolidated balance sheets. The income tax provisions for the nine-months ended December 31, 2001 and 2000 differ from the federal statutory rate primarily as a result of state income taxes and permanent timing differences. C. Net Earnings Per Share Basic earnings per share has been calculated by dividing net earnings by the weighted average number of common shares outstanding during each period. For purposes of calculating diluted earnings per share, shares issuable under employee stock options were considered potential common shares and were included in the weighted average common shares. 6 The computation of basic and diluted earnings per common share is as follows: Three Months Ended Nine months Ended December 31, December 31, 2001 2000 2001 2000 Net earnings $ 156,232 $ 498,000 $1,245,123 $ 830,252 Weighted average common shares: Shares outstanding - basic 2,716,764 2,731,220 2,714,323 2,742,853 Dilutive stock options 59,312 49,152 55,637 31,620 Shares outstanding - diluted 2,776,076 2,780,372 2,769,960 2,774,473 Net earnings per common share: Basic $ 0.06 $ 0.18 $ 0.46 $ 0.30 Diluted $ 0.06 $ 0.18 $ 0.45 $ 0.30 D. Inventories Inventories consist of the following: December 31, 2001 March 31,2001 Aircraft parts and supplies $ 4,880,050 $ 5,458,681 Aircraft equipment manufacturing: Raw materials 3,474,168 2,666,270 Work in process 951,060 1,131,565 Finished goods 1,174,360 1,527,170 Total $ 10,479,638 $ 10,783,686 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 7 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 issued accounting standards will materially impact the Company's financial position and results of operations. The Financial Accounting Standards Board has approved SFAS No. 143, "Accounting for Asset Retirement Obligations" and No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and Accounting Principles Bulletin No. 30. Along with establishing a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale, this standard retains the basic provisions of APB30 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 fiscal years beginning after December 15, 2001. The Company is evaluating the impact of these standards and has not yet determined the effect of adoption on our financial position and results of operations. F. 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 implementation of SFAS 133 at April 1, 2001 had no material effect on the Company's financial position or results of operations. 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, the Company entered into two interest rate swaps with a notional amount of $3 million, and $2 million respectively. These agreements were entered into as cash flow hedges to fix the interest rates on the $3 million term portion and $2 million of the revolving portion of the credit facility at respective interest rates of 6.97% and 6.5% respectively. The fair value of these swaps had decreased by $194,000 at December 31, 2001. Because the swaps are considered perfectly effective the change in fair value of the swaps is recorded as other comprehensive loss and long-term debt on the balance sheet. 8 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. 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 December 31, 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 December 31, 2001 was 1.87%. At December 31, 2001 and 2000, the amounts outstanding against the line were $4,504,000 and $7,539,000, respectively. At December 31, 2001, $5,196,000 was available under the entire credit facility. 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. 9 Segment data is summarized as follows: As of and for the Nine months ended December 31, 2001 2000 Operating Revenues Overnight Air Cargo $ 21,906,879 $ 21,256,697 Ground Equipment 26,479,654 23,369,693 Aviation Services 10,210,826 5,459,877 Corporate 18,000 18,000 Total $ 58,615,359 $ 50,104,267 Operating Income Overnight Air Cargo $ 1,809,239 $ 2,017,524 Ground Equipment 3,126,906 1,421,759 Aviation Services (524,545) 234,830 Corporate (1) (1,997,417) (1,758,989) Total $ 2,414,183 $ 1,915,124 Depreciation and Amortization Overnight Air Cargo $ 205,154 $ 232,834 Ground Equipment 148,371 199,919 Aviation Services 114,265 107,163 Corporate 61,165 121,328 Total $ 528,955 $ 661,244 Capital Expenditures, net Overnight Air Cargo $ 180,947 $ 173,082 Ground Equipment 48,634 65,751 Aviation Services 35,297 203,184 Corporate 103,890 17,181 Total $ 368,768 $ 459,198 Identifiable Assets Overnight Air Cargo $ 2,781,630 $ 4,685,741 Ground Equipment 12,383,531 14,883,813 Aviation Services 6,736,786 8,798,680 Corporate 3,512,806 1,084,276 Total $ 25,414,753 $ 29,452,510 1) Excludes income from inter-segment transactions, included as non- operating income. 10 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 45.2% and 37.4% of revenue were generated, respectively, 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 $26,480,000 and $23,370,000 to the Company's revenues for the nine-month periods ended December 31, 2001 and 2000, respectively. The significant increase in revenues in 2001 was primarily related to a four- year 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 $21,907,000 and $21,257,000 to the Company's revenues for the nine-month periods ended December 31, 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 December 31, 2001) are owned by and dry-leased from a major air express company (Customer), and Short Brothers SD3-30 aircraft (two aircraft at December 31, 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 $10,211,000 and $5,460,000 to the Company's revenues for the nine-month periods ended December 31, 2001 and 2000, respectively, and are included in Aircraft Services and Other in the accompanying consolidated statement of earnings. 11 The Company's four subsidiaries operate in three business segments. Each business segment has separate management teams and infrastructures that offer different products and services. The subsidiaries have been combined into the following reportable segments: air cargo, aviation services and aviation ground equipment in the accompanying consolidated 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 These costs were expensed as incurred. In June 1999, Global was awarded a four-year contract to supply deicing equipment to the United States Air Force (USAF) 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 fourth quarter of fiscal 2002. The Company anticipates that revenue from the USAF contract will continue to contribute to management's plan to reduce Global's seasonal fluctuation in revenues. The Company believes that this seasonal trend was not reflected in Global's current third quarter results due to the September 11, 2001 terrorist attacks and weakening aviation market discussed below. The remainder of the Company's business is not materially seasonal. Results of Operations Consolidated revenue increased $8,511,000 (17.0%) to $58,615,000 and decreased $4,813,000 (23.4%) to $15,769,000, respectively, for the nine and three-month periods ended December 31, 2001 compared to their equivalent 2000 periods. The nine-month current period net increase in revenue primarily resulted from increased Philadelphia Airport contract revenue at Global and a $4,700,000 engine sale by MAS. The three months ended December 31, 2001 decrease in revenue in part resulted from the effects of the September 11, 2001 terrorist attacks against the United States which exacerbated weak aviation market conditions; resulting in decreased commercial aircraft deicer orders at Global and aircraft component overhaul and parts orders at MAS. Operating expenses increased $8,012,000 (16.6%) to $56,201,000 for the nine-month period ended December 31, 2001 and decreased $4,145,000 (21.2%) to $15,386,000 for the three-month period ended December 31, 2001 compared to their equivalent 2000 periods. The change in operating expenses for the nine-month period consisted of the following: cost of flight operations increased $580,000 (5.8%), primarily as a result of increases in costs associated with pilot salaries and airport fees, partially offset by decreased pilot travel costs; maintenance and brokerage expense increased $5,666,000 (49.3%), primarily as a result of cost of parts related to engine and brokerage parts sales and increased outside maintenance costs; 12 Results of Operations (Cont'd) ground equipment increased $1,210,000 (6.1%), as a result of cost of parts and labor associated with increased Global sales; depreciation and amortization decreased $132,000 (20.0%) primarily as a result of decreased depreciation related to the completion of certain assets' depreciable lives; general and administrative expense increased $689,000 (11.2%) primarily as a result of increased wages, performance based bonuses and benefits, particularly related to the increased earnings of Global and additional accounts receivable reserves, partially offset by decreased professional fees and contract labor. The change in operating expenses for the three-month period consisted of the following: cost of flight operations decreased a net of $214,000 (5.8%), primarily as a result of decreased travel cost and airport fees, partly offset by increased pilot salaries; maintenance and brokerage expense increased $302,000 (7.6%), primarily as a result of increases associated with cost of parts, labor and outside maintenance related to the overhaul and repair operations of MAC and MAS; ground equipment decreased $4,178,000 (44.6%), as a result of lower cost of parts and labor associated with Global's decreased sales; depreciation and amortization decreased $39,000 (18.0%) as a result of decreased depreciation related to the completion of certain assets' depreciable lives related to the expansion of MAS and Global; general and administrative expense decreased $17,000 (0.7%) primarily as a result of decreased professional fees partially offset by increased wages. Non-operating expense decreased $197,000 and $125,000, respectively, for the current nine and three-month periods ended December 31, 2001. The decreases were principally due to decreased credit-line interest expense. Pretax earnings increased $696,000 and decreased $544,000, respectively, for the nine and three-month periods ended December 31, 2001, compared to their respective December 31, 2000 periods. The nine-month increase was principally due to a $1,929,000 increase in profitability at Global, partially offset by changes in fleet utilization and a reduction in workorders, in part due to the September 11, 2001 terrorist attacks, which decreased earnings from other corporate operations. The $544,000 decrease for the three-month period ended December 31, 2001 compared to 2000 earnings was due to the above mentioned September 11, 2001 attacks, intensified by an already weakening aviation market which substantially reduced Global's revenue and earnings. Reduced aircraft utilization and maintenance workorders caused further decreases in earnings in each of Air T's other operating sectors. The provision for income taxes increased $281,000 and decreased $202,000 for the nine and three-month periods ended December 31, 2001, compared to their respective 2000 periods due to respective increased and decreased taxable income. 13 Liquidity and Capital Resources As of December 31, 2001 the Company's working capital amounted to $12,304,000, an increase of $55,000 compared to March 31, 2001. The net increase primarily resulted from increased cash from operations, decreased accounts payable, 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 is 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 December 31, 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 December 31, 2001 was 1.87%. At December 31, 2001 and 2000, the amounts outstanding against the line were $4,504,000 and $7,539,000, respectively. At December 31, 2001, an additional $5,196,000 was available under the entire credit facility. The respective nine-month periods ended December 31, 2001 and 2000 resulted in the following changes in cash flow: operating activities provided $2,138,000 and used $3,128,000, investing activities used $397,000 and $49,000 and financing activities used $1,636,000 and provided $3,117,000. Net cash increased $105,000 and decreased $59,000 for the respective nine-month periods ended December 31, 2001 and 2000. Cash provided by operating activities was $5,265,000 more for the nine- months ended December 31, 2001 compared to the similar 2000 period, principally due to decreased accounts receivable and decreased inventory and increased profitability, partially offset by decreased accounts payable. Cash used in investing activities for the nine-months ended December 31, 2001 was approximately $349,000 more than the comparable period in, 2000, principally due to a decrease in sale of marketable securities, partially offset by decreased capital expenditures. 14 Liquidity and Capital Resources (Cont'd) Cash used in financing activities for the nine-months ended December 31, 2001 was approximately $4,753,000 more than the comparable 2000 period, principally due to a decrease in borrowings under the line of credit in 2001. 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 $0.15 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 inflation could be passed on to its customers, or on its air cargo business since the major cost components of its operations, consisting principally of fuel, crew and certain maintenance costs are reimbursed, without markup, under current contract terms. Recent Accounting Pronouncements 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 materially impact the Company's financial position and results of operations. 15 The Financial Accounting Standards Board has approved SFAS No. 143, "Accounting for Asset Retirement Obligations" and No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and Accounting Principles Bulletin No. 30. Along with establishing a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale, this standard retains the basic provisions of APB30 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 fiscal years beginning after December 15, 2001. The Company is evaluating the impact of these standards and has not yet determined the effect of adoption on our 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. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The implementation of SFAS 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 cash flow hedges to fix the interest rates on the $3 million term portion and $2 million of the revolving portion of the credit facility at respective interest rates of 6.97% and 6.5% respectively. The fair value of these swaps had decreased by $194,000 at December 31, 2001. Because the swaps are considered completely effective the change in fair market value of the swaps are recorded in other comprehensive loss and long-term debt on the balance sheet. 16 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 $45,000. 17 PART II -- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits No. Description 3.1 Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 of the Company's Quarterly Reports on Form 10-Q for the period ended September 30, 2001. 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 _______________________ b. Reports on Form 8-K No Current Reports on Form 8-K were filed in the three months ended December 31, 2001. 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: January 31, 2002 /s/ Walter Clark Walter Clark, Chief Executive Officer Date: January 31, 2002 /s/ John Gioffre John J. Gioffre, Chief Financial Officer 18