Overview

The Company operates in three business segments. The overnight air cargo segment, comprised of its Mountain Air Cargo, Inc. ("MAC") and CSA Air, Inc. ("CSA") subsidiaries, operates in the air express delivery services industry. The ground equipment sales segment, comprised of its Global Ground Support, LLC ("GGS") subsidiary, manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the U.S. military and industrial customers. The ground support services segment, comprised of its Global Aviation Services, LLC ("GAS") subsidiary, provides ground support equipment maintenance and facilities maintenance services to domestic airlines and aviation service providers. Each business segment has separate management teams and infrastructures that offer different products and services. The Company evaluates the performance of its operating segments based on operating income. Prior to the quarter ended September 30, 2008, the Company had reported two operating segments, previously combining GGS and GAS into a single segment. The Company has modified the prior period's segment information to conform to the current period presentation.

Following is a table detailing revenues by segment and by major customer category:

       (In thousands)
                                             Three Months Ended June 30,
                                            2009                       2008

       Overnight Air Cargo Segment:
         FedEx                           $     8,788          46 %   $  9,456        42 %
       Ground Equipment Sales Segment:
         Military                              5,873          31 %      8,795        39 %
         Commercial - Domestic                 1,112           6 %      1,467         7 %
         Commercial - International            1,118           6 %      1,079         5 %
                                               8,103          43 %     11,341        51 %

       Ground Support Services Segment         2,057          11 %      1,620         7 %
                                         $    18,948         100 %   $ 22,417       100 %

MAC and CSA are short-haul express airfreight carriers and provide air cargo services to one primary customer, FedEx Corporation ("FedEx"). MAC will also on occasion provide maintenance services to other airline customers and the U.S. Military. Under the terms of dry-lease service agreements, which currently cover all of the 82 revenue aircraft, the Company receives a monthly administrative fee based on the number of aircraft operated and 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. As a result, the fluctuating cost of fuel has not had any direct impact on our air cargo operating results. Pursuant to such agreements, FedEx 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. These agreements are renewable on two to five-year terms and may be terminated by FedEx at any time upon 30 days' notice. The Company believes that the short term and other provisions of its agreements with FedEx are standard within the airfreight contract delivery service industry. FedEx has been a customer of the Company since 1980. Loss of its contracts with FedEx would have a material adverse effect on the Company.

MAC and CSA combined contributed approximately $8,788,000 and $9,456,000 to the Company's revenues for the three-month periods ended June 30, 2009 and 2008, respectively, a current year decrease of $667,000 (7%).

GGS manufactures and supports aircraft deicers and other specialized industrial equipment on a worldwide basis. GGS manufactures five basic models of mobile deicing equipment with capacities ranging from 700 to 2,800 gallons. GGS also provides fixed-pedestal-mounted deicers. Each model can be customized as requested by the customer, including single operator configuration, fire suppressant equipment, open basket or enclosed cab, a patented forced-air deicing nozzle and on-board glycol blending system to substantially reduce glycol usage, color and style of the exterior finish. GGS also manufactures four models of scissor-lift equipment, for catering, cabin service and maintenance service of aircraft, and has developed a line of decontamination equipment and other special purpose mobile equipment. GGS competes primarily on the basis of the quality, performance and reliability of its products, prompt delivery, customer service and price. In June 1999, GGS was awarded a four-year contract to supply deicing equipment to the United States Air Force. In June 2003 GGS was awarded a three-year extension of that contract and a further three-year extension was awarded in June 2006. On July 15, 2009, the Company announced that GGS had been awarded a new contract to supply deicing trucks to the United States Air Force. The contract award was for one year with four additional one-year extension options that may be exercised by the United States Air Force.

GGS contributed approximately $8,103,000 and $11,341,000 to the Company's revenues for the three-month periods ended June 30, 2009 and 2008, respectively. The $3,238,000 (29%) decrease in revenues was due to primarily to a decrease in the number of military deicing units delivered in the current quarter. At June 30, 2009, GGS's order backlog was $14.8 million compared to $21.3 million at June 30, 2008.

GAS was formed in September 2007 to operate the aircraft ground support equipment and airport facility maintenance services business of the Company. GAS is providing aircraft ground support equipment and airport facility maintenance services to a wide variety of customers at a number of locations throughout the country.

GAS contributed approximately $2,057,000 and $1,620,000 to the Company's revenues for the three-month periods ended June 30, 2009 and 2008, respectively. The $437,000 increase in revenues was due to the continued growth and expansion of GAS as it continued to add new customers and service locations over the past year. GAS has grown to 11% of consolidated revenues for the three-month period ended June 30, 2009.

First Quarter Highlights

The Company has produced solid first quarter results though they did not match the results for the prior year first quarter ended June 30, 2008. The prior year quarter was an exceptional quarter which was fueled by the unusually high backlog at March 31, 2008 as well as the high demand and volume of military and commercial deicers delivered in the prior year comparable quarter. General economic and industry conditions continue to be a major concern and as a result we remain cautious going forward. In these difficult times, we remain dedicated to conserving cash, monitoring costs, and strengthening our customer and vendor relationships.

On July 15, 2009, the Company announced that GGS had been awarded a new contract to supply deicing trucks to the United States Air Force. The contract award was for one year with four additional one-year extension options. The contract replaces GGS's previous contract with the United States Air Force which expired in June 2009, under which GGS provided 420 deicers over the past ten years. The new contract was the result of a highly competitive bid process and the Company expects margins on deicing trucks to be reduced under the new contract compared to the recently expired contract.

During the quarter ended June 30, 2009, revenues from our GAS subsidiary totaled $2,057,000. This new line of business continues to expand its customer base. GAS's main challenges continue to be its ability to add additional customers and develop existing ones to optimally utilize our staffing capacity at existing locations, to selectively add new stations, and to manage accounts receivable in a difficult operating environment and industry. We also continue to monitor the Northwest Airlines and Delta Airlines merger as the combined airline comprises a substantial portion of GAS's business.

Critical Accounting Policies and Estimates

The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States 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 Company believes that the following are its most significant accounting policies:

Inventories. The Company's inventories are valued at the lower of cost or market. Provisions for excess and obsolete inventories are based on assessment of the marketability of slow-moving and obsolete inventories. Historical parts 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.

Warranty Reserves. The Company warranties its ground equipment products for up to a three-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 quarterly as actual warranty cost becomes known.

Income Taxes. Income taxes have been provided using the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Deferred income taxes reflect the net affects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes using enacted rates expected to be in effect during the year in which the basis differences reverse.

Stock Based Compensation. The Company recognizes compensation pursuant to Statement of Financial Accounting Standards No. 123(R), Accounting for Stock-Based Compensation ("SFAS 123(R)") using the modified prospective method of adoption, which requires all share-based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values over the requisite service period. The compensation cost we record for these awards is based on their fair value on the date of grant. The Company has used the Black Scholes option-pricing model as its method for valuing stock options. The key assumptions for this valuation method include the expected term of the option, stock price volatility, risk-free interest rate and dividend yield.

Revenue Recognition. Cargo revenue is recognized upon completion of contract terms. Maintenance and ground support services revenue is recognized when the service has been performed. Revenue from product sales is recognized when contract terms are completed and ownership has passed to the customer.

Seasonality

GGS's business has historically been seasonal. The Company has continued its efforts to reduce GGS's seasonal fluctuation in revenues and earnings by increasing military and international sales and broadening its product line to increase revenues and earnings throughout the year. In June 1999, GGS was awarded a four-year contract to supply deicing equipment to the United States Air Force, and subsequently was awarded two three-year extensions on the contract, which expired in June 2009. In July 2009, GGS was awarded a new one-year contract with the United States Air Force with four additional one-year extension options. Although sales remain somewhat seasonal, this diversification has lessened the seasonal impacts and allowed the Company to be more efficient in its planning and production. The overnight air cargo and ground support services segments are not susceptible to seasonal trends.

Results of Operations

First Quarter 2010 Compared to First Quarter 2009

Consolidated revenue decreased $3,468,000 (15%) to $18,948,000 for the three-month period ended June 30, 2009 compared to its equivalent prior period. The decrease in revenues resulted from a number of factors. Revenues in the air cargo segment were down $667,000 (7%) primarily as a result of decreased flight and maintenance department costs passed through to its customer at cost as the number of aircraft operated at the end of the quarter decreased to 82 from 87 at June 30, 2008. The reduction in aircraft also resulted in a $126,000 decrease in administrative fee revenue from FedEx. Revenues in the ground equipment segment decreased $3,238,000 (29%) to $8,103,000 principally as a result of a decrease in military revenues during the first quarter of fiscal 2009. In addition, GAS provided revenues of $2,057,000 during the three-month period ended June 30, 2009, compared to revenue of $1,620,000 in the prior year comparable quarter, as it continues to add new customers and new service locations.

Operating expenses decreased $3,123,000 (15%) to $17,213,000 for the three-month period ended June 30, 2009 compared to its equivalent prior period. The decrease was due to a number of factors. Operating expenses in the air cargo segment were down $594,000 (8%) primarily as a result of decreased flight and maintenance departments costs passed through to its customer at cost. Ground equipment segment operating costs decreased $2,292,000 (28%) driven primarily by the current quarter's decrease in military units and revenues. The ground support services segment reported a $263,000 increase in operating expenses directly related to the increased revenue provided by GAS this quarter. General and administrative expenses decreased $493,000 (16%) to $2,651,000 for the three-month period ended June 30, 2009 compared to its equivalent prior period. The principal component of this decrease was a decrease in the provision for doubtful accounts. The allowance had been increased by approximately $320,000 in the period ended June 30, 2008 as compared to an increase of $34,000 in the current period. In addition, travel, tradeshow and advertising expense decreased by approximately $110,000, quarter to quarter. Finally, profit sharing expense was $61,000 less in the current quarter based on the decreased earnings.

Operating income for the quarter ended June 30, 2009 was $1,735,000, a $345,000 (17%) decrease from the same quarter of the prior year. The overnight air cargo segment saw a 6% decrease in its operating income due to fewer aircraft and the corresponding decrease in administrative fee revenue, but otherwise experienced no significant changes to its operations or margins. The ground equipment segment experienced a 35% decrease in its operating income principally a result of the 29% decrease in revenues, with the segment's gross margin relatively consistent over the two periods. The ground support services segment saw its operating income go from a loss of $65,000 in the prior year comparable period to income of $255,000 in the current period. The new segment had been focusing on adding customers and locations while incurring additional costs in the startup mode and is now beginning to benefit from the maturing of its business and individual locations.

Pretax earnings decreased $328,000 for the three-month period ended June 30, 2009 compared to 2008, primarily due to the decrease in the ground equipment segment operating income.

During the three-month period ended June 30, 2009, the Company recorded $639,000 in income tax expense, which resulted in an estimated annual tax rate of 36.4%, compared to 35.7% for the comparable quarter in 2008. The estimated annual effective tax rates for both periods differ from the U. S. federal statutory rate of 34% primarily due to the effect of state income taxes offset by permanent tax differences, including the federal production deduction.

Liquidity and Capital Resources

As of June 30, 2009 the Company's working capital amounted to $18,090,000, an increase of $394,000 compared to March 31, 2009. The increase was primarily the result of positive earnings for the period offset by the payment of the annual dividend in June 2009.

The Company had no outstanding obligations under its line of credit at June 30, 2009. In August 2008, the Company amended its $7,000,000 secured long-term revolving credit line to extend its expiration date to August 31, 2010. 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 June 30, 2009, 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 June 30, 2009, $7,000,000 was available for borrowing under the credit line.

Amounts advanced under the credit facility bear interest at the 30-day "LIBOR" rate plus 137 basis points. The LIBOR rate at June 30, 2009 was .31%. The Company is exposed to changes in interest rates on its line of credit with respect to any borrowings outstanding under the line of credit. However, because the Company's outstanding balance under the line of credit was negligible during the quarter ended June 30, 2009, changes in the LIBOR rate during that period would have had a minimal affect on its interest expense for the quarter.

Following is a table of changes in cash flow for the respective periods ended June 30, 2009 and 2008:

                                            Three Months Ended June 30,
                                               2009               2008

           Net Cash Used in Operating
           Activities                     $    (2,992,000 )   $ (1,182,000 )
           Net Cash (Used in) Provided
           by Investing Activities                (81,000 )      1,937,000
           Net Cash Used in Financing
           Activities                          (1,254,000 )       (763,000 )

           Net Decrease in Cash           $    (4,327,000 )   $     (8,000 )

Cash used in operating activities was $1,810,000 more for the three-month period ended June 30, 2009 compared to the similar prior year period, resulting from a variety of offsetting factors. Accounts receivable increased significantly during the current period, offset by inventory levels that grew considerably less in the current period compared to the comparable prior year period, as well as accrued expenses which were paid down at a much greater rate in the current period as compared to the prior year period.

Cash used in investing activities for the three-month period ended June 30, 2009 was $2,018,000 more than the comparable prior year period primarily due to a significant level of investment sales activity in the prior year period with minimal activity in the current period.

Cash used by financing activities was $491,000 more in the three-month period ended June 30, 2009, than in the corresponding prior year period primarily due to the payoff of the aircraft term loan in April 2009.

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 profitability and other factors, in the first quarter of each fiscal year, in an amount to be determined by the Board. The Company paid a $0.33 per share cash dividend in June 2009.

During the year ended March 31, 2009, the Company amended the employment agreement of William H. Simpson, the Company's Executive Vice President. The amendment deleted all provisions providing for certain payments to be made to Mr. Simpson upon his retirement and replaces them with an obligation for the Company to pay Mr. Simpson in July 2009, an amount designed to equal the amount that he would have been entitled to receive had he retired at that time and elected to receive a lump sum. The actual amount of that liability was estimated at $950,000 at March 31, 2009 but has been definitively determined to be approximately $942,000 at June 30, 2009 and was paid in full in July 2009.

The Company has been subject to significant contingencies associated with the February 28, 2005 de-icing boom collapse in Philadelphia and resulting litigation. The majority of these contingencies have now been resolved. These matters are described in Note 11 to the Notes to Condensed Consolidated Financial Statements (Unaudited), included in Part I, Item 1 of this report, which is incorporated herein by reference.

Impact of Inflation

The Company believes that inflation has not had a material effect on its operations, because increased costs to date have been passed on to its customers. Under the terms of its air cargo business contracts the major cost components of its operations, consisting principally of fuel, crew and other direct operating costs, and certain maintenance costs are reimbursed, without markup by its customer. Significant increases in inflation rates could, however, have a material impact on future revenue and operating income. Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.