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.

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

(In thousands)
                          Three Months Ended September 30,              Six Months Ended September 30,
                        2009                        2008                   2009                  2008

Overnight Air Cargo
Segment:
  FedEx              $     9,814      49 %     $  11,561     48 %   $    18,602      48 %    $ 21,017    45 %
Ground Equipment
Sales Segment:
  Military                 1,763       9 %         2,462     10 %         7,636      19 %      11,258    25 %
  Commercial -
Domestic                   3,282      16 %         6,388     27 %         4,394      11 %       7,896    17 %
  Commercial -
International              3,048      15 %         1,860      8 %         4,166      11 %       2,897     6 %
                           8,093      40 %        10,710     45 %        16,196      41 %      22,051    48 %

Ground Support
Services Segment           2,235      11 %         1,741      7 %         4,292      11 %       3,361     7 %
                     $    20,142     100 %     $  24,012    100 %   $    39,090     100 %    $ 46,429   101 %

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 81 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 $18,602,000 and $21,017,000 to the Company's revenues for the six-month periods ended September 30, 2009 and 2008, respectively, a current year decrease of $2,415,000 (11%).

GGS manufactures and supports aircraft deicers and other specialized industrial equipment on a worldwide basis. GGS manufactures a variety of 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, and style of the exterior finish. GGS also manufactures various 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. GGS was awarded two three-year extensions of that contract through June 2009. 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 $16,196,000 and $22,051,000 to the Company's revenues for the six-month periods ended September 30, 2009 and 2008, respectively. The $5,855,000 (27%) decrease in revenues was due to a decrease in the number of military and commercial deicing units delivered in the current period. Those decreases have been partially offset by an increase in international deicer sales, particularly to the China market. At September 30, 2009, GGS's order backlog was $13.6 million compared to $18.6 million at September 30, 2008 and $14.8 million at June 30, 2009.

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

GAS contributed approximately $4,292,000 and $3,361,000 to the Company's revenues for the six-month periods ended September 30, 2009 and 2008, respectively. The $931,000 (28%) 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 six-month period ended September 30, 2009.

Second Quarter Highlights

The prior year quarter ended September 30, 2008 was an exceptional quarter in terms of revenues and net earnings which was fueled by the unusually high backlog at March 31, 2008 as well as the high demand for military and commercial deicers. The current year second quarter ended September 30, 2009 saw a significant decline from the outstanding quarter of a year ago, although it was in line with historical standards. We saw a significant decline in both military and domestic commercial deicer deliveries from the prior year comparable quarter. The domestic commercial market has slowed reflecting the current difficult economic and industry conditions. The military deliveries slowed this quarter as we were delayed by the availability of certain inventory components. We also saw a decline in the revenues and operating income from the air cargo segment as the number of revenue aircraft decreased from 87 a year ago to 81 currently. 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. The Company expects orders and deliveries under the new contract to begin in the last quarter of fiscal 2010 or the first quarter of fiscal 2011. The company does not know at this time the number of units or configurations of the expected delivery order for the U.S. Government fiscal year beginning October 1, 2009.

During the quarter ended September 30, 2009, revenues from our GAS subsidiary totaled $2,235,000. This new line of business continues to expand its customer base though revenues have stabilized over the past twelve months. 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:

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, customer financial condition and the collectability of outstanding accounts receivables. 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 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. 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 stock based compensation 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

Second Quarter Fiscal 2010 Compared to Second Quarter Fiscal 2009

Consolidated revenue decreased $3,871,000 (16%) to $20,142,000 for the three-month period ended September 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 $1,747,000 (15%) 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 81 from 87 at September 30, 2008. The reduction in aircraft also resulted in a $93,000 decrease in administrative fee revenue from FedEx. Revenues in the ground equipment sales segment decreased $2,617,000 (24%) to $8,093,000 principally as a result of a decrease in both military and domestic commercial deicer deliveries during the second quarter of fiscal 2010 compared to the historically high level of deliveries in the prior year period. In addition, GAS provided revenues of $2,235,000 during the three-month period ended September 30, 2009, compared to revenue of $1,742,000 in the prior year comparable quarter, as it continues to add new customers and new service locations compared to a year ago.

Operating expenses decreased $3,183,000 (14%) to $18,811,000 for the three-month period ended September 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 $1,480,000 (15%) primarily as a result of decreased flight and maintenance departments costs passed through to its customer at cost, resulting from the decrease in number of aircraft operated. Ground equipment sales segment operating costs decreased $1,907,000 (23%) driven primarily by the current quarter's decrease in military and domestic commercial deicing units and revenues. The ground support services segment reported a $313,000 (25%) increase in operating expenses directly related to the increased revenue provided by GAS this quarter. General and administrative expenses decreased $105,000 (4%) to $2,562,000 for the three-month period ended September 30, 2009 compared to its equivalent prior period, with a significant component being a profit sharing expense decrease of $69,000 in the current quarter based on the decrease in earnings.

Operating income for the quarter ended September 30, 2009 was $1,331,000, a $688,000 (34%) decrease from the same quarter of the prior year. The overnight air cargo segment saw a 35% decrease in its operating income due to fewer aircraft and the corresponding decrease in administrative fee revenue. The ground equipment sales segment experienced a 40% decrease in its operating income principally as a result of the decrease in revenues, with the segment's gross margin relatively consistent over the two periods. On a positive note, the ground support services segment saw a 59% increase in its operating income as the new segment has transitioned from startup mode and is benefitting from the maturing of its business and individual locations.

Non-operating income, net, increased by $4,000 to $22,000 for the three-month period ended September 30, 2009. The principal differences were a decrease in interest expense of $19,000 offset by a decrease in investment income of $13,000, due to decreased investment rates in the current period.

Pretax earnings decreased $684,000 for the three-month period ended September 30, 2009 compared to 2008, as a result of the decreased revenues and profits in both the air cargo and ground equipment sales segments, partially offset by the increased revenues and profits within the ground support services segment.

During the three-month period ended September 30, 2009, the Company recorded $505,000 in income tax expense, which resulted in an estimated annual tax rate of 37.4%, compared to 35.1% 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.

First Six Months of Fiscal 2010 Compared to First Six Months of Fiscal 2009

Consolidated revenue decreased $7,339,000 (16%) to $39,090,000 for the six-month period ended September 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 $2,414,000 (11%) 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 period decreased to 81 from 87 at September 30, 2008. The reduction in aircraft also resulted in a $218,000 decrease in administrative fee revenue from FedEx. Revenues in the ground equipment sales segment decreased $5,855,000 (27%) to $16,196,000 principally as a result of a decrease in military and domestic commercial deicer revenues during the first six months of fiscal 2010. In addition, GAS provided revenues of $4,292,000 during the six-month period ended September 30, 2009, compared to revenue of $3,362,000 in the prior year comparable period, as it continues to add new customers and new service locations.

Operating expenses decreased $6,306,000 (15%) to $36,024,000 for the six-month period ended September 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 $2,074,000 (12%) primarily as a result of decreased flight and maintenance departments costs passed through to its customer at cost, as a result of the decrease in the number of aircraft operated. Ground equipment sales segment operating costs decreased $4,199,000 (26%) driven primarily by the current period's decrease in military and domestic commercial units and revenues. The ground support services segment reported a $576,000 increase in operating expenses directly related to the increased revenue provided by GAS this period. General and administrative expenses decreased $598,000 (10%) to $5,212,000 for the six-month period ended September 30, 2009 compared to its equivalent prior period. There were a number of significant components comprising this decrease. First, the provision for doubtful accounts had increased by $160,000 in the prior year period compared with an increase of $30,000 in the current year period, a $130,000 reduction. In addition, travel, tradeshow and advertising expense decreased by approximately $160,000, period to period, while insurance and professional fee expense decreased by $52,000 and $70,000, respectively. Compensation expense relating to stock options is also declining and was $40,000 less in the current period. Finally, profit sharing expense was $130,000 less in the current period based on the decreased earnings.

Operating income for the six-month period ended September 30, 2009 was $3,066,000, a $1,033,000 (25%) decrease from the same period of the prior year. The overnight air cargo segment saw a 21% 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 sales segment experienced a 37% decrease in its operating income principally a result of the decrease in revenues, with the segment's gross margin relatively consistent over the two periods. The ground support services segment saw a 338% increase in its operating income as the new segment has transitioned from startup mode and is now beginning to benefit from the maturing of its business and individual locations.

Non-operating income, net, increased by $21,000 to $43,000 for the six-month period ended September 30, 2009. The principal difference was a decrease in interest expense of $19,000.

Pretax earnings decreased $1,012,000 for the six-month period ended September 30, 2009 compared to the prior period, due in large part to the decrease in the ground equipment sales segment operating revenues and income and to a lesser degree to the decrease in the air cargo segment operating revenues and income.

During the six-month period ended September 30, 2009, the Company recorded $1,144,000 in income tax expense, which resulted in an estimated annual tax rate of 36.8%, compared to 35.4% for the comparable prior period. 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 September 30, 2009 the Company's working capital amounted to $19,436,000, an increase of $1,741,000 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.

In September 2009, the Company amended its $7,000,000 secured long-term revolving credit line, modifying the debt covenants, modifying the interest rate spread and extending its expiration date to August 31, 2011. The revolving credit line contains customary events of default, a subjective acceleration clause and a fixed charge coverage requirement, which the Company was in compliance with at September 30, 2009. There is no requirement for the Company to maintain a lock-box arrangement under this agreement. 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, 2009, $6,937,000 was available under the terms of the credit facility. The line of credit had an outstanding balance of $63,000 at September 30, 2009.

Amounts advanced under the credit facility bear interest at the 30-day "LIBOR" rate plus 150 basis points. The LIBOR rate at September 30, 2009 was .25%. 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 minimal during the quarter ended September 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:

                                           Six Months Ended September 30,
                                               2009                 2008

          Net Cash Provided by (Used
          in) Operating Activities       $      (2,753,000 )     $ 1,796,000
          Net Cash Used in Investing
          Activities                               (97,000 )         (85,000 )
          Net Cash Used in Financing
          Activities                            (1,200,000 )        (787,000 )

          Net Increase (Decrease) in
          Cash and Cash Equivalents      $      (4,050,000 )     $   924,000

Cash used in operating activities was $4,549,000 more for the six-month period ended September 30, 2009 compared to the similar prior year period, resulting from a variety of offsetting factors. Accounts receivable increased significantly during the current period while they had decreased in the prior year comparable period, offset by inventory levels that were flat in the current period compared to a significant increase in the comparable prior year period. In addition, accrued compensation and other expenses were paid down at a much greater rate in the current six-month period as compared to the prior year period.

Cash used in investing activities was very comparable in the six-month periods, principally equipment acquisitions.

Cash used in financing activities was $413,000 more in the six-month period ended September 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 replaced 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 balance due of $942,000 including payroll taxes was paid in full in July 2009.

Contingencies

The Company has been subject to significant contingencies associated with the February 28, 2005 de-icing boom collapse in Philadelphia and resulting litigation. All of the resulting litigation has now been settled. 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.