Item 1. Business.
Air T, Inc., incorporated under the laws of the State of Delaware in 1980 (the "Company"), operates in three industry segments, providing overnight air cargo services to the air express delivery industry through its wholly owned subsidiaries, Mountain Air Cargo, Inc. ("MAC") and CSA Air, Inc. ("CSA"), aviation related parts brokerage and overhaul services through its wholly owned subsidiary, Mountain Aircraft Services, LLC ("MAS"), and aviation ground support equipment products through its wholly owned subsidiary, Global Ground Support, LLC ("Global"). For the fiscal year ended March 31, 2002 the Company's air cargo services through MAC and CSA accounted for approximately 41.2% of the Company's consolidated revenues, aircraft deice and other ground support equipment products through Global accounted for 42.8% of consolidated revenues and aviation related parts brokerage and overhaul services through MAS accounted for 16.0% of consolidated revenues. The Company's air cargo services are provided exclusively to one customer -- Federal Express Corporation ("Federal Express"). Revenues from contracts with Federal Express accounted for approximately 41.2% of the Company's consolidated revenues for the year ended March 31, 2002. Certain financial data with respect to the Company's overnight air cargo, aviation services and ground support equipment segments are set forth in Note 15 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report. Such data are incorporated herein by reference.
The principal place of business of the Company and MAC is Maiden, North Carolina; the principal places of business of CSA, MAS and Global are, respectively: Iron Mountain, Michigan; Kinston, North Carolina; and Olathe, Kansas.
Diversification and Acquisition.
In October 1993, the Company organized MAS to diversify its customer base and business mix. MAS provides aircraft maintenance, parts and other aviation related services to the commercial and military aviation industries. MAS is organized as a limited liability company 100% owned by Air T.
In August 1997, the Company organized Global to acquire the Simon Deicer Division of Terex Aviation Ground Equipment, and the acquisition was completed that month. Global is located in Olathe, Kansas and manufactures, sells and services aircraft ground support equipment sold to domestic and international passenger and cargo airlines, as well as to airports. During the fiscal year ended March 31, 2000, Global diversified its product line to include additional models of aircraft deicers and scissor-lift ground support equipment. Global is organized as a limited liability company 100% owned by Air T.
The organization of MAS and Global reflects the Company's strategy to diversify its operations within the aviation industry to reduce its dependence on the air cargo service segment.
Overnight Air Cargo Services.
MAC and CSA provide small package overnight air freight delivery services on a contract basis throughout the eastern half of the United States and Canada, and in Puerto Rico and the U.S. Virgin Islands. MAC and CSA's revenues are derived principally pursuant to "dry-lease" service contracts. Under the dry-lease service contracts, the customer leases its aircraft to MAC (or CSA) for a nominal amount and pays an administrative fee to MAC (or CSA). Under these arrangements, all direct costs related to the operation of the aircraft (including fuel, maintenance, landing fees and pilot costs) are passed through to the customer. For the most recent fiscal year, operations under dry-lease service contracts accounted for 98.0% of MAC and CSA's revenues (41.2% of the Company's consolidated revenues).
For the fiscal year ended March 31, 2002, MAC and CSA provided air delivery service exclusively to Federal Express. As of March 31, 2002, MAC and CSA operated an aggregate of 95 aircraft under agreements with Federal Express. Separate agreements cover the three types of aircraft operated by MAC and CSA for Federal Express -- Cessna Caravan, Fokker F- 27 and Short Brothers SD3-30. Cessna Caravan and Fokker aircraft are dry-leased from Federal Express, and Short Brothers SD3-30 aircraft are owned by the Company and operated under "wet-lease" arrangements with Federal Express which provide for a fixed fee per flight regardless of the amount of cargo carried. Pursuant to such agreements, Federal Express determines the schedule of routes to be flown by MAC and CSA.
Agreements with Federal Express are renewable annually and may be terminated by Federal Express any time upon 15 to 30 days' notice. The Company believes that the short term and other provisions of its agreements with Federal Express are standard within the air freight contract delivery service industry. Loss of Federal Express as a customer would have a material adverse effect on MAC, CSA and the Company.
MAC and CSA operate under separate aviation certifications. MAC is certified to operate under Part 121, Part 135 and Part 145 of the regulations of the Federal Aviation Administration (the "FAA"). These certifications permit MAC to operate and maintain aircraft that can carry up to 18,000 pounds of cargo and provide maintenance services to third party operators. CSA is certified to operate under Part 135 of the FAA regulations. This certification permits CSA to operate aircraft with a maximum cargo capacity of 7,500 pounds.
MAC and CSA, together, operated or held for sale the following aircraft as of March 31, 2002:
Form of Number of Type of Aircraft Model Year Ownership Aircraft
Cessna Caravan, 208A and 208B (single turbo prop) 1985-1996 dry lease 73
Fokker (twin turbo prop) 1968-1981 dry lease 20
Short Brothers SD3-30 (twin turbo prop) 1981 owned 2
Total 95
Of the 95 aircraft fleet, 93 aircraft (the Cessna Caravan and Fokker aircraft) are owned by Federal Express. Under the dry-lease service contracts, certain maintenance expense, including cost of parts inventory, and maintenance performed by personnel not employed by the Company, is passed directly to the customer, and the expense of daily, routine maintenance and aircraft service checks is charged to the customer on an hourly basis. Accordingly, the Company does not anticipate maintenance expense, such as engine overhauls, to be material to the Company's operating results.
All FAA Part 135 aircraft, including Cessna Caravan models 208A and 208B, and Short Brothers SD3-30 aircraft are maintained on FAA approved inspection programs. The inspection intervals range from 100 to 200 hours. The engines are produced by Pratt & Whitney, and overhaul periods are based on FAA approved schedules. The current overhaul period on the Cessna aircraft is 7,500 hours. The Short Brothers manufactured aircraft are maintained on an "on condition" maintenance program (i.e., maintenance is performed when performance deviates from certain specifications) with engine inspections at each phase inspection and in-shop maintenance at predetermined intervals.
The Fokker aircraft are maintained under a FAA Part 121 maintenance program. The program consists of A, B, C, D and I service checks. The engine overhaul period is 6,700 hours.
In May 2000, MAC completed its FAA certification to commence operation of a Part 145 maintenance facility at its Kinston, N.C. location. MAC's future plans include the ability to perform heavy maintenance for regional/trunk FAA Part 121 certified carriers.
The Company operates in highly competitive markets and competes with approximately 50 other contract cargo carriers in the United States. MAC and CSA's contracts are renewed on an annual basis. Accurate industry data is not available to indicate the Company's position within its marketplace (in large measure because most of the Company's competitors are privately held), but management believes that MAC and CSA, combined, constitute one of the largest contract carriers of the type described immediately above.
The Company's air cargo operations are not materially seasonal.
Aircraft Deice and Other Equipment Products.
Global manufactures, sells, services and supports aircraft devices on a worldwide basis. During the fiscal year ended March 31, 2000, Global diversified its product line to include additional models of aircraft deicers and scissor-lift ground support equipment. Global's primary customers are passenger and cargo airlines, the U.S. Air Force, as well as airports located in the United States and in international markets. Global's operations are located in Olathe, Kansas.
In the manufacture of its ground service equipment, Global assembles components acquired from third party suppliers. Components are readily available from a number of different suppliers. The primary components are the chassis (which is similar to the chassis of a medium to heavy truck) and heating equipment.
Global manufactures five basic models of mobile deicing equipment ranging from 700 to 3,200 gallon capacity models in addition to fixed pedestal mounted deicers. Each model can be customized as requested by the customer, including the addition of twin engine deicing systems, fire suppressant equipment, modifications for open or enclosed cab design, a recently patented forced-air deicing nozzle to substantially reduce glycol usage, and color and style of the exterior finish. Global also manufactures three models of scissor-lift equipment, for catering, cabin service and maintenance service of aircraft. Global competes primarily on the basis of reliability of its products, prompt delivery and price. The market for aviation ground service equipment is highly competitive.
Global's mobile deicing equipment business has historically been highly seasonal, with the bulk of deicing equipment being purchased by customers in the late summer and fall in preparation for winter months. Historically, the bulk of Global's revenues have occurred during the second and third fiscal quarters, and comparatively little revenue has occurred during the first and fourth fiscal quarters. The Company has reduced Global's seasonal fluctuation in revenues by the introduction of a line of non-deicer related ground support equipment, the January 2000 commencement of a long-term contract to provide deicing equipment to the U.S. Air Force and the award of a $7.1 million pedestal-mounted deicer contract with the Philadelphia International Airport.
Revenue from Global's contract with the U.S. Air Force accounted for approximately 13.9% of the Company's consolidated revenue for the year ended March 31, 2002.
Aviation Related Parts Brokerage and Overhaul Services.
MAS provides aircraft maintenance and parts and other aviation related services to the commercial and military aviation industries. MAS's principal offices and primary overhaul facilities are located at the Global TransPark in Kinston, North Carolina and Miami, Florida.
Services offered by MAS include engine overhaul management, aircraft maintenance and component repair. Services are provided under standard purchase contracts.
In addition, MAS sells aircraft parts, of which approximately 1% of the amount sold in the fiscal year ended March 31, 2002 were used in connection with maintenance performed by MAS. Sales of parts by MAS do not include any parts purchased for maintenance of aircraft operated by MAC or CSA.
MAS's inventory of parts held for sale was approximately $4.8 million at March 31, 2002 and included parts for use in primarily 15 types of commercial and military aircraft, all of which are generally in current use. MAS maintains its own inventory controls and documentation, sets stocking levels and determines the conditions for surplus parts disposal.
MAS's customers include the commercial air cargo and passenger aviation industries and manufacturers of commercial and military aircraft and contract maintenance companies serving the commercial and military aviation industry. MAS also provides parts or services under contracts directly with the U.S. government. For the fiscal year ended March 31, 2002, MAS provided services or parts to over 75 customers, with five customers accounting for approximately 95% of MAS's revenues for the year.
MAS's operations are not materially seasonal.
Backlog.
The Company's backlog consists of "firm" orders supported by customer purchase orders with fixed delivery dates for the deicing equipment sold by Global and for parts and equipment sold by MAS. At March 31, 2002, the Company's backlog of orders was $3.0 million, of which $2.7 million was attributable to Global and approximately $.3 million was attributable to MAS, all of which the Company expects to be filled in the current fiscal year.
Governmental Regulation.
Under the Federal Aviation Act of 1958, as amended, the FAA has safety jurisdiction over flight operations generally, including flight equipment, flight and ground personnel training, examination and certification, certain ground facilities, flight equipment maintenance programs and procedures, examination and certification of mechanics, flight routes, air traffic control and communications and other matters. The FAA also has power to suspend or revoke for cause the certificates it issues and to institute proceedings for imposition and collection of fines for violation of federal aviation regulations. The Company has secured appropriate operating certificates and airworthiness certificates for all aircraft operated by it.
The FAA periodically conducts routine reviews of MAC and CSA's operating procedures and flight and maintenance records.
The Airline Deregulation Act of 1978 created a new class of domestic certificated all-cargo carriers. Pursuant to such certificate, aircraft of specified size may be operated within the United States, without restriction on routes.
The Company has been subject to FAA regulation since the commencement of its business activities. The FAA is concerned with safety and the regulation of flight operations generally, including equipment used, ground facilities, maintenance, communications and other matters. The FAA can suspend or revoke the authority of air carriers or their licensed personnel for failure to comply with its regulations and can ground aircraft if questions arise concerning airworthiness. The Company, through its subsidiaries, holds all operating airworthiness and other FAA certificates that are currently required for the conduct of its business, although these certificates may be suspended or revoked for cause.
The FAA has authority under the Noise Control Act of 1972, as amended, to monitor and regulate aircraft engine noise. The aircraft operated by the Company are in compliance with all such regulations promulgated by the FAA. Moreover, because the Company does not operate jet aircraft, noncompliance is not likely. Such aircraft also comply with standards for aircraft exhaust emissions promulgated by the Environmental Protection Agency pursuant to the Clean Air Act of 1970, as amended.
Because of the extensive use of radio and other communication facilities in its aircraft operations, the Company is subject to the Federal Communications Act of 1934, as amended.
Maintenance and Insurance.
The Company, through its subsidiaries, maintains its aircraft under the appropriate FAA standards and regulations.
The Company has secured public liability and property damage insurance in excess of minimum amounts required by the United States Department of Transportation. The Company has also obtained all-risk hull insurance on Company-owned aircraft.
The Company maintains cargo liability insurance, workers' compensation insurance and fire and extended coverage insurance, for leased as well as owned facilities and equipment.
Employees.
At May 24, 2002, the Company and its subsidiaries had 379 full-time and full-time-equivalent employees, of which 10 are employed by the Company, 257 are employed by MAC, 52 are employed by CSA, 21 are employed by MAS and 39 are employed by Global. None of the Company's employees are represented by a union. The Company believes its relations with its employees are good.
Item 2.
Item 2. Properties.
The Company leases the Little Mountain Airport in Maiden, North Carolina from a corporation whose stock is owned in part by J. Hugh Bingham, William H. Simpson and John J. Gioffre, officers and directors of the Company, and the estate of David Clark, of which, Walter Clark, the Company's chairman and Chief Executive Officer, is a co-executor and beneficiary, and Allison Clark, a director, is a beneficiary. The facility consists of approximately 65 acres with one 3,000 foot paved runway, approximately 20,000 square feet of hangar space and approximately 10,300 square feet of office space. The operations of the Company and MAC are headquartered at this facility. The lease for this facility extends through May 31, 2006, and the monthly lease payment is $9,155.
The Company also leases approximately 800 square feet of office space and approximately 6,000 square feet of hangar space at the Ford Airport in Iron Mountain, Michigan. CSA's operations are headquartered at these facilities. These facilities are leased, from a third party, under an annually renewable agreement with a monthly rental payment, as of March 31, 2002, of approximately $1,698.
On November 16, 1995, the Company entered into a twenty-one and a half year premises and facilities lease with Global TransPark Foundation, Inc. to lease approximately 53,000 square feet of a 66,000 square foot aircraft hangar shop and office facility at the North Carolina Global TransPark in Kinston, North Carolina. On August 10, 1996, MAS's component repair services and part of MAC's aircraft maintenance operations were relocated to this facility. Rent under this lease increases over time as follows: the first 18 months, no rent; the next 5-year period, $2.25 per square foot; the next 5-year period, $3.50 per square foot; the next 5-year period, $4.50 per square foot; and the final 5-year period, $5.90 per square foot. This lease is cancelable under certain conditions at the Company's option. The Company currently considers the lease to be non-cancelable for seven years and has calculated rent expense on a straight-line basis over this portion of the lease term. The Company began operations at this facility in August 1996.
MAS operates an engine overhaul management facility in Miami, Florida, leasing, from a third party, approximately 4,700 square feet of shop space. The lease expired on March 31, 2002 and MAS relocated to a smaller facility in April 2002 and signed a lease expiring February 2003 at a monthly rental payment of $1,523. MAS also operates a 145 repair shop facility in Kinston, North Carolina. The lease expired on March 31, 2002 and MAS relocated to a smaller facility under a month to month lease in May 2002, with a monthly rental payment of $1,225.
Global leases a 112,500 square foot production facility in Olathe, Kansas. The facility is leased, from a third party, under a five-year lease agreement which expires in August 2006. The monthly rental payment, as of March 31, 2002, was $29,341, and the monthly rental will increase to $29,809 over the life of the lease.
As of March 31, 2002, the Company leased hangar space from third parties at 35 other locations for aircraft storage. Such hangar space is leased, from third parties, at prevailing market terms.
The table of aircraft presented in Item 1 lists the aircraft operated by the Company's subsidiaries and the form of ownership.
Item 3.
Item 3. Legal Proceedings.
Global and one of its employees are defendants in a lawsuit filed in March 2002 in the United States District Court for the District of Columbia, Catalyst & Chemical Services et al v. Terex, et al. In this action, the plaintiffs allege that they provided to Global and the employee certain trade secrets regarding aircraft de/anti-icing systems that were then disclosed by Global and the employee to third parties. The plaintiffs allege misappropriation of trade secrets, breach of contract and violation of the federal Racketeer Influenced and Corrupt Organization Act and seek monetary damages. An answer in this action is not yet due and has not yet been filed. The Company does not believe that the action has any merit and intends to defend the lawsuit vigorously.
The Company is currently aware of certain employee, product liability and environmental matters, some of which involve pending or threatened lawsuits. If adversely decided, management believes the results of these pending or threatened lawsuits would not have a material adverse effect on the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
Item 5.
Item 5. Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock is publicly traded in the over-the- counter market under the NASDAQ symbol "AIRT."
As of June 5, 2002 the number of holders of record of the Company's Common Stock was approximately 362. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. The range of high and low bid quotations per share for the Company's common stock from April 2000 through March 2002 is as follows:
Common Stock Quarter Ended High Low
June 30, 2000 3.875 3.000 September 30, 2000 3.750 2.750 December 31, 2000 4.000 2.250 March 31, 2001 4.438 3.000
June 30, 2001 4.480 2.810 September 30, 2001 4.150 2.290 December 31, 2001 6.490 2.500 March 31, 2002 6.310 2.700
The Company's Board of Directors has adopted a policy to pay a regularly scheduled annual cash dividend in the first quarter of each fiscal year. The $0.12 per share cash dividend, declared on May 22, 2002, will be paid on June 20, 2002 to stockholders of record on June 5, 2002.
Item 6.
Item 6. Selected Financial Data
(In thousands except per share data)
Year Ended March 31,
2002 2001 2000 1999 1998
Operating revenues $ 70,958 $ 70,246 $ 58,846 $ 52,120 $ 51,001
Net earnings $ 1,278 $ 1,289 $ 362 $ 523 $ 1,706
Net earnings per share- Basic $ 0.47 $ 0.47 $ 0.13 $ 0.19 $ 0.64
Net earnings per share- Diluted $ 0.46 $ 0.46 $ 0.13 $ 0.19 $ 0.61
Total assets $ 22,903 $ 28,533 $ 23,936 $ 20,852 $ 18,289
Long-term obligations, including current portion $ 4,158 $ 5,969 $ 1,486 $ 1,364 $ 1,144
Stockholders' equity $ 11,100 $ 10,170 $ 9,383 $ 9,636 $ 9,712
Average common shares outstanding-Basic 2,717 2,733 2,758 2,698 2,660
Average common shares outstanding-Diluted 2,789 2,781 2,837 2,794 2,788
Dividend declared per common share (1) $ 0.15 $ 0.10 $ 0.08 $ 0.14 $ 0.10
Dividend paid per common share (1) $ 0.15 $ 0.10 $ 0.08 $ 0.14 $ 0.10 __________________________ ___
(1) On May 22, 2002, the Company declared a cash dividend of $0.12 per common share payable on June 20, 2002 to stockholders of record on June 5, 2002.
Item 7.
Item 7. 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 42.8% and 41.2% of revenue in fiscal 2002 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 ground support equipment on a worldwide basis. Global's revenue contributed approximately $30,345,000 and $31,406,000 to the Company's revenues in fiscal 2002 and 2001, respectively. The small decrease in revenues in 2002 was primarily due to decreased commercial equipment orders being virtually offset by 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 $29,264,000 and $30,262,000 to the Company's revenues in fiscal 2002 and 2001, 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, and Short Brothers SD3-30. Cessna Caravan and Fokker aircraft (a total of 93 aircraft at March 31, 2002) are owned by and dry-leased from a major air express company (Customer), and Short Brothers SD3-30 aircraft (two aircraft at March 31, 2002) are owned by the Company and operated periodically 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 parts brokerage and repair services contributed approximately $11,349,000 and $8,578,000 to the Company's revenues in fiscal 2002 and 2001, respectively, and are included in Aircraft Services and Other in the accompanying consolidated statement of earnings.
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 ground equipment and aviation services in the accompanying consolidated financial statements.
The following table summarizes the changes and trends in the Company's expenses as a percentage of revenue:
Fiscal Year Ended March 31, 2002 2001 2000
Operating revenue (in thousands) $ 70,958 $ 70,246 $ 58,846
Expense as a percentage of revenue: Flight operations 20.32% 21.30% 23.31% Maintenance and brokerage 29.33 24.06 35.11 Ground equipment 33.19 37.43 25.58 General and administrative 12.88 12.44 12.78 Depreciation and amortization 0.94 1.18 1.57
Total costs and expenses 96.65% 96.41% 98.35%
Critical Accounting Policies and Estimates
The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the U.S. requires the use of estimates and assumptions to determine certain assets, liabilities, revenues and expenses. Management bases these estimates and assumptions upon the best information available at the time of the estimates or assumptions. The Company's estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from estimates. The most significant estimates made by management include allowance for doubtful accounts receivable, reserves for excess and obsolete inventories, deferred tax asset valuation, retirement benefit obligations, valuation of revenue recognized under the percentage of completion method and valuation of long-lived assets. Following is a discussion of critical accounting policies and related management estimates and assumptions necessary in determining the value of related assets or liabilities. A full description of all significant accounting policies is included in Note 1 to our Consolidated Financial Statements included elsewhere in this Report.
Allowance for Doubtful Accounts. An allowance for doubtful accounts receivable is established based on management's estimates of the collectability of accounts receivable. The required allowance is determined using information such as customer credit history, industry information, credit reports and customer financial condition. The estimates can be affected by changes in the aviation industry, customer credit issues or general economic conditions.
Inventories. The Company's parts inventories are valued at the lower of cost or market. Provisions for excess and obsolete inventories are based on assessment of slow-moving and obsolete inventories. Historical part usage and estimated future demand provide the basis for estimates. Estimates are subject to volatility and can be affected by reduced equipment utilization, the retirement of aircraft or ground equipment and changes in the aviation industry.
Deferred Taxes. Deferred tax assets net of valuation allowance, if any, reflect the likelihood of the recoverability of these assets. Company judgement of the recoverability of these assets is based primarily on estimates of current and expected future earnings and tax planning.
Retirement Benefits Obligation. The Company determines the value of retirement benefits assets and liabilities on an actuarial basis. Values are affected by our outside actuary's estimates of the expected return on plan assets, insurance policies and the discount rates used. Actual changes in the fair market value of plan assets, differences between the actual return and the expected return on plan assets and changes in the discount rate used will affect the amount of pension gain or loss recognized.
Revenue Recognition. Cargo revenue is recognized upon completion of contract terms and maintenance revenue is recognized when the service has been performed. Revenue from product sales is recognized when contract terms are completed and title has passed to customers. Revenues from overhaul contracts on customer owned parts and long term fixed price manufacturing projects are recognized on the percentage-of- completion method. Revenues for contracts under percentage of completion are measured by the percentage of cost incurred to date, to estimated total cost for each contract or workorder.
Valuation of Long-Lived Assets. The Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" on April 1, 2002. If required, the Company will record impairment charges on long-lived assets used in operations when events and circumstances indicate the assets may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amount. In the event it is determined that the carrying values of long-lived assets are in excess of estimated gross future cash flows for those assets, the Company then will write-down the value of the assets to a level commensurate with their fair value using a discounted cash flow approach.
Seasonality
Global's business has historically been highly seasonal. Due to the nature of its product line, the bulk of Global's revenues and earnings have typically occurred during the second and third fiscal quarters in anticipation of the winter season, and comparatively little has occurred during the first and fourth fiscal quarters. The Company has continued its efforts, started in fiscal 1999, to reduce Global's seasonal fluctuation in revenues and earnings by broadening its product line to increase revenues and earnings in the first and fourth fiscal quarters. In June 1999, Global was awarded a four-year contract to supply deicing equipment to the United States Air Force (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 first quarter of fiscal 2003. 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
Fiscal 2002 vs. 2001
Consolidated revenue increased $712,000 (1.0%) to $70,958,000 for the fiscal year ended March 31, 2002 compared to the prior fiscal year. The increase in 2002 revenue primarily resulted from increases in revenue from MAS of $2,685,000 (31.0%) to $11,349,000 partially offset by decreases in Global revenue of $1,061,000 (3.4%) to $30,345,000 and a $912,000 (3.0%) decrease in air cargo revenue to $29,264,000.
Operating expenses increased $854,000 (1.3%) to $68,582,000 for fiscal 2002 compared to fiscal 2001. The net increase in operating expenses consisted of the following changes: cost of flight operations decreased $547,000 (3.7%) as a result of decreases in fuel, landing fees, and costs associated with pilot travel partially offset by increases in pilot and flight personnel costs; maintenance and brokerage expenses increased $3,906,000 (23.1%) primarily as a result of cost associated with the sale of an aircraft engine, partially offset by lower outside maintenance and parts costs at MAC; ground equipment costs decreased $2,748,000 (10.5%), as a result of decreased sales at Global; depreciation and amortization decreased $160,000 (19.3%) as a result of certain assets becoming fully depreciated, or written off during fiscal 2002; the general and administrative expense increase of $402,000 (4.6%) is primarily the result of increases in general wages and benefits, insurance cost and staff expense.
On a segment basis, the most significant impacts on the Company's operating results comparing the fiscal year ended March 31, 2002 to the prior period resulted from changes in the ground equipment operation at Global and the aircraft services operation at MAS. In the fiscal year ended March 31, 2002, Global had operating income of $3,335,000 compared to prior period income of $2,049,000 and MAS had an operating loss of $905,000 compared to a $274,000 profit in the prior year. Several factors contributed to the changes in Global's and MAS's operating results. Global's current fiscal year operating income increased compared to its prior fiscal year primarily due to commencement of a large scale airport contract and higher sales volume on its U.S. Air Force contract offsetting declines in commercial equipment orders. MAS's current fiscal year revenue increased 31.4% compared to its prior fiscal year revenue, primarily due to a large engine sale offsetting declines in service revenue. The net decrease, exclusive of the engine sale, in MAS revenue, and operating income, was primarily due to decreased brokerage sales and parts overhaul revenue. Operating income for the Company's overnight air cargo operations was $2,216,000 in the fiscal year ended March 31, 2002, a decrease of 10.5% from $2,476,000 in the prior fiscal year revenue. The decrease resulted from decreased levels of aircraft maintenance.
Non-operating expense decreased a net $305,000 due to decreased current year interest expense related to decreased borrowing on the Company's line of credit.
Provision for income taxes increased $175,000 (26.6%) due to changes in the effective tax rate. The provision for income taxes for the fiscal years ended March 31, 2002, 2001 and 2000 were different from the Federal statutory rates due to state tax provisions and a reduction in the Company's excise tax accrual due to a favorable tax ruling.
Although fiscal 2002's revenues and net earnings closely match fiscal 2001, the effect of the September 11th terrorist attacks and a softening aviation market during fiscal 2002 substantially affected Air T's operations during the second half of the current year. Air T's operating subsidiaries experienced significant decreases in current fourth quarter revenues and earnings compared to the prior year's fourth quarter. Additional accruals contributed to the Company's current period fourth quarter loss of $38,000.
Fiscal 2001 vs. 2000
Consolidated revenue increased $11,400,000 (19.4%) to $70,246,000 for the fiscal year ended March 31, 2001 compared to the prior fiscal year. The increase in 2001 revenue primarily resulted from increases in revenue from Global of $14,397,000 (84.6%) to $31,406,000 partially offset by decreases in MAS revenue of $591,000 (6.4%) to $8,578,000 and a $2,405,000 (7.4%) decrease in air cargo revenue to $30,262,000.
Operating expenses increased $9,857,000 (17.0%) to $67,729,000 for fiscal 2001 compared to fiscal 2000. The net increase in operating expenses consisted of the following changes: cost of flight operations increased $1,248,000 (9.1%) as a result of increases in fuel, landing fees, pilot and flight personnel and costs associated with pilot travel; maintenance and brokerage expenses decreased $3,755,000 (18.2%) primarily as a result of decreases associated with cost of parts stock purchases and labor related to the decreased revenue of MAS's repair facility and by lower outside maintenance costs at MAC; ground equipment costs increased $11,244,000 (74.7%), as a result of increased sales at Global; depreciation and amortization decreased $96,000 (10.4%) as a result of certain assets becoming fully depreciated, or written off during fiscal 2001; the general and administrative expense increase of $1,217,000 (16.2%) is primarily the result of increases in general wages and benefits, professional fees and staff expense.
On a segment basis, the most significant impacts on the Company's operating results comparing the fiscal year ended March 31, 2001 to the prior period resulted from changes in parent company revenue and expense, the ground equipment operation at Global and the aircraft services operation at MAS. Current year corporate operating loss increased $420,000 due to increased general and administrative expense over the prior year and decreased investment income. In the fiscal year ended March 31, 2001, Global had an operating income of $2,049,000 compared to a prior period loss of $591,000, MAS had operating income of $274,000 compared to $650,000 in the prior year. Several factors contributed to the changes in Global's and MAS's operating results. Global's current fiscal year revenue increased 84.6% compared to its prior fiscal year primarily due to commencement of the USAF contract. MAS's current fiscal year revenue decreased 6.4% compared to its prior fiscal year revenue. The decrease in MAS revenue, and operating income, was primarily due to decreased brokerage sales and parts overhaul revenue. Operating income for the Company's overnight air cargo operations was $2,476,000 in the fiscal year ended March 31, 2001, a decrease of 7.6% from $2,680,000 in the prior fiscal year revenue. The MAC decrease resulted from decreased levels of aircraft maintenance.
Non-operating expense increased a net $225,000 due to increased current year interest expense related to higher levels of borrowing on the Company's line of credit to fund the expanded operations of Global and MAS and a decrease in investment income.
Provision for income taxes increased $390,000 (146.9%) due to increased taxable income. The provision for income taxes for the fiscal years ended March 31, 2001, 2000 and 1999 were different from the Federal statutory rates due to state tax provisions and a reduction in the Company's excise tax accrual due to a favorable tax ruling.
Liquidity and Capital Resources
As of March 31, 2002 the Company's working capital amounted to $11,221,000, a decrease of $1,028,000 compared to March 31, 2001. The net decrease primarily resulted from decreases in accounts receivable and inventory and an increase in accrued expenses, partially offset by decreased accounts payable and increased deferred tax assets.
On May 23, 2001 the Company expanded its bank financing line to a $10,000,000 credit facility. Under the terms of the agreement, a $7,000,000 secured long-term revolving credit line which expires on August 31, 2003 replaced the Company's $8,500,000 unsecured short-term revolving credit line. The remaining $3,000,000 of the credit facility is a five-year term loan which matures on May 31, 2006; with quarterly payments of $150,000, plus accrued interest.
The credit facility contains customary events of default and restrictive covenants that, among other matters, require the Company to maintain certain financial ratios. As of March 31, 2002, the Company was in compliance with all of the restrictive covenants. The amount of credit available to the Company under the agreement at any given time is determined by an availability calculation, based on the eligible borrowing base, as defined in the credit agreement, which includes the Company's outstanding receivables, inventories and equipment, with certain exclusions. The credit facility is secured by substantially all of the Company's assets.
Amounts advanced under the credit facility bear interest at the 30- day "LIBOR" rate plus 137 basis points. The LIBOR rate at March 31, 2002 was 1.85%. At March 31, 2002 and 2001, the amounts outstanding against the credit facility were $3,860,000 and $5,763,000, respectively. At March 31, 2002, $5,690,000 was available under the entire credit facility.
The Company has classified $3,260,000 of its outstanding balance on the credit facility as of March 31, 2002 as long-term to reflect the terms included under the agreement signed on May 31, 2001. The Company entered into two swap agreements on May 31, 2001 to fix the interest rate on the $3,000,000 term portion and $2,000,000 of the revolving portion of the credit facility at respective interest rates of 6.97% and 6.50%.
The following table of material debt and lease commitments at March 31, 2002 summarizes the effect these obligations are expected to have on the Company's cash flow in the future periods.
Related Cash Outflows Contractual Obligations Total 2003 2004 2005 2006 2007
Long-term bank debt $3,860,000 $ 600,000 $1,910,000 $ 600,000 $ 600,000 $ 150,000 Operating leases 2,827,000 638,000 622,000 629,000 637,000 301,000 Capital leases 149,000 51,000 46,000 39,000 13,000 - Total $6,836,000 $1,289,000 $2,578,000 $1,268,000 $1,250,000 $ 451,000
The respective years ended March 31, 2002, 2001 and 2000 resulted in the following changes in cash flow: operating activities provided $2,890,000 and $262,000, respectively in 2002 and 2000 and used $1,129,000 in 2001. Investing activities used $657,000, $227,000, and $172,000, respectively, in 2002, 2001 and 2000 and financing activities used $2,300,000 and $209,000, respectively, in 2002 and 2000 and provided $1,310,000 in 2001. Net cash decreased $66,000, $47,000 and $119,000, respectively, in 2002, 2001 and 2000.
Cash provided by operating activities was $4,020,000 more for the year ended March 31, 2002, compared to 2001 principally due to decreases in accounts receivable and inventory, partially offset by decreases in accounts payable. Cash used in investing activities for the year ended March 31, 2002 was approximately $430,000 more than 2001, principally due to a sale of marketable securities in 2001. Cash used in financing activities was $3,609,000 more in 2002 compared to 2001 principally due to changes relating to borrowings under the line of credit.
During the fiscal year ended March 31, 2002 the Company repurchased 13,500 shares of its common stock at a total cost of $42,785. Pursuant to its previously announced stock repurchase program, $147,134 remains available for repurchase of common stock.
There are currently no commitments for significant capital expenditures. The Company's Board of Directors, on August 7, 1997, 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 and declared a $0.12 per share cash dividend on May 22, 2002, to be paid on June 20, 2002 to shareholders of record dated June 5, 2002.
Deferred Retirement Obligation
The Company's former Chairman and Chief Executive Officer passed away on April 18, 1997. The death benefits are payable in the amount of $75,000 per year for 10 years.
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
The Financial Accounting Standards Board has approved SFAS No. 143, "Accounting for Asset Retirement Obligations" and No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and amends, Accounting Principles Bulletin (APB) No. 30. Along with establishing a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale, this standard retains the basic provisions of APB No. 30 for the presentation of discontinued operations in the income statement but broadens that presentation to include a component of an entity. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of SFAS No. 143 or 144 to have a material effect on our financial position and results of operations.
Derivative Financial Instruments
On April 1, 2001, the Company adopted Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value.
The Company is exposed to market risk, such as changes in interest rates. To manage the volatility relating to interest rate risk, we may enter into interest rate hedging arrangements from time to time. The Company does not utilize derivative financial instruments for trading or speculative purposes.
During the first quarter of fiscal 2002, 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 interest rates of 6.97% and 6.50%, respectively; the maturity dates of the swaps vested the respective maturity dates of the underlying debt instruments. The fair value of these swaps had decreased by $119,000 at March 31, 2002. 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.
Item 7A.
Item 7A. 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 $39,000.
Item 8.
Item 8. Financial Statements and Supplementary Data.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Air T, Inc. Denver, North Carolina
We have audited the accompanying consolidating balance sheets of Air T, Inc. and subsidiaries (the "Company") as of March 31, 2002 and 2001, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2002 in conformity with accounting principles generally accepted in the United States of America.
/s/Deloitte & Touche LLP DELOITTE & TOUCHE LLP Charlotte, North Carolina May 31, 2002
AIR T, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended March 31,
2002 2001 2000
Operating Revenues (Note 10): Cargo $ 19,861,747 $ 20,258,595 $ 18,823,692 Maintenance 9,366,524 9,917,749 13,712,681 Ground equipment 30,344,889 31,405,711 17,009,311 Aircraft services and other 11,384,943 8,663,818 9,300,454
70,958,103 70,245,873 58,846,138
Operating Expenses: Flight operations 14,418,205 14,965,001 13,717,147 Maintenance and brokering 20,810,379 16,903,938 20,658,917 Ground equipment 23,547,474 26,295,686 15,052,477 General and administrative 9,139,897 8,738,131 7,521,446 Depreciation and amortization 666,389 826,018 921,791
68,582,343 67,728,774 57,871,778
Operating Income 2,375,759 2,517,099 974,360
Non-operating Expense (Income): Interest 491,387 745,077 638,138 Deferred retirement expense (Note 12) 88,078 24,996 24,996 Investment income (115,562) (114,467) (183,227) Increase in cash surrender value of life insurance (164,000) (95,457) (133,378) Other (33,142) 12,075 256
266,761 572,224 346,785
Earnings Before Income Taxes 2,108,998 1,944,875 627,575
Income Taxes (Note 11) 830,499 655,950 265,718
Net Earnings $ 1,278,499 $ 1,288,925 $ 361,857
Net Earnings Per Share (Note 13): Basic $ 0.47 $ 0.47 $ 0.13 Diluted $ 0.46 $ 0.46 $ 0.13
Weighted Average Shares Outstanding: Basic 2,716,823 2,733,428 2,757,549 Diluted 2,788,700 2,780,732 2,837,398
See notes to consolidated financial statements.
AIR T, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31,
2002 2001 ASSETS (Note 6)
Current Assets: Cash and cash equivalents $ 31,770 $ 97,799 Marketable securities (Note 2) 982,028 875,836 Accounts receivable, less allowance for doubtful accounts of $455,805 in 2002 and $163,862 in 2001 5,875,754 11,089,528 Costs and estimated earnings in excess of billings on uncompleted contracts (Note 4) 14,320 194,067 Inventories, net (Note 3) 9,907,430 10,783,686 Deferred tax asset (Note 11) 727,665 444,764 Prepaid expenses and other 188,245 203,765 Total Current Assets 17,727,212 23,689,445
Property and Equipment (Note 1): Furniture, fixtures and improvements 7,210,133 6,500,938 Flight equipment and rotables inventory 1,329,153 1,153,301 8,539,286 7,654,239 Less accumulated depreciation (5,020,238) (4,400,067) Property and equipment, net 3,519,048 3,254,172
Deferred Tax Asset (Note 11) 568,186 567,282 Intangible Pension Asset (Note 12) 290,862 361,631 Other Assets 797,454 660,682
Total Assets $ 22,902,762 $ 28,533,212
See notes to consolidated financial statements.
AIR T, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31,
2002 2001
LIABILITIES AND STOCKHOLDERS'EQUITY
Current Liabilities: Accounts payable $ 3,543,568 $ 8,879,628 Accrued expenses (Note 5) 1,915,605 1,573,468 Income taxes payable (Note 11) 355,195 287,846 Current portion of long-term obligations (Notes 6 & 7) 691,812 699,719
Total Current Liabilities 6,506,180 11,440,661
Capital Lease Obligations (less current portion) (Note 7) 87,718 105,007 Long-term Debt (less current portion) (Note 6) 3,378,934 5,163,829 Deferred Retirement Obligations (less current portion) (Note 12) 1,830,205 1,653,400
Stockholders' Equity (Note 9): Preferred stock, $1 par value, authorized 50,000 shares, none issued - - Common stock, par value $.25; authorized 4,000,000 shares; 2,724,320 and 2,705,153 shares issued and outstanding in 2002 and 2001,respectively 681,080 676,288 Additional paid in capital 6,858,898 6,828,640 Retained earnings 4,079,621 3,206,642 Accumulated other comprehensive loss (519,874) (541,255) Total Stockholders'Equity 11,099,725 10,170,315
Total Liabilities and Stockholders' Equity $ 22,902,762 $ 28,533,212
See notes to consolidated financial statements.
AIR T, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31, 2002 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 1,278,499 $ 1,288,925 $ 361,857 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Increase in accounts receivable and inventory reserves 616,049 172,844 93,478 Depreciation and amortization 666,389 826,018 921,791 Deferred tax provision (283,805) (252,395) (101,046) Net periodic pension cost 253,609 240,385 219,456 Changes in assets and liabilities which provided (used)cash: Accounts receivable 4,921,831 (3,133,354) (987,870) Inventories 291,324 (1,834,225) (2,873,729) Prepaid expenses and other 58,495 (49,547) (461,826) Accounts payable (5,336,060) 1,361,988 3,249,750 Accrued expenses 356,793 432,626 (629,703) Income taxes payable 67,349 (182,401) 470,247 Total adjustments 1,611,974 (2,418,061) (99,452) Net cash provided by (used in) operating activities 2,890,473 (1,129,136) 262,405
CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment 50,000 30,581 - Capital expenditures (720,428) (720,545) (647,084) Purchase of marketable securities - - (100,000) Sale and maturity of marketable securities 13,496 462,617 575,143 Net cash used in investing activities (656,932) (227,347) (171,941)
CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments) borrowings on line of credit (1,479,100) 1,740,910 89,402 Repayment of term loan (450,000) - - Payment of cash dividend (405,520) (274,858) (220,278) Repurchase of common stock (42,785) (186,783) (78,437) Proceeds from exercise of stock options 77,835 30,500 - Net cash (used in) provided by financing activities (2,299,570) 1,309,769 (209,313)
NET DECREASE IN CASH AND CASH EQUIVALENTS (66,029) (46,714) (118,849) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 97,799 144,513 263,362
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 31,770 $ 97,799 $ 144,513
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Capital leases entered into during fiscal year $ 24,581 $ 138,181 $ 30,236
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 609,912 $ 722,885 $ 608,938 Income taxes paid/(refunds received) 1,039,595 1,091,684 (596,993)
See notes to consolidated financial statements.
AIR T, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock (Note 9) Addit- Accumulated ional Other Total Paid-In Retained Comprehensive Stock- Shares Amount Capital Earnings Income holder's (Loss) Equity Balance,March 31, 1999 2,764,653 $ 690,491 $7,049,157 $2,050,995 $ (154,745) $9,635,898 Comprehensive Income: Net earnings 361,857 Other Comprehensive Loss: Unrealized loss on available-for- sale securities (315,438) Excess of additional pension liability over unrecognized prior service cost (127,721) Total Comprehensive Loss (81,302) Repurchase and retirement Of common stock (24,300) (6,075) (72,362) - - (78,437) Cash dividend ($.08 per share) - - - (220,278) - (220,278)
Balance, March 31,2000 2,740,353 684,416 6,976,795 2,192,574 (597,904) 9,255,881 Comprehensive Income: Net earnings 1,288,925 Other Comprehensive Income: Unrealized gain on available-for- sale securities 74,980 Excess of additional pension liability over unrecognized prior service cost (18,331) Total Comprehensive Income 1,345,574 Repurchase and retirement of common stock (61,200) (14,628) (172,155) - - (186,783) Exercise of stock options 26,000 6,500 24,000 30,500 Cash dividend ($.10 per share) - - - (274,858) - (274,858)
Balance, March 31, 2001 2,705,153 676,288 6,828,640 3,206,642 (541,255) 10,170,315 Comprehensive Income: Net earnings 1,278,499 Other Comprehensive Income: Unrealized gain on available-for- sale securities 119,690 Excess of additional pension liability over unrecognized prior service cost 20,691 Change in fair value of derivatives (119,000) Total Comprehensive Income 1,299,880 Repurchase and retirement of common stock (13,500) (3,375) (39,410) - - (42,785) Exercise of stock options 32,667 8,167 69,668 77,835 Cash dividend ($.15 per share) - - - (405,520) (405,520)
Balance, March 31,2002 2,724,320 $ 681,080 $6,858,898 $4,079,621 $ (519,874)$11,099,725
See notes to consolidated financial statements.
AIR T, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 2002, 2001, AND 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principal Business Activities - Air T, Inc. (Company), through its operating subsidiaries, is an air cargo carrier specializing in the overnight delivery of small package air freight, a provider of aircraft parts, engine overhaul management and component repair services and a manufacturer of aircraft ground service equipment.
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Mountain Air Cargo, Inc., CSA Air, Inc., Mountain Aircraft Services, LLC and Global Ground Support, LLC (Global). All significant intercompany transactions and balances have been eliminated.
Concentration of Credit Risk - The Company's potential exposure to concentrations of credit risk consists of trade accounts receivable. Accounts receivable are normally due within 30 days and the Company performs periodic credit evaluations of its customers' financial condition.
Substantially all of the Company's customers are concentrated in the aviation industry and revenue can be materially affected by current economic conditions and the price of certain supplies such as fuel, the cost of which is passed through to the customer. The Company has customer concentrations in two areas of operations, air cargo which provides service to one major customer and ground support equipment which provides equipment and services to approximately 90 customers, one of which is considered a major customer. The loss of a major customer would have a material impact on the Company's results of operations.
Cash Equivalents - Cash equivalents consist of liquid investments with maturities of three months or less when purchased.
Marketable Securities - Marketable securities consists primarily of investments in mutual funds and REITs. The Company has classified marketable securities as available-for-sale and they are carried at fair value. Unrealized gains and losses on such securities are excluded from earnings and reported as a component of accumulated comprehensive loss until realized. Realized gains and losses on marketable securities are determined by calculating the difference between the basis of each specifically identified marketable security sold and its sales price.
Inventories - Inventories of the manufacturing subsidiary are carried at the lower of cost (first in, first out) or market. Aviation parts and supplies inventories are carried at the lower of average cost or market. Consistent with industry practice, the Company includes aircraft parts and supplies in current assets, although a certain portion of these inventories may not be used within one year.
Property and Equipment - Property and equipment is stated at cost or, in the case of equipment under capital leases, the present value of future lease payments. Rotables inventory represents aircraft parts which are repairable, capitalized and depreciated over their estimated useful lives. Depreciation and amortization are provided on a straight-line basis over the asset's service life or related lease term, as follows:
Flight equipment and intellectual property 7 years Other equipment and furniture 3 to 7 years
Revenue Recognition - Cargo revenue is recognized upon completion of contract terms and maintenance revenue is recognized when the service has been performed. Revenue from product sales is recognized when contract terms are completed and title has passed to customers. Revenues from overhaul contracts on customer owned parts and long term fixed price construction projects are recognized on the percentage-of-completion method, in accordance with AICPA Statement of Position No. 81-1, "Accounting for Performance of Construction Type and Certain Production Type Contracts". Revenues for contracts under percentage of completion are measured by the percentage of cost incurred to date to estimated total cost for each contract or workorder. Contract costs include all direct material and labor costs and overhead costs related to contract performance. Unanticipated changes in job performance, job conditions and estimated profitability may result in revisions to costs and income, and are recognized in the period in which the revisions are determined or future periods. Such contracts generally have no customer retainage provisions. Except for a construction contract at Global, which is billed on a progress billing basis, the Company generally bills its customer at the time of completion of the contract or workorder.
Operating Expenses Reimbursed by Customer - The Company, under the terms of its air cargo dry-lease service contracts, passes through to its major customer certain cost components of its operations without markup. The cost of flight crews, fuel, landing fees, outside maintenance and certain other direct operating costs are included in operating expenses and billed to the customer, at cost, as cargo and maintenance revenue.
Stock Based Compensation - The Company measures employee stock compensation plans using the intrinsic method with pro-forma disclosure of net earnings and earnings per share determined as if the fair value based method had been applied in measuring compensation cost.
Income Taxes - Income taxes are provided for temporary differences between the tax and financial accounting bases of assets and liabilities using the asset and liability method. Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse.
Accounting Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates. Significant estimates include the allowance for doubtful account, inventory reserve, intangible pension asset, deferred retirement obligations and revenue recognized under the percentage of completion method.
Derivative Financial Instruments - In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 133, ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities", which requires all derivative instruments to be recognized on the balance sheet at their fair value. Changes in the fair value of derivatives are to be recorded each period either in other comprehensive income or in current earnings depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133 was effective for the Company beginning on April 1, 2001. The adoption of SFAS No. 133 did not significantly impact the Company's financial statements.
Recent Accounting Pronouncements -
The Financial Accounting Standards Board has approved SFAS No. 143, "Accounting for Asset Retirement Obligations" and No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. SFAS No. 144 supersedes SFAS No. 121 and amends, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and Accounting Principles Bulletin (APB No. 30). Along with establishing a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale, this standard retains the basic provisions of APB No. 30 for the presentation of discontinued operations in the income statement but broadens that presentation to include a component of an entity. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of SFAS No. 143 or 144 to have a material effect on our financial position and results of operations.
Reclassifications - Certain reclassifications have been made to 2001 and 2000 amounts to conform to the current year presentation.
2. MARKETABLE SECURITIES
At March 31, 2002 and 2001, marketable securities consist of the following investment types:
2002 2001 Real estate investment trusts $ 242,200 $ 98,000 Mutual funds 739,828 764,336 Certificate of deposit - 13,500
Total $ 982,028 $ 875,836
The Company recorded a realized gain of approximately $40,000 in 2001 and a realized loss of approximately $26,000 in 2000 in the accompanying consolidated statements of earnings due to the sale of securities.
3. INVENTORIES
Inventories consist of the following: March 31, 2002 2001 Aircraft parts and supplies $ 5,373,398 $ 5,571,721 Aircraft equipment manufacturing: Raw materials 2,777,175 2,819,329 Work in process 914,730 1,131,565 Finished goods 1,432,332 1,527,170 Total inventory 10,497,635 11,049,785 Reserves (590,205) (266,099)
Total, net of reserves $9,907,430 $10,783,686
4. UNCOMPLETED CONTRACTS
Overhaul contracts in process accounted for under the percentage of completion method at March 31, 2002 and 2001 are summarized as follows:
2002 2001 Costs incurred on uncompleted contracts $ 6,337 $ 53,953 Estimated earnings 7,983 140,114 Subtotal 14,320 194,067 Less billings to date - - Costs and estimated earnings in excess of billings on uncompleted contracts $ 14,320 $194,067
5. ACCRUED EXPENSES
Accrued expenses consist of the following: March 31, 2002 2001
Salaries, wages and related items $ 613,671 $ 661,600 Profit sharing 556,363 403,466 Health insurance 305,834 - Other 439,737 508,402
$ 1,915,605 $ 1,573,468
6. FINANCING ARRANGEMENTS
On May 23, 2001 the Company expanded its bank financing line to a $10,000,000 credit facility. Under the terms of the agreement, a $7,000,000 secured long-term revolving credit line, which expires on August 31, 2003, replaced the Company's $8,500,000 unsecured short-term revolving credit line. The remaining $3,000,000 of the credit facility is a five-year term loan which matures on May 31, 2006; with quarterly payments of $150,000, plus accrued interest.
Long-term debt maturities are as follows:
2003 $ 600,000 2004 1,910,000 2005 600,000 2006 600,000 2007 150,000
Total $ 3,860,000
Both the revolving credit line and the term loan contain customary events of default and restrictive covenants that, among other matters, require the Company to maintain certain financial ratios. As of March 31, 2002, the Company was in compliance with all of the restrictive covenants. The amount of credit available to the Company under the agreement at any given time is determined by an availability calculation, based on the eligible borrowing base, as defined in the credit agreement which includes the Company's outstanding receivables, inventories and equipment, with certain exclusions. The credit facility is secured by substantially all of the Company's assets.
Amounts advanced under the credit facility bear interest at the 30- day "LIBOR" rate plus 137 basis points. The LIBOR rate at March 31, 2002 was 1.85%. At March 31, 2002 and 2001, the amounts outstanding against the credit facility were $3,860,000 and $5,764,000, respectively. At March 31, 2002, $5,690,000 was available under the entire credit facility.
The Company has classified $3,260,000 of its outstanding bank debt as long-term as of March 31, 2002 to reflect the terms included under the agreement signed on May 31, 2001. The Company entered into two swap agreements on May 31, 2001 to fix the interest rate on the $3,000,000 term portion and $2,000,000 of the revolving portion of the credit facility at respective interest rates of 6.97% and 6.50%. See Footnote 8.
7. LEASE COMMITMENTS
The Company has operating lease commitments for office equipment and its office and maintenance facilities as well as capital leases for certain office and other equipment. The Company leases its corporate offices from a company controlled by Company officers for $9,155 per month under a five-year lease which expires in May 2006.
In August 1996, the Company relocated certain portions of its maintenance operations to a new maintenance facility located at the Global TransPark in Kinston, N. C. Under the terms of the long- term facility lease, after an 18 month grace period (from date of occupancy), rent will escalate from $2.25 per square foot to $5.90 per square foot, per year, over the 21.5 year life of the lease. However, based on the occurrence of certain events the lease may be canceled by the Company. The Company currently considers the lease to be non-cancelable for seven years and has calculated rent expense on a straight-line basis over this portion of the lease term.
In August 1997 Global, located in Olathe, Kansas, leased approximately 57,000 square feet of manufacturing space for $17,030 per month, under a two-year operating lease originally set to expire in September 1999. In September 1998, the lease was expanded to 112,500 square feet of manufacturing and office space for $35,903 per month expiring August 2001. In April 2001 the lease was renewed through August 2006; monthly rental will increase from $28,967 to $30,842 over the life of the lease.
At March 31, 2002, future minimum annual lease payments under capital and non-cancellable operating leases with initial or remaining terms of more than one year are as follows:
Capital Operating Leases Leases 2003 $ 50,590 $ 637,901 2004 46,388 622,340 2005 38,703 629,474 2006 13,115 636,608 2007 - 300,227
Total minimum lease payments $ 148,796 $ 2,826,549 Less amount representing interest 20,028
Present value of lease payments 128,768 Less current maturities 41,050
Long-term maturities $ 87,718
Rent expense for operating leases totaled approximately $759,000, $819,000, and $728,000 for 2002, 2001 and 2000, respectively. Rent expense to related parties was $109,860 for 2002 and $96,900 for 2001 and 2000, respectively.
8. DERIVATIVE FINANCIAL INSTRUMENTS
On April 1, 2001, the Company adopted Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value.
The Company is exposed to market risk, such as changes in interest rates. To manage the volatility relating to interest rate risk, we may enter into interest rate hedging arrangements from time to time. The Company does not utilize derivative financial instruments for trading or speculative purposes.
During the first quarter of fiscal 2002, 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 interest rates of 6.97% and 6.50%, respectively; the maturity dates of the swaps match the respective maturity dates of the underlying debt instruments. The fair value of these swaps had decreased by $119,000 at March 31, 2002. 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.
9. STOCKHOLDERS' EQUITY
The Company may issue up to 50,000 shares of preferred stock, in one or more series, on such terms and with such rights, preferences and limitations as determined by the Board of Directors. No preferred shares have been issued as of March 31, 2002.
The Company has granted options to purchase up to a total of 285,200 shares of common stock to certain Company employees and outside directors at prices ranging from $2.75 to $6.38 per share. As of March 31, 2002, 79,800 shares remain available for future issuance. All options were granted at exercise prices which approximated the fair market value of the common stock on the date of grant. Options granted in fiscal 1999 and 2000 vest over one to three year periods and must be exercised within one to ten years of the vesting date.
The following table summarizes information about stock options at March 31, 2002:
Options Outstanding Options Exercisable Weighted Average Weighted Weighted Option Remaining Average Average Grant Exercise Options Contractual Exercise Options Exercise Date Price Outstanding Life (years) Price Exerciable Price
3/19/99 $ 2.75 132,533 1.0 $ 2.75 132,533 $ 2.75 1/28/00 3.19 89,000 2.3 3.19 79,000 3.19 8/13/98 6.38 5,000 6.4 6.38 5,000 6.38
$2.75 to $6.38 226,533 1.6 $ 3.00 216,533 $ 2.99
Option information is summarized as follows:
Weighted Average Shares Exercise Price Per Share Outstanding March 31, 1999 196,200 2.57 Granted 89,000 3.19 Outstanding March 31, 2000 285,200 2.77 Exercised (26,000) 1.17 Outstanding March 31, 2001 259,200 2.93 Exercised (32,667) 2.75 Outstanding March 31, 2002 226,533 3.00
The fair value of options granted in 2000 and 1999, is estimated on the date of grant using the Black-Scholes option-pricing model with the assumptions listed below. No options were granted in 2002 or 2001.
2000 1999 Weighted average fair value per option $ 1.62 $ 1.15 Assumptions used: Weighted average expected volatility 65.1% 61.0% Weighted average expected dividend yield 2.4% 2.2% Weighted average risk-free interest rate 6.59% 5.70% Weighted average expected life, in years 4.6 3.0
The Company measures stock-based compensation using the intrinsic value method in accordance with APB Opinion No. 25. Had compensation cost for the Company's stock-based compensation awards been determined at the grant dates based on the fair market value method described in FASB Statement No. 123, "Accounting for Stock- Based Compensation" the Company's pro forma net income would have been $1,232,623, or $0.44 per diluted share, $1,240,350, or $0.45 per diluted share, and $279,927, or $0.10 per diluted share, respectively, for 2002, 2001 and 2000.
The Company has announced its intention to repurchase up to $3,400,000 of the Company's common stock under a share repurchase program. At March 31, 2002 the Company had repurchased a total of 789,780 shares at a total cost of $3,257,622 and may expend up to an additional $142,378 under this program.
10. REVENUES FROM MAJOR CUSTOMER
Approximately 41.2%, 43.1% and 55.5% of the Company's revenues were derived from services performed for a major air express company in 2002, 2001 and 2000, respectively. In addition, approximately 22.9% and 13.9% of the Company's revenues for 2002 and 2001 respectively, were generated from Global's US Air Force contract.
11. INCOME TAXES
The provision for income taxes consists of:
Year Ended March 31,
2002 2001 2000 Current: Federal $ 911,000 $ 730,000 $ 300,000 State 203,000 178,000 67,000 Total current 1,114,000 908,000 367,000 Deferred: Federal (214,000) (207,000) (83,000) State (70,000) (45,000) (18,000) Total deferred (284,000) (252,000) (101,000)
Total $ 830,000 $ 656,000 $ 266,000
The consolidated income tax provision was different from the amount computed using the statutory Federal income tax rate for the following reasons:
2002 2001 2000
Income tax provision at U.S. Statutory rate $ 716,000 $ 661,000 $ 213,000 State income taxes 99,000 94,000 32,000 Meal and entertainment disallowance 25,000 21,000 17,000 Other, net (10,000) 17,000 4,000 Reduction in valuation allowance - (137,000) -
Income tax provision $ 830,000 $ 656,000 $ 266,000
The tax effect of temporary differences that gave rise to the Company's deferred tax assets at March 31, 2002 and 2001 are as follows: 2002 2001 Book accruals over tax, net: Warranty reserve $ 47,742 $ 80,123 Accounts receivable reserve 177,008 66,210 Inventory reserve 227,937 102,767 Accrued insurance (7,103) 25,561 Accrued vacation 86,879 79,467 Deferred compensation 565,097 519,111 Other 198,277 96,117 Fixed assets 14 42,690 Total $ 1,295,851 $ 1,012,046
The deferred tax asset is classified in the accompanying 2001 and 2000 consolidated balance sheets according to the classification of the related asset and liability.
12. EMPLOYEE BENEFITS
The Company has a 401K defined contribution plan (AirT 401(K) Retirement Plan). All employees of the Company are eligible to participate in the plan. The Company's contribution to the 401(K) plan for the years ended March 31, 2002, 2001 and 2000 was $228,000, $229,000, and $229,000, respectively.
The Company, in each of the past three years, has paid a discretionary profit sharing bonus in which all employees have participated. The Company's expense for the years ended March 31, 2002, 2001, and 2000 was $562,000, $400,000 and $126,000, respectively.
Effective January 1, 1996 the Company entered into supplemental retirement agreements with certain key executives of the Company, to provide for a monthly benefit upon retirement. The following table sets forth the funded status of the plan at March 31, 2002 and 2001.
March 31, 2002 2001
Vested benefit obligation and accumulated benefit obligation $ 1,555,827 $ 1,392,100 Projected benefit obligation 1,555,827 1,395,178 Plan assets at fair value - -
Projected benefit obligation greater than plan assets 1,555,827 1,395,178 Unrecognized prior service cost (290,862) (361,631) Unrecognized actuarial loss (125,361) (147,552) Adjustment required to recognize minimum liability 416,223 506,105
Accrued pension cost recognized in the consolidated balance sheet $ 1,555,827 $ 1,392,100
In accordance with the provisions of Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," the Company has recorded an additional minimum liability representing the excess of the accumulated benefit obligation over the fair value of plan assets and accrued pension liability for its pension plan. The additional liability has been offset by an intangible asset to the extent of prior service cost. The portion of unrecognized prior service cost in excess of additional liability in fiscal 2002 totaled $20,691 and is reported as a component of accumulated other comprehensive loss.
The projected benefit obligation was determined using an assumed discount rate of 7% and an assumed rate of return on assets of 7%. The liability relating to these benefits has been included in deferred retirement obligation in the accompanying financial statements.
Net periodic pension expense for fiscal 2002 and 2001 included the following:
2002 2001 2000
Future service cost $ 62,944 $ 58,826 $ 53,106 Interest cost 97,665 87,425 77,987 Amortization 93,000 94,134 88,363
Net periodic pension cost $ 253,609 $ 240,385 $ 219,456
A rollforward of the projected benefit obligation (PBO) is as follows:
PBO March 31, 2001 $ 1,395,178 Actuarial loss 40 Future service cost 62,944 Interest cost 97,665 PBO March 31, 2002 $ 1,555,827
The Company's former Chairman and CEO passed away on April 18, 1997. Under the terms of his supplemental retirement agreement, approximately $498,000 in present value of death benefits is required to be paid to fulfill death benefit payments over the next 10 years. As of March 31, 2002 accruals related to the unpaid present value of the benefit amounted to approximately $324,000 (of which approximately $274,000 is included under deferred retirement obligations in the accompanying balance sheet). The net periodic pension costs are included in general and administrative expenses in the accompanying consolidated statements of earnings.
13. NET EARNINGS PER COMMON 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.
The computation of basic and diluted earnings per common share is as follows:
Year Ended March 31, 2002 2001 2000
Net earnings $ 1,278,499 $ 1,288,925 $ 361,857
Weighted average common shares: Shares outstanding - basic 2,716,823 2,733,428 2,757,549 Dilutive stock options 71,877 47,304 79,849 Shares outstanding - diluted 2,788,700 2,780,732 2,837,398
Net earnings per common share: Basic $ 0.47 $ 0.47 $ 0.13 Diluted $ 0.46 $ 0.46 $ 0.13
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (in thousands except per share data)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER Operating Revenues $ 17,573 $ 25,273 $ 15,769 $ 12,343 Operating Income (Loss) 701 1,331 382 (38) Earnings Before Income Taxes 571 1,230 278 30 Net Earnings 343 746 156 34
Net Earnings Per Share-Basic $ 0.13 $ 0.27 $ 0.06 $ 0.01 Net Earnings Per Share-Diluted 0.12 0.27 0.06 0.01
Operating Revenues $ 14,412 $ 15,110 $ 20,583 $ 20,141 Operating Income 406 458 1,051 602 Earnings Before Income Taxes 280 282 822 561 Net Earnings 165 167 498 459
Net Earnings Per Share-Basic $ 0.06 $ 0.06 $ 0.18 $ 0.17 Net Earnings Per Share-Diluted 0.06 0.06 0.18 0.16
15. 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, ground equipment, and aviation services.
The accounting policies for all reportable segments are the same as those described in Footnote 1 of Notes to Consolidated Financial Statements. The Company evaluates the performance of its operating segments based on operating income.
Segment data is summarized as follows:
Year Ended March 31,
2002 2001 2000 Operating Revenues Overnight Air Cargo $ 29,264,031 $ 30,262,362 $ 32,667,694 Ground Equipment 30,344,889 31,405,711 17,009,311 Aviation Services 11,349,183 8,577,800 9,169,133 Corporate - - - Total $ 70,958,103 $ 70,245,873 $ 58,846,138
Operating Income (Loss) Overnight Air Cargo $ 2,215,901 $ 2,475,522 $ 2,679,793 Ground Equipment 3,335,477 2,048,843 (591,440) Aviation Services (904,911) 274,337 650,033 Corporate (1) (2,270,708) (2,281,603) (1,764,026) Total $ 2,375,759 $ 2,517,099 $ 974,360
Identifiable Assets Overnight Air Cargo $ 3,852,042 $ 4,957,327 $ 5,168,813 Ground Equipment 10,051,691 13,531,515 10,284,886 Aviation Services 6,142,237 8,862,645 6,111,755 Corporate 2,856,792 1,181,725 2,370,993 Total $ 22,902,762 $ 28,533,212 $ 23,936,447
Capital Expenditures, net Overnight Air Cargo $ 107,264 $ 371,505 $ 353,409 Ground Equipment 271,672 77,288 58,483 Aviation Services 38,308 229,650 132,238 Corporate 303,184 42,102 108,497 Total $ 720,428 $ 720,545 $ 652,627
Depreciation and Amortization Overnight Air Cargo $ 228,051 $ 261,122 $ 322,479 Ground Equipment 197,708 271,496 283,664 Aviation Services 149,437 146,683 161,781 Corporate 91,193 146,717 153,867 Total $ 666,389 $ 826,018 $ 921,791
(1) Excludes income from inter-segment transactions.
16. COMMITMENTS AND CONTINGENCIES
Global and one of its employees are defendants in a lawsuit filed in March 2002 in the United States District Court for the District of Columbia, Catalyst & Chemical Services et al v. Terex, et al. In this action, the plaintiffs allege that they provided to Global and the employee certain trade secrets regarding aircraft de/anti- icing systems that were then disclosed by Global and the employee to third parties. The plaintiffs allege misappropriation of trade secrets, breach of contract and violation of the federal Racketeer Influenced and Corrupt Organization Act and seek monetary damages. An answer in this action is not yet due and has not yet been filed. The Company does not believe that the action has any merit and intends to defend the lawsuit vigorously.
The Company is currently aware of certain employee, intellectual property and environmental matters, some of which involve pending or threatened lawsuits. If adversely decided, management believes the results of these pending or threatened lawsuits would not have a material adverse effect on the Company.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
The Company had no disagreements on accounting or financial disclosure matters with its independent certified public accountants to report under this Item 9.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
J. Hugh Bingham, age 56, has served as President and Chief Operating Officer of the Company since April 1997, as Senior Vice President of the Company from June 1990 until April 1997, as Executive Vice President from June 1983 to June 1990, and as a director since March 1987. Mr. Bingham also serves as Chief Executive Officer and a director of MAC, as Chief Executive Officer of MAS and as an Executive Vice President and director of CSA.
Walter Clark, age 45, has served as Chairman of the Board of Directors of the Company and Chief Executive Officer since April 1997. Mr. Clark also serves as a director of MAC and CSA. Mr. Clark was elected a director of the Company in April 1996. Mr. Clark was self- employed in the real estate development business from 1985 until April 1997.
John J. Gioffre, age 58, has served as Vice President-Finance and Chief Financial Officer of the Company since April 1984 and as Secretary/Treasurer of the Company since June 1983. He has served as a director of the Company since March 1987. Mr. Gioffre also serves as Vice-President, Secretary/Treasurer and a director of MAC and CSA and as Vice President-Finance, Treasurer and Secretary of MAS.
J. Leonard Martin, age 65, was elected a director in August 1994 and joined the Company as a Vice President in April 1997. From June 1995 until April 1997, Mr. Martin was an independent aviation consultant. From April 1994 to June 1995, Mr. Martin served as Chief Operating Officer of Musgrave Machine & Tool, Inc., a machining company. From January 1989 to April 1994, Mr. Martin served as a consultant to the North Carolina Air Cargo Authority in connection with the establishment of the Global TransPark air cargo facility in Kinston, North Carolina. From 1955 through 1988 Mr. Martin was employed by Piedmont Airlines, a commercial passenger airline, in various capacities, ultimately serving as Senior Vice President-Passenger Services.
William H. Simpson, age 54, has served as Executive Vice President of the Company since June 1990, as Vice President from June 1983 to June 1990, and as a director of the Company since June 20, 1985. Mr. Simpson is also the President and a director of MAC, the Chief Executive Officer and a director of CSA and Executive Vice President of MAS.
Menda J. Street, age 50, has served as Vice President of MAC since 1984, and in various other capacities at MAC since 1979.
Claude S. Abernethy, Jr., age 75, was elected as director of the Company in June 1990. For the past five years, Mr. Abernethy has served as a Senior Vice President of Wachovia Securities, a securities brokerage and investment banking firm, and its predecessor. Mr. Abernethy is also a director of Carolina Mills, Inc. and Wellco Enterprises.
Sam Chesnutt, age 65, was elected a director of the Company in August 1994. Mr. Chesnutt serves as President of Sam Chesnutt and Associates, an agribusiness consulting firm. From November 1988 to December 1994, Mr. Chesnutt served as Executive Vice President of AgriGeneral Company, L.P., an agribusiness firm.
Allison T. Clark, age 46, has served as a director of the Company since May 1997. Mr. Clark has been self-employed in the real estate development business since 1987.
Herman A. Moore, age 72, was elected a director of the Company on June 22, 1998. Mr. Moore is the president of Herman A. Moore & Assoc., Inc., a real estate development company.
George C. Prill, age 79, has served as a director of the Company since June 1982, as Chief Executive Officer and Chairman of the Board of Directors from August 1982 until June 1983, and as President from August 1982 until spring 1984. Mr. Prill has served as an Editorial Director for General Publications, Inc., a publisher of magazines devoted to the air transportation industry, from November 1992 until 2001 and was retired from 1990 until that time. From 1979 to 1990, Mr. Prill served as President of George C. Prill & Associates, Inc., of Charlottesville, Virginia, which performed consulting services for the aerospace and airline industry. Mr. Prill has served as President of Lockheed International Company, as Assistant Administrator of the FAA, as a Senior Vice President of the National Aeronautic Association and Chairman of the Aerospace Industry Trade Advisory Committee.
The officers of the Company and its subsidiaries each serve at the pleasure of the Board of Directors. Allison Clark and Walter Clark are brothers.
Each director receives a director's fee of $500 per month and an attendance fee of $500 is paid to outside directors for each meeting of the board of directors or a committee thereof. Pursuant to the Company's 1998 Omnibus Securities Award Plan (the "Plan") each director who is not an employee of the Company received an option to purchase 1,000 shares of Common Stock at an exercise price of $6.375 per share (the closing bid price per share on the date of stockholder approval of the Plan.) The Plan provides for a similar option award to any director first elected to the board after the date the stockholders approved the Plan. Such options expire ten years after the date they were granted.
To the Company's knowledge, based solely on review of the copies of reports under Section 16(a) of the Securities Exchange Act of 1934 that have been furnished to the Company and written representations that no other reports were required, during the fiscal year ended March 31, 2002 all executive officers, directors and greater than ten-percent beneficial owners have complied with all applicable Section 16(a) filing requirements.
Item 11.
Item 11. Executive Compensation.
The following table sets forth a summary of the compensation paid during each of the three most recent fiscal years to the Company's Chief Executive Officer and to the four other executive officers on March 31, 2002 with total compensation of $100,000 or more.
SUMMARY COMPENSATION TABLE
Long-term Compensation Name and Principal Awards Position Securities Annual Compensation Underlying Year Salary ($)(1) Bonus ($) Options (#) Walter Clark 2002 111,522 52,140 - Chief Executive 2001 125,732 46,900 - Officer 2000 126,035 15,080 50,000
J. Hugh Bingham 2002 193,304 52,564 - President 2001 193,004 46,900 - 2000 196,032 15,080 -
John J. Gioffre 2002 122,058 39,880 - Vice President 2001 121,788 35,175 - 2000 121,948 11,311 -
J. Leonard Martin 2002 122,659 59,900 - Vice President 2001 122,673 24,880 - 2000 122,205 6,880 -
William H. Simpson 2002 195,364 52,140 - Executive Vice 2001 194,803 46,900 - President 2000 195,169 15,080 9,000
__________________________________________ (1) Includes perquisites in aggregate amount no greater than 10% of the officer's base salary plus bonus.
The following table sets forth, for each of the executive officers listed in the Summary Compensation Table who exercised options to purchase shares of Common Stock during the most recent fiscal year, the number of shares purchased and the value realized upon exercise, which is determined based on the aggregate fair market value of the shares at the time of the exercise minus the aggregate exercise price. The table also sets forth the number of shares of Common Stock underlying unexercised options at March 31, 2002 held by each of the executive officers listed in the Summary Compensation Table. The table also includes the value of such options at March 31, 2002 based upon the closing bid price of the Company's Common Stock in the over-the-counter market on that date ($3.50 per share) and the exercise price of the options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of Value of Securities Unexercised Shares Underlying In-the-Money Acquired Value Unexercised Options On Realized Options at FY-End(#) at FY-End ($) Name Exercise# ($) Exercis- Unexercis- Exercis- Unexercis- able able able able Walter Clark - - 50,000 - 15,500 -
J. Hugh Bingham - - 9,000 - 6,750 -
John J. Gioffre - - 9,000 - 6,750 -
J. Leonard Martin 6,000 4,800 3,000 - 2,250 -
William H. Simpson 8,000 20,400 9,000 - 2,790 -
EMPLOYMENT AGREEMENTS
Effective January 1, 1996, the Company and each of its subsidiaries entered into employment agreements with J. Hugh Bingham, John J. Gioffre and William H. Simpson, each of substantially similar form. Each of such employment agreements provides for an annual base salary ($130,000, $103,443 and $165,537 for Messrs. Bingham, Gioffre and Simpson, respectively) which may be increased upon annual review by the Compensation Committee of the Company's Board of Directors. In addition, each such agreement provides for the payment of annual incentive bonus compensation equal to a percentage (2.0%, 1.5% and 2.0% for Messrs. Bingham, Gioffre and Simpson, respectively) of the Company's consolidated earnings before income taxes and extraordinary items as reported by the Company in its Annual Report on Form 10-K. Payment of such bonus is to be made within 15 days after the Company files its Annual Report on Form 10-K with the Securities and Exchange Commission.
The initial term of each such employment agreement expired on March 31, 1999, and the term is automatically extended for additional one-year terms unless either such executive officer or the Company's Board of Directors gives notice to terminate automatic extensions which must be given by December 1 of each year (commencing with December 1, 1996).
Each such agreement provides that upon the executive officer's retirement, he shall be entitled to receive an annual benefit equal to $75,000 ($60,000 for Mr. Gioffre), reduced by three percent for each full year that the termination of his employment precedes the date he reaches age 65. The retirement benefits under such agreements may be paid at the executive officer's election in the form of a single life annuity or a joint and survivor annuity or a life annuity with a ten- year period certain. In addition, such executive officer may elect to receive the entire retirement benefit in a lump sum payment equal to the present value of the benefit based on standard insurance annuity mortality tables and an interest rate equal to the 90-day average of the yield on ten-year U.S. Treasury Notes.
Retirement benefits shall be paid commencing on such executive officer's 65th birthday, provided that such executive officer may elect to receive benefits on the later of his 62nd birthday, in which case benefits will be reduced as described above, or the date on which his employment terminates, provided that notice of his termination of employment is given at least one year prior to the termination of employment. Any retirement benefits due under the employment agreement shall be offset by any other retirement benefits that such executive officer receives under any plan maintained by the Company. In the event such executive officer becomes totally disabled prior to retirement, he will be entitled to receive retirement benefits calculated as described above.
In the event of such executive officer's death before retirement, the agreement provides that the Company shall be required to pay an annual death benefit to such officer's estate equal to the single life annuity benefit such executive officer would have received if he had terminated employment on the later of his 65th birthday or the date of his death, payable over ten years; provided that such amount would be reduced by five percent for each year such executive officer's death occurs prior to age 65, but in no event more than 50 percent.
Each of the employment agreements provides that if the Company terminates such executive officer's employment other than for "cause" (as defined in the agreement), such executive officer be entitled to receive a lump sum cash payment equal to the amount of base salary payable for the remaining term of the agreement (at the then current rate) plus one-half of the maximum incentive bonus compensation that would be payable if such executive officer continued employment through the date of the expiration of the agreement (assuming for such purposes that the amount of incentive bonus compensation would be the same in each of the years remaining under the agreement as was paid for the most recent year prior to termination of employment). Each of the agreements further provides that if any payment on termination of employment would not be deductible by the Company under Section 280G(b)(2) of the Internal Revenue Code, the amount of such payment would be reduced to the largest amount that would be fully deductible by the Company.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
CERTAIN BENEFICIAL OWNERS
The following table sets forth information regarding the beneficial ownership of shares of Common Stock (determined in accordance with Rule 13d-3 of the Securities and Exchange Commission) of the Company as of June 1, 2002 by each person that beneficially owns five percent or more of the shares of Common Stock. Each person named in the table has sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned, except as otherwise set forth in the notes to the table.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Amount of Beneficial Title of Name and Address of Ownership Percent Class Beneficial Owner as of June 1, Of 2002 Class Common Walter Clark and Caroline Clark, 1,342,416(1) 48.7% Stock, par Executors(1) value $.25 P.O. Box 488 per share Denver, North Carolina 28650
William H. Simpson 270,580(2) 9.9% P.O. Box 488 Denver, North Carolina 28650
_____________________________
(1) Includes 1,279,272 shares controlled by such individuals as the executors of the estate of David Clark, 10,922 shares owned by Walter Clark, 50,000 shares purchasable by Walter Clark under options awarded by the Company and 2,222 shares owned by Caroline Clark.
(2) Includes 1,200 shares held jointly with J. Hugh Bingham and 9,000 shares under options granted by the Company.
The following table sets forth information regarding the beneficial ownership of shares of Common Stock of the Company by each director of the Company and by all directors and executive officers of the Company as a group as of June 1, 2002. Each person named in the table has sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned, except as otherwise set forth in the notes to the table.
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
Shares and Percent of Common Stock Beneficially Owned as of June 1, 2002 Name Position with Company No. of Shares Percent
J. Hugh Bingham President, Chief 128,080(1)(2) 4.7% Operating Officer, Director
Walter Clark Chairman of the 1,340,194(3) 48.3% Board of Directors and Chief Executive Officer
John J. Gioffre Vice President- 66,580(4) 2.4% Finance, Chief Financial Officer, Secretary and Treasurer, Director
J. Leonard Martin Vice President, 3,100(5) * Director
William H.Simpson Executive Vice 270,580(1)(6) 9.9% President, Director
Claude S. Abernethy, Jr. Director 44,011(7)(8) 1.6%
Sam Chesnutt Director 12,100(7) *
Allison T. Clark Director 3,222(7) *
Herman A. Moore Director 1,000(7) *
George C. Prill Director 46,966(7) 1.7%
All directors N/A 1,930,833(9) 68.5% and executive officers as a group (11 persons) __________________________________________
* Less than one percent. (1) Includes 1,200 shares jointly held by Messrs. Simpson and Bingham. (2) Includes 9,000 shares under options granted by the Company to Mr. Bingham. (3) Includes 1,279,272 shares held by the estate of David Clark, of which Mr. Walter Clark is a co-executor and 50,000 shares under options granted by the Company to Mr. Walter Clark. (4) Includes 9,000 shares under options granted by the Company to Mr. Gioffre. (5) Such 100 shares are held by Mr. Martin's spouse of which shares Mr. Martin disclaims beneficial ownership and 3,000 shares under options granted by the Company to Mr. Martin. (6) Includes 9,000 shares under options granted by the Company to Mr. Simpson. (7) Includes 1,000 shares under options granted by the Company. (8) Includes 20,400 shares held by the Estate of Raenelle B. Abernethy, of which Mr. Abernethy is the executor. (9) Includes an aggregate of 94,000 shares of Common Stock members of such group have the right to acquire within 60 days.
This table summarizes share and exercise price information about our equity compensation plans as of March 31, 2002.
EQUITY COMPENSATION PLAN INFORMATION
Number of Number of securities to Weighted- securities be issued average remaining upon exercise exercise price available for of outstanding of outstanding future issuance options, warrants options, warrants under equity Plan Category and rights and rights compensation plan
Equity compensation plans approved by security holders 226,533 $3.00 79,800 Equity compensation plans not approved by security holders None N/A N/A
Item 13.
Item 13. Certain Relationships and Related Transactions.
The Company leases its corporate and operating facilities at the Little Mountain, North Carolina airport from Little Mountain Airport Associates, Inc. ("Airport Associates"), a corporation whose stock is owned by J. Hugh Bingham, William H. Simpson, John J. Gioffre, the estate of David Clark and three unaffiliated third parties. Walter Clark and Allison Clark are beneficiaries of the estate of David Clark, and Walter Clark is also a co-executor of the estate. On May 31, 2001, the Company renewed its lease for this facility, scheduled to expire on that date, for an additional five-year term, and adjusted the rent to account for increases in the consumer price index. Upon the renewal, the monthly rental payment was increased from $8,073 to $9,155. The Company paid aggregate rental payments of $96,876 to Airport Associates pursuant to such lease during the fiscal year ended March 31, 2002. The Company believes that the terms of such lease are no less favorable to the Company than would be available from an independent third party.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The following documents are filed as part of this report:
1. Financial Statements
The following financial statements are incorporated herein by reference in Item 8 of Part II of this report:
(i) Independent Auditors' Report. (ii) Consolidated Balance Sheets as of March 31, 2002 and 2001. (iii)Consolidated Statements of Earnings for each of the three years in the period ended March 31, 2002. (iv) Consolidated Statements of Stockholders' Equity for each of the three years in the period ended March 31, 2002. (v) Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2002. (vi) Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
No schedules are required to be submitted.
3. Exhibits
No. Description
3.1 Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2001
3.2 By-laws of the Company, as amended, incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996
4.1 Specimen Common Stock Certificate, incorporated by reference to Exhibit 4.1 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994
10.1 Aircraft Dry Lease and Service Agreement dated February 2, 1994 between Mountain Air Cargo, Inc. and Federal Express Corporation, incorporated by reference to Exhibit 10.13 to Amendment No. 1 on Form 10- Q/A to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1993
10.2 Loan Agreement among Bank of America, N.A. the Company and its subsidiaries, dated May 23, 2001, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2001.
10.3 Aircraft Wet Lease Agreement dated April 1, 1994 between Mountain Air Cargo, Inc. and Federal Express Corporation, incorporated by reference to Exhibit 10.4 of Amendment No. 1 on Form 10-Q/Q to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1994
10.4 Adoption Agreement regarding the Company's Master 401(k) Plan and Trust, incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1993*
10.5 Amendment No. 1 to Omnibus Securities Award Plan incorporated by reference to Exhibit 10.14 of the Company's Annual Report on Form 10-K for the year ended March 31, 2000*.
10.6 Premises and Facilities Lease dated November 16, 1995 between Global TransPark Foundation, Inc. and Mountain Air Cargo, Inc., incorporated by reference to Exhibit 10.5 to Amendment No. 1 on Form 10- Q/A to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 1995
10.7 Employment Agreement dated January 1, 1996 between the Company, Mountain Air Cargo Inc. and Mountain Aircraft Services, LLC and William H. Simpson, incorporated by reference to Exhibit 10.8 to the Company's Annual Report Form 10-K for the fiscal year ended March 31, 1996*
10.8 Employment Agreement dated January 1, 1996 between the Company, Mountain Air Cargo Inc. and Mountain Aircraft Services, LLC and John J. Gioffre, incorporated by reference to Exhibit 10.9 to the Company's Annual Report Form 10-K for the fiscal year ended March 31, 1996*
10.9 Employment Agreement dated January 1, 1996 between Company, Mountain Air Cargo Inc. and Mountain Aircraft Services, LLC and J. Hugh Bingham, incorporated by reference to Exhibit 10.10 to the Company's Annual Report Form 10k for the fiscal year end March 31, 1996.*
10.10 Employment Agreement dated September 30, 1997 between Mountain Aircraft Services, LLC and J. Leonard Martin, incorporated by reference to Exhibit 10.10 to the Company's Quarterly Report Form 10-Q for the quarter ended December 31, 1997.*
10.11 Omnibus Securities Award Plan, incorporated by reference to Exhibit 10.11 to the Company's Quarterly Report Form 10-Q for the quarter ended June 30, 1998.*
10.12 Commercial and Industrial Lease Agreement dated August 25, 1998 between William F. Bieber and Global Ground Support, LLC, incorporated by reference to Exhibit 10.12 of the Company's Quarterly Report on 10Q for the period ended September 30, 1998.
10.13 Amendment, dated February 1, 1999, to Aircraft Dry Lease and Service Agreement dated February 2, 1994 between Mountain Air Cargo, Inc. and Federal Express Corporation, incorporated by reference to Exhibit 10.13 of the Company's Quarterly Report on 10Q for the period ended December 31, 1998.
10.14 ISDA Schedule to Master Agreement between Bank of America, N.A. and the Company dated May 23, 2001, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2001
21.1 List of subsidiaries of the Company, incorporated by reference to Exhibit 21.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997
23.1 Consent of Deloitte & Touche LLP __________________
* Management compensatory plan or arrangement required to be filed as an exhibit to this report.
b. Reports on Form 8-K.
No Current Reports on Form 8-K were filed in the last quarter of the fiscal year ended March 31, 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Walter Clark Walter Clark, Chief Executive Officer (Principal Executive Officer)
Date: June 11, 2002
By: /s/ John J. Gioffre John J. Gioffre, Chief Financial Officer (Principal Financial and Accounting Officer)
Date: June 11, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Claude S. Abernethy Claude S. Abernethy, Jr., Director
Date: June 11, 2002
By: /s/ J. Hugh Bingham J. Hugh Bingham, Director
Date: June 11, 2002
By: /s/ Allison T. Clark Allison T. Clark, Director
Date: June 11, 2002
By: /s/ Walter Clark Walter Clark, Director
Date: June 11, 2002
By: /s/ Sam Chesnutt Sam Chesnutt, Director
Date: June 11, 2002
By: /s/ John J. Gioffre John J. Gioffre, Director
Date: June 11, 2002
By: /s/ J. Leonard Martin J. Leonard Martin, Director
Date: June 11, 2002
By: /s/ Herman A. Moore Herman A. Moore, Director
Date: June 11, 2002
By: /s/ George C. Prill George C. Prill, Director
Date: June 11, 2002
By: /s/ William Simpson William Simpson, Director
Date: June 11, 2002
EXHIBIT INDEX
Exhibit Number Document
23.1 Consent of Deloitte & Touche LLP