Overview

The Company operates in three business segments. The overnight air cargo segment, comprised of the Company's 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 the Company's 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 the Company's 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 June 30,
                                                  2012                   2011

         Overnight Air Cargo Segment:
           FedEx                           $ 10,734        44 %   $ 10,827        65 %
         Ground Equipment Sales Segment:
           Military                           4,024        17 %         84         1 %
           Commercial - Domestic              5,140        21 %      2,197        13 %
           Commercial - International         1,579         6 %      1,890        11 %
                                             10,743        44 %      4,171        25 %

         Ground Support Services Segment      3,011        12 %      1,564        10 %
                                           $ 24,488       100 %   $ 16,562       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 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. We are presently in the process of negotiating replacement agreements with FedEx. The terms of the replacement agreements may differ from the terms of our current agreements, which may affect our results going forward.

MAC and CSA combined contributed approximately $10,734,000 and $10,827,000 to the Company's revenues for the three-month periods ended June 30, 2012 and 2011, respectively, a current year decrease of $93,000 (1%).

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 design, 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 five models of scissor-lift equipment, for catering, cabin service and maintenance service of aircraft, and has developed a line of decontamination equipment, flight-line tow tractors, glycol recovery vehicles 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.

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 ("USAF"). The contract award was for one year with four additional one-year extension options that may be exercised by the USAF. In June 2012, the third option period under the contract was exercised, extending the contract to July 2013.

In September 2010, GGS was awarded a contract to supply flight line tow tractors to the USAF. The contract award is for one year commencing September 28, 2010 with four additional one-year extension options that may be exercised by the USAF. In September 2011, the first option period under the contract was exercised, extending the contract to September 2012. The value of the contract, as well as the number of units to be delivered, will be determined based upon annual requirements and available funding of the USAF.

GGS contributed approximately $10,743,000 and $4,171,000 to the Company's revenues for the three-month periods ended June 30, 2012 and 2011, respectively, representing a $6,572,000 (158%) increase. At June 30, 2012, GGS's order backlog was $12.0 million compared to $10.1 million at June 30, 2011 and $15.3 million at March 31, 2012.

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 $3,011,000 and $1,564,000 to the Company's revenues for the three-month periods ended June 30, 2012 and 2011, respectively, representing a $1,447,000 (92%) increase. GAS has been successful in the past year in adding new customers and locations to build its revenue base and increase profitability.

First Quarter Highlights

The first quarter of fiscal 2012 saw the Company revenues increase by 48% over the prior year comparable quarter. Operating income also increased 160% in the same first quarter compared to the prior year quarter. These results represent a positive reversal of recent trends in profitability and reflect a solid first quarter for the Company.

Revenues from the air cargo segment decreased 1% compared to the first quarter of the prior fiscal year, while operating income decreased 19%. The air cargo segment had benefited in the prior year from the four additional ATR 72 aircraft that were added to its revenue fleet of aircraft. The air cargo segment has added a number of key management personnel in both its flight and maintenance departments in the past year in order to adequately staff the company for the increased level of aircraft. This personnel cost is the principal cause for the decrease in operating income this quarter.

Revenues for GGS increased by 158% compared to the first quarter of the prior fiscal year. GGS had operating income of approximately $252,000 for the quarter, compared to an operating loss of $311,000 in the prior year's comparable quarter. GGS's revenues included $4,024,000 in sales to the USAF in the first quarter of the current fiscal year under the deicer and flight line tow tractor contracts. Pricing under our current contracts with the USAF resulted from very competitive conditions, and accordingly, margins under these contracts are substantially lower than under the contracts they replaced. GGS continues to see increased pressure on margins in highly competitive domestic, international and military equipment markets.

During the quarter ended June 30, 2012, revenues from our GAS subsidiary increased by $1,447,000 (92%) as a result of the company's growth in new customers and locations. Operating income for GAS increased by $184,000 (475%) for the quarter.

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.

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

The deicer industry that GGS operates in has historically been seasonal. The Company has been able to reduce GGS's seasonal fluctuation in revenues and earnings by broadening its product line to include military and international sales to increase revenues and earnings throughout the year. Although sales remain somewhat seasonal, particularly with regard to commercial deicers which typically are delivered prior to the winter season, this diversification has lessened the impact on the Company. If sales to the USAF cease to be a significant component of GGS's sales, seasonal patterns of revenues and earnings attributable to its commercial deicer business may resume, with revenues and operating income for the segment being lower in the first and fourth fiscal quarters. The overnight air cargo and ground support services segments are not susceptible to seasonal trends.

Results of Operations

First Quarter 2013 Compared to First Quarter 2012

Consolidated revenue increased $7,927,000 (48%) to $24,488,000 for the three-month period ended June 30, 2012 compared to its equivalent prior period. The increase in revenues can be principally attributed to an increase in business in our ground equipment and ground support segments. Revenue in the ground equipment segment increased $6,573,000 (158%) as a result of increased military and commercial sales. The segment benefited from significant USAF deliveries in the current year quarter. Revenues in the ground support services segment were up $1,447,000 (92%), as a result of the company's addition of new customers and locations. Revenues in our air cargo segment were relatively flat, decreasing 1%.

Operating expenses increased $7,524,000 (46%) to $23,834,000 for the three-month period ended June 30, 2012 compared to its equivalent prior period. The principal component of the increase was a $5,926,000 (169%) increase in ground equipment sales segment operating expenses, correlating to the increase in segment revenue. Ground support services segment operating costs increased $1,113,000 (100%) driven primarily by the current quarter's increase in revenues. Air cargo operating expenses increased by $25,000, principally as a result of increased management personnel costs in the flight and maintenance departments. General and administrative expenses increased $411,000 (16%) to $2,947,000 for the three-month period ended June 30, 2011 compared to its equivalent prior period. The principal components of this increase were a $150,000 increase in professional fees, a $143,000 increase in salaries and related benefits and a $50,000 increase in profit sharing expense as a result of increased profits.

Operating income for the quarter ended June 30, 2012 was $654,000, a $403,000 (160%) increase from the same quarter of the prior year. The ground equipment sales segment produced operating income of $252,000 in the quarter ended June 30, 2012 compared to an operating loss of $311,000 in the prior year comparable quarter. The increase is the result of increased unit sales in the current quarter compared to the prior quarter. The ground support services segment saw an $184,000 (475%) increase in its operating income resulting from the growth in customers and locations over the past year. The overnight air cargo segment saw a 19% decrease in its operating income but remains a very profitable segment of the Company. The decrease in operating income of this segment was principally attributable to the addition of key management personnel in both its flight and maintenance departments to address increased aircraft levels.

Pretax earnings increased $389,000 for the three-month period ended June 30, 2012 compared to the prior comparable period, primarily due to the increases in the ground equipment sales and ground support services segments operating income.

During the three-month period ended June 30, 2012, the Company recorded $235,000 in income tax expense, which resulted in an estimated annual tax rate of 36%, the same rate as for the comparable quarter in 2011. 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 the benefit of the federal production deduction.

Liquidity and Capital Resources

As of June 30, 2012 the Company's working capital amounted to $23,175,000, a decrease of $65,000 compared to March 31, 2012.

The Company has a $7,000,000 secured long-term revolving credit line with an expiration date of August 31, 2013. The revolving credit line contains customary events of default, a subjective acceleration clause and a fixed charge coverage requirement, with which the Company was in compliance at June 30, 2012. 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 June 30, 2012, $7,000,000 was available for borrowing under the credit line and no amounts were outstanding.

Amounts advanced under the credit facility bear interest at the 30-day "LIBOR" rate plus 150 basis points. The LIBOR rate at June 30, 2012 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 negligible during the quarter ended June 30, 2012, 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, 2012 and 2011:

                                            Three Months Ended June 30,
                                                2012               2011

           Net Cash Provided by (Used
           in) Operating Activities       $       (349,000 )    $  981,000
           Net Cash Used in Investing
           Activities                             (127,000 )      (344,000 )
           Net Cash Used in Financing
           Activities                             (612,000 )      (491,000 )

           Net Increase (Decrease) in
           Cash and Cash Equivalents      $     (1,088,000 )    $  146,000

Cash used in operating activities was $1,330,000 more for the three-month period ended June 30, 2012 compared to the similar prior year period, resulting from a variety of offsetting factors. The most significant factor was accounts receivable which increased marginally during the current period while it decreased substantially in the prior comparable period, relating to sales levels in each of the respective periods.

Cash used in investing activities for the three-month period ended June 30, 2012 was $217,000 less than the comparable prior year period due to the decrease in capital expenditures.

Cash used in financing activities was $121,000 more in the three-month period ended June 30, 2012, than in the corresponding prior year period due to proceeds from the exercise of stock options in the prior period totaling $124,000.

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 $0.25 per share cash dividend in June 2012.

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 or a change in air cargo contracts, shifting the risk of these cost increases to the Company, could have a material impact on future revenue and operating income.