-----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, Oxnf9QSkXEyoR8CbD2lGbrcuGoCMw6epq7Ng44cDf4gxBcoMKgjBP8S0fdXAlnQG Iz0kOXqkPBziGxZy6BLIRQ== 0000353184-03-000018.txt : 20030701 0000353184-03-000018.hdr.sgml : 20030701 20030701163023 ACCESSION NUMBER: 0000353184-03-000018 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030701 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11720 FILM NUMBER: 03768375 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: AIR TRANSPORTATION HOLDING CO INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: ATLANTA EXPRESS AIRLINE CORP DATE OF NAME CHANGE: 19840321 10-K 1 airtedgar.txt 10K 3/31/03 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-K ----------------- (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended March 31, 2003 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _______________ to _____________ 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 Identification No.) incorporation or organization) 3524 Airport Road Maiden, North Carolina 28650 - ---------------------------------------- ---------------------- (Address of principal executive offices) (Zip Code) (704) 377-2109 --------------- (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, par value $.25 per share ------------------------------------------------ (Title of Class) ------------------ 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 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 ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [|X|] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12G-2). Yes No |X| The aggregate market value of voting stock held by non-affiliates of the registrant, computed by reference to the average of the closing bid and asked prices for such stock on September 30, 2002, was $2,490,306. As of June 5, 2003, 2,726,320 shares of Common Stock were outstanding. PART I Item 1. Business. Air T, Inc., incorporated under the laws of the State of Delaware in 1980 (the "Company"), operates in two 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"), and aviation ground support equipment products through its wholly owned subsidiary, Global Ground Support, LLC ("Global"). During fiscal 2003 the Company decided to dispose of its aviation related parts brokerage and overhaul services through its wholly owned subsidiary, Mountain Aircraft Services, LLC ("MAS"). The Company entered into a letter of intent on June 19, 2003 to sell the business operations of MAS. The Company's financial statements have been reclassified to reflect the results of MAS as a discontinued operation. For the fiscal year ended March 31, 2003 the Company's air cargo services through MAC and CSA accounted for approximately 69.7% of the Company's consolidated revenues and aircraft deice and other ground support equipment products through Global accounted for 30.3% 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 68.3% of the Company's consolidated revenues for the year ended March 31, 2003. Certain financial data with respect to the Company's overnight air cargo and ground support equipment segments are set forth in Note 16 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 3524 Airport Road, Maiden, North Carolina; the principal places of business of CSA and Global are, respectively, Iron Mountain, Michigan and Olathe, Kansas. The principal place of business of MAS is located in Kinston, North Carolina. Diversification. 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. During the fourth quarter of fiscal 2003, Company management, in order to focus its resources on core operations, agreed to a plan to sell MAS assets and to discontinue the operations of the Company's aviation service sector business. See Note 10 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report. 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. 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 (68.3% of the Company's consolidated revenues). For the fiscal year ended March 31, 2003, MAC and CSA provided air delivery service exclusively to Federal Express. As of March 31, 2003, 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 F-27 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. 2 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, 2003: 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 F-27 (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 F-27 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 F-27 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. 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. Starting in fiscal 2000, Global began to diversify its product line to include additional models of aircraft deicers and scissor-lift ground support equipment. 3 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 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, in addition to being highly seasonal, was significantly impacted by the softening economy and effect of the September 11, 2001 terrorist attacks on the United States. 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 United States Air Force and other non-seasonal contracts. Revenue from Global's contract with the U.S. Air Force accounted for approximately 19.9% of the Company's consolidated revenue for the year ended March 31, 2003. 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. 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, 2003, MAS provided services or parts to over 80 customers, with five customers accounting for approximately 85% of MAS's revenues for the year. MAS's operations are not materially seasonal. As stated above, during the fourth quarter of fiscal 2003, Company management agreed to a plan to discontinue the operations of the Company's aviation service sector business and sell MAS assets. Accordingly, the accompanying consolidated financial statements reflect the MAS assets as held for sale and reclassify the net operations of MAS as discontinued operations net of tax for all periods presented. Backlog. The Company's backlog for its continuing operations consists of "firm" orders supported by customer purchase orders for the deicing equipment sold by Global and for parts and equipment sold by MAS. At March 31, 2003, the Company's backlog of orders was $5.1 million attributable to Global, all of which the Company expects to be filled in the current fiscal year. In addition, the backlog of MAS orders at March 31, 2003 was $0.7 million. Governmental Regulation. Under the Federal Aviation Act of 1958, as amended, the FAA has safety jurisdiction over flight operations generally, including flight equipment, flight 4 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 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 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, 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 periodically conducts routine reviews of MAC and CSA's operating procedures and flight and maintenance records. 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 9, 2003, the Company and its subsidiaries had 367 full-time and full-time-equivalent employees, of which 10 are employed by the Company, 256 are employed by MAC, 49 are employed by CSA, 10 are employed by MAS and 42 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. 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, 2003, of approximately $1,698. On November 16, 1995, the Company entered into a twenty-one and one-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. In August 1996, the maintenance, repair and parts brokerage operation of MAC and MAS were relocated to this facility. Rent under this lease increases over time as follows: 5 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 eight and one-half 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 a parts brokerage facility in Miami, Florida, leasing, from a third party, approximately 2,700 square feet of space. The lease, signed in April 2002, expires in February 2004, with monthly rental payments of $1,523. MAS also operates a facility in Kinston, North Carolina under a month to month lease 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, 2003, was $29,341, and the monthly rental will increase to $29,809 over the life of the lease, based on increases in the Consumer Price Index. As of March 31, 2003, 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. 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 Organizations Act and seek monetary damages. The Company and its employee have filed an answer in this action denying all liability. Upon Global's motion, the court has dismissed the plaintiff's claims under the Racketeer Influenced and Corrupt Organizations Act. The Company does not believe that the action has any merit and intends to defend the lawsuit vigorously. In November 2002, Global and the Company filed suit in North Carolina state court against affiliates of the plaintiffs in the Catalyst & Chemical Services et al v. Terex, et al action alleging defamation. This action has been removed to, and is pending before, the United States District Court for the Western District of North Carolina. The Company is currently aware of certain 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 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. 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, 2003 the number of holders of record of the Company's Common Stock was approximately 431. 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 2001 through March 2003 is as follows: 6 Common Stock Quarter Ended High Low June 30, 2001...................................... 4.48 2.81 September 30, 2001................................. 4.15 2.29 December 31, 2001.................................. 6.49 2.50 March 31, 2002..................................... 6.31 2.70 June 30, 2002...................................... 3.97 2.99 September 30, 2002................................. 3.46 2.94 December 31, 2002.................................. 3.00 1.90 March 31, 2003..................................... 2.20 1.41 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. On May 27, 2003, the Company declared that, due to losses sustained in fiscal 2003, no common share dividend would be paid in fiscal 2004. 7 Item 6. Selected Financial Data The operations of MAS have been reclassified as discontinued operations for all years presented below. (In thousands except per share data)
Year Ended March 31, ------------------------------------------------------- 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- Operating revenues ........................ $ 42,872 $ 59,603 $ 61,668 $ 49,546 $ 46,829 Earnings from continuing operations ....... 366 2,016 1,418 102 663 (Loss) earnings from discontinued operations ........... (1,590) (738) (129) 260 (140) Net (loss) earnings ...................... (1,224) 1,278 1,289 362 523 Basic (loss) earnings per share: Continuing operations .................. 0.13 0.74 0.52 0.04 0.25 Discontinued operations ................ (0.58) (0.27) (0.05) 0.09 (0.06) Total basic net (loss) earnings per share . (0.45) 0.47 0.47 0.13 0.19 Diluted (loss) earnings per share: Continuing operations .................. 0.13 0.72 0.51 0.04 0.24 Discontinued operations ................ (0.58) (0.27) (0.05) 0.09 (0.05) Total diluted net (loss) earnings per share (0.45) 0.45 0.46 0.13 0.19 Total assets .............................. 21,328 22,903 28,533 23,936 20,852 Long-term obligations, including current portion ........................ 2,459 4,158 5,969 1,486 1,364 Stockholders' equity ...................... 9,611 11,100 10,170 9,383 9,636 Average common shares outstanding-Basic ... 2,726 2,717 2,733 2,758 2,698 Average common shares outstanding-Diluted . 2,726 2,789 2,781 2,837 2,794 Dividend declared per common share (1) .... $ 0.12 $ 0.15 $ 0.10 $ 0.08 $ 0.14 Dividend paid per common share (1) ........ $ 0.12 $ 0.15 $ 0.10 $ 0.08 $ 0.14
- -------- (1) On May 27, 2003, the Company declared that, due to losses sustained in fiscal 2003, no common share dividend would be paid in fiscal 2004. 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company's most significant component of revenue, which accounted for 69.5% of revenue in fiscal 2003, was generated through 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 $29,898,000 and $29,264,000 to the Company's revenues in fiscal 2003 and 2002, respectively. Under the terms of the dry-lease service agreements, which currently cover approximately 98% of the revenue aircraft operated, the Company passes through to its customer certain cost components of its operations without markup. The cost of fuel, flight crews, landing fees, outside maintenance, parts and certain other direct operating costs are included in operating expenses and billed to the customer as cargo and maintenance revenue, at cost. Separate agreements cover the three types of aircraft operated by MAC and CSA--Cessna Caravan, Fokker F-27, and Short Brothers SD3-30. Cessna Caravan and Fokker F-27 aircraft (a total of 93 aircraft at March 31, 2003) are owned by and dry-leased from Federal Express Corporation (Customer), and Short Brothers SD3-30 aircraft (two aircraft at March 31, 2003) 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. Global manufactures, services and supports aircraft deicers and ground support equipment on a worldwide basis. Global's revenue contributed approximately $12,973,000 and $30,345,000 to the Company's revenues in fiscal 2003 and 2002, respectively. The decrease in revenues in 2003 was primarily due to decreased commercial and military equipment orders and the April 2002 completion of a large scale airport deicer system contract. During fiscal 2003, the Company decided to dispose of its aircraft component parts brokerage and repair services operation and accordingly, the Company's financial statements have been reclassified to reflect the results of MAS as a discontinued operation. See Note 10 of Notes to Consolidated Financial Statements included elsewhere in this report. The Company's continuing operations operate in two business segments, providing overnight air cargo services to the air express delivery services and aviation ground support equipment products to passenger and cargo airlines and airports. 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 and ground equipment in the accompanying consolidated financial statements. The following table summarizes the changes and trends in the Company's operating expenses for continuing operations as a percentage of revenue: Fiscal Year Ended March 31, -------------------------------------- 2003 2002 2001 --------- -------- --------- Operating revenue (in thousands) .. $ 42,872 $ 59,603 $ 61,668 Expense as a percentage of revenue: Flight operations .............. 33.66% 24.20% 24.30% Maintenance .................... 24.09 16.70 16.20 Ground equipment ............... 23.73 39.50 42.60 General and administrative ..... 16.08 13.20 12.10 Depreciation and amortization .. 1.35 0.90 1.10 --------- -------- --------- Total costs and expenses .......... 98.91% 94.50% 96.30% --------- -------- --------- 9 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 associated with the MAS operations. During the fourth quarter of fiscal 2003, Company management agreed to a plan to sell MAS assets and to discontinue the operations of the Company's aviation service sector business. 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, estimated future demand and anticipated transactions between willing buyers and sellers 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 and liabilities 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 currently determines the value of retirement benefits assets and liabilities on an actuarial basis using a 6.5% discount rate. Values are affected by our outside actuary's estimates of the expected return on insurance policies and the discount rates used. Changes in the discount rate used will 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, certain labor service contracts 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 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 assesses long-lived assets used in operations for impairment 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 the fair value of those assets, the Company then will write-down the value of the assets to fair value. The Company has applied the discontinued operations provisions of SFAS No. 144 for the MAS operations and has reflected the long-lived assets associated with the MAS subsidiary at management's best estimate of their fair value at March 31, 2003. 10 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 and March 2003 Global received additional large scale, non-seasonal, contracts which the Company believes contributed to management's plan to reduce seasonal fluctuation in revenues during fiscal 2003, 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. Results of Continuing Operations As discussed above, the operations of MAS have been reclassed as discontinued operations and, therefore, are not included in the Results of Continuing Operations discussed below. Fiscal 2003 vs. 2002 Consolidated revenue from continuing operations decreased $16,731,000 (28.1%) to $42,872,000 for the fiscal year ended March 31, 2003 compared to the prior fiscal year. The decrease in 2003 revenue primarily resulted from a decrease in Global revenue of $17,372,000 (57.3%) to $12,973,000, partially offset by a $640,000 (3.9%) increase in air cargo revenue to $29,899,000 in fiscal 2003. The business of Global has been adversely affected by reduced orders from commercial airlines and aviation related companies, due principally to the continued severe downturn in the commercial aviation industry, which started in early 2001 and significantly increased after September 11, 2001. Although this business also derives a significant portion of its revenue from sale of products for military applications, certain military programs that use the Company's products have not been fully funded to date and the Company is uncertain as to the timing of such funding or the final decision to use Company products. Operating expenses from continuing operations decreased $13,915,000 (24.7%) to $42,407,000 for fiscal 2003 compared to fiscal 2002. The net decrease in operating expenses consisted of the following changes: cost of flight operations decreased $15,000 (0.1%) as a result of decreases in personnel cost and costs associated with pilot travel partially offset by increases in fuel and landing fees; maintenance expenses increased $350,000 (3.5%) primarily as a result of increases associated with contract service costs, partially offset by decreases in contract services related to the operations of MAC; ground equipment costs decreased $13,373,000 (56.8%), as a result of decreased sales at Global; depreciation and amortization increased $61,000 (11.8%) as a result of purchases of certain assets; general and administrative expense decrease of $968,000 (12.3%) primarily as a result of decreased profit sharing expense, staffing, contract labor, rent and related facilities cost, partially offset by increases in professional fees. On a continuing operations segment basis, the most significant impacts on the Company's operating results comparing the fiscal year ended March 31, 2003 to the prior period resulted from changes in the ground equipment operation at Global. In the fiscal year ended March 31, 2003, Global had operating income of $205,000 compared to prior period income of $3,335,000. Several factors contributed to the changes in Global's operating results. Global's current fiscal year operating income decreased compared to its prior fiscal year primarily due to completion of a large scale airport contract, lower sales volume on its U.S. Air Force contract and declines in commercial equipment orders. Operating income for the Company's overnight air cargo operations was $2,621,000 in the fiscal year ended March 31, 2003, an increase of 18.3% from $2,216,000 in the prior fiscal year. The increase primarily resulted from increased levels of aircraft maintenance revenue. Non-operating expense decreased a net $160,000 due to decreased current year interest expense related to decreased borrowing on the Company's line of credit, partially offset by an other than temporary impairment charge on marketable securities. Provision for income taxes decreased $1,006,000 (78.4%) primarily due to decreased earnings at Global. The provision for income taxes for the fiscal years ended March 31, 2003, 2002 and 2001 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. 11 Fiscal 2002 vs. 2001 Consolidated revenue from continuing operations decreased $2,065,000 (3.4%) to $59,603,000 for the fiscal year ended March 31, 2002 compared to the prior fiscal year. The decrease in 2002 revenue primarily resulted from decreases in Global revenue of $1,061,000 (3.4%) to $30,345,000 and a $1,004,000 (3.3%) decrease in air cargo revenue to $29,258,000. Operating expenses decreased $3,103,000 (5.2%) to $56,322,000 for fiscal 2002 compared to fiscal 2001. The net decrease 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 expenses decreased $29,000 (0.3%) due to 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 $162,000 (23.9%) as a result of certain assets becoming fully depreciated, or written off during fiscal 2002; the general and administrative expense increase of $384,000 (5.1%) 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. 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. Several factors contributed to the changes in Global's operating results. Global's 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. 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. The decrease resulted from decreased levels of aircraft maintenance. Non-operating expense decreased a net $109,000 due to decreased interest expense related in fiscal 2002 to decreased borrowing on the Company's line of credit. Provision for income taxes increased $548,000 (74.6%) due to changes in the effective tax rate. The provision for income taxes for the fiscal years ended March 31, 2003, 2002 and 2001 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, 2003 the Company's working capital amounted to $9,585,000, a decrease of $1,636,000 compared to March 31, 2002. The net decrease primarily resulted from decreased inventory, partially offset by an increase in assets held for sale. 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, a subjective clause and restrictive covenants that, among other matters, require the Company to maintain certain financial ratios. As of March 31, 2003, 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, 2003 was 1.33%. At March 31, 2003 and 2002, the amounts outstanding against the line were $2,217,000 and $3,860,000, respectively. At March 31, 2003, an additional $2,199,000 was available under the terms of the 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 Company has classified the $2,217,000 outstanding balance on its credit line as of March 31, 2003 as long-term to reflect the terms included under the amendment signed on August 31, 2002. 12 The following table of material debt and lease commitments at March 31, 2003 summarizes the effect these obligations are expected to have on the Company's cash flow in the future periods.
Contractual Obligations Total 2004 2005 2006 2007 2008 - ----------------------- ----- ---- ---- ---- ---- ---- Long-term bank debt $2,217,000 $ -- $2,217,000 $ -- $ -- $ -- Operating leases .. 2,356,000 698,000 680,000 685,000 272,000 21,000 Capital leases .... 98,000 46,000 39,000 13,000 -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total ............. $4,671,000 $ 744,000 $2,936,000 $ 698,000 $ 272,000 $ 21,000 ---------- ---------- ---------- ---------- ---------- ----------
The respective years ended March 31, 2003, 2002 and 2001 resulted in the following changes in cash flow: operating activities provided $2,317,000 and $2,890,000, respectively in 2003 and 2002 and used $1,129,000 in 2001. Investing activities used $278,000, $657,000 and $227,000, respectively, in 2003, 2002 and 2001 and financing activities used $1,991,000 and $2,300,000, respectively, in 2003 and 2002 and provided $1,310,000 in 2001. Net cash increased $48,000 in 2003 and decreased $66,000 and $47,000, respectively, in 2002 and 2001. Cash provided by operating activities was $573,000 less for the year ended March 31, 2003, compared to 2002 principally due to decreases in earnings from continuing operations and inventory, partially offset by increases in accounts payable. Cash used in investing activities for the year ended March 31, 2003 was approximately $379,000 less than 2002, principally due to decreased capital expenditures and proceeds from sale of assets. Cash used in financing activities was $309,000 less in 2003 compared to 2002 principally due to changes relating to borrowings under the line of credit. During the fiscal year ended March 31, 2003 the Company repurchased none of its 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 $0.12 per share cash dividend in June 2002 and on May 27, 2003, the Company declared that, due to losses sustained in fiscal 2003, no common share dividend would be paid fiscal 2004. Deferred Retirement Obligation Contractual death benefits for the Company's former Chairman and Chief Executive Officer who passed away on April 18, 1997 are payable by the Company 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. Outlook The Company believes its ground support equipment 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 fiscal 2004 suggests that the commercial aviation market will grow at a rate that is substantially less than the rest of the economy. Increased military and Homeland Security budgets, and pending funding approvals, 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. As stated above, during the fourth quarter of fiscal 2003, Company management agreed to a plan to sell MAS assets and to discontinue the operations of the Company's aviation service sector business. See Note 10 of Notes to Consolidated Financial Statements included elsewhere in this report. 13 Based on the current general economic and industry outlook and cost cutting measures implemented over the past twelve months, 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 2004. 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 fiscal 2004 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," "depends" 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: 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 and services; Changes in government regulation and technology Mild winter weather conditions reducing the demand for deicing equipment 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. Derivative Financial Instruments As required by SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", the Company recognizes all derivatives as either assets or liabilities in the statement of financial position and measures 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 unwind 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 fair value of the remaining swap decreased by $56,000 from a liability of $73,000 as of March 31, 2002 to a liability of $129,000 as of March 31, 2003. The Company assesses the effectiveness of the swap using the hypothetical derivative method and has determined that it qualifies as an effective hedge under SFAS No. 133 at March 31, 2003 and 2002. Recent Accounting Pronouncements On June 29, 2001, the Financial Accounting Standards Board (FASB) approved Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and that the use of the pooling-of-interest method is no longer allowed. SFAS No. 142 requires that upon adoption, amortization of goodwill will cease and instead the carrying value of goodwill will be evaluated for impairment on an annual basis. Identifiable intangible 14 assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The Company has determined that neither of these recently accounting standards impacted the Company's financial position and results of operations. The FASB has issued 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 effect of the adoption of SFAS No. 144 on management's plan to discontinue the operations of MAS is reflected in the Company's consolidated statements of financial position and results of operations and is detailed in Note 10 of Notes to Consolidated Financial Statements included elsewhere in this report. 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 amendment 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. This statement did not have an effect on the Company's consolidated statements of financial position or results of operations. 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 adoption of this statement did not have an effect on the Company's financial position and results of operations. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of this Interpretation are currently effective and did not affect the Company's financial position and results of operations. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company has evaluated all of its guarantees under the provisions of FIN 45 and does not believe the effect of its adoption on its financial position and results of operations will be material. The Company's ground equipment subsidiary warranties its products for up to a two-year period from date of sale. Product warranty reserves are recorded at time of sale based on the historical average warranty cost and are adjusted as actual warranty cost becomes known. As of March 31, 2003 the Company's warranty reserve amounted to $116,000. Product warranty reserve activity during fiscal 2003 is as follows: Balance at 3/31/02 $119,000 Additions to reserve 199,000 Use of reserve (202,000) --------- Balance at 3/31/03 $116,000 -------- 15 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". This Statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Because the Company has elected to continue to account for its stock-based compensation under the provisions of Accounting Principles Bulletin No. 25, SFAS No. 148 has no impact on the Company's consolidated statement of operations for 2003. However, the disclosure provisions of SFAS No. 148 are reflected in the accompanying notes to the Company's consolidated financial statements. In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). This Interpretation requires that variable interest entities created after January 31, 2003, and variable interest entities in which an interest is obtained after that date, be evaluated for consolidation into an entity's financial statements. This Interpretation also applies, beginning July 1, 2003, to all variable interest entities in which an enterprise holds an interest that it acquired before February 1, 2003. The Company has determined that the adoption of FIN 46 will not have an impact on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 is effective for the Company in fiscal year 2004. The Company is in the process of evaluating the impact of adopting SFAS No. 150 and has not yet determined the effect of its adoption on its financial position and results of operations. 16 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The Company does not hold or issue derivative financial instruments for trading purposes. As of March 31, 2003 the Company had outstanding one interest rate swap agreement 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 balance of the line of credit at March 31, 2003, annual interest expense would have increased by approximately $22,000. 17 Item 8. Financial Statements and Supplementary Data. INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Air T, Inc. Maiden, North Carolina We have audited the accompanying consolidated balance sheets of Air T, Inc. and subsidiaries (the "Company") as of March 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the three years in the period ended March 31, 2003. 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 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2003 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 10 to the consolidated financial statements, the Company has presented the results of its aviation service business in loss from discontinued operations in the accompanying consolidated financial statements as a result of the decision to discontinue these operations and sell substantially all of the related assets of the aviation service business. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Charlotte, North Carolina June 19, 2003 18 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31, ------------------------------------------------------------------- 2003 2002 2001 ------------------- ------------------- ------------------- Operating Revenues (Note 11): Cargo $ 19,688,555 $ 19,891,562 $ 20,344,612 Maintenance 10,210,285 9,366,524 9,917,749 Ground equipment 12,972,887 30,344,889 31,405,711 ------------------ ------------------- ------------------- 42,871,727 59,602,975 61,668,072 ------------------ ------------------- ------------------- Operating Expenses: Flight 14,432,941 14,418,205 14,965,001 Maintenance 10,328,867 9,978,664 10,007,942 Ground equipment 10,174,888 23,547,474 26,295,686 General and administrative 6,892,795 7,861,010 7,477,345 Depreciation and amortization 577,716 516,952 679,335 ------------------ ------------------- ------------------- 42,407,207 56,322,305 59,425,309 ------------------ ------------------- ------------------- Operating Income 464,520 3,280,670 2,242,763 Non-operating Expense (Income): Interest (30,728) 288,761 346,592 Deferred retirement expense (Note 13) 21,000 88,078 24,996 Investment income (90,003) (115,562) (114,467) Cash surrender value of life insurance (164,000) (164,000) (95,457) Other 84,636 (115,942) (71,222) ------------------ ------------------- ------------------- (179,095) (18,665) 90,442 ------------------ ------------------- ------------------- Earnings From Continuing Operations Before Income Taxes 643,615 3,299,335 2,152,321 Income Taxes (Note 12) 277,249 1,282,827 734,779 ------------------- ------------------- ------------------- Earnings From Continuing Operations 366,366 2,016,508 1,417,542 ------------------- ------------------- ------------------- Loss From Discontinued Operations, net of Income Taxes (Note 10) (1,590,577) (738,009) (128,617) ------------------- ------------------- ------------------- Net (Loss) Earnings $ (1,224,211) $ 1,278,499 $ 1,288,925 =================== =================== =================== Basic (Loss) Earnings Per Share (Note 14): Continuing Operations $ 0.13 $ 0.74 $ 0.52 Discontinued Operations (0.58) (0.27) (0.05) ------------------- ------------------- ------------------- Total Basic Net (Loss) Earnings Per Share $(0.45) $ 0.47 $ 0.47 =================== =================== =================== Diluted (Loss) Earnings Per Share (Note 14): Continuing Operations $ 0.13 $ 0.72 $ 0.51 Discontinued Operations (0.58) (0.27) (0.05) ------------------- ------------------- ------------------- Total Diluted Net (Loss) Earnings Per Share $ (0.45) $ 0.45 $ 0.46 =================== =================== =================== Weighted Average Shares Outstanding: Basic 2,726,320 2,716,823 2,733,428 Diluted 2,726,320 2,788,700 2,780,732
See notes to consolidated financial statements. 19 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, ------------------------- 2003 2002 ----------- ----------- ASSETS (Note 6) Current Assets: Cash and cash equivalents ......................... $ 79,715 $ 31,770 Marketable securities (Note 2) .................... 1,057,042 982,028 Accounts receivable, less allowance for doubtful accounts of $449,358 in 2003 and $455,805 in 2002 ............................. 6,239,144 5,875,754 Costs and estimated earnings in excess of billings on uncompleted contracts (Note 4) ................ -- 14,320 Inventories (Notes 3 and 10) ...................... 6,275,288 9,907,430 Assets held for sale (Note 10) .................... 1,950,000 -- Deferred tax asset (Note 12) ...................... 1,036,998 727,665 Prepaid expenses and other ........................ 129,029 188,245 ------------ ------------ Total Current Assets ............................ 16,767,216 17,727,212 ============ ============ Property and Equipment (Notes 1 and 10): Furniture, fixtures and improvements .............. 5,609,003 7,210,133 Flight equipment and rotables inventory ........... 1,483,029 1,329,153 ------------ ------------ 7,092,032 8,539,286 Less accumulated depreciation ..................... (4,788,779) (5,020,238) ------------ ------------ Property and equipment, net ....................... 2,303,253 3,519,048 Deferred Tax Asset (Note 12) .......................... 1,096,883 568,186 Intangible Pension Asset (Note 13) .................... 219,862 290,862 Other Assets .......................................... 940,479 797,454 ------------ ------------ Total Assets $ 21,327,693 $ 22,902,762 ============ ============
See notes to consolidated financial statements. 20 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED)
March 31, ---------------------------- 2003 2002 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable ..................................... $ 4,436,291 $ 3,543,568 Accrued expenses (Note 5) ............................ 1,691,341 1,915,605 Billings in excess of costs and estimated earnings on uncompleted contracts (Note 4) ................. 760,979 -- Income taxes payable (Note 12) ....................... 180,278 355,195 Current portion of long-term obligations (Notes 6 & 7) 113,130 691,812 ------------ ------------ Total Current Liabilities ......................... 7,182,019 6,506,180 ------------ ------------ Capital Lease Obligations (less current portion) (Note 7) .................................... 50,070 87,718 Long-term Debt (Note 6) .................................. 2,345,910 3,378,934 Deferred Retirement Obligations (less current portion) (Note 13) ................................... 2,138,712 1,830,205 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; 2,726,320 and 2,724,320 shares issued and outstanding in 2003 and 2002, respectively ................... 681,580 681,080 Additional paid in capital ............................ 6,863,898 6,858,898 Retained earnings ..................................... 2,529,556 4,079,621 Accumulated other comprehensive loss .................. (464,052) (519,874) ------------ ------------ Total Stockholders' Equity ........................ 9,610,982 11,099,725 ------------ ------------ Total Liabilities and Stockholders' Equity ....... $ 21,327,693 $ 22,902,762 ============ ============
See notes to consolidated financial statements. 21 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31, ------------------------------------------- 2003 2002 2001 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) earnings ........................................... $(1,224,211) $ 1,278,499 $ 1,288,925 Adjustments to reconcile net (loss) earnings to net cash provided by (used in) operating activities: Change in accounts receivable and inventory reserves ........ (432,187) 616,049 172,844 Depreciation and amortization ............................... 748,912 666,389 826,018 Deferred tax provision ...................................... (838,030) (283,805) (252,395) Other-than-temporary impairment charge on securities ........ 161,000 -- -- Net periodic pension cost ................................... 276,283 253,609 240,385 Impairment charge on discontinued operations ................ 1,655,895 -- -- Changes in assets and liabilities which provided (used) cash: Accounts receivable ...................................... (356,943) 4,921,831 (3,133,354) Inventories .............................................. 1,195,955 291,324 (1,834,225) Prepaid expenses and other ............................... (69,489) 58,495 (49,547) Accounts payable ......................................... 892,723 (5,336,060) 1,361,988 Accrued expenses ......................................... (279,040) 356,793 432,626 Billings in excess of costs and estimated earnings on uncompleted contracts ................................ 760,979 -- -- Income taxes payable ..................................... (174,917) 67,349 (182,401) ----------- ----------- ----------- Total adjustments ...................................... 3,541,141 1,611,974 (2,418,061) ----------- ----------- ----------- Net cash provided by (used in) operating activities ........... 2,316,930 2,890,473 (1,129,136) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of fixed assets ............................. 140,000 50,000 30,581 Capital expenditures ........................................... 134,005 (720,428) (720,545) Sale and maturity of marketable securities ..................... -- 13,496 462,617 ----------- ----------- ----------- Net cash provided by (used in) investing activities ............ 274,005 (656,932) (227,347) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments) borrowings on line of credit .................. (1,370,630) (1,479,100) 1,740,910 Repayment of term loan ......................................... (300,000) (450,000) -- Payment of cash dividend ....................................... (325,854) (405,520) (274,858) Repurchase of common stock ..................................... -- (42,785) (186,783) Proceeds from excercise of stock options ....................... 5,500 77,835 30,500 ----------- ----------- ----------- (1,990,984) (2,299,570) 1,309,769 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............. 47,945 (66,029) (46,714) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................... 31,770 97,799 144,513 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR ......................... $ 79,715 $ 31,770 $ 97,799 ----------- ----------- ----------- SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Capital leases entered into during fiscal year ................. $ -- $ 24,581 $ 138,181 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest .................................................... $ 368,670 $ 609,912 $ 722,885 Income taxes ................................................ 274,587 1,039,595 1,091,684
See notes to consolidated financial statements. 22 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
Accumulated Common Stock (Note 9) Additional Other Total Paid-In Retained Comprehensive Stockholders' Shares Amount Capital Earnings Income (Loss) Equity ------ ------ ------- -------- ------------- ------ 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 (loss): Unrealized gain on securities 74,980 Pension liability adjustment (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 ($0.10 per share) - - - (274,857) - (274,857) --------- ------- --------- --------- -------- ---------- 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 (loss): Unrealized gain on securities 119,690 Pension liability adjustment 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 ($0.15 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 Comprehensive Loss: Net loss (1,224,211) Other Comprehensive income (loss): Other than temporary impairment charge on securities 161,000 Unrealized gain on securities 74,098 Pension liability adjustment (158,000) Change in fair value of derivatives (21,276) Total Comprehensive Loss (1,168,389) Exercise of stock options 2,000 500 5,000 5,500 Cash dividend ($0.12 per share) - - - (325,854) - (325,854) --------- ------- --------- --------- -------- ---------- Balance, March 31, 2003 2,726,320 $ 681,580 $ 6,863,898 $ 2,529,556 $ (464,052) $ 9,610,982 =========== ============== ============= ============== ============ ==============
See notes to consolidated financial statements. 23 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 and a manufacturer of aircraft ground service equipment. In the fourth quarter of 2003 management committed to a plan to discontinue the operations of the aviation services sector of its business. See Note 10 Discontinued Operations. 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 (MAS) 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 preferred stocks. The Company has classified marketable securities as available-for-sale and they are carried at fair value in the accompanying consolidated balance sheets. Unrealized gains and losses on such securities are excluded from earnings and reported as a separate component of accumulated other 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 shorter of 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 24 revisions to costs and income, and are recognized in the period in which the revisions are determined. 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. As the Company uses the intrinsic method no compensation cost has been included in the accompanying financial statements. 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", compensation cost, net of taxes, would have increased $46,000 and $49,000, respectively in fiscal 2002 and 2001. The Company's pro-forma net (loss) income would have been $(1,224,211), or $(0.45) per diluted share, $1,232,623, or $0.44 per diluted share and $1,240,350, or $0.45 per diluted share, respectively, for 2003, 2002 and 2001. Financial Instruments - The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accrued expenses, and long-term debt approximate their fair value at March 31, 2003 and 2002 because of their relatively short maturity or their variable interest nature. 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 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 accounts, inventory reserves, intangible pension asset, deferred retirement obligations, revenue recognized under the percentage of completion method and valuation of long-lived assets. Derivative Financial Instruments -As required by SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", the Company recognizes all derivatives as either assets or liabilities in the consolidated statement of financial position and measures 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. Recent Accounting Pronouncements - On June 29, 2001, the Financial Accounting Standards Board (FASB) approved Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and that the use of the pooling-of-interest method is no longer allowed. SFAS No. 142 requires that upon adoption, amortization of goodwill will cease and instead the carrying value of goodwill will be evaluated for impairment on an annual basis. Identifiable intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The Company has determined that neither of these recently accounting standards impacted the Company's financial position and results of operations. The FASB has issued 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 25 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 effect of the adoption of SFAS No. 144 on management's plan to discontinue the operations of MAS is reflected in the Company's consolidated statements of financial position and results of operations and is detailed in Note 10 Discontinued 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. This statement did not have an effect on the Company's consolidated statements of financial position or results of operations. 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 adoption of this statement did not have an effect on the Company's financial position and results of operations. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of this Interpretation are currently effective and did not affect the Company's financial position and results of operations. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company has evaluated all of its guarantees under the provisions of FIN 45 and does not believe the effect of its adoption on its financial position and results of operations will be material. The Company's ground equipment subsidiary warranties its products for up to a two-year period from date of sale. Product warranty reserves are recorded at time of sale based on the historical average warranty cost and are adjusted as actual warranty cost becomes known. As of March 31, 2003 the Company's warranty reserve amounted to $116,000. Product warranty reserve activity during fiscal 2003 is as follows: Balance at 3/31/01 $211,000 Additions to reserve 147,000 Use of reserve (239,000) --------- Balance at 3/31/02 119,000 Additions to reserve 199,000 Use of reserve (202,000) --------- Balance at 3/31/03 $116,000 --------- In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". This Statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Because the Company has elected to continue 26 to account for its stock-based compensation under the provisions of Accounting Principles bulletin No. 25, SFAS No. 148 has no impact on the Company's consolidated statement of operations for 2003. However, the disclosure provisions of SFAS No. 148 are reflected in the accompanying notes to the Company's consolidated financial statements. In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). This Interpretation requires that variable interest entities created after January 31, 2003, and variable interest entities in which an interest is obtained after that date, be evaluated for consolidation into an entity's financial statements. This Interpretation also applies, beginning July 1, 2003, to all variable interest entities in which an enterprise holds an interest that it acquired before February 1, 2003. The Company has determined that the adoption of FIN 46 will not have an impact on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 is effective for the Company in fiscal year 2004. The Company is in the process of evaluating the impact of adopting SFAS No. 150 and has not yet determined the effect of its adoption on its financial position and results of operations. Reclassifications - Certain reclassifications have been made to 2002 and 2001 amounts to conform to the current year presentation. 2. MARKETABLE SECURITIES Marketable securities consist of the following investment types: March 31, ----------------------------------- 2003 2002 ---- ---- Preferred stocks $ 313,600 $ 242,200 Mutual funds 743,442 739,828 ---------------- --------------- Total $ 1,057,042 $ 982,028 ================ =============== An other-than-temporary impairment charge of $161,000 was recorded in the consolidated statement of operations in the year ended March, 31, 2003. 3. INVENTORIES Inventories consist of the following: March 31, ---------------------------- 2003 2002 ---- ---- Aircraft parts and supplies $ 2,088,315 $ 5,373,398 Aircraft equipment manufacturing: Raw materials 2,595,448 2,777,175 Work in process 745,409 914,730 Finished goods 1,940,077 1,432,332 -------------- ------------- Total inventory 7,369,249 10,497,635 Reserves (1,093,961) (590,205) -------------- ------------- Total, net of reserves $ 6,275,288 $ 9,907,430 ============== ============= 4. UNCOMPLETED CONTRACTS Overhaul contracts in process accounted for under the percentage of completion method are summarized as follows: March 31, ------------------------ 2003 2002 ------------- ---------- Costs incurred on uncompleted contracts $ 532,479 $ 6,337 Estimated earnings 271,126 7,983 ------------ ---------- Total 803,605 14,320 Less billings to date 1,564,584 - ------------ ---------- Net (over) under billings $ (760,979) $ 14,320 ============ ========== 27 5. ACCRUED EXPENSES Accrued expenses consist of the following: March 31, 2003 2002 ---- ---- Salaries, wages and related items $ 819,848 $ 613,671 Profit sharing 81,000 556,363 Health insurance 305,834 305,834 Professional fees 223,922 199,524 Warranty reserves 116,000 119,000 Other 144,737 121,212 ------------ ------------ Total $ 1,691,341 $ 1,915,605 =========== ============ 6. 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 amended 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, a subjective acceleration clause and restrictive covenants that, among other matters, require the Company to maintain certain financial ratios. As of March 31, 2003, 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, 2003 was 1.33%. At March 31, 2003 and 2002, the amounts outstanding against the line were $2,217,000 and $3,860,000, respectively. At March 31, 2003, $2,199,000 was available under the terms of the credit facility. The Company has classified its outstanding bank debt of $2,217,000 as long-term as of March 31, 2003, to reflect the terms included under the agreement signed on August 31, 2002. See Note 8 for derivative financial instruments associated with the bank financing line of credit. During fiscal 2003 Air T, Inc. had guaranteed a $215,000 contractual obligation of its Global subsidiary; subsequent to fiscal year-end, the guarantee was released. 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. Subsequent to fiscal year-end 2003 the Company leased additional office space under similar terms of agreement for $2,100 per month. 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 eight and one-half 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. 28 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, based on increases in the Consumer Price Index. At March 31, 2003, 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 ----------- ----------- 2004 $ 46,124 698,371 2005 38,703 679,811 2006 13,115 685,434 2007 271,437 2008 -- 21,132 ---------- ---------- Total minimum lease payments .... 97,942 $2,356,185 ========== Less amount representing interest 8,537 ---------- Present value of lease payments . 89,405 Less current maturities ......... 39,335 ---------- Long-term maturities ............ $ 50,070 ========== Rent expense for operating leases totaled approximately $713,000, $759,000, and $819,000 for 2003, 2002 and 2001, respectively. Rent expense, included above, to related parties was $109,860 for both 2003 and 2002 and $96,900 for 2001. 8. DERIVATIVE FINANCIAL INSTRUMENTS As required by SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", the Company recognizes all derivatives as either assets or liabilities in the statement of financial position and measures 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 unwind its $2,000,000 (6.5%) revolving credit line swap in consideration for $58,750, the fair-market-value termination fee as of that date. The fair value of the remaining swap decreased by $56,000 from a liability of $73,000 at March 31, 2002, to a liability of $129,000 as of March 31, 2003. This liability is included in long-term debt on the consolidated balance sheets. The Company assesses the effectiveness of the swap using the hypothetical derivative method and has determined that it qualifies as an effective hedge at March 31, 2003 and 2002 under SFAS No. 133. 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, 2003. The Company has granted options to purchase up to a total of 64,000 shares of common stock to certain Company employees and outside directors at prices of $3.19 and $6.38 per share. As of March 31, 2003, 301,000 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 are fully vested and must be exercised within five to nine years of the vesting date. 29 The following table summarizes information about stock options at March 31, 2003:
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 Exercisable Price ---- ----- ----------- ------------ ----- ----------- ------ 1/28/00 $ 3.19 59,000 1.8 $3.19 59,000 $3.19 8/13/98 6.38 5,000 5.4 6.38 5,000 6.38 ------------- ---------- $3.19 and 6.38 64,000 2.1 $3.44 64,000 $ 3.44 ============= ==========
Option information is summarized as follows: Weighted Average Exercise Price Per -------------------- Shares Share 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 Exercised (2,000) 2.75 Expired (160,533) 2.83 ------------- --------------------- Outstanding March 31, 2003 64,000 3.44 ------------- --------------------- The fair value of options granted in fiscal 2000 and 1999, was estimated on the date of grant using the Black-Scholes option-pricing model with the assumptions listed below. No options were granted in fiscal 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", compensation cost, net of taxes, would have increased $46,000 and $49,000, respectively in fiscal 2002 and 2001. The Company's pro-forma net (loss) income would have been $(1,224,211), or $(0.45) per diluted share, $1,232,623, or $0.44 per diluted share and $1,240,350, or $0.45 per diluted share, respectively, for 2003, 2002 and 2001. During fiscal 2003 the Company suspended its stock repurchase program. No common shares were repurchased in fiscal 2003. Through March 31, 2003 the Company had repurchased and retired a total of 789,780 shares at a total cost of $3,257,622. 10. DISCONTINUED OPERATIONS During the fourth quarter of fiscal 2003, Company management, in order to focus its resources on core operations, agreed to a plan to sell the assets of MAS and to discontinue the operations of the Company's aviation service sector business. Accordingly, the accompanying consolidated financial statements reflect the MAS assets as held for sale and reclassify the net operations of MAS as discontinued operations, net of tax, for all periods presented. The Company entered into a letter of intent on June 19, 2003 to sell the business operations of MAS. A summary of the assets held for sale at March 31, 2003 is as follows: 2003 2002 Inventory $ 1,900,000 - Property, plant and equipment 50,000 - --------------- --------------- Assets held for sale $ 1,950,000 - =============== =============== A summary of the operating results of the discontinued operations is as follows: 2003 2002 2001 Revenue $ 5,977,697 $ 11,355,128 $ 8,577,801 Operating earnings (loss) (942,110) (904,911) 274,336 Loss before income taxes (2,598,005) (1,190,337) (207,446) Income tax benefit 949,428 452,328 78,829 -------------- --------------- -------------- Net loss $ (1,648,577) $ (738,009) $ (128,617) -------------- --------------- -------------- The loss before income taxes on discontinued operations as of March 31, 2003, which totaled $2,598,005, was comprised of a $942,110 loss from operations and $1,655,895 impairment charge recorded to write down MAS assets to their estimated fair value. 11. REVENUES FROM MAJOR CUSTOMER Approximately 69.5%, 41.2% and 43.1% of the Company's revenues were derived from services performed for a major air express company in 2003, 2002 and 2001, respectively. In addition, approximately 19.9%, 22.9% and 13.9% of the Company's revenues for 2003, 2002 and 2001 respectively, were generated from Global's US Air Force contract. 12. INCOME TAXES The provision for income taxes consists of: Year Ended March 31, 2003 -------------------------------------------- Discontinued Continued Operations Operations Total Current: Federal ......... $ (226,000) $ 278,000 $ 42,000 State ........... -- 56,000 66,000 -------- ------- ------- Total current (226,000) 334,000 108,000 Deferred: Federal ......... (582,000) (102,000) (684,000) State ........... (199,000) 45,000 (154,000) -------- ------- ------- Total deferred (781,000) (57,000) (838,000) -------- ------- ------- Total ........... $(1,007,000) $ 277,000 $ (730,000) Year Ended March 31, 2002 -------------------------------------------- Discontinued Continued Operations Operations Total Current: Federal ......... $ (293,000) $ 1,209,000 $ 916,000 State ........... (65,000) 264,000 199,000 -------- ------- ------- Total current (358,000) 1,473,000 1,115,000 Deferred: Federal ......... (77,000) (137,000) (214,000) State ........... (17,000) (53,000) (70,000) -------- ------- ------- Total deferred (94,000) (190,000) (284,000) -------- ------- ------- Total ........... $ (452,000) $ 1,283,000 $ 831,000 31 Year Ended March 31, 2002 -------------------------------------------- Discontinued Continued Operations Operations Total Current: Federal ......... $ (55,000) $ 785,000 $ 730,000 State ........... (12,000) 190,000 178,000 Total current (67,000) 975,000 908,000 Deferred: Federal ......... (10,000) (197,000) (207,000) State ........... (2,000) (43,000) (45,000) Total deferred (12,000) (240,000) (252,000) Total ........... $ (79,000) $ 735,000 $ 656,000 The income tax provision for continuing operations was different from the amount computed using the statutory Federal income tax rate for the following reasons:
2003 2002 2001 Income tax provision at U.S. Statutory rate $ 219,000 $ 1,122,000 $ 732,000 State income taxes ......................... 31,000 154,000 99,000 Meal and entertainment disallowance ........ 15,000 23,000 18,000 Other, net ................................. (71,000) (16,000) 23,000 Change in valuation allowance .............. 83,000 -- (137,000) ----------- ----------- ----------- Income tax provision ....................... $ 277,000 $ 1,283,000 $ 735,000 ----------- ----------- -----------
2003 2002 Book accruals over tax, net: Warranty reserve ........... $ 46,864 $ 47,742 Accounts receivable reserve 174,523 177,008 Inventory reserve .......... 422,269 227,937 Accrued insurance .......... (32,846) (7,103) Accrued vacation ........... 94,290 86,879 Deferred compensation ...... 658,559 565,097 Other ...................... 326,071 198,277 Fixed assets ............... (88,124) 14 MAS discontinued operations 545,705 -- State loss carry forward ... 70,000 -- Valuation allowance ........ (83,430) -- ----------- ----------- Total ...................... $ 2,133,881 $ 1,295,851 ----------- ----------- The deferred tax items are reported on a net current and noncurrent basis in the accompanying 2003 and 2002 consolidated balance sheets according to the classification of the related asset and liability. The Company has state net operating loss carryforwards as of March 31, 2003 with a tax effected amount of approximately $70,000. The state loss carryforwards will expire in varying periods through March 2023. At March 31, 2003 the Company had deferred tax assets of $21,853 for capital loss carryforwards and $61,577 for unrealized capital losses. The Company recorded a full valuation allowance of $83,430 on the deferred tax assets relating to these capital losses at March 31, 2003 based on management's belief that realization is unlikely. 32 13. 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, 2003, 2002 and 2001 was $232,000, $228,000, and $229,000, respectively and was recorded in general and administrative expenses in the consolidated statements of operations. 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 March 31, 2003, 2002, and 2001 expense was $81,000, $562,000 and $400,000, respectively and was recorded in general and administrative expenses in the consolidated statements of operations. 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. Cost of funding the benefit is recorded in general and administrative expense on the consolidated statements of operations. The following tables set forth the funded status of the plan at March 31, 2003 and 2002 and the change n the projected benefit obligation from March 31, 2002 to March 31, 2003.
March 31, 2003 2002 Vested benefit obligation and accumulated benefit obligation ..... $ 1,918,826 $ 1,555,827 Projected benefit obligation ..................................... 1,918,826 1,555,827 Plan assets at fair value ........................................ -- -- --------- --------- Projected benefit obligation greater than plan assets ............ 1,918,826 1,555,827 Unrecognized prior service cost .................................. (219,862) (290,862) Unrecognized actuarial loss ...................................... (283,363) (125,361) Adjustment required to recognize minimum liability ............... 503,225 416,223 --------- --------- Accrued pension cost recognized in the consolidated balance sheets $ 1,918,826 $ 1,555,827 --------- ---------
Projected benefit obligation, March 31, 2002 $ 1,555,827 Service cost 70,244 Interest cost 112,194 Actuarial loss $ 1,918,826 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 additional minimum liability in excess of unrecognized prior service cost in fiscal 2003 totaled $158,000 and is reported as a component of accumulated other comprehensive loss. The projected benefit obligation was determined using an assumed discount rate of 6.5% for fiscal year 2003 and 7% for fiscal years 2002 and 2001. The liability relating to these benefits has been included in deferred retirement obligation in the accompanying financial statements. 33 Net periodic pension expense for fiscal 2003, 2002 and 2001 included the following: 2003 2002 2001 Future service cost ..... $ 70,244 $ 62,944 $ 58,826 Interest cost ........... 112,194 97,665 87,425 Amortization ............ 93,845 93,000 94,134 Net periodic pension cost $276,283 $253,609 $240,385 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 10 years after his death. As of March 31, 2003 and 2002 accruals related to the unpaid present value of the benefit amounted to approximately $293,000 and $324,000, respectively (of which approximately $220,000 and $274,000, respectively is included under defined retirement obligations in the accompanying consolidated balance sheets). The net periodic pension costs are included in general and administrative expenses in the accompanying consolidated statements of operations. 14. 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 unless they were anti-dilutive. As of March 31, 2003 all outstanding stock options were anti-dilutive. The computation of basic and diluted earnings per common share is as follows: Year Ended March 31, 2003 2002 2001 Net (loss) earnings ....................... $(1,224,211) $1,278,499 $1,288,925 Basic (Loss) Earnings Per Share: Continuing Operations ................. $ 0.13 $ 0.74 $ 0.52 Discontinued Operations ............... $ (0.58) $ (0.27) $ (0.05) Total Basic Net (Loss) Earnings Per Share . $ (0.45) $ 0.47 $ 0.47 Diluted (Loss) Earnings Per Share: Continuing Operations ................. $ 0.13 $ 0.72 $ 0.51 Discontinued Operations ............... $ (0.58) $ (0.27) $ (0.05) Total Diluted Net (Loss) Earnings Per Share $ (0.45) $ 0.45 $ 0.46 Weighted Average Shares Outstanding: Basic ................................ 2,726,320 2,716,823 2,733,428 Diluted .............................. 2,726,320 2,788,700 2,780,732 15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (in thousands except per share data) During the fourth quarter of 2003, management agreed to a plan to discontinue the operations of MAS and dispose of its assets. As a result, the Company has reflected the discontinued operations of MAS in the accompanying consolidated statements of financial position and results of operations. The quarterly financial information below has been reconciled to amounts previously reported on Form 10-Q. 34
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER 2003 Operating Revenues - as previously reported ..... $ 11,891 $ 10,231 $ 13,432 Less revenues associated with discontinued operations ......................... (1,693) (1,055) (2,199) ------ ----- ------ ------ Operating Revenues .............................. 10,198 9,176 11,233 12,265 ------ ----- ------ ------ Operating Income (Loss) - as previously reported $ (32) $ (511) $ 147 Less operating loss associated with discontinued operations ........................ (73) (121) (13) ------ ----- ------ ------ Operating Income (Loss) ......................... 41 (390) 160 654 ------ ----- ------ ------ (Loss) Earnings Before Income Taxes - as previously reported ........... $ (268) $ (581) $ 71 Less loss associated with discontinued operations (198) (230) (106) ------ ----- ------ ------ (Loss) Earnings Before Income Taxes ............. (70) (351) 177 888 ------ ----- ------ ------ Net (Loss) Earnings - as previously reported .... $ (161) $ 364 $ 37 Less net (loss) earnings associated with discontinued operations .......... (118) (147) 73 ------ ----- ------ ------ Net (Loss) Earnings ............................. (43) (217) 110 516 ------ ----- ------ ------ Diluted Net (Loss) Earnings per share - as previously reported .......... $ (0.06) $ (0.13) $ 0.01 Diluted Net (Loss) per share associated with discontinued operations ....... (0.04) (0.05) (0.03) ------ ----- ------ ------ Diluted Net (Loss) Earnings per share ........... (0.02) (0.08) 0.04 0.23 ------ ----- ------ ------ 2002 Operating Revenues - as previously reported ..... $ 17,573 $ 25,273 $ 15,769 $ 12,343 Less revenues associated with discontinued operations ........... (1,540) (6,905) (1,766) (1,144) ------ ----- ------ ------ Operating Revenues .............................. 16,033 18,368 14,003 11,199 ------ ----- ------ ------ Operating Income (Loss) - as previously reported ............... $ 701 $ 1,331 $ 382 $ (38) Less operating income (loss) associated with discontinued operations ..... (113) 37 (165) (664) ------ ----- ------ ------ Operating Income (Loss) ......................... 814 1,294 547 626 ------ ----- ------ ------ Earnings Before Income Taxes - as previously reported .......... $ 571 $ 1,230 $ 278 $ 30 Less loss associated with discontinued operations .......... (264) 95) (325) (506) ------ ----- ------ ------ Earnings Before Income Taxes .................... 835 1,325 603 536 ------ ----- ------ ------ Net Earnings - as previously reported ........... $ 343 $ 746 $ 156 $ 34 Less net loss associated with discontinued operations ............ (164) (59) (201) (314) ------ ----- ------ ------ Net Earnings .................................... 507 805 357 348 ------ ----- ------ ------ Diluted Net Earnings per share - as previously reported ............... $ 0.13 $ 0.27 $ 0.06 $ 0.13 Diluted Net Loss per share associated with discontinued operations ...... (0.05) (0.02) (0.07) (0.01) ------ ----- ------ ------ Diluted Net Earnings per share .................. 0.18 0.29 0.13 0.12 ------ ----- ------ ------
16. SEGMENT INFORMATION The Company operates three subsidiaries in two continuing business segments. Each business segment has separate management teams and infrastructures that offer different products and services. During the fourth quarter of fiscal 2003, Company management agreed to a plan to sell the assets of MAS and to discontinue the operations of the Company's aviation service sector business. The operations of MAS are, therefore, not presented in the segment information below. The subsidiaries with continuing operations have been combined into the following two reportable segments: overnight air cargo and ground equipment. The overnight air cargo segment encompasses services provided primarily to one customer, Federal Express, and the ground equipment segment encompasses the operations of Global. The accounting policies for all reportable segments are the same as those described in Note 1 to the Consolidated Financial Statements. The Company evaluates the performance of its operating segments based on operating income from continuing operations. 35 Segment data is summarized as follows: Year Ended March 31, 2003 2002 2001 Overnight Revenues Overnight Air Cargo $ 29,898,840 $ 29,258,086 $ 30,262,362 Ground Equipment .. 12,972,887 30,344,889 31,405,711 Corporate ........ -- -- -- Total ........... $ 42,871,727 $ 59,602,975 $ 61,668,073 Operating Income from continuing operations Overnight Air Cargo $ 2,621,003 $ 2,215,901 $ 2,475,522 Ground Equipment ... 204,642 3,335,477 2,048,844 Corporate (1) ..... (2,361,125) (2,270,708) (2,281,603) Total ............. $ 464,520 $ 3,280,670 $ 2,242,763 Identifiable Assets Overnight Air Cargo .. $ 4,130,676 $ 3,852,042 $ 4,957,327 Ground Equipment ..... 8,615,032 10,051,691 13,531,515 Corporate ............ 4,684,070 2,856,792 1,181,725 Total ................ $ 17,429,778 $ 16,760,525 $ 19,670,567 Capital Expenditures, net Overnight Air Cargo .. $ 131,626 $ 107,264 $ 371,505 Ground Equipment ..... (123,490) 271,672 77,288 Corporate ............ 126,785 303,184 42,102 Total ................ $ 134,921 $ 682,120 $ 490,895 Depreciation and Amortization Overnight Air Cargo .. $ 243,635 $ 228,051 $ 261,122 Ground Equipment ..... 190,833 197,708 271,496 Corporate ............ 143,248 91,193 146,717 Total ............... $ 577,716 $ 516,952 $ 679,335 (1) Includes income from inter-segment transactions, which eliminate in consolidation. 36 17. 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 Organizations Act and seek monetary damages. The Company and its employee have filed an answer in this action denying all liability. Upon Global's motion, the court has dismissed the plaintiff's claims under the Racketeer Influenced and Corrupt Organizations Act. The Company does not believe that the action has any merit and intends to defend the lawsuit vigorously. In November 2002, Global and the Company filed suit in North Carolina state court against affiliates of the plaintiffs in the Catalyst & Chemical Services et al v. Terex, et al action alleging defamation. This action has been moved to, and is pending before, the United States District Court for the Western District of North Carolina. The Company is currently aware of certain 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. 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. Directors and Executive Officers of the Registrant. J. Hugh Bingham, age 57, 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 46, 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 59, 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 66, was elected a director in August 1994 and joined the Company as a Vice President in April 1997. He served as Chief Executive Officer of Global from August 1997 to January 2001. 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 55, 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. Claude S. Abernethy, Jr., age 76, 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 IJL 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, Inc. 37 Sam Chesnutt, age 66, 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 47, 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 73, 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 80, 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, 2003 all executive officers, directors and greater than ten-percent beneficial owners have complied with all applicable Section 16(a) filing requirements. 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, 2003 with total compensation of $100,000 or more. SUMMARY COMPENSATION TABLE Annual Compensation Position Year Salary($)(1) Bonus ($) Walter Clark ........... 2003 99,001 -- Chief Executive Officer 2002 111,522 52,140 2001 125,732 46,900 J. Hugh Bingham ........ 2003 191,335 -- President .............. 2002 193,304 52,564 2001 193,004 46,900 John J. Gioffre ........ 2003 120,767 -- Vice President ......... 2002 122,058 39,880 2001 121,788 35,175 J. Leonard Martin ...... 2003 121,214 -- Vice President ......... 2002 122,659 59,900 2001 122,673 24,880 38 William H. Simpson ..... 2003 193,705 -- Executive Vice President 2002 195,364 52,140 2001 194,803 46,900 - ------------------------------------------ (1) Includes perquisites in aggregate amount no greater than 10% of the officer's base salary plus bonus. The following table sets forth, the number of shares of Common Stock underlying unexercised options at March 31, 2003 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, 2003 based upon the closing bid price of the Company's Common Stock in the over-the-counter market on that date ($1.41 per share) and the exercise price of the options. None of the executive officers listed in this table exercised any options in fiscal 2003. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options at FY-End (#) at FY-End ($) Name Exercisable Unexercisable Exercisable Unexercisable Walter Clark 50,000 - - - J. Hugh Bingham - - - - John J. Gioffre - - - - J. Leonard Martin - - - - William H. Simpson 9,000 - - - 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. 39 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. 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 Title Beneficial Ownership Percent of Class Name and Address of Beneficial Owner as of June 1, 2002 Of Class - -------- ------------------------------------ ------------------ -------- Common Stock, Walter Clark and Caroline Clark, Executors(1) 1,342,416(1) 48.7% par value $.25 P.O. Bocx 488 per share Denver, North Carolina 28650 William H. Simpson 270,580(2) 9.7% 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, 2003. 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. 40 SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
Shares and Percent of Common Stock Beneficially Owned as of June 1, 2003 Name Position with Company No. of Shares Percent J. Hugh Bingham President, Chief Operating Officer, 119,680(1) 4.3% Director Walter Clark Chairman of the Board of Directors 1,340,194(2) 48.0% and Chief Executive Officer John J. Gioffre Vice President-Finance, Chief 57,580 2.1% Financial Officer, Secretary and Treasurer, Director J. Leonard Martin Vice President, Director 100(3) * William H. Simpson Executive Vice President, Director 271,180(1)(4) 9.7% Claude S. Abernethy, Jr. Director 44,011(5)(6) 1.6% Sam Chesnutt Director 12,100(5) * Allison T. Clark Director 3,222(5) * Herman A. Moore Director 1,000(5) * George C. Prill Director 46,966(5) 1.7% All directors and executive N/A 1,894,833(7) 67.9% officers as a group (10 persons)
* Less than one percent. (1) Includes 1,200 shares jointly held by Messrs. Simpson and Bingham. (2) 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. (3) Such 100 shares are held by Mr. Martin's spouse of which shares Mr. Martin disclaims beneficial ownership. (4) Includes 9,000 shares under options granted by the Company to Mr. Simpson. (5) Includes 1,000 shares under options granted by the Company. (6) Includes 20,400 shares held by the Estate of Raenelle B. Abernethy, of which Mr. Abernethy is the executor. (7) Includes an aggregate of 64,000 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 equity compensation plans as of March 31, 2003. EQUITY COMPENSATION PLAN INFORMATION
Number of securities to Weighted-average Number of securities be issued upon exercise exercise price remaining available for of outstanding options, of outstanding options, future issuance under warrants and rights warrants and rights equity compensation plans ----------------------- ---------------------- ------------------------- Equity compensation plans approved by security holders 64,000 $3.44 301,000 Equity compensation plans not approved by security holders None N/A N/A
41 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 $109,860 to Airport Associates pursuant to such lease during the fiscal year ended March 31, 2003. In May 2003 the Company leased additional office space from Airport Associates under terms similar to the above lease at a monthly rental payment of $2,100. The Company believes that the terms of such leases are no less favorable to the Company than would be available from an independent third party. Item 14. Controls and Procedures Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive Officer and Chief Financial Officer have, through direct knowledge and discussions with subsidiary management and department heads, 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. Changes in Internal Controls. There were no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K The following documents are filed as part of this report: 1. Financial Statements a. 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, 2003 and 2002. (iii) Consolidated Statements of Operations for each of the three years in the period ended March 31, 2003. (iv) Consolidated Statements of Stockholders' Equity for each of the three years in the period ended March 31, 2003. (v) Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2003. (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 42 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 43 10.15 Amendment No 1. to Loan Agreement among Bank of America, N.A. The Company and its subsidiaries, dated August 31, 2002, incorporated by reference to Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2002 10.16 Lease Agreement between Little Mountain Airport Associates, Inc. and Mountain Air Cargo, Inc., dated June 1, 1991, most recently amended May 28, 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 99.1 Certification of Walter Clark 99.2 Certification of John Gioffre ------------------ * 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 20, 2003 By: /s/ John J. Gioffre John J. Gioffre, Chief Financial Officer (Principal Financial and Accounting Officer) Date: June 20, 2003 44 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 20, 2003 By: /s/ J. Hugh Bingham J. Hugh Bingham, Director Date: June 20, 2003 By: /s/ Allison T. Clark Allison T. Clark, Director Date: June 20, 2003 By: /s/ Walter Clark Walter Clark, Director Date: June 20, 2003 By: /s/ Sam Chesnutt Sam Chesnutt, Director Date: June 20, 2003 By: /s/ John J. Gioffre John J. Gioffre, Director Date: June 20, 2003 By: /s/ J. Leonard Martin J. Leonard Martin, Director Date: June 20, 2003 45 By: /s/ Herman A. Moore Herman A. Moore, Director Date: June 20, 2003 By: /s/ George C. Prill George C. Prill, Director Date: June 20, 2003 By: /s/ William Simpson William Simpson, Director Date: June 20, 2003 46 Exhibit Number Document 23.1 Consent of Deloitte & Touche LLP 47 CERTIFICATION I, Walter Clark, Chief Executive Officer, certify that: 1. I have reviewed this Annual Report on Form 10-K of Air T, Inc. 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 13a-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 annual 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 annual report (the "Evaluation Date"); and c) presented in this annual 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 annual 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: June 20, 2003 /s/ Walter Clark Walter Clark, Chief Executive Officer CERTIFICATION I, John Gioffre, Chief Financial Officer, certify that: 1. I have reviewed this Annual Report on Form 10-K of Air T, Inc. 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 13a-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 annual 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 annual report (the "Evaluation Date"); and c) presented in this annual 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 annual 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: June 20, 2003 /s/ John Gioffre John J. Gioffre, Chief Financial Officer AIR T, INC EXHIBIT INDEX PAGE 10.15 Lease Agreement between Little Mountain Airport Associates, Inc. and Mountain Air Cargo, Inc., dated June 1, 1991, most recently amended May 28, 2001 23.1 Consent of Deloitte & Touche LLP 99.1 Certification of Walter Clark 52 99.2 Certification of John J. Gioffre 54 CERTIFICATION The undersigned hereby certifies in his capacity as an officer of Air T, Inc. (the "Company") that the Annual Report of the Company on Form 10-K for the fiscal year ended March 31, 2003 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: June 20, 2003 /s/ Walter Clark Walter Clark, Chief Executive Officer CERTIFICATION The undersigned hereby certifies in his capacity as an officer of Air T, Inc. (the "Company") that the Annual Report of the Company on Form 10-K for the fiscal year ended March 31, 2003 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: June 20, 2003 /s/ John Gioffre John J. Gioffre, Chief Financial Officer EX-10 4 consent.txt CONSENT LETTER INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-37224 on Form S-8 of Air T, Inc., of our report dated June 19, 2003 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the presentation of discontinued operations for the Company's aviation service business), appearing in this Annual Report on Form 10-K of Air T, Inc. for the year ended March 31, 2003. .. Charlotte, North Carolina June 30, 2003 1 EX-10 5 lmalease.txt LMA LEASE State of North Carolina County of Catawba lease Agreement THIS LEASE AGREEMENT, made and entered into this 1st day of June, 1991, by and between Little Mountain Airport Association ("Lessor") and Mountain Air Cargo, Inc. ("Lessee"): WITNESSETH: That for and in consideration of the rentals hereinafter reserved and the covenants and agreements herein contained, Lessor does hereby demise and lease unto Lessee, and Lessee does hereby lease from Lessor the premises ("Leased Premises") described in the attached Exhibit A, for the rentals and on the conditions hereinafter stated. ARTICLE I TERM: The term of this lease shall be for a period of five (5) years commencing June 1, 1991 and continuing until May 31, 1996. Lessee has option to renew lease for an additional five (5) year period commencing June 1, 1996 and ending May 31, 2001. ARTICLE II RENTAL: Lessee shall pay to the Lessor as rental monthly installments, each in the amount of Seven Thousand ($7,000.00) Dollars, payable in advance on the first day of each and every calendar month, commencing with June 1991. If Lessee exercises option to renew Lease for the additional five (5) year Lease period starting June 1, 1996, monthly rental will be adjusted to reflect the CPI change from June 1, 1991 to June 1, 1996. ARTICLE III MAINTENANCE: The maintenance of the Leased Premises shall be the sole responsibility of the Lessee, it being understood and agreed that the premises are being leased without obligation on the part of the Lessor to make repairs. And the Lessee covenants and agrees to take good care of the Leased Premises and upon the termination of this lease will surrender the said Leased Premises in as good order and condition as they now are, ordinary wear and tear excepted. ARTICLE IV IMPROVEMENTS BY LESSEE: Any air conditioning, heating, plumbing or other improvements installed in the leased Premises by the Lessee shall become a part of the Leased Premises and Lessee shall have no right to remove same at the termination of the lease. ARTICLE V UTILITIES: Lessee shall pay for all utilities furnished the Leased Premises during the term of this lease. ARTICLE VI TAXES AND INSURANCE: Lessee shall be responsible for providing insurance on the Leased Premises and shall pay all ad valorem taxes on the Leased Premises. Lessee shall be responsible for ad valorem taxes on all equipment owned by it and placed on the Leased Premises. Page 2 ARTICLE VII USE OF PREMISES: Lessee shall use the Leased Premises for the operation of an airport, maintenance facility, and corporate offices. ARTICLE VIII FORFEITURE FOR DEFAULT: It is expressly agreed that if Lessee shall neglect to make any payments of rent when due or neglect to do and perform any matter or thing herein agreed to be done and performed by it, and shall remain in default thereof for a period of fifteen (15) days after written notice from Lessor calling attention to such default, Lessor may declare the lease terminated and cancelled and take possession of said Leased Premises without prejudice to any other legal remedy it may have on account of such default. Said notice may be given to the person at such time in charge of said Leased Premises or sent by registered mail to Lessee addressed to P.O. Box 488, Denver, North Carolina, 28037. ARTICLE IX ASSIGNMENT: Lessee shall have no right to assign or sublease the Leased Premises without the written approval of Lessor. ARTICLE X SALE OF LEASED PREMISES: Lessor shall have the right to sell the Leased Premises and the lease shall continue in full force and effect. Page 3 ARTICLE XI ENTIRE AGREEMENT: This lease contains all the agreements and conditions made between the parties hereto and may not be modified orally or in any other manner than by an agreement in writing, signed by all the parties hereto or their respective successors in interest. IN WITNESS WHEREOF, the parties hereto have executed this Lease Agreement the day and year first above written. (Corporate Seal) LESSOR: Little Mountain Airport Assoc. /s/ John Gioffre (Assistant Secretary) /s/ Hugh Bingham Hugh Bingham, Vice President LESSEE: (Corporate Seal) Mountain Air Cargo, Inc. /s/ Joy Hansley By /s/ David Clark Chief Executive Officer Page 4 EXHIBIT "A" The Leased Premises shall be nonexclusive use of the runway, ramp and parking and exclusive use of the existing buildings located in Catawba County on land described as follows: "BEGINNING at iron pin, Cauthen's corner, and runs from said beginning point with Cauthen's line North 20 degrees East. 75 feet to a stake, a common corner of Cauthen and Roy O. Smith, Jr.; thence with the line of Roy O. Smith, Jr.; thence with the line of Roy O. Smith, Jr. North 24 degrees 52 minutes East 1092 feet to a stake; thence South 68 degrees 8 minutes East 765 feet to a stake; thence South 24 degrees 52 minutes West 2925.7 feet to a stake; thence South 53 degrees West 350.57 feet to a stake; thence North 34 degrees West 758.03 feet to a stake; thence North 24 degrees 52 minutes East 1391.31 feet to a stake on the Northeast edge of a 60-foot road; thence North 33 degrees 58 minutes East 26.46 feet to the point of BEGINNING, containing 54.448 acres, in accordance with a survey prepared by Joe F. Robinson, Registered Surveyor, dated December 28, 1973." For a more particular description of the buildings, refer to the Appraisal by C.E. Lawing, CRA, Home Realty, Inc., dated March 17, 1980. -----END PRIVACY-ENHANCED MESSAGE-----