-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E8CsLGzrar3C7zJpK0JnbgBMuf4AD22rGCZ99AsmTuEXkjMmGbV9Bn9YKAAZ6S0K ufwwdZZAT4QyXLRtPhDHOA== 0000353184-02-000021.txt : 20021114 0000353184-02-000021.hdr.sgml : 20021114 20021114165812 ACCESSION NUMBER: 0000353184-02-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIR T INC CENTRAL INDEX KEY: 0000353184 STANDARD INDUSTRIAL CLASSIFICATION: AIR COURIER SERVICES [4513] IRS NUMBER: 521206400 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11720 FILM NUMBER: 02825922 BUSINESS ADDRESS: STREET 1: 3524 AIRPORT RD CITY: MAIDEN STATE: NC ZIP: 28650 BUSINESS PHONE: 7043772109 MAIL ADDRESS: STREET 1: P O BOX 488 CITY: DENVER STATE: NC ZIP: 28037 FORMER COMPANY: FORMER CONFORMED NAME: ATLANTA EXPRESS AIRLINE CORP DATE OF NAME CHANGE: 19840321 FORMER COMPANY: FORMER CONFORMED NAME: AIR TRANSPORTATION HOLDING CO INC DATE OF NAME CHANGE: 19920703 10-Q 1 sept.txt AIR T, INC. SEPTEMBER 30, 2002 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 September 30, 2002 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. 2,726,320 Common Shares, par value of $.25 per share were outstanding as of October 25, 2002 This filing contains 31 pages. AIR T, INC. AND SUBSIDIARIES INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Operations for the three and six-month periods ended September 30, 2002 and 2001 (Unaudited) 3 Consolidated Balance Sheets at September 30, 2002 (Unaudited) and March 31, 2002 4 Consolidated Statements of Cash Flows for the six-month periods ended September 30, 2002 and 2001 (Unaudited) 5 Consolidated Statement of Stockholders' Equity at September 30, 2002 (Unaudited) 6 Notes to Consolidated Financial Statements (Unaudited) 7-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-21 Item 3. Quantitative and Qualitative Disclosures about Market Risk 22 Item 4. Controls and procedures 22 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 23 Signatures and Certifications 24-26 Exhibit Index 27 Exhibit 10.15- Bank of America Amendment to Loan agreement 28-29 Exhibits 99.1 and 99.2- Officers' Certifications 30-31 2 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Six months Ended September 30, September 30, 2002 2001 2002 2001 Operating Revenues: Cargo 4,985,091 5,108,544 9,511,929 9,845,334 Maintenance 2,565,446 2,564,808 4,549,754 4,805,569 Ground equipment 1,458,718 10,683,577 5,034,177 19,721,309 Aircraft services and other 1,222,005 6,916,131 3,026,348 8,474,244 10,231,260 25,273,060 22,122,208 42,846,456 Operating Expenses: Flight operations 3,635,309 3,668,240 6,844,718 7,119,890 Maintenance and services 3,617,162 9,149,113 7,255,676 12,899,661 Ground equipment 1,365,975 8,485,309 4,250,948 15,880,080 General and administrative 1,946,815 2,461,893 3,959,430 4,562,200 Depreciation and amortization 176,619 177,483 354,331 352,899 10,741,880 23,942,038 22,665,103 40,814,730 Operating (Loss) Income (510,620) 1,331,022 (542,895) 2,031,726 Non-operating Expense (Income): Interest 123,702 111,310 207,636 252,923 (Gain) loss on impairment of marketable securities and sale of assets (13,810) - 161,197 - Deferred retirement expense 5,250 6,249 10,500 12,498 Investment income (21,766) (16,309) (43,884) (34,829) Other (22,671) - (28,671) - 70,705 101,250 306,778 230,592 (Loss) Earnings Before Income Taxes (581,325) 1,229,772 (849,673) 1,801,134 (Benefit) Provision For Income Taxes (217,800) 483,648 (325,000) 712,244 Net (Loss) Earnings $ (363,525) 746,124 (524,673) 1,088,890 Net (Loss) Earnings Per Share: Basic $ (0.13) 0.27 (0.19) 0.40 Diluted $ (0.13) 0.27 (0.19) 0.39 Weighted Average Shares Outstanding: Basic 2,726,320 2,713,853 2,726,320 2,713,103 Diluted 2,726,320 2,760,875 2,726,320 2,766,901 See Notes to Consolidated Financial Statements. 3 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30,2002 MARCH 31, 2002 ASSETS (Unaudited) Current Assets: Cash and cash equivalents $ 71,939 31,770 Marketable securities 1,015,294 982,028 Accounts receivable, net 5,440,211 5,875,754 Costs and estimated earnings in excess of billings on uncompleted contracts - 14,320 Inventories 9,300,540 9,907,430 Deferred tax asset 743,513 727,665 Prepaid expenses and other 171,223 188,245 Total Current Assets 16,742,720 17,727,212 Property and Equipment, net 2,989,726 3,519,048 Deferred Tax Asset 594,435 568,186 Intangible Pension Asset 290,862 290,862 Other Assets 819,975 797,454 Total Assets $ 21,437,718 22,902,762 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable 2,980,768 3,543,568 Accrued expenses 1,780,597 1,915,605 Income taxes (receivable) payable (155,536) 355,195 Current portion of long-term obligations 691,812 691,812 Total Current Liabilities 5,297,641 6,506,180 Capital Lease Obligations (less current portion) 66,182 87,718 Long-term Debt (less current portion) 3,770,541 3,378,934 Deferred Retirement Obligations (less current portion) 1,883,203 1,830,205 Stockholders' Equity: Preferred stock, $1 par value, authorized 50,000 shares, none issued - - Common stock, par value $.25; authorized 4,000,000 shares; 2,726,320 and 2,724,320 shares issued 681,580 681,080 Additional paid in capital 6,863,898 6,858,898 Retained earnings 3,229,094 4,079,621 Accumulated other comprehensive loss (354,421) (519,874) 10,420,151 11,099,725 Total Liabilities and Stockholders' Equity $ 21,437,718 22,902,762 See notes to consolidated financial statements. 4 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended September 30, 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES: Net (Loss) earnings $ (524,673) 1,088,890 Items not involving cash: Increase in accounts receivable and inventory reserves 123,314 - Loss on disposal of assets and impairment of investments 130,716 - Increase in deferred tax asset (42,097) - Depreciation and amortization 354,331 352,899 Net periodic pension cost 42,498 136,040 Changes in assets and liabilities: Accounts receivable 430,229 331,438 Inventories 768,378 157,547 Prepaid expenses and other 8,821 2,836 Accounts payable (562,800) (1,918,698) Accrued expenses (124,508) (120,738) Income taxes payable (510,731) 140,655 Total adjustments 618,151 (918,021) Net cash provided by operating activities 93,478 170,869 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (192,490) (307,310) Redemption of marketable securities - 13,497 Proceeds from sale of equipment 140,000 - Net cash used in investing activities (52,490) (293,813) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit, net 319,535 563,659 Payment of cash dividend (325,854) (405,520) Repurchase of common stock - (42,785) Proceeds from exercise of stock options 5,500 26,500 Net cash (used in) provided by financing activities (819) 141,854 NET INCREASE IN CASH & CASH EQUIVALENTS 40,169 18,910 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 31,770 97,799 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 71,939 116,709 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 212,763 262,192 Income/Franchise taxes 229,015 560,582 SUMMARY OF SIGNIFICANT NON-CASH INFORMATION: Decrease in fair value of derivatives $ 29,000 194,000 Increase in fair value or marketable securities 33,256 68,499 See notes to consolidated financial statements. 5 AIR T, INC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) Accumulated Other Compre- Total Additional hensive Stock- Common Stock Paid-In Retained Income holder's Shares Amount Capital Earnings (Loss) Equity Balance, March 31,2002 2,724,320 $ 681,080 6,858,898 4,079,621 (519,874) 11,099,725 Comprehensive Income (Loss): Net loss (524,673) (524,673) Other Comprehensive Income (Loss): Fair value adjustment on marketable securities 33,256 33,256 Other than temporary impairment of marketable securities 161,197 161,197 Change in fair value of derivatives (29,000) (29,000) Exercise of stock options 2,000 500 5,000 5,500 Cash dividend ($.12 per share) (325,854) (325,854) Balance, September 30, 2002 2,726,320 $ 681,580 6,863,898 3,229,094 (354,421) 10,420,151 See notes to consolidated financial statements. 6 AIR T, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) A. Financial Statements The Consolidated Balance Sheet as of September 30, 2002, the Consolidated Statements of Operations for the three and six-month periods ended September 30, 2002 and 2001, the Consolidated Statements of Cash Flows for the six-month periods ended September 30, 2002 and 2001 and the Consolidated Statement of Stockholders' Equity have been prepared by Air T, Inc. (the Company) without audit. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations, cash flows and equity position as of September 30, 2002, 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, 2002. The results of operations for the periods ended September 30 are not necessarily indicative of the operating results for the full year. B. Income Taxes The tax effect of temporary differences, primarily asset reserves and accrued liabilities, gave rise to the Company's deferred tax asset in the accompanying September 30, 2002 and March 31, 2002 consolidated balance sheets. Management has assessed the need for a valuation allowance to reduce its deferred tax asset to an amount which, more likely than not, will be realized. The income tax provisions for the six-months ended September 30, 2002 and 2001 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 (loss) per share, shares issuable under employee stock options were considered potential common shares and were included in the weighted average common shares unless they were anti-dilutive. 7 The computation of basic and diluted earnings (loss) per common share is as follows: Three Months Ended Six months Ended September 30, September 30, 2002 2001 2002 2001 Net (loss) earnings $ (363,525) 746,124 (524,673) 1,088,890 Weighted average common shares: Shares outstanding - basic 2,726,320 2,713,853 2,726,320 2,713,103 Dilutive stock options - 47,022 - 53,798 Shares outstanding - diluted 2,726,320 2,760,875 2,726,320 2,766,901 Net (loss) earnings per common share: Basic $ (0.13) 0.27 (0.19) 0.40 Diluted $ (0.13) 0.27 (0.19) 0.39 D. Inventories Inventories consist of the following: September 30, 2002 March 31, 2002 Aircraft parts and supplies $ 5,270,794 5,373,398 Aircraft equipment manufacturing: Raw materials 3,446,024 2,777,175 Work in process 304,174 914,730 Finished goods 987,753 1,432,332 Total Inventory 10,008,745 10,497,635 Reserves (708,205) (590,205) Total, net of reserves $ 9,300,540 9,907,430 8 E. Recent Accounting Pronouncements The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard (SFAS) No. 143, "Accounting for Asset Retirement Obligations" and SFAS 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. Upon adoption the Company does not expect it to have a material effect on the Company's financial position and results of operations. 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 "Reporting the Results of operations-Discontinued Events and Extraordinary items". 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 the current fiscal year. The adoption of SFAS No. 144 did not have a material effect on the Company's financial position and results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This statement requires gains and losses from the extinguishment of debt to be classified as extraordinary only if they meet the criteria for extraordinary treatment set forth in APB Opinion No. 30. The statement also amends SFAS No. 13, Accounting for Leases, to require that certain lease modifications that have economic effects similar to sale- leaseback transactions be accounted for in the same manner as such transactions. Finally, the statement makes certain technical corrections, which the FASB deemed to be nonsubstantive, to a number of existing accounting pronouncements. The rescission of SFAS No. 4, 44, and 64 is effective for the Company in fiscal 2004. The amendments of SFAS No. 13 is effective for transactions occurring after May 15, 2002, and all other provisions of the statement are effective for financial statements issued on or after May 15, 2002. The Company is evaluating the effect of this statement. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement is effective for exit or disposal activities initiated after December 31, 2002. Liabilities for costs associated with an exit activity should be initially measured at fair value, when incurred. This statement applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination, or a disposal activity covered by SFAS No. 144. The Company is evaluating the effect of this statement. 9 F. Derivative Financial Instruments The Company follows SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which 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, the Company may enter into interest rate hedging arrangements from time to time. The Company does not utilize derivative financial instruments for trading or speculative purposes. During the first quarter of fiscal 2003, the Company had outstanding two interest rate swaps with a notional amount of $2.4 million, and $2 million respectively. These agreements were originally entered into at respective interest rates of 6.97% and 6.5% respectively. On July 31, 2002 the Company elected to undo its $2,000,000 (6.5%) revolving credit line swap in consideration of $58,750, the fair-market-value termination fee as of that date. The $58,750 swap termination fee was charged to interest expense during the quarter ended September 30, 2002. The fair value of the remaining swap decreased by $40,000 to $148,000 as of September 30, 2002. The Company assessed the effectiveness of the swap using the hypothetical derivative method. G. Financing Arrangements On August 31, 2002 the Company amended its bank financing line to a $7,000,000 credit facility. Under the terms of the agreement, the $7,000,000 secured long-term revolving credit line expires on August 31, 2004. The revolving credit line contains customary events of default and restrictive covenants that, among other matters, require the Company to maintain certain financial ratios. As of September 30, 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 September 30, 2002 was 1.82%. At September 30, 2002 and 2001, the amounts outstanding against the line were $4,223,000 and $6,327,000, respectively. At September 30, 2002, $2,777,000 was available under the entire credit facility. 10 H. Segment Information The Company's four subsidiaries operate in three business segments. Each business segment has separate management teams and infrastructures that offer different products and services. The subsidiaries have been combined into the following reportable segments: overnight air cargo, aviation services and aviation ground equipment. 11 Segment data is summarized as follows: Three months ended Six months ended September 30, September 30, 2002 2001 2002 2001 Operating Revenues Overnight Air Cargo $ 7,715,802 7,654,772 14,338,485 14,650,903 Ground Equipment 1,458,718 10,683,577 5,034,177 19,721,309 Aviation Services 1,056,740 6,934,711 2,749,546 8,474,244 Corporate - - - - Total $10,231,260 25,273,060 22,122,208 42,846,456 Operating (Loss) Income Overnight Air Cargo $ 694,879 709,421 1,309,510 1,186,111 Ground Equipment (552,603) 1,352,888 (569,257) 2,316,209 Aviation Services (120,900) 37,320 (193,965) (75,562) Corporate (1) (531,996) (768,607) (1,089,183) (1,395,032) Total $ (510,620) 1,331,022 (542,895) 2,031,726 Depreciation and Amortization Overnight Air Cargo $ 64,808 66,910 129,743 136,915 Ground Equipment 46,123 52,143 94,184 98,660 Aviation Services 30,021 38,445 60,310 77,337 Corporate 35,667 19,985 70,094 39,987 Total $ 176,619 177,483 354,331 352,899 Capital Expenditures, net Overnight Air Cargo $ 21,138 75,045 17,752 177,954 Ground Equipment 90,467 (10,210) 94,884 61,882 Aviation Services 1,426 4,734 3,566 18,994 Corporate 65,631 24,204 76,288 48,480 Total $ 178,662 93,773 192,490 307,310 As of September March 31, 30, 2002 2002 Identifiable Assets Overnight Air Cargo $ 3,914,223 3,852,042 Ground Equipment 7,923,278 10,051,691 Aviation Services 5,694,622 6,142,237 Corporate 3,905,595 2,856,792 Total $21,437,718 22,902,762 (1) Excludes income from inter-segment transactions, included as non- operating income. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Air T's management's discussion and analysis, which describes the principal factors affecting the results of operations of the Company, should be read in conjunction with the accompanying financial statements and our Annual Report on Form 10-K for the year ended March 31, 2002, which include additional information about our significant accounting policies. Overview The Company's most significant component of revenue for the six-month period ended September 30, 2002, which accounted for 64.8% of revenue, was generated by its air cargo subsidiaries, Mountain Air Cargo, Inc.(MAC) and CSA Air, Inc.(CSA). MAC and CSA are short-haul express air freight carriers. MAC and CSA's revenue contributed approximately $14,338,000 and $14,651,000 to the Company's revenues for the six-month periods ended September 30, 2002 and 2001, respectively. Under the terms of the dry-lease service agreements, which currently cover approximately 98% of the revenue generating aircraft operated, the Company passes through to its customer certain cost components of its operations without markup. The cost of fuel, flight crews, landing fees, outside maintenance, parts and certain other direct operating costs are included in operating expenses and billed to the customer as cargo and maintenance revenue, at cost. Separate agreements cover the three types of aircraft operated by MAC and CSA-Cessna Caravan, Fokker F-27, and Short Brothers SD3-30. Cessna Caravan and Fokker F-27 aircraft (a total of 93 aircraft at September 30, 2002) are owned by and dry-leased from a major air express company (Customer), and Short Brothers SD3-30 aircraft (two aircraft at September 30, 2002) are owned by the Company and operated under wet-lease arrangements with the Customer. Pursuant to such agreements, the Customer determines the type of aircraft and schedule of routes to be flown by MAC and CSA, with all other operational decisions made by the Company. Agreements are renewable annually and may be terminated by the Customer at any time upon 15 to 30 days' notice. The Company believes that the short term and other provisions of its agreements with the Customer are standard within the air freight contract delivery service industry. The Company is not contractually precluded from providing such services to other firms, and has done so in the past. Loss of its contracts with the Customer would have a material adverse effect on the Company. Global Ground Support, LLC (Global), another subsidiary of the Company, manufactures, services and supports aircraft deicers and other ground support equipment on a worldwide basis. Global's revenue contributed approximately $5,034,000 and $19,721,000 to the Company's revenues for the six-month periods ended September 30, 2002 and 2001, respectively. The significant decrease in revenues in 2002 was primarily related to reductions in commercial ground support equipment and military aircraft deicer orders and the April 2002 completion of a large scale airport contract, which commenced in February 2001. 13 Mountain Aircraft Services, LLC's (MAS) aircraft brokerage and repair services contributed approximately $2,750,000 and $8,474,000 to the Company's revenues for the six-month periods ended September 30, 2002 and 2001, respectively, and are included in Aircraft Services and Other in the accompanying consolidated statements of operations. The 2002 decrease was due to a $4,700,000 engine sale in 2001 and lower levels of brokering and repair activity in 2002. The Company's four subsidiaries operate in three business segments. Each business segment has separate management teams and infrastructures that offer different products and services. The subsidiaries have been combined into the following reportable segments: air cargo, aviation services and aviation ground equipment in the accompanying consolidated financial statements. 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 allowances for doubtful accounts receivables, reserves for excess and obsolete inventories, valuation allowances for deferred tax assets, calculation of retirement benefit obligations, 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. Allowance for Doubtful Accounts. An allowance for doubtful accounts receivable is established based on management's estimates of the collectability of accounts receivables. The required allowance is determined using information such as the age of the account receivable, customer credit history, industry information, credit reports and customer financial condition. The estimates can be affected by changes in the age of the receivable, 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 allowances, 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. 14 Retirement Benefits Obligation. The Company determines the value of retirement benefits assets and liabilities on an actuarial basis. Values are affected by management's estimates, based upon the Company's independent actuary's calculation 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 7.0 discount rate currently used could affect the amount of pension gain or loss recognized in other comprehensive income. 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. Unanticipated changes in job performance, job conditions and estimated profitability may result in revisions to costs and income, and are recognized prospectively beginning in the period in which the revisions are determined. 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. 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 fair value. 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 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, and in January 2001 Global received a $7.1 million pedestal-mounted deicer contract with the Philadelphia International Airport, which was completed in the first quarter of fiscal 2003. The Company believes that revenue from these contracts contributed to management's plan to reduce Global's seasonal fluctuation in revenues during fiscal 2002 and 2001, however, as these contracts are completed, seasonal trends for Global's business may resume. The remainder of the Company's business is not materially seasonal. 15 Results of Operations Consolidated revenue decreased $20,724,000 (48.4%) to $22,122,000 and $15,042,000 (59.5%) to $10,231,000, respectively, for the six and three- month periods ended September 30, 2002 compared to their equivalent 2001 periods. The six and three-month current period net decrease in revenue primarily resulted from decreased revenue at Global and MAS, as described in the Overview section of Item 2. Operating expenses decreased $18,150,000 (44.5%) to $22,665,000 for the six-month period ended September 30, 2002 and $13,200,000 (55.1%) to $10,742,000 for the three-month period ended September 30, 2002 compared to their equivalent 2001 periods. The change in operating expenses for the six-month period consisted of the following: cost of flight operations decreased $275,000 (3.9%), primarily as a result of schedule changes which decreased costs associated with airport fees, pilot salaries and travel partially offset by increased fuel costs; maintenance and brokerage expense decreased $5,644,000 (43.8%), primarily as a result of decreases associated with cost of parts, outside maintenance and maintenance salaries, partially offset by increases in contract services related to the operations of MAC; ground equipment decreased $11,629,000 (73.2%), as a result of lower cost of parts and labor associated with decreased Global sales; and general and administrative expense decreased $603,000 (13.2%) primarily as a result of decreased profit sharing accrual, staffing, contract labor, rent and related facilities cost, partially offset by increases in professional fees. The change in operating expenses for the three-month period consisted of the following: cost of flight operations decreased $33,000 (0.9%), primarily as a result of schedule changes which decreased costs associated with airport fees, pilot salaries and travel partially offset by increased fuel costs; maintenance and brokerage expense decreased $5,532,000 (60.5%), primarily as a result of decreases associated with cost of parts, outside maintenance and maintenance salaries, partially offset by increases in contract services; ground equipment decreased $7,119,000 (83.9%), as a result of lower cost of parts and labor associated with decreased Global sales; and general and administrative expense decreased $515,000 (20.9%) primarily as a result of decreased profit sharing accrual, staffing, rent and contract labor, partially offset by increases in professional fees. The current six month period's decreased revenue and the related operating loss resulted primarily from decreased production related to the above mentioned commercial orders and Air Force and Philadelphia airport contracts at Global and decreased maintenance and brokerage parts revenue and operating income in the aviation services sector. During the six month period ended September 30, 2002 Global's revenue and operating income decreased $14,687,000 (74.5%) and $2,885,000 (124.6%), respectively, to $5,034,000 and an operating loss of $569,000 compared to the six months ended September 30, 2001. MAS's revenue and operating loss, respectively, decreased and increased by $5,696,000 (67.4%) and $118,000 (156.7%) for the similar periods. 16 Results of Operations (Cont'd) The business of Global and MAS has been significantly adversely affected by reduced orders from commercial airlines, due principally to the severe downturn in the commercial aviation industry. Although both of these businesses also derive a significant portion of their revenue from sale of products for military applications, the military programs that use the Company's products have not been fully funded and the Company is uncertain as to the timing of such funding. Non-operating expense increased $76,000 and decreased $31,000, respectively, for the six and three-month periods ended September 30, 2002 and September 30, 2001. The six-month increase in non-operating expense was principally due to a $161,000 other-than-temporary loss on impairment of marketable securities, partially offset by a decrease in credit line interest related to lower levels of borrowing. The three-month decrease was principally due to a sale of assets and increases in investment and other income during the 2002 period. Pretax earnings decreased $2,651,000 and $1,811,000, respectively, for the six and three-month periods ended September 30, 2002, compared to their respective September 30, 2001 periods. The six-month decrease was principally due to the above stated decrease in Global earnings and loss on securities, partially offset by an increase in current period earnings for the air cargo segment. The provision for income taxes decreased $1,037,000 and $701,000 for the six and three-month periods ended September 30, 2002, respectively compared to their respective 2001 periods, primarily due to the net loss for the periods ended September 30, 2002. The effective tax rate for the three and six-month periods ended September 30, 2002 and 2001 was approximately 38%. Liquidity and Capital Resources As of September 30, 2002 the Company's working capital amounted to $11,445,000, an increase of $224,000 compared to March 31, 2002. The net increase primarily resulted from decreased accounts and income taxes payable and accrued expenses, partially offset by decreased accounts receivables and inventory. On August 31, 2002 the Company amended its bank financing line to a $7,000,000 credit facility. Under the terms of the agreement, the $7,000,000 secured long-term revolving credit line expires on August 31, 2004. The credit facility contains customary events of default and restrictive covenants that, among other matters, require the Company to maintain certain financial ratios. As of September 30, 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 17 Liquidity and Capital Resources (Cont'd) base, as defined in the credit agreement, which includes the Company's outstanding receivables, inventories and equipment, with certain exclusions. The credit facility is secured by substantially all of the Company's assets. Amounts advanced under the credit facility bear interest at the 30-day "LIBOR" rate plus 137 basis points. The LIBOR rate at September 30, 2002 was 1.82%. At September 30, 2002 and 2001, the amounts outstanding against the line were $4,223,000 and $6,327,000, respectively. At September 30, 2002, an additional $2,777,000 was available under the entire credit facility. The Company has not currently, nor in the past, engaged in the use of structured finance arrangements, known as off-balance sheet financing transactions, with unconsolidated entities or other persons. The respective six-month periods ended September 30, 2002 and 2001 resulted in the following changes in cash flow: operating activities provided $93,000 and $171,000, investing activities used $52,000 and $294,000 and financing activities used $1,000 and provided $142,000. Net cash increased $40,000 and $19,000 for the respective six-month periods ended September 30, 2002 and 2001. Cash provided by operating activities was $77,000 less for the six- months ended September 30, 2002 compared to the similar 2001 period, principally due to decreased earnings, a smaller decrease in accounts payable and a larger decrease in inventory, partially offset by decreased income tax payable. Cash used in investing activities for the six-months ended September 30, 2002 was approximately $241,000 less than the comparable period in 2001, principally due to decreased capital expenditures and $140,000 proceeds on an asset sale in the period ended September 30, 2002. Cash provided by financing activities for the six-months ended September 30, 2002 was approximately $143,000 less than the comparable 2001 period, principally due to a decrease in net borrowings under the line of credit in 2002 partially offset by a decrease in cash dividend. There are currently no commitments for significant capital expenditures. The Company's Board of Directors, on August 7, 1998, adopted the policy to pay an annual cash dividend in the first quarter of each fiscal year, in an amount to be determined by the board. The Company paid a $0.12 per share cash dividend in June 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. 18 Impact of Inflation The Company believes the impact of inflation and changing prices on its revenues and net earnings will not have a material effect on its manufacturing operations because increased costs due to the currently low level of inflation could be passed on to its customers, or on to its air cargo business since the major cost components of its operations, consisting principally of fuel, crew and certain maintenance costs are reimbursed, without markup, under current contract terms. Outlook The Company believes its ground support equipment and aircraft services order declines were largely the result of the economic downturn and effects of the September 11, 2001 terrorist attacks which particularly impacted the aviation sector of the economy. The Company's current forecast for the remainder of fiscal 2003 suggests that the commercial aviation market for Company related products and services will grow at a rate that is substantially less than that of the U.S. gross domestic product. Due to the increased military and Homeland Security budgets, this area may help offset the expected lower than normal order levels from commercial customers. Given the uncertainties associated with the above factors, the Company continues to operate in a highly unpredictable environment. Based on the current general economic and industry outlook, the Company believes its existing cash and cash equivalents, cash flow from operations, and funds available from current and renewed credit facilities will be adequate to meet its current and anticipated working capital requirements through 2003. If these sources are inadequate or become unavailable, then the Company may pursue additional funds through the financing of unencumbered assets, although there is no assurance these additional funds will be sufficient to replace the sources that are inadequate or become unavailable. Actual results for 2003 will depend upon a number of factors beyond the Company's control, including, in part, the timing, speed and magnitude of the economic recovery, military funding and commercial aviation capital spending. FORWARD LOOKING STATEMENTS Certain statements in this Report, including those contained in "Outlook," are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the Company's financial condition, results of operations, plans, objectives, future performance and business. Forward-looking statements include those preceded by, followed by or that include the words "believes," "expects," "anticipates," "estimates," or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements, because of, among other things, potential risks and uncertainties, such as: 19 Economic conditions in the Company's markets; The continuing impact of the events of September 11, 2001, or any subsequent terrorist activities; The Company's ability to manage its cost structure for capital expenditures and operating expenses and match them to shifting customer volume levels; Market acceptance of the Company's new commercial and military equipment and services. Competition from other providers of similar equipment, parts brokerage and overhaul services; Changes in government regulation, weather and technology A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. Recent Accounting Pronouncements The Financial Accounting Standards Board has issued 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. Upon adoption the Company does not expect it to have a material effect on the Company's financial position and results of operations. 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 "Reporting the Results of Operations-Discontinued Events and Extraordinary Items". Along with establishing a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposedof 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 the Company for the current fiscal year. The adoption of SFAS No. 144 did not have a material effect on the Company's financial position and results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This statement requires gains and losses from the extinguishment of debt to be classified as extraordinary only if they meet 20 the criteria for extraordinary treatment set forth in APB Opinion No. 30. The statement also amends SFAS No. 13, Accounting for Leases, to require that certain lease modifications that have economic effects similar to sale- leaseback transactions be accounted for in the same manner as such transactions. Finally, the statement makes certain technical corrections, which the FASB deemed to be nonsubstantive, to a number of existing accounting pronouncements. The rescission of SFAS No. 4, 44, and 64 is effective for the Company in fiscal 2004. The amendments of SFAS No. 13 is effective for transactions occurring after May 15, 2002, and all other provisions of the statement are effective for financial statements issued on or after May 15, 2002. The Company is evaluating the effect of this statement. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement is effective for exit or disposal activities initiated after December 31, 2002. Liabilities for costs associated with an exit activity should be initially measured at fair value, when incurred. This statement applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination, or a disposal activity covered by SFAS No. 144. The Company is evaluating the effect of this statement. 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, the Company may enter into interest rate hedging arrangements from time to time. The Company does not utilize derivative financial instruments for trading or speculative purposes. During the first quarter of fiscal 2003, the Company had outstanding two interest rate swaps with a notional amount of $2.4 million, and $2 million respectively. These agreements were originally entered into at respective interest rates of 6.97% and 6.5% respectively. On July 31, 2002 the Company elected to undo its $2,000,000 (6.5%) revolving credit line swap in consideration of $58,750, the Mark to Market swap shortfall as of that date. The $58,750 swap termination fee was charged to interest expense during the quarter ended September 30, 2002. The fair value of the remaining swap decreased by $40,000 to $148,000 as of September 30, 2002. The Company assessed the effectiveness of the swap using the hypothetical derivative method. 21 Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company does not hold or issue derivative financial instruments for trading purposes. On May 31, 2001 the Company entered into swap agreements to 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 $42,000. Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive Officer and Chief Financial Officer have evaluated the Company's disclosure controls and procedures within 90 days of the filing date of this report, and they concluded that these controls and procedures are effective in providing material information relating to the Company and its subsidiaries. (b) Changes in Internal Controls. There are no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 22 PART II -- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits No. Description 3.1 Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2002 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 10.15 Amendment No 1. to Loan Agreement among Bank of America N.A. the Company and its subsidiaries, dated August 31, 2002. 21.2 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 99.1 Certification of Walter Clark 99.2 Certification of John J. Gioffre _______________________ b. Reports on Form 8-K No Current Reports on Form 8-K were filed in the three months ended September 30, 2002. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AIR T, INC. (Registrant) Date: October 30, 2002 /s/ Walter Clark Walter Clark, Chief Executive Officer Date: October 30, 2002 /s/ John Gioffre John J. Gioffre, Chief Financial Officer 24 CERTIFICATION I, Walter Clark, Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Air T, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 12a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6.The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 30, 2002 /s/ Walter Clark Walter Clark, Chief Executive Officer 25 CERTIFICATION I, John Gioffre, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Air T, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 12a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 30, 2002 /s/ John Gioffre John J. Gioffre, Chief Financial Officer 26 AIR T, INC EXHIBIT INDEX PAGE 10.15 Amendment No. 1 to Loan Agreement among Bank of America N.A. the company and its subsidiaries, dated August 31, 2002. 28-29 99.1 Certification of Walter Clark 30 99.2 Certification of John J. Gioffre 31 27 AMENDMENT NO. 1 TO LOAN AGREEMENT This Amendment No. 1 (the "Amendment") dated as of August 31, 2002, is between Bank of America, N.A. ("Lender") and Air T, Inc. and Affiliates: CSA Air, Inc., Mountain Air Cargo, Inc., Mountain Aircraft Services, LLC, and Global Ground Support, LLC (individually and collectively, the "Borrower"). RECITALS A. Borrower has executed various documents concerning credit extended by the Lender, including, a certain Loan Agreement and Exhibit "A" Borrowing Base Agreement dated as of May 23, 2001 (together with any previous amendments, the "Loan Agreement"). B. Lender and Borrower desire to amend the Loan Agreement. AGREEMENT 1. Definitions. Capitalized terms used but not defined in this Amendment shall have the meaning given to them in the Loan Agreement. 2. Amendments to Loan Agreement. The Loan Agreement is hereby amended as follows: (A.) Total Liabilities to Tangible Net Worth Ratio. Existing paragraph 4(A.)(i) is deleted in its entirety and replaced to read as follows: Maintain on a consolidated basis a ratio of Total Liabilities (excluding the non-current portion of Subordinated Liabilities) to Tangible Net Worth not exceeding 1.50:1.0. (B.) Debt Service Coverage Ratio. Existing paragraph 4(A.)(ii) is deleted in its entirety. (C.) Funded Debt to EBITDA Ratio. Existing paragraph 4(A.)(iii) is deleted in its entirety, renumbered as paragraph 4(A.)(ii), and replaced to read as follows: Maintain on a consolidated basis a ratio of Funded Debt to EBITDA not exceeding 3.50:1.0. "Funded Debt" means all outstanding liabilities for borrowed money and other interest-bearing liabilities, including current and long-term debt, less the non- current portion of Subordinated Liabilities. "EBITDA" means net income, less income or plus loss from discontinued operations and extraordinary items, plus income taxes, plus interest expense, plus depreciation, depletion, amortization and other non-cash charges. This ratio will be calculated at the end of each fiscal year, using the results of the twelve-month period ending with that reporting period. "Subordinated Liabilities" means liabilities subordinated to Borrower's obligations to Bank in a manner acceptable to Bank in its sole discretion. (D.) Modification of Borrowing Base Agreement. The Borrowing Base Agreement is hereby amended by deleting the existing Maximum Amount paragraph and replacing it with the following new paragraph: "Maximum Amount" shall mean the lesser of $10,000,000.00 $7,000,000 or the Borrowing Base. The "Borrowing Base" at any time, shall be equal to (i) 85% of Eligible Accounts Receivable plus (ii) 50% of Eligible Accounts Receivable - Accruals plus (iii) 75% of the value of Eligible Inventory (up to the period ending August 31, 2003) and 50% of the value of Eligible Inventory, limited to 75% of the outstanding balance on the Line and beginning on September 1, 2003, reducing to a limitation of 50% of the outstanding balance on the Line(for the period commencing September 1, 2003), plus (iv) 50% of adjusted book value of Property, Plant and Equipment. As used herein, "Eligible Accounts Receivable-Accruals" shall mean all accounts receivable of Borrower which represent Borrower's right to receive payment, which are absolute and not contingent upon the fulfillment of any condition whatsoever, but have not yet been invoiced, due to an existing agreement with the Customer. 28 4. Representations and Warranties. When Borrower signs this Amendment, Borrower represents and warrants to Lender that: (a) there is no event which is, or with notice or lapse of time or both would be, a default under the Loan Agreement except those events, if any, that have been disclosed in writing to Lender or waived in writing by Lender, (b) the representations and warranties in the Loan Agreement are true as of the date of this Amendment as if made on the date of this Amendment, (c) this Amendment does not conflict with any law, agreement, or obligation by which Borrower is bound, and (d) this Amendment is within Borrower's powers, has been duly authorized, and does not conflict with any of Borrower's organizational papers. 5. Effect of Amendment. Except as provided in this Amendment, all of the terms and conditions of the Loan Agreement shall remain in full force and effect. 6. Counterparts. This Amendment may be executed in counterparts, each of which when so executed shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. 7. FINAL AGREEMENT. THIS WRITTEN AMENDMENT REPRESENTS THE FINAL AGREEMENT BETWEEN AND AMONG THE PARTIES HERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN OR AMONG THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN OR AMONG THE PARTIES. This Amendment is executed as of the date stated at the beginning of this Amendment. Bank of America, N.A. By Typed Name Title Air T, Inc. CSA Air, Inc. [Borrower:] By (Seal) By (Seal) Typed Name Typed Name Title Title [Corporate Seal] [Corporate Seal] Mountain Air Cargo, Inc. Mountain Aircraft Services, LLC [Borrower:] By (Seal) By (Seal) Typed Name Typed Name Title Title [Corporate Seal] [Corporate Seal] Global Ground Support, LLC[Borrower:] By (Seal) Typed Name Title [Corporate Seal] 29 CERTIFICATION The undersigned hereby certifies in his capacity as an officer of Air T, Inc. (the "Company") that the Quarterly Report of the Company on Form 10-Q for the period ended September 30, 2002 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period. Date: October 30, 2002 /s/ Walter Clark Walter Clark, Chief Executive Officer 30 CERTIFICATION The undersigned hereby certifies in his capacity as an officer of Air T, Inc. (the "Company") that the Quarterly Report of the Company on Form 10-Q for the period ended September 30, 2002 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period. Date: October 30, 2002 /s/ John Gioffre John J. Gioffre, Chief Financial Officer 31 -----END PRIVACY-ENHANCED MESSAGE-----