10-Q 1 sep.txt AIR T, INC. 9/30/04 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For Quarter Ended September 30, 2004 Commission File Number 0-11720 Air T, Inc. (Exact name of registrant as specified in its charter) Delaware 52-1206400 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Post Office Box 488, Denver, North Carolina 28037 (Address of principal executive offices) (704) 377-2109 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 2,658,334 Common Shares, par value of $.25 per share were outstanding as of October 18, 2004. This filing contains 28 pages. AIR T, INC. AND SUBSIDIARIES INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations for the three and six-month periods ended September 30, 2004 and 2003 (Unaudited) 3 Condensed Consolidated Balance Sheets at September 30, 2004 (Unaudited) and March 31, 2004 4 Condensed Consolidated Statements of Cash Flows for the six-month periods ended September 30, 2004 and 2003 (Unaudited) 5 Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the six-month periods ended September 30, 2004 and 2003(Unaudited) 6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-21 Item 3. Quantitative and Qualitative Disclosure About Market Risk 21 Item 4. Controls and Procedures 21 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 22 Signatures 23 Exhibit Index 24 Officers' Certifications 25-27 AIR T, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended September 30, September 30, 2004 2003 2004 2003 Operating Revenues: Overnight air cargo $ 9,552,478 $ 8,514,306 $18,603,606 $15,799,774 Ground equipment 6,813,166 5,108,772 12,848,871 8,879,365 16,365,644 13,623,078 31,452,477 24,679,139 Operating Expenses: Flight-air cargo 4,206,951 3,702,484 7,940,298 6,854,869 Maintenance-air cargo 3,779,125 3,134,575 7,341,896 5,535,086 Ground equipment 5,322,068 3,782,400 9,978,360 6,650,201 General and administrative 2,007,545 1,920,660 4,109,438 3,735,021 Depreciation and amortization 139,081 137,820 299,713 275,377 15,454,770 12,677,939 29,669,705 23,050,554 Operating Income 910,874 945,139 1,782,772 1,628,585 Non-operating (Income) Expense: Interest, net 30,252 (48,434) 51,648 (90,158) Deferred retirement expense 5,250 5,250 10,500 10,500 Investment income and other (22,840) (30,219) (46,053) (66,303) Gain on asset sale (6,616) - (6,616) - 6,046 (73,403) 9,479 (145,961) Earnings From Continuing Operations Before Income Taxes 904,828 1,018,542 1,773,293 1,774,546 Income Tax Expense 366,538 406,178 701,727 718,482 Earnings From Continuing Operations $ 538,290 $ 612,364 $ 1,071,566 $ 1,056,064 Loss From Discontinued Operations, Net of Income taxes - (253,945) - (348,857) Net Earnings $ 538,290 $ 358,419 $ 1,071,566 $ 707,207 Basic and Diluted Earnings (Loss) Per Share: Continuing Operations $ 0.20 $ 0.22 $ 0.40 $ 0.39 Discontinued Operations - (0.09) - (0.13) Total Basic and Diluted Net Earnings Per Share $ 0.20 $ 0.13 $ 0.40 $ 0.26 Weighted Average Shares Outstanding: Basic 2,657,334 2,726,320 2,672,081 2,726,320 Diluted 2,693,009 2,733,614 2,703,023 2,726,320 See notes to condensed consolidated financial statements.
AIR T, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 MARCH 31, 2004 (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 1,972,692 $ 459,449 Marketable securities 830,316 849,018 Accounts receivable, less allowance for doubtful accounts of $340,298 at September 30, 2004 and $367,505 at March 31, 2004 6,594,163 5,094,849 Notes and other non-trade receivables-current 111,248 146,137 Inventories, net 6,585,898 6,460,072 Deferred tax assets 1,281,506 1,254,870 Prepaid expenses and other 87,135 151,879 Total Current Assets 17,462,958 14,416,274 Property and Equipment 8,037,817 8,376,370 Less accumulated depreciation (5,085,555) (5,105,802) Property and Equipment, net 2,952,262 3,270,568 Deferred Tax Assets 257,988 288,920 Intangible Pension Asset 70,500 79,695 Other Assets 54,635 54,635 Cash surrender value of life insurance policies 1,143,862 1,059,862 Notes and other non-trade receivables-long term 360,651 403,584 Total Assets $22,302,856 $19,573,538 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 4,461,735 $ 3,540,350 Accrued expenses 2,041,091 2,200,209 Billings in excess of costs and estimated earnings on uncompleted contracts 80,129 80,129 Income taxes payable 211,532 172,359 Current portion of long-term debt and obligations 153,051 94,807 Total Current Liabilities 6,947,538 6,087,854 Capital Lease Obligations (less current portion) 36,129 52,659 Long-term Debt (less current portion) 1,587,346 131,864 Deferred Retirement Obligations (less current portion) 1,669,208 1,624,361 Stockholders' Equity: Preferred stock, $1 par value, authorized 50,000 shares, none issued - - Common stock, par value $.25; authorized 4,000,000 shares; 2,658,334 and 2,686,827 shares issued and outstanding at September 30, 2004 and March 31, 2004, respectively 664,583 671,706 Additional paid in capital 6,840,463 6,834,279 Retained earnings 4,526,367 4,127,484 Accumulated other comprehensive income, net 31,222 43,331 12,062,635 11,676,800 Total Liabilities and Stockholders' Equity $22,302,856 $19,573,538 See notes to condensed consolidated financial statements.
AIR T, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended September 30, 2004 2003 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 1,071,566 $ 707,207 Adjustments to reconcile net earnings to net cash provided by operating activities: Change in accounts receivable and inventory reserves (1,096) 77,323 Depreciation and amortization 299,713 275,377 Deferred tax (provision) benefit (15,705) 320,200 Net periodic pension cost 82,998 79,998 Gain on asset retirement/sale (6,616) - Change in assets and liabilities which provided (used> cash Accounts receivable (1,472,107) 540,002 Notes receivable 77,822 - Inventories 31,554 (363,087) Prepaid expenses and other (19,256) 31,942 Accounts payable 921,385 (945,726) Accrued expenses and other current liabilities (188,074) 450,375 Net billings in excess of costs and estimate earnings on uncompleted contracts - (470,001) Income taxes payable 39,173 (222,181) Total adjustments (250,209) (225,778) Net cash provided by operating activities 821,357 481,429 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets-discontinued operations - 1,550,000 Proceeds from sale of marketable securities - 325,575 Capital expenditures (213,282) (71,041) Cash proceeds from sale of fixed asset 55,000 - Net cash (used in) provided by investing activities (158,282) 1,804,534 CASH FLOWS FROM FINANCING ACTIVITIES: Aircraft term loan 975,000 - Repayment of term loan (38,125) - Net borrowings on line of credit 586,915 (1,953,052) Payment of cash dividend (535,658) - Proceeds from exercise of stock options 41,460 - Repurchase of common stock (179,424) - Net cash provided by (used in) financing activities 850,168 (1,953,052) NET INCREASE IN CASH & CASH EQUIVALENTS 1,513,243 332,911 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 459,449 79,715 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,972,692 $ 412,626 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 72,603 $ 63,539 Income taxes 678,258 405,743 SUMMARY OF SIGNIFICANT NON-CASH INFORMATION: Note receivable from sale of assets- discontinued operations $ - $ 331,736 Change in fair value of derivatives - 41,612 (Decrease) increase in fair value of marketable securities (18,701) 82,179 Leased equipment transferred from inventory (37,691) (133,261) See notes to condensed consolidated financial statements.
AIR T, INC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Accumulated other Comprehen- Common Stock Additional sive Total Paid-In Retained Income Stockholders' Shares Amount Capital Earnings (Loss) Equity Balance, March 31, 2003 2,726,320 $681,580 $6,863,898 $2,529,556 $ (464,052) $9,610,982 Comprehensive Income: Net earnings 707,207 Other compre- hensive income 123,791 Total Compre- hensive Income 830,998 Balance, Sept- ember 30, 2003 2,726,320 $681,580 $6,863,898 $3,236,763 $ (340,261) $10,441,980 Accumulated other Comprehen- Common Stock Additional sive Total Paid-In Retained Income Stockholders' Shares Amount Capital Earnings (Loss) Equity Balance, March 31, 2004 2,686,827 $671,706 $6,834,279 $4,127,484 $ 43,331 $11,676,800 Comprehensive Income: Net earnings 1,071,566 Other compre- hensive loss (12,109) Total Compre- hensive Income 1,059,457 Repurchase and Repurchase and retirement of common stock (39,493) (9,873) (32,526) (137,025) (179,424) Exercise of stock options 11,000 2,750 38,710 41,460 Cash dividend ($0.20 per share) (535,658) (535,658) Balance, Sept- ember 30, 2004 2,658,334 $664,583 $6,840,463 $4,526,367 $ 31,222 $12,062,635 See notes to condensed consolidated financial statements.
AIR T, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Financial Statement Presentation The Condensed Consolidated Balance Sheet as of September 30, 2004 and the Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Cash Flows and the Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss), for the periods ended September 30, 2004 and 2003 have been prepared by Air T, Inc. (the Company) without audit. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows as of September 30, 2004, and for prior periods presented, have been made. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A for the year ended March 31, 2004. The results of operations for the period ended September 30 are not necessarily indicative of the operating results for the full year. Current reclassifications have been made to fiscal 2004 amounts to conform to the current year presentation. 2. Income Taxes The tax effect of temporary differences, primarily asset reserves and accrued liabilities, gave rise to the Company's deferred tax asset in the accompanying September 30, 2004 and March 31, 2004 consolidated balance sheets. 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. The income tax provisions for continuing operations for the respective three and six-months ended September 30, 2004 and 2003 differ from the federal statutory rate primarily as a result of state income taxes and, to a lesser extent, permanent tax differences. 3. Net Earnings Per Share Basic earnings (loss) 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 September 30, 2004 all stock options were dilutive. The computation of basic and diluted earnings (loss) per common share is as follows: Three Months Ended Six Months Ended September 30, September 30, 2004 2003 2004 2003 Net earnings $ 538,290 $ 358,419 $1,071,566 $ 707,207 Basic and Diluted Earnings (Loss) Per Share: Continuing Operations $ 0.20 $ 0.22 $ 0.40 $ 0.39 Discontinued Operations - (0.09) - (0.13) Total Basic and Diluted Net Earnings Per Share $ 0.20 $ 0.13 $ 0.40 $ 0.26 Weighted Average Shares Outstanding: Basic 2,657,334 2,726,320 2,672,081 2,726,320 Plus: Incremental shares from stock options 35,675 7,294 30,942 - Diluted 2,693,009 2,733,614 2,703,023 2,726,320 4. Inventories Inventories consist of the following: September 30, 2004 March 31, 2004 Aircraft parts and supplies $ 2,023,746 $ 2,053,665 Aircraft equipment manufacturing: Raw materials 4,180,820 3,508,363 Work in process 1,424,787 1,563,259 Finished goods 568,020 920,149 Total inventory 8,197,373 8,045,436 Reserves (1,611,475) (1,585,364) Total, net of reserves $ 6,585,898 $ 6,460,072 5. Recent Accounting Pronouncements In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". 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. Product warranty reserve activity during the six-months ended September 30, 2004 and 2003 are as follows: Six Months Ended September 30, 2004 2003 Beginning balance $ 147,000 $ 116,000 Additions to reserve 65,000 66,000 Use of reserve (56,000) (32,000) Ending balance $ 156,000 $ 150,000 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. The Company has elected to continue to account for its stock-based compensation under the provisions of Accounting Principles Bulletin No. 25. The Company has applied the fair value recognition provisions of SFAS No. 123 to its stock-based compensation and has determined that, due to the fact that no stock options were granted since fiscal 2000, there is no effect on proforma net income and proforma earnings per share for the six-month periods ended September 30, 2004 and 2003. 6. Derivative Financial Instruments As required by SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended, 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. In May 2001, the Company entered into two interest rate swaps with notional amounts of $2.4 million, and $2 million respectively. These agreements were originally entered into at respective interest rates of 6.97% and 6.5%. 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. On October 30, 2003, the Company terminated its remaining credit line swap for $97,500, the fair-market- value termination fee as of that date. The $62,044 included in accumulated other comprehensive income (loss) at date of termination is being ratably amortized into interest expense over the remaining term of the Company's credit line. 7. Financing Arrangements In August 2004 the Company amended its $7,000,000 secured long-term revolving credit line to extend its expiration date to August 31, 2006. In order to more closely match the credit line's limits to the Company's financing needs in light of its current cash balances, the Company agreed to reduce the credit line's limit to $3,500,000 from September 1, 2004 to December 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. There is no requirement for the Company to maintain a lock-box arrangement under this agreement. As of September 30, 2004, 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. At September 30, 2004, $2,791,000 was available under the terms of the credit facility. The credit facility is secured by substantially all of the Company's assets. Amounts advanced under the credit facility bear interest at the 30-day "LIBOR" rate plus 137 basis points. The LIBOR rate at September 30, 2004 was 1.84%. At September 30, 2004 and March 31, 2004, the amounts outstanding against the line were $709,000 and $132,000, respectively. In March 2004, the Company utilized its revolving credit line to acquire a corporate aircraft for $975,000. In April 2004, the Company refinanced the aircraft under a secured 4.35% fixed rate five-year term loan, based on a ten year amortization with a balloon payment at the end of the fifth year. 8. Discontinued Operations During the fourth quarter of fiscal 2003, Company management agreed to a plan to sell the assets of Mountain Aircraft Services, LLC. (MAS) and to discontinue the operations of the Company's aviation service sector business. The Company entered into a letter of intent on June 19, 2003 to sell certain assets and the business operations of MAS to an investor group, which included former management of MAS, for consideration of $1,950,000. On August 14, 2003, the Company closed on the transaction for consideration totaling $1,885,000, comprised of $1,550,000 in cash and a $335,000 promissory note. The sale resulted in the recognition of losses totaling $1,121,000. In conjunction with the sale, the Company agreed to indemnify the buyer and its affiliates with respect to certain matters related to contractual representations and warranties and the operation of the business prior to closing. Although no assurances can be made, the Company does not believe the indemnities provided will have a material effect on its financial condition or results of operations. Under the terms of the sale agreement, the Company also entered into a three-year consignment agreement granting the buyer an exclusive right to sell the remaining MAS inventory not included in the sale transaction. Upon termination of the consignment agreement, all unsold inventory will be returned to the Company. Inventory on consignment, net of applicable reserves, under this agreement amounted to $671,000 as of September 30, 2004. The accompanying fiscal 2004 condensed consolidated financial statements reflects the sale of certain MAS assets and the net operations of MAS as discontinued operations, net of tax, for all periods presented. A summary of the operating results of the discontinued operations for the six-months ended September 30, 2004 and 2003 is as follows: 2004 2003 Revenue $ - $ 2,565,931 Operating Loss $ - $ (373,819) Loss before income taxes $ - $ (571,897) Income tax benefit - 223,040 Net loss $ - $ (348,857) 9. 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 Corporation, and the ground equipment segment encompasses the operations of Global Ground Support, LLC. The Company evaluates the performance of its operating segments based on operating income from continuing operations. Segment data is summarized as follows: Three months ended Six months ended September 30, September 30, 2004 2003 2004 2003 Operating Revenues Overnight Air Cargo $ 9,552,478 $ 8,514,306 $18,603,606 $15,799,774 Ground Equipment 6,813,166 5,108,772 12,848,871 8,879,365 Total $16,365,644 $13,623,078 $31,452,477 $24,679,139 Operating Income(Loss)(1) Overnight Air Cargo $ 498,486 $ 814,658 $ 1,280,692 $ 1,658,735 Ground Equipment 726,503 694,083 1,361,971 1,011,605 Corporate (2) (314,115) (563,602) (859,891) (1,041,755) Total $ 910,874 $ 945,139 $ 1,782,772 $ 1,628,585 Depreciation and Amortization Overnight Air Cargo $ 94,581 $ 55,675 $ 210,712 $ 110,476 Ground Equipment 30,813 40,399 61,144 82,067 Corporate 13,687 41,746 27,857 82,834 Total $ 139,081 $ 137,820 $ 299,713 $ 275,377 Capital Expenditures, net Overnight Air Cargo $ 109,168 $ 23,534 $ 124,425 $ 32,148 Ground Equipment - 11,131 4,232 15,548 Corporate 63,805 22,548 84,625 23,345 Total $ 172,973 $ 57,213 $ 213,282 $ 71,041 As of September 30, March 31, 2004 2004 Identifiable Assets Overnight Air Cargo $ 6,094,443 $ 5,727,470 Ground Equipment 11,096,380 9,646,490 Corporate 5,112,033 3,093,449 Total $22,302,856 $18,467,409 (1) Reclassifications have been made to fiscal 2004 amounts to reflect current period changes in allocations of corporate administrative costs. (2) Includes income from inter-segment transactions. 10. Resignation of Executive Officer Effective December 31, 2003, an executive officer and director of the Company resigned his employment. In consideration of approximately $300,000, payable in three installments over a one-year period starting January 12, 2004, the executive agreed to forgo certain retirement and other contractual benefits for which the Company had previously accrued aggregate liabilities of amounting to approximately $715,000. During the third quarter of fiscal 2004 the above-mentioned cancellation of contractual retirement benefits reduced recorded liabilities by $715,000. The difference between the recorded liability and ultimate cash payment of $300,000 resulted in a $305,000 reductionthe offset of which write-off in actuarial losses, recorded in Other Comprehensive Loss, a $90,000 reduction in intangible assets and a net $20,000 reduction in executive compensation charges included in the statement of operations. During the third quarter of fiscal 2004 the Company also agreed to buyback purchase from the former executive officer 118,480 shares of the Company common stock held by him (representing approximately 4.3% of the outstanding shares of common stock at December 31, 2003) for $4.54 per share (80% of the January 5, 2004 closing price). The stock repurchase will take place in three approximately equal installments over a one-year period, starting January 12, 2004, and will total approximately $538,000. The repurchase of the former executive's stock will be recorded in the period that the repurchase occurs as treasury stock transactions and all such stock will be subsequently retired. The first two installment payments required to be made under the above agreements were made on January 12 and July 7, 2004, the third, and final, installment is scheduled to be made on January 7, 2005. 11. Commitments and Contingencies Global and one of its former employees are defendants in a lawsuit commenced in March 2002 in the United States District Court for the District of Columbia, Catalyst & Chemical Services, et al. vs Global Ground Support, LLC, et al., Case No. 1:02CV00388. The plaintiffs claim to have developed a novel method of aircraft de/ant-icing, and allege that the system is the subject of trade secrets and a patent. The plaintiffs allege that the defendants misappropriated the trade secrets, breached a confidentiality agreement, and infringed the patent. The defendants deny all the claims and have defended the lawsuit vigorously. Discovery has been completed, with the exception of the deposition of the plaintiffs' damages expert witness which has not been scheduled. On May 7, 2004, the defendants moved for summary judgment on all claims. The plaintiffs have moved for summary judgment on the patent infringement claim. The summary judgment motions have been fully briefed and the parties' are awaiting the Court's ruling. No trial date has been set. If any of the plaintiffs' claims survive the defendants' summary judgment motion, trial is expected to be conducted in the first quarter of 2005. The Company is currently involved in certain intellectual property, personal injury and environmental matters, which involve pending or threatened lawsuits. Management believes the results of these pending or threatened lawsuits will not have a material adverse effect on the Company's results of operations or financial position. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Continuing Operations. As discussed above, during fiscal 2003, the Company decided to discontinue and dispose of its aircraft component parts brokerage and repair services business operated by its Mountain Aircraft Services, LLC (MAS) subsidiary and accordingly, the Company's consolidated financial statements have been reclassified to reflect the results of MAS as a discontinued operation. See Note 8 Discontinued Operations of Notes to Condensed Consolidated Financial Statements. Consequently, MAS' operations are not included in the Results of Continuing Operations discussed below, however, continuing operations reflect certain residual cost associated with discontinued operations. Overview The Company's continuing operations operate in two business segments, providing overnight air cargo services to the express delivery services industry and aviation ground support and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers. Each business segment has separate management teams and infrastructures that offer different products and services. The subsidiaries make up the following reportable segments: air cargo and ground equipment in the accompanying condensed consolidated financial statements. The Company's most significant component of revenue, which accounted for approximately 59%, of revenue for the six-months ended September 30, 2004, was generated through its overnight air cargo subsidiaries, Mountain Air Cargo, Inc. (MAC) and CSA Air, Inc. (CSA). MAC and CSA provide short-haul express air freight services primarily to one customer, Federal Express Corporation (the customer). Separate agreements cover the four types of aircraft operated by MAC and CSA for their customer-Cessna Caravan, ATR-42, Fokker F-27, and Short Brothers SD3- 30. Cessna Caravan, ATR-42 and Fokker F-27 aircraft (a total of 93 revenue aircraft at September 30, 2004) are owned by and dry-leased from the Customer. Two Short Brothers SD3-30 aircraft are owned by the Company. The SD3-30's are 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. Under the terms of the dry-lease service agreements which currently cover approximately 98% of the revenue aircraft operated, the Company charges an administrative fee and passes through to its customer certain other 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. MAC and CSA's revenue contributed approximately $18,604,000 and $15,800,000 to the Company's revenues for the six-month periods ended September 30, 2004 and 2003, respectively, a current year increase of approximately 18%. The increase in revenue was primarily attributed to $2,144,000 of increased direct operating costs, passed through to customer, and an increased volume of maintenance services, related to customer fleet modernization and route expansion, provided during the current period, partly offset by decreased administrative fees as older Fokker F-27 aircraft were retired from service prior to the pending introduction of newer ATR-42 replacement aircraft. The air cargo segments' operating income decreased $378,000 to $1,281,000 for the six-month period ended September 30, 2004 compared to the prior year period principally due to the temporary effects of the customer's modernization of the aircraft fleet, as well as route expansion. Revenues from that segment's administrative fees (which are based on the number of aircraft operated) declined due to delays in the customer's introduction of newer technology aircraft to replace the older aircraft removed from service. In addition, administrative costs increased as additional staffing was put in place to oversee the phase-in of the newer aircraft and the expansion in the number of routes. Global Ground Support, LLC (Global), which provided the remaining 41% of the Company's revenues for the six months ended September 30, 2004, manufactures, services and supports aviation ground support and specialized military and industrial equipment on a worldwide basis. On January 23, 2004 the Company received a three-year extension to its existing four-year supply agreement with the U.S. Air Force. Global's revenue contributed approximately $12,849,000 and $8,879,000 to the Company's revenues for the six-month periods ended September 30, 2004 and 2003, respectively. The 45% increase in revenues was primarily related to a current period $5,479,000 increase in military equipment orders, partially offset by the completion of a large scale airport contract during the previous six-month period. This shift in the mix of products sold during the period reduced operating margins from the comparable prior period. Global's operating income increased $351,000 to $1,362,000 for the six-months ended September 30, 2004 compared to the prior year period due principally to an increase in the level of orders under the long-term supply contract with the U.S. Air Force, which was offset in part by the inclusion in the prior year period of revenues from a large-scale airport contract which was principally completed in the third quarter of fiscal 2004. Outlook The Company's current outlook for fiscal 2005 assumes that, due to significantly higher fuel cost and increased losses sustained by commercial carriers since September 11, 2001, the commercial aviation market will grow at a rate that is substantially less than the rest of the economy. Current period orders from the military, lower cost airlines and aviation service providers have helped offset the lower than normal order levels experienced from Global's major commercial ground equipment customers. During the first half of fiscal 2005 MAC's air cargo customer experienced delays in introducing its newer replacement aircraft into revenue service. Company management currently anticipates ground equipment orders will remain level and that its air cargo customer will continue its aircraft fleet modernization program through fiscal 2005, however, future aircraft conversion delays, terrorist attacks, competition or inflation may cause further delays or termination of certain customer orders or projects. As stated above, during the second quarter of fiscal 2004, Company management closed on its agreement to sell certain MAS assets and to discontinue the operations of the Company's aviation service sector business. The completion of this sale and resulting decrease in operating losses experienced by this business segment are expected to continue to improve the Company's overall operating results and financial position throughout fiscal 2005, as compared to fiscal 2004. As detailed in Footnote 8 Discontinued Operations, under the terms of the sale agreement, the Company retained certain inventory which was consigned to the buyer for sale under a three-year consignment agreement. Future changes in the market value of this inventory could negatively affect the carrying value of the inventory on the Company's books. Reductions in the carrying value of the inventory would negatively affect net earnings. Based on the current general economic and industry outlook and cost- cutting measures implemented over the past two fiscal years, 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 fiscal 2005. 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. Actual results for fiscal 2005 will depend upon a number of factors beyond the Company's control, including, in part, future significant increases in the rate of inflation, including fuel prices, the timing, speed and magnitude of the economic recovery, military funding of pending future equipment orders, future levels of commercial aviation capital spending, future terrorists acts and market value of used aviation parts and components systems. Critical Accounting Policies and Estimates The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the U.S. requires the use of estimates and assumptions to determine certain assets, liabilities, revenues and expenses. Management bases these estimates and assumptions upon the best information available at the time of the estimates or assumptions. The Company's estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from estimates. The most significant estimates made by management include allowance for doubtful accounts receivable, reserves for excess and obsolete inventories, deferred tax asset valuation, retirement benefit obligations, valuation of revenue recognized under the percentage of completion method and valuation of long-lived assets. Following is a discussion of critical accounting policies and related management estimates and assumptions. Allowance for Doubtful Accounts. An allowance for doubtful accounts receivable in the amount of $340,000 and $368,000, respectively, at September 30, 2004 and March 31, 2004, was 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 financial strength of 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 in the amount of $1,611,000 and $1,585,000, respectively, at September 30, 2004 and March 31, 2004, are based on assessment of slow-moving and obsolete inventories. Historical part usage, current period sales, 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, existing supplies of used inventory available for sale, the retirement of aircraft or ground equipment and changes in the financial strength of the aviation industry. Deferred Taxes. Deferred tax assets and liabilities, net of valuation allowance in the amount of $83,000, at September 30, 2004 and March 31, 2004, reflect the likelihood of the recoverability of these assets. Company judgment 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 5.75% discount rate. Long-term deferred retirement benefit obligations amounted to $1,536,000 and $1,462,000, respectively, at September 30, 2004 and March 31, 2004. Values are affected by current independent indices, which estimate the expected return on insurance policies and the discount rates used. Changes in the discount rate used will affect the amount of pension liability as well as 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. Billings in excess of cost and estimated earnings for contracts under percentage of completion amounted to $80,000 at September 30, 2004 and March 31, 2004. Revenues are measured by the percentage of cost incurred to date, to estimated total cost for each contract or work order; 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 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 any remaining long-lived assets associated with the discontinued MAS subsidiary at zero fair market value at September 30, 2004. Resignation of Executive Officer Effective December 31, 2003, an executive officer and director of the Company resigned his employment. In consideration of approximately $300,000, payable in three installments over a one-year period starting January 12, 2004, the executive agreed to forgo certain retirement and other contractual benefits for which the company had previously accrued aggregate liabilities of amounting to approximately $715,000. During the third quarter of fiscal 2004 the above-mentioned cancellation of contractual retirement benefits reduced recorded liabilities by $715,000. The difference between the recorded liability and ultimate cash payment of $300,000 resulted in a $305,000 reductionthe offset of which write-off in actuarial losses, recorded in Other Comprehensive Loss, a $90,000 reduction in intangible assets and a net $20,000 reduction in executive compensation charges included in the statement of operations. During the third quarter of fiscal 2004 the Company also agreed to buyback purchase from the former executive officer 118,480 shares of the Company common stock held by him (representing approximately 4.3% of the outstanding shares of common stock at December 31, 2003) for $4.54 per share (80% of the January 5, 2004 closing price). The stock repurchase will take place in three approximately equal installments over a one-year period, starting January 12, 2004, and will total approximately $538,000. The repurchase of the former executive's stock will be recorded in the period that the repurchase occurs as treasury stock transactions and all such stock will be subsequently retired. The first two installment payments required to be made under the above agreements were made on January 12 and July 7, 2004, the third and final, installment is scheduled to be made on January 7, 2005. Seasonality Global's business has historically been seasonal. Due to the nature of its product line, the bulk of Global's revenues and earnings have historically occurred during the second and third fiscal quarters in anticipation of the winter season, although in most recent periods the Company's efforts to reduce seasonal fluctuations have ameliorated this seasonal trend. 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 June 2003 Global was awarded a three-year extension on the contract. In January 2001 and March 2003 Global received two large scale, fixed-stand deicer contracts, which the Company believes contributed to management's plan to reduce seasonal fluctuation in revenues during fiscal 2002 and 2004. However, these fixed-stand deicer contracts have been completed, and seasonal trends for Global's business may resume, unless offset by additional revenue from other sources. The remainder of the Company's business is not materially seasonal. Results of Operations Consolidated revenue increased $6,773,000 (27.5%) to $31,452,000 and $2,743,000 (20.1%) to $16,365,000, respectively, for the six and three- month periods ended September 30, 2004 compared to their equivalent 2003 periods. The six and three-month current period net increase in revenue primarily resulted from increased revenues in both the air cargo and ground equipment business segment, as detailed above in Overview. Operating expenses increased $6,619,000 (28.7%) to $29,670,000 for the six-month period ended September 30, 2004 and $2,777,000 (21.9%) to $15,455,000 for the three-month period ended September 30, 2004 compared to their equivalent 2003 periods. The change in operating expenses for the six-month period consisted of the following: cost of flight operations increased $1,085,000 (15.8%) primarily as a result of increased direct operating costs, including fuel, airport fees, pilot staffing, and costs associated with pilot travel, due to increased cost of oil and customer flight schedule changes and increased administrative staffing due to fleet modernization and route expansion programs; maintenance expense increased $1,807,000 (32.6%) primarily as a result of increases in cost of maintenance personnel, cost of travel, contract services, parts and outside maintenance related to customer fleet modernization and route expansion; ground equipment increased $3,328,000 (50.1%), as a result of increased cost of parts and supplies and assembly line personnel related to increased customer order backlog; depreciation and amortization increased $24,000 (8.8%) as a result of purchases of capital assets; and general and administrative expense increased $374,000 (10.0%) primarily as a result of increased professional fees, corporate aircraft costs, telephone costs, and staffing, offset by decreased profit sharing provision due to management changes. The change in operating expenses for the three-month period consisted of the following: cost of flight operations increased $504,000 (13.6%), primarily as a result of increased direct operating cost associated with route schedule changes and expansion which increased the cost of fuel, pilot salaries, travel and airport fees and administration; maintenance expense increased $645,000 (20.6%), primarily as a result of increased cost of parts, outside maintenance, travel and maintenance salaries stated above; ground equipment increased $1,540,000 (40.7%), as a result of higher cost of parts and labor associated with increased Global sales; and general and administrative expense increased $87,000 (4.5%) primarily as a result of increased professional fees, corporate aircraft costs and telephone costs, offset by decreased profit sharing provision due to management changes. The current six-month period's increased operating income ($154,000) resulted primarily from increased ground equipment sector revenues and operating income related to current period's higher levels of military equipment orders, partly offset by the prior period completion of a large scale airport contract; the equipment sector's increase was offset by a net decrease in the air cargo sector's operating income. The net decrease in air cargo operating income was due to a combination of temporarily decreased administrative fees which resulted from delays in the introduction of replacement aircraft, currently undergoing conversion to cargo configuration, as older cargo aircraft are phased out of service, and higher levels of current period administrative costs as additional staffing has been put in place to oversee the phase-in of the newer aircraft and route expansion. Net non-operating expense increased $155,000 and $79,000, respectively, for the six and three-month periods ended September 30, 2004 compared to September 30, 2003. The six and three-month months increase in non-operating expense was principally due to increased interest expense recognized by continuing operations during the current periods and a reduction in investment income from marketable securities during the periods ended September 30, 2004. Pretax earnings from continuing operations decreased $1,000 and $114,000, respectively, for the six and three-month periods ended September 30, 2004, compared to their respective September 30, 2003 periods, principally due to the above stated increased administrative cost and decreased administrative fees associated with the, respective, air cargo aircraft fleet modernization and delayed introduction of replacement aircraft. The provision for income taxes decreased $40,000 and $17,000 for the six and three-month periods ended September 30, 2004, respectively compared to their respective 2003 periods, primarily due to the decreased earnings from continuing operations for the periods ended September 30, 2004. The effective tax rate for the three and six-month periods ended September 30, 2004 and 2003 averaged approximately 40%. Liquidity and Capital Resources As of September 30, 2004 the Company's working capital amounted to $10,515,000, an increase of $2,187,000 compared to March 31, 2004. The net increase primarily resulted from increases in cash and cash equivalents and accounts receivable, partially offset by an increase in accounts payable. In August 2004 the Company amended its $7,000,000 secured long-term revolving credit line to extend its expiration date to August 31, 2006. In order to more closely match the credit line's limits to the Company's financing needs, the credit line limits were amended to $3,500,000 from September 1, 2004 to December 31, 2004 and $7,000,000 from January 1, 2005 to expiration date. 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. There is no requirement for the Company to maintain a lock-box arrangement under this agreement. As of September 30, 2004, 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. At September 30, 2004, $2,791,000 was available under the terms of the credit facility. The credit facility is secured by substantially all of the Company's assets. Amounts advanced under the credit facility bear interest at the 30-day "LIBOR" rate plus 137 basis points. The LIBOR rate at September 30, 2004 was 1.84%. At September 30, 2004 and March 31, 2004, the amounts outstanding against the line were $709,000 and $132,000, respectively. In March 2004, the Company utilized its revolving credit line to acquire a corporate aircraft for $975,000. In April 2004, the Company refinanced the aircraft under a secured 4.35% fixed rate five-year term loan, based on a ten year amortization with a balloon payment at the end of the fifth year. The Company assumes various financial obligations and commitments in the normal course of its operations and financing activities. Financial obligations are considered to represent known future cash payments that the Company is required to make under existing contractual arrangements such as debt and lease agreements. A table representing the scheduled maturities of the Company's contractual obligations as of March 31, 2004 was included under the heading "Contractual Obligations" on page 14 of the Company's 2004 Annual report on Form 10-K filed with the SEC on June 24, 2004. There were no significant changes from the table referenced above during the quarter ended September 30, 2004, except for the aircraft refinancing discussed above. The Company has not currently, nor in the past, engaged in the use of structured finance arrangements, known as off-balance sheet financing transactions, with unconsolidated entities or other persons. The respective six-month periods ended September 30, 2004 and 2003 resulted in the following changes in cash flow: operating activities provided $821,000 and $481,000 in 2004 and 2003, respectively, investing activities used $158,000 in 2004 and provided $1,805,000 in 2003, and financing activities provided $850,000 in 2004 and used $1,953,000 in 2003. Net cash increased $1,513,000 and $333,000 during the six months ended September 30, 2004 and 2003, respectively. Cash provided by operating activities was $340,000 more for the six- months ended September 30, 2004 compared to the similar 2003 period, principally due to increased earnings and accounts payable and decreased inventories, partly offset by increased accounts receivables. Cash used in investing activities for the six-months ended September 30, 2004 was approximately $1,963,000 more than the comparable period in 2003 due to the sale of discontinued operations and proceeds from a sale of marketable securities in the six-months ended September 30, 2003. Cash provided by financing activities was $2,803,000 more in the 2004 six-month period than in the corresponding 2003 period due to current period aircraft financing and net borrowings on the line of credit, partially offset by the payment of a 2004 cash dividend. There are currently no commitments for significant capital expenditures. The Company's Board of Directors on August 7, 1998 adopted the policy to pay an annual cash dividend, based on profitablility and other factors, in the first quarter of each fiscal year, in an amount to be determined by the Board. The Company paid a $0.20 per share cash dividend in June 2004. 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. In May 2001, the Company entered into two interest rate swaps with notional amounts of $2.4 million, and $2 million respectively. These agreements were originally entered into at respective interest rates of 6.97% and 6.5%. 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. On October 30, 2003, the Company terminated its remaining credit line swap for $97,500, the fair-market-value termination fee as of that date. The $62,044 included in accumulated other comprehensive income (loss) at date of termination is being ratably amortized into interest expense over the remaining term of the Company's credit line. 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 from the date of his death. As of September 30, 2004, $64,000 has been reflected as a current liability and $147,000 has been reflected as a long-term liability associated with this death benefit. Impact of Inflation If interest rates continue to rise, the Company believes the impact of inflation and changing prices on its revenues and net earnings could have a material effect on its manufacturing operations if the Company cannot increase prices to pass the additional costs on to its customers. Although the Company's air cargo business can pass through the major direct operating cost components of its operations, without markup, under its current contract terms, higher rates of inflation could affect our customer's current business plans. Recent Accounting Pronouncements 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". 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. Product warranty reserve activity during the six-months ended September 30, 2004 and 2003 are as follows: Six Months Ended September 30, 2004 2003 Beginning balance $ 147,000 $ 116,000 Additions to reserve 65,000 66,000 Use of reserve (56,000) (32,000) Ending balance $ 156,000 $ 150,000 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 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 the periods ended September 30, 2004 and 2003. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Quantitative and qualitative disclosures about market risk are included in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Continuing Operations. Item 4. Controls and Procedures As of the end of the period covered by this report, management, including the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures with respect to the information generated for use in this report. Based upon, and as of the date of that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. There were no changes in the Company's internal control over financial reporting during or subsequent to the three months ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. It should be noted that while the Company's management, including the Chief Executive Officer and the Chief Financial Officer, believe that the Company's disclosure controls and procedures provide a reasonable level of assurance, they do not expect that the disclosure controls and procedures or internal controls will prevent all error and all fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. PART II -- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits No. Description 3.1 Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2001 3.2 By-laws of the Company, as amended, incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996 4.1 Specimen Common Stock Certificate, incorporated by reference to Exhibit 4.1 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994 10.1 Amendment No 3 to Loan Agreement among Bank of America N.A. the Company and its subsidiaries, dated as of August 31, 2004, incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8- K dated October 25, 2004 31.1 Certification of Walter Clark 31.2 Certification of John J. Gioffre 32.1 Section 1350 Certification b. Reports on Form 8-K The Company furnished a Current Report Form 8-K on July 29, 2004, which was amended later on July 29, 2004, to report under Item 12 the financial results for the three months ended June 30, 2004. On July 30, 2004, the Company furnished two amendments to previously filed Current Reports on Form 8-K that had reported financial results for prior periods pursuant to Item 12 to correct Formatting errors in those Current Reports. 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: November 4, 2004 By: /s/ John J. Gioffre John J. Gioffre, Chief Financial Officer (Principal Financial and Accounting Officer) Date: November 4, 2004 AIR T, INC. EXHIBIT INDEX Exhibit Number Document 31.1 Certification of Walter Clark 31.2 Certification of John Gioffre 32.1 Section 1350 certification