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, 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. 2,705,653 Common Shares, par value of $.25 per share were outstanding as of October 29, 2001. This filing contains 19 pages. The exhibit index is on page 19. AIR T, INC. AND SUBSIDIARIES INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Earnings for the three and six-month periods ended September 30, 2001 and 2000 (Unaudited) 3 Consolidated Balance Sheets at September 30, 2001 (Unaudited) and March 31, 2001 4 Consolidated Statements of Cash Flows for the six-month periods ended September 30, 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 16 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote Of Security Holders 17 Item 6. Exhibits and Reports on Form 8-K 17-18 Exhibit Index 19 Exhibit 20-23 2 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) Three Months Ended Six months Ended September 30, September 30, 2001 2000 2001 2000 Operating Revenues: Cargo $ 5,108,544 $ 4,724,920 $ 9,845,334 $ 8,979,330 Maintenance 2,564,808 2,261,568 4,805,569 4,841,247 Ground equipment 10,683,577 6,512,966 19,721,309 12,236,553 Aircraft services and other 6,916,131 1,610,085 8,474,244 3,464,781 25,273,060 15,109,539 42,846,456 29,521,911 Operating Expenses: Flight operations 3,668,240 3,324,515 7,119,890 6,326,487 Maintenance and services 9,149,113 3,652,942 12,899,661 7,535,498 Ground equipment 8,485,309 5,588,576 15,880,080 10,492,003 General and administrative 2,461,893 1,858,002 4,562,200 3,856,934 Depreciation and amortization 177,483 227,048 352,899 446,671 23,942,038 14,651,083 40,814,730 28,657,593 Operating Income 1,331,022 458,456 2,031,726 864,318 Non-operating Expense (Income): Interest 111,310 199,128 252,922 359,109 Deferred retirement expense 6,249 6,249 12,498 12,498 Investment income (16,309) (27,988) (34,829) (70,609) Other - (540) - 1,609 101,250 176,849 230,592 302,607 Earnings Before Income Taxes 1,229,772 281,607 1,801,134 561,711 Income Taxes 483,648 114,811 712,244 229,459 Net Earnings $ 746,124 $ 166,796 $1,088,890 $ 332,252 Net Earnings Per Share: Basic $ 0.27 $ 0.06 $ 0.40 $ 0.12 Diluted $ 0.27 $ 0.06 $ 0.39 $ 0.12 Weighted Average Shares Outstanding: Basic 2,713,853 2,748,753 2,713,103 2,748,670 Diluted 2,760,875 2,787,780 2,766,901 2,787,697 See Notes to Consolidated Financial Statements. 3 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2000 MARCH 31,2001 ASSETS (Unaudited) Current Assets: Cash and cash equivalents $ 116,709 $ 97,799 Marketable securities 930,838 875,836 Accounts receivable, net 10,758,090 11,089,528 Costs and estimated earnings in excess of billings on uncompleted contracts 183,049 194,067 Inventories 10,938,944 10,783,686 Deferred tax asset 444,764 444,764 Prepaid expenses and other 171,119 203,765 Total Current Assets 23,543,513 23,689,445 Property and Equipment, net 2,897,687 3,254,172 Deferred Tax Asset 567,282 567,282 Intangible Pension Asset 361,631 361,631 Other Assets 701,510 660,682 Total Assets $ 28,071,623 $ 28,533,212 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable 6,960,929 8,879,628 Accrued expenses 1,473,746 1,573,468 Income taxes payable 428,502 287,846 Current portion of long-term obligations 678,703 699,719 Total Current Liabilities 9,541,879 11,440,661 Capital Lease Obligations (less current portion) 106,916 105,007 Long-term Debt (less current portion) 5,921,488 5,163,829 Deferred Retirement Obligations (less current Portion) 1,789,440 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; 2,705,653 and 2,740,353 shares issued 676,413 676,288 Additional paid in capital 6,812,230 6,828,640 Retained earnings 3,890,013 3,206,642 Accumulated other comprehensive loss (666,756) (541,255) 10,711,900 10,170,315 Total Liabilities and Stockholders' Equity $ 28,071,623 $ 28,533,212 See notes to consolidated financial statements. 4 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended September 30, 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $1,088,890 $ 332,252 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 352,899 446,671 Deferred tax provision - (97,000) Net periodic pension cost 136,040 132,996 Changes in assets and liabilities: Accounts receivable, net 331,438 693,640 Cost and estimated earnings in excess of billings on uncompleted contracts 11,018 (60,086) Inventories 157,547 (4,028,233) Prepaid expenses and other (8,182) 76,178 Accounts payable (1,918,698) 402,647 Accrued expenses (120,739) 517,539 Income taxes payable 140,655 (112,696) Total adjustments (918,021) (2,028,344) Net cash provided by (used in) operating activities 170,869 (1,696,092) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (307,310) (385,228) Redemption of marketable securities 13,497 - Net cash used in investing activities (293,813) (385,228) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit, net 563,659 2,391,370 Payment of cash dividend (405,520) (274,858) Repurchase of common stock (42,785) (51,054) Proceeds from exercise of stock options 26,500 30,500 Net cash provided by financing activities 141,854 2,095,958 NET INCREASE IN CASH & CASH EQUIVALENTS 18,910 14,638 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 97,799 144,513 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 116,709 $ 159,151 SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES: Capital lease entered into during period - 19,894 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 262,192 $ 321,573 Income/Franchise taxes 560,582 439,991 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 September 30, 2001, the Consolidated Statements of Earnings for the three and six-month periods ended September 30, 2001 and 2000 and the Consolidated Statements of Cash Flows for the six-month periods ended September 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 September 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 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, 2001 and March 31, 2001 consolidated balance sheets. The income tax provisions for the six-months ended September 30, 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 common share equivalents 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 Six months Ended September 30, September 30, 2001 2000 2001 2000 Net earnings $ 746,124 $ 166,796 $ 1,088,890 $ 332,252 Weighted average common shares: Shares outstanding - basic 2,713,853 2,748,753 2,713,103 2,748,670 Dilutive stock options 47,022 39,027 53,798 39,027 Shares outstanding - diluted 2,760,875 2,787,780 2,766,901 2,787,697 Net earnings per common share: Basic $ 0.27 $ 0.06 $ 0.40 $ 0.12 Diluted $ 0.27 $ 0.06 $ 0.39 $ 0.12 D. Inventories Inventories consist of the following: September 30, 2001 March 31, 2001 Aircraft parts and supplies $ 4,967,517 $ 5,458,681 Aircraft equipment manufacturing: Raw materials 2,985,958 2,666,270 Work in process 1,243,172 1,131,565 Finished goods 1,742,297 1,527,170 Total $ 10,938,944 $ 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 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. We are evaluating the impact of these standards and have 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, 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. 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 September 30, 2001. Because the swaps are considered completely effective the change in fair value of the swaps is recorded as other comprehensive income 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 September 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 September 30, 2001 was 3.58%. At September 30, 2001 and 2000, the amounts outstanding against the line were $6,327,000 and $6,380,000, respectively. At September 30, 2001, $3,523,000 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. 9 Segment data is summarized as follows: Six months ended September 30, 2001 2000 Operating Revenues Overnight Air Cargo $ 14,650,903 $ 13,820,577 Ground Equipment 19,721,309 12,236,553 Aviation Services 8,462,244 3,452,781 Corporate 12,000 12,000 Total $ 42,846,456 $ 29,521,911 Operating Income Overnight Air Cargo $ 1,186,111 $ 1,308,388 Ground Equipment 2,316,209 477,243 Aviation Services (75,562) 171,644 Corporate (1) (1,395,032) (1,092,957) Total $ 2,031,726 $ 864,318 Depreciation and Amortization Overnight Air Cargo $ 136,915 $ 154,883 Ground Equipment 98,660 139,518 Aviation Services 77,337 67,913 Corporate 39,987 84,357 Total $ 352,899 $ 446,671 Capital Expenditures, net Overnight Air Cargo $ 177,954 $ 126,023 Ground Equipment 61,882 61,751 Aviation Services 18,994 186,146 Corporate 53,980 11,308 Total $ 312,810 $ 385,228 Identifiable Assets Overnight Air Cargo $ 4,224,776 $ 11,635,258 Ground Equipment 16,092,809 5,902,969 Aviation Services 7,083,583 1,760,016 Corporate 670,455 9,234,969 Total $ 28,071,623 $ 28,533,212 (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 46.0% and 34.2% 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 $19,721,000 and $12,237,000 to the Company's revenues for the six-month periods ended September 30, 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 $14,651,000 and $13,821,000 to the Company's revenues for the six-month periods ended September 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 September 30, 2001) are owned by and dry-leased from a major air express company (Customer), and Short Brothers SD3-30 aircraft (two aircraft at September 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 $8,474,000 and $3,465,000 to the Company's revenues for the six-month periods ended September 30, 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 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 $13,325,000 (45.1%) to $42,846,000 and increased $10,164,000 (67.3%) to $25,273,000, respectively, for the six and three-month periods ended September 30, 2001 compared to their equivalent 2000 periods. The six and three-month current period net increase in revenue primarily resulted from increased revenue at Global and MAS. Operating expenses increased $12,157,000 (42.4%) to $40,815,000 for the six-month period ended September 30, 2001 and $9,291,000 (63.4%) to $23,942,000 for the three-month period ended September 30, 2001 compared to their equivalent 2000 periods. The change in operating expenses for the six-month period consisted of the following: cost of flight operations increased $793,000 (12.5%), primarily as a result of increases in costs associated with pilot salaries and airport fees partially offset by decrease in fuel cost; maintenance and brokerage expense increased $5,364,000 (71.2%), primarily as a result of increases associated with cost of parts related to the purchase and sale of an aircraft engine at MAS; ground equipment increased $5,388,000 (51.4%), as a result of cost associated with increased Global sales; depreciation and amortization decreased $94,000 (21.0%) primarily related to the completion of certain assets' depreciable lives; and general and administrative expense increased $705,000 (18.3%) primarily as a result of increased wages and benefits, staff and telephone expense, particularly related to the expansion of Global and increased 12 Results of Operations (Cont'd) inventory and accounts receivable reserves. The change in operating expenses for the three-month period consisted of the following: cost of flight operations increased $344,000 (10.3%), primarily as a result of increases in costs associated with pilot salaries and airport fees partially offset by decrease in fuel cost; maintenance and brokerage expense increased $5,496,000 (150.5%), primarily as a result of increases in cost of parts related to an engine sale at MAS; ground equipment increased $2,897,000 (51.8%), as a result of cost associated with increased Global sales; depreciation and amortization decreased $50,000 (21.9%) as a result of completion of certain assets' depreciable lives; and general and administrative expense increased $604,000 (32.5%) primarily as a result of increased wages and benefits, staff and telephone expense, particularly related to the expansion of Global and increased inventory and accounts receivable reserves. Non-operating expense decreased $72,000 and $76,000, respectively, for the six and three-month periods ended September 30, 2001 and September 30, 2000. The decreases were principally due to decreased credit line interest due to reduced borrowing. Pretax earnings increased $1,239,000 and $948,000, respectively, for the six and three-month periods ended September 30, 2001, compared to their respective September 30, 2000 periods. The six-month increase was principally due to a $1,960,000 increase in profitability at Global, partially offset by a decrease in MAC and MAS earnings. Global's earnings increase of $1,175,000 for the three-month period ended September 30, 2001 compared to 2000 was partially offset by decreased profitability at MAS. The substantial increase in Global's current period profit was primarily due to increased revenue. The provision for income taxes increased $483,000 and $369,000 for the six and three-month periods ended September 30, 2001, respectively compared to their respective 2000 periods due to increased taxable income. Liquidity and Capital Resources As of September 30, 2001 the Company's working capital amounted to $14,002,000, an increase of $1,753,000 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. 13 Liquidity and Capital Resources (Cont'd) 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, 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 September 30, 2001 was 3.58%. At September 30, 2001 and 2000, the amounts outstanding against the line were $6,327,000 and $6,380,000, respectively. At September 30, 2001, an additional $3,523,000 was available under the entire credit facility. The respective six-month periods ended September 30, 2001 and 2000 resulted in the following changes in cash flow: operating activities provided $171,000 and used $1,696,000, investing activities used $294,000 and $385,000 and financing activities provided $142,000 and $2,096,000. Net cash increased $19,000 and $15,000 for the respective six-month periods ended September 30, 2001 and 2000. Cash used in operating activities was $1,865,000 less for the six- months ended September 30, 2001 compared to the similar 2000 period, principally due to increased earnings, a decrease in accounts receivable and the significant decrease in funding current period inventory, partially offset by decreased accounts payable and accrued expenses. Cash used in investing activities for the six-months ended September 30, 2001 was approximately $91,000 less than the comparable period in 2000, principally due to decreased capital expenditures. Cash provided by financing activities for the six-months ended September 30, 2001 was approximately $1,954,000 less than the comparable 2000 period, principally due to a decrease in borrowings under the line of credit in 2001, partially offset by an increase 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 $0.15 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. 14 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 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. We are evaluating the impact of these standards and have 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 15 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 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 September 30, 2001. Because the swaps are considered completely effective the change in fair market value of the swaps are recorded in other comprehensive income and long-term debt on the balance sheet. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company does not hold or issue derivative financial instruments for trading purposes. 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 $63,000. 16 PART II -- OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company held its annual meeting of stockholders on August 22, 2001. At the annual meeting, stockholders voted to re-elect each of the members of the Board of Directors, to ratify the Board's appointment of Deloitte & Touche as independent auditors for the fiscal year ending March 31, 2001, and to approve an amendment to the Company's Certificate of Incorporation to reduce the number of authorized shares of preferred stock to 50,000. In each instance, 1,774,992 votes were cast in favor and no votes were cast against. There were no abstentions or broker non-votes. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits No. Description 3.1 Restated Certificate of Incorporation. 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 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 _______________________ b. Reports on Form 8-K No Current Reports on Form 8-K were filed in the three months ended September 30, 2001. 17 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, 2001 /s/ Walter Clark Walter Clark, Chief Executive Officer Date: October 30, 2001 /s/ John Gioffre John J. Gioffre, Chief Financial Officer 18 AIR T, INC. EXHIBIT INDEX EXHIBIT PAGE 3.1 Restated Certificate of Incorporation 20-23 19