10-Q 2 dec.txt AIRT DECEMBER 31, 2000 10Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For Quarter Ended December 31, 2000 Commission File Number 0-11720 AIR T, INC. (Exact name of registrant as specified in its charter) Delaware 52-1206400 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Post Office Box 488, Denver, North Carolina 28037 (Address of principal executive offices) (704) 377-2109 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 2,705,453 Common Shares, par value of $.25 per share were outstanding as of February 9, 2001. This filing contains 26 pages. The exhibit index is on page 16. AIRT, INC. AND SUBSIDIARIES INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Earnings (Loss) for the three and nine-month periods ended December 31, 2000 and 1999 (Unaudited) 3 Condensed Consolidated Balance Sheets at December 31, 2000 (Unaudited) and March 31, 2000 4 Condensed Consolidated Statements of Cash Flows for the nine-month periods ended December 31, 2000 and 1999 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-12 Item 3. Quantitative and Qualitative Disclosure About Market Risk 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 6. Exhibits and Reports on Form 8-K 14-15 Exhibit Index 16 Exhibits 17-26 2 AIRT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (UNAUDITED) Three Months Ended Nine months Ended December 31, December 31, 2000 1999 2000 1999 Operating Revenues: Cargo $5,092,020 $4,762,519 $14,071,350 $13,733,496 Maintenance 2,288,298 2,842,958 7,129,545 9,777,530 Ground equipment 11,133,140 5,573,038 23,369,693 10,227,571 Aircraft services and other 2,068,899 2,400,631 5,533,680 6,536,989 20,582,357 15,579,146 50,104,268 40,275,586 Operating Expenses: Flight operations 3,691,669 3,340,241 10,018,156 9,901,360 Maintenance and brokerage 3,969,676 4,680,162 11,505,174 14,854,505 Ground equipment 9,375,995 4,696,544 19,867,998 9,075,590 General and administrative 2,279,638 1,864,927 6,136,572 5,490,636 Depreciation and amortization 214,573 236,108 661,244 700,510 19,531,551 14,817,982 48,189,144 40,022,601 Operating Income 1,050,806 761,164 1,915,124 252,985 Non-operating Expense (Income): Interest 197,549 165,199 556,658 467,531 Deferred retirement expense 6,249 6,249 18,747 19,003 Investment income (13,967) (38,579) (84,576) (129,620) Loss on asset sale 39,438 26,108 41,047 26,108 229,269 158,977 531,876 383,022 Earnings (Loss) Before Income Taxes 821,537 602,187 1,383,248 (130,037) Income Tax Provision (Benefit) 323,537 228,000 552,996 (50,000) Net Earnings (Loss) $ 498,000 $ 374,187 $ 830,252 $ (80,037) Net Earnings (Loss) Per Share: Basic $ 0.18 $ 0.14 $ 0.30 $ (0.03) Diluted $ 0.18 $ 0.13 $ 0.30 $ (0.03) Average Shares Outstanding: Basic 2,731,220 2,759,153 2,742,853 2,762,820 Diluted 2,780,372 2,831,312 2,774,472 2,762,820 See notes to condensed consolidated financial statements. 3 AIRT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 MARCH 31, 2000 ASSETS (Unaudited) Current Assets: Cash and cash equivalents $ 85,539 $ 144,513 Marketable securities 794,594 1,295,678 Accounts receivable, net 11,544,509 7,960,978 Costs and estimated earnings in excess of billings on uncompleted contracts 270,781 210,178 Inventories 12,298,207 9,741,675 Deferred tax asset, net 437,097 321,097 Prepaid expenses and other 129,075 228,757 Total Current Assets 25,559,802 19,902,876 Property and Equipment 6,921,182 6,461,984 Less accumulated depreciation (4,475,679) (3,867,778) 2,445,503 2,594,206 Deferred Tax Asset 419,554 438,554 Intangible Pension Asset 520,778 430,778 Other Assets 506,873 570,033 Total Assets $29,452,510 $ 23,936,447 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable to bank $ 7,539,194 $ 3,988,191 Accounts payable 8,644,140 7,517,640 Accrued expenses 1,426,735 1,090,838 Income taxes payable 452,025 470,247 Current portion of long-term obligations 64,833 64,833 Total Current Liabilities 18,126,927 13,131,749 Capital Lease Obligation (less current Portion) 37,527 36,440 Deferred Retirement Obligation (less current Portion) 1,632,872 1,512,377 Stockholders' Equity: Preferred stock, $1 par value, authorized 10,000,000 shares, none issued - - Common stock, par value $.25; authorized 4,000,000 shares; 2,705,453 and 2,740,353 shares issued 676,363 684,416 Additional paid in capital 6,825,981 6,976,795 Accumulated other comprehensive loss (595,118) (597,904) Retained earnings 2,747,958 2,192,574 9,655,184 9,255,881 Total Liabilities and Stockholders' Equity $29,452,510 $ 23,936,447 See notes to condensed consolidated financial statements. 4 AIRT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended December 31, 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 830,252 $ (80,037) Adjustments to reconcile net earnings (loss) to net cash used in operations: Depreciation and amortization 661,244 700,510 Loss (Gain) on sale of asset 41,047 (26,108) Change in assets and liabilities: Accounts receivable (3,583,531) (388,072) Cost and estimated earnings in excess of billings on uncompleted contracts (60,603) - Inventories (2,556,532) (3,013,654) Prepaid expenses and other 72,842 (321,476) Deferred tax asset (97,000) - Accounts payable 1,126,500 1,644,519 Accrued expenses 335,897 (226,500) Retirement obligation 120,495 4,605 Income taxes payable (18,222) 150,444 Total adjustments (3,957,863) (1,475,732) Net cash used in operating activities (3,127,611) (1,555,769) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (618,795) (430,551) Purchase of marketable securities - (100,000) Sale of marketable securities 570,164 674,998 Net cash (used in) provided by investing activities (48,631) 144,447 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit , net 3,551,003 1,512,566 Payment of cash dividend (274,858) (220,278) Repurchase of common stock (189,377) (53,107) Proceeds from exercise of stock options 30,500 - Net cash provided by financing activities 3,117,268 1,239,181 NET DECREASE IN CASH & CASH EQUIVALENTS (58,974) (172,141) CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 144,513 263,362 CASH & CASH EQUIVALENTS AT END OF PERIOD $ 85,539 $ 91,221 SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES: Other comprehensive gain (loss) $ 2,776 $ (282,777) Equipment capital lease 19,894 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 526,320 $ 454,618 Income/Franchise taxes 669,192 50,746 See notes to condensed consolidated financial statements. 5 AIRT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. Financial Statements The Condensed Consolidated Balance Sheet as of December 31, 2000, the Condensed Consolidated Statements of Earnings (Loss) for the three and nine- month periods ended December 31, 2000 and 1999 and the Condensed Consolidated Statements of Cash Flows for the nine-month periods ended December 31, 2000 and 1999 have been prepared by AirT, Inc. (the Company) without audit. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows as of December 31, 2000, and for prior periods presented, have been made. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 2000. The results of operations for the period ended December 31 are not necessarily indicative of the operating results for the full year. B. Income Taxes The tax effect of temporary differences, primarily asset reserves and accrued liabilities, gave rise to the Company's deferred tax assets in the accompanying December 31, 2000 and March 31, 2000 consolidated balance sheets. The income tax provisions for the nine-months ended December 31, 2000 and 1999 differ from the federal statutory rate primarily as a result of state income taxes and permanent timing differences. C. Net Earnings (Loss) Per Share Basic earnings (loss) per share has been calculated by dividing net earnings (loss) by the weighted average number of common shares outstanding during each period. For purposes of calculating diluted earnings per share, shares issuable under employee stock options were considered common share equivalents and were included in the weighted average common shares unless their effect on basic earnings (loss) per share was considered anti- dilutive. 6 The computation of basic and diluted earnings (loss) per common share is as follows: Three Months Ended Nine months Ended December 31, December 31, 2000 1999 2000 1999 Net earnings (loss) $ 498,000 $ 374,187 $ 830,252 $ (80,037) Weighted average common shares: Shares outstanding - basic 2,731,220 2,759,153 2,742,853 2,762,820 Dilutive stock options 49,152 72,159 31,620 - Shares outstanding - diluted 2,780,372 2,831,312 2,774,473 2,762,820 Net earnings (loss) per common share: Basic $ 0.18 $ 0.14 $ 0.30 $ (0.03) Diluted $ 0.18 $ 0.13 $ 0.30 $ (0.03) D New Accounting Standard On April 1, 2001, the Company is required to adopt Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This statement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for other hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. The Company is currently assessing the impact, if any, that the adoption of SFAS 133 will have on the Company's financial statements. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview Statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" or made by management of the Company which contain more than historical information may be considered forward- looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) which are subject to risks and uncertainties. Actual results may differ materially from those expressed in the forward-looking statements because of important risks and uncertainties, including but not limited to the effects of economic, competitive and market conditions in the aviation industry. Year to date, the Company's most significant components of revenue were generated through Global Ground Support, LLC (Global) (47%), its deice manufacturing subsidiary, and Mountain Air Cargo, Inc. (MAC) and CSA Air, Inc. (CSA) (42%), its air cargo subsidiaries. MAC and CSA are short-haul express air freight carriers flying nightly contracts for a major express delivery company out of 80 cities, principally located in 30 states in the eastern half of the United States and in Puerto Rico, Canada and the Virgin Islands. Global manufactures, services and supports aircraft deicers and other aircraft ground support equipment on a worldwide basis. Global contributed approximately $23,370,000 and $10,228,000 to revenue for the nine-month periods ended December 31, 2000 and 1999, respectively. Separate agreements cover the three types of aircraft operated by MAC and CSA-Cessna Caravan, Fokker F-27 and Short Brothers SD3-30. Cessna Caravan and Fokker F-27 aircraft (a total of 93 aircraft at December 31, 2000) are owned by and dry-leased from a major air express company (Customer), and Short Brothers SD3-30 aircraft (two aircraft at December 31, 2000) are owned by the Company and periodically operated under wet- lease arrangements with the Customer. Pursuant to such agreements, the Customer determines the type of aircraft and schedule of routes to be flown by MAC and CSA, with all other operational decisions made by the Company. 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. 8 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. MAC and CSA contributed approximately $21,257,000 and $23,601,000 to revenue for the nine-month periods ended December 31, 2000 and 1999, respectively. The Company's Mountain Aircraft Services, LLC (MAS) subsidiary, which offers aircraft component repair and parts brokerage services, contributed $5,460,000 and $6,429,000 to the Company's revenues for the nine-month periods ended December 31, 2000 and 1999, respectively. Seasonality Global's business has historically been highly seasonal. In general, the bulk of Global's revenues and earnings have occurred during the second and third fiscal quarters, and comparatively little has occurred during the first and fourth fiscal quarters due to the nature of its product line. The Company is currently reducing Global's seasonal fluctuation in revenues and earnings by broadening its product line and customer base to increase revenues and earnings in the first and fourth fiscal quarters. The Company expended exceptional effort in fiscal 1999 and 2000 to design and produce prototype equipment to expand its product line to include additional deicer models and two models of scissor-lift equipment for catering and cabin service of aircraft. These costs were expensed as incurred. In June 1999, the Company 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. Although the first shipments under this contract did not commence until the quarter ended March 31, 2000, revenue from this contract will contribute to management's plan to reduce Global's seasonal fluctuation in revenues. Revenue from the USAF contract contributed 46% and 17%, respectively, for the nine and three-month periods ended December 31, 2000. The remainder of the Company's business is not materially seasonal. Results of Operations Consolidated revenue increased $9,829,000 (24.4%) to $50,104,000 and increased $5,003,000 (32.1%) to $20,582,000, respectively, for the nine and three-month periods ended December 31, 2000 compared to their equivalent 1999 periods. The nine and three-month current period net increase in revenue primarily resulted from increased Air Force contract revenue at Global. Decreases in maintenance and component repair services were primarily due to the timing of scheduled major overhauls at MAC in fiscal 2000 compared to the current period and the expiration of an overhaul contract at MAS in place during fiscal 2000. 9 Results of Operations (Cont'd) Operating expenses increased $8,167,000 (20.4%) to $48,189,000 for the nine-month period ended December 31, 2000 and $4,714,000 (31.8%) to $19,532,000 for the three-month period ended December 31, 2000 compared to their equivalent 1999 periods. The change in operating expenses for the nine-month period consisted of the following: cost of flight operations increased $117,000 (1.2%), primarily as a result of increases in costs associated with airport fees and fuel costs, partially offset by decreased pilot travel costs; maintenance and brokerage expense decreased $3,349,000 (22.6%), primarily as a result of decreases associated with cost of parts, labor and outside maintenance related to the overhaul and repair operations of MAC and MAS; ground equipment increased $10,792,000 (118.9%), as a result of cost of parts and labor associated with increased Global sales; depreciation and amortization decreased $39,000 (5.6%) primarily as a result of decreased depreciation related to the completion of certain assets' depreciable lives; general and administrative expense increased $646,000 (11.8%) primarily as a result of increased wages, performance based bonuses and benefits, particularly related to the increased earnings of Global, partially offset by decreased professional fees and telephone expense. The change in operating expenses for the three-month period consisted of the following: cost of flight operations increased a net of $351,000 (10.5%), primarily as a result of increased personnel, travel cost, airport fees and fuel cost; maintenance and brokerage expense decreased $710,000 (15.2%), primarily as a result of decreases associated with cost of parts, labor and outside maintenance related to the overhaul and repair operations of MAC and MAS; ground equipment increased $4,679,000 (99.6%), as a result of cost of parts and labor associated with Global increased sales; depreciation and amortization decreased $22,000 (9.1%) as a result of decreased depreciation related to the completion of certain assets' depreciable lives related to the expansion of MAS and Global; general and administrative expense increased $415,000 (22.2%) primarily as a result of increased wages, performance based bonuses and benefits, particularly related to the increased earnings of Global, partially offset by decreased advertising and telephone expense. Non-operating expense increased $149,000 and $70,000, respectively, for the nine and three-month periods ended December 31, 2000 and September 30, 1999. The increases were principally due to increased credit-line interest expense and decreased investment income. 10 Results of Operations (Cont'd) Pretax earnings increased $1,513,000 and $219,000, respectively, for the nine and three-month periods ended December 31, 2000, compared to their respective December 31, 1999 periods. The nine-month increase was principally due to a $1,918,000 increase in profitability at Global and increased earnings at MAC, partially offset by a decrease in AIRT and MAS earnings. For the three-month period ended December 31, 2000 compared to 1999 Global's earnings increased $783,000, Global's increase was supported by increased earnings at MAC and partially offset by decreased profitability at MAS and AIRT. The substantial increase in Global's current period profit was primarily due to increased revenue. The provision for income taxes increased $603,000 and $96,000 for the nine and three-month periods ended December 31, 2000, respectively compared to their respective 1999 periods due to increased taxable income. Liquidity and Capital Resources As of December 31, 2000 the Company's working capital amounted to $7,433,000, an increase of $662,000 compared to March 31, 2000. A separate, unsecured, line of credit was set up in November 2000 to fund the purchase of rotable aircraft parts. The Company's unsecured lines of credit, which increased by $1,145,000 during the current third quarter, matures on August 31, 2001, provide credit up to $8,645,000. Amounts advanced under the line of credit bear interest at the 30-day "LIBOR" rate plus 137 basis points. Under the terms of the lines of credit the Company must maintain certain financial ratios and may not encumber certain real or personal property. At December 31, 2000, the Company was in compliance with these covenants. At December 31, 2000 the Company was in a net borrowing position against its credit lines of $7,539,000. Management believes that funds anticipated from operations and the continuation of existing credit facilities will provide adequate cash flow to meet the Company's future financial needs. The respective nine-month periods ended December 31, 2000 and 1999 resulted in the following changes in cash flow: operating activities used $3,128,000 and $1,556,000, investing activities used $49,000 and provided $144,000 and financing activities provided $3,117,000 and $1,239,000. Net cash decreased $59,000 and $172,000 for the respective nine-month periods ended December 31, 2000 and 1999. 11 Liquidity and Capital Resources (Cont'd) Cash used in operating activities was $1,572,000 more for the nine- months ended December 31, 2000 compared to the similar 1999 period, principally due to increased accounts receivable and decreased accounts payable, partially offset by increased profitability, accrued expenses, and inventory. During the current nine-month period ended December 31, 2000 the Company repurchased 60,900 shares of its common stock at a total cost of $189,377. In December 2000 the Company's Board of Directors authorized the repurchase of an additional $200,000 of Company stock. As of December 2000 $187,000 remains available for repurchase of common stock. Cash used in investing activities for the nine-months ended December 31, 2000 was approximately $193,000 more than the comparable period in, 1999, principally due to increased capital expenditures. Cash provided by financing activities for the nine-months ended December 31, 2000 was approximately $1,878,000 more than the comparable 1999 period, principally due to an increase in borrowings under the line of credit in 2000. There are currently no commitments for significant capital expenditures. The Company's Board of Directors, on August 7, 1998, adopted the policy to pay an annual cash dividend in the first quarter of each fiscal year, in an amount to be determined by the board. The Company paid a $0.10 per share cash dividend in June 2000. Deferred Retirement Obligation The Company's former Chairman and Chief Executive Officer passed away on April 18, 1997. In addition to amounts previously expensed, under the terms of his supplemental retirement agreement, death benefits with a present value of approximately $420,000 were expensed in the first quarter 1998. The death benefits are payable in the amount of $75,000 per year for 10 years. Impact of Inflation The Company believes the impact of inflation and changing prices on its revenues and net earnings will not have a material effect on its manufacturing operations because increased costs due to inflation could be passed on to its customers, or on its air cargo business since the major cost components of its operations, consisting principally of fuel, crew and certain maintenance costs are reimbursed, without markup, under current contract terms. 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company does not hold or issue derivative financial instruments for trading or other purposes. The Company is exposed to changes in interest rates on 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 quarter-end balance of the line of credit, annual interest expense would have increased by approximately $75,000. 13 PART II -- OTHER INFORMATION Item 1. Legal Proceedings The Company's subsidiary, Global Ground Support, LLC, is a party to a lawsuit against FMC Corporation pending in United States District Court for the Western District of North Carolina. Global commenced the lawsuit against FMC on May 8, 2000 as a declaratory judgment proceeding to confirm that aspects of Global's de-icing equipment did not infringe a patent held by FMC and to have FMC's patent declared unenforceable. On August 21, 2000, FMC filed an answer and counterclaim against both Global and the Company alleging that aspects of Global's de-icing equipment infringe a patent held by FMC seeking injunctive relief and unquantified damages. Discovery has not yet commenced. The Company and Global are vigorously defending the counterclaim. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits No. Description 3.1 Certificate of Incorporation, as amended, incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994 3.2 By-laws of the Company, incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996 4.1 Specimen Common Stock Certificate, incorporated by reference to exhibit 4.1 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994 10.1 Loan agreement among Bank of America, the Company and its subsidiaries, dated August 31, 2000. 10.2 Loan agreement among Bank of America, the Company and its subsidiaries, dated November 21, 2000. 21.1 List of subsidiaries of the Company, incorporated by reference to Exhibit 21.1 of the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997 27.1 Financial Data Schedule (For SEC use only) _______________________ b. Reports on Form 8-K No Current Reports on Form 8-K were filed in the first nine months of the fiscal year ending March 31, 2001. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AIRT, INC. (Registrant) Date: February 9, 2001 /s/ Walter Clark Walter Clark, Chief Executive Officer Date: February 9, 2001 /s/ John Gioffre John J. Gioffre, Chief Financial Officer 15 AIRT, INC. EXHIBIT INDEX EXHIBIT PAGE 10.2 Loan Agreement among Bank of America, the Company and its subsidiaries, dated November 21, 2000. 17-28 16