BACKGROUND
The Company provides airline operations, aircraft leases, aircraft maintenance and other support services primarily to the cargo transportation and package delivery industries. Through the Company's subsidiaries, it offers a range of complementary services to delivery companies, freight forwarders, airlines and government customers. The Company's principal subsidiaries include three independently certificated airlines, ABX Air, Inc. ("ABX"), Capital Cargo International Airlines, Inc. ("CCIA") and Air Transport International, Inc. ("ATI"), and an aircraft leasing company, Cargo Aircraft Management, Inc. ("CAM").
At September 30, 2012, the Company's subsidiaries owned 53 aircraft in serviceable condition consisting of 21 Boeing 767-200 standard freighter aircraft leased to external customers and 32 freighter aircraft operated by the Company's airlines. The 32 freighter aircraft operated by the Company's airlines consisted of 15 Boeing 767-200, four Boeing 767-300, three Boeing 757, four Boeing 727, two McDonnell Douglas DC-8 freighter aircraft and four McDonnell Douglas DC-8 "combi" aircraft. The combi aircraft are capable of simultaneously carrying passengers and cargo containers on the main flight deck. The Company's subsidiaries also leased four Boeing 767-200 freighter aircraft and two Boeing 767-300 freighter aircraft as of September 30, 2012. Additionally, as of September 30, 2012, the Company had three Boeing 767-300 aircraft undergoing freighter modification, one Boeing 757 aircraft undergoing freighter modification and one Boeing 757 aircraft undergoing combi modification. The Company has two reportable segments: ACMI Services, which primarily includes the cargo transportation operations of its three airlines and the CAM segment, which includes the Company's aircraft leasing business. The Company's other business operations, which primarily provide support services to the transportation industry, include aircraft maintenance, aircraft parts sales, ground equipment leasing and mail handling services. These operations do not constitute reportable segments due to their size.
The Company's largest customer is DHL Network Operations (USA), Inc. and its affiliates ("DHL"), which accounted for 53% and 35% of the Company's consolidated revenues for the nine month periods ending September 30, 2012 and 2011, respectively. The Company has had long term contracts with DHL since August of 2003. Commencing March 31, 2010, the Company and DHL executed commercial agreements under which DHL leases 13 Boeing 767 freighter aircraft from CAM and contracted with ABX to operate those aircraft under a separate crew, maintenance and insurance ("CMI") agreement. The CMI agreement pricing is based on pre-defined fees, scaled for the number of aircraft operated and the number of flight crews provided to DHL for its U.S. network. The initial term of the CMI agreement is five years and the terms of the aircraft leases are seven years, with early termination provisions. In addition to the 13 CAM-owned Boeing 767 aircraft, ABX also operates four DHL-owned Boeing 767 aircraft under the CMI agreement. Additionally, the Company's airlines are providing eight other Boeing 767 aircraft, four Boeing 727 aircraft and one Boeing 757 aircraft to DHL under other contracts having durations of one year or less, and two Boeing 757 aircraft under multi-year contracts.
The U.S. Military comprised 16% and 12% of the Company's consolidated revenues for the nine month periods ended September 30, 2012 and 2011, respectively. The Company's airlines contract their services to the Air Mobility Command ("AMC"), which is organized under the U.S. Military. ATI contracts its unique fleet of McDonnell Douglas DC-8 combi aircraft to the AMC.
A substantial portion of the Company's revenues and cash flows have historically been derived from providing airlift in North America to BAX Global, Inc., an affiliate of DB Schenker ("BAX/Schenker"). BAX/Schenker is a specialized heavy weight, business to business shipper. In July 2011, BAX/Schenker announced its plans to adopt a

new operating model that phased out the dedicated air cargo network in North America supported by the Company. In September 2011, BAX/Schenker ceased air cargo operations at its air hub in Toledo, Ohio and began to conduct air operations from the Cincinnati/Northern Kentucky airport, utilizing DHL's U.S. air hub. Instead of dedicated aircraft, BAX/Schenker now utilizes DHL and other delivery services for its air transportation delivery requirements. The Company provided limited airlift directly to BAX/Schenker through the peak delivery season, until late December 2011. Beginning in January 2012, DHL contracted with the Company's airlines to supplement DHL's U.S. air network to service BAX/Schenker freight volumes on its expanded air network without use of the Company's DC-8 aircraft and with only limited use of Boeing 727 aircraft. The Company ceased providing services to BAX/Schenker as of the end of 2011. The Company's revenues from the services performed for BAX/Schenker, derived primarily by providing Boeing 727 and DC-8 airlift, were $52.4 million and $168.7 million for the three and nine month periods ended September 30, 2011, respectively. The Company's revenues from BAX/Schenker comprised approximately 27% and 30% of the Company's total revenues during the three and nine month periods ended September 30, 2011, respectively, (16% and 17% of total revenues excluding directly reimbursable revenues).

RESULTS OF OPERATIONS
Summary
The consolidated net earnings from continuing operations were $11.6 million and $29.4 million for the three and nine month periods ended September 30, 2012, respectively, compared to a $4.8 million loss and earnings of $10.3 million for the corresponding periods of 2011. Pre-tax earnings from continuing operations were $19.0 million and $47.9 million for the three and nine month periods ended September 30, 2012, respectively, compared to a $6.7 million loss and earnings of $17.6 million for the corresponding periods of 2011.
Earnings during the first nine months of 2011 were impacted by pre-tax charges of $27.1 million for asset impairments and $6.8 million stemming from the refinancing of the Company's former credit agreement. The impairment charges of $27.1 million related to the discontinuation of the BAX/Schenker North American network in 2011. After removing the impairment charges, the charges related to debt refinancing and the effects of interest rate derivatives, adjusted pre-tax earnings from continuing operations, a non-GAAP measure, were $18.7 million and $46.9 million for the three and nine month periods ended September 30, 2012, respectively, compared to $22.4 million and $53.0 million for the corresponding periods of 2011. (A definition and reconciliation of adjusted pre-tax earnings is shown below.) Adjusted pre-tax earnings from continuing operations during the three and nine month periods ending September 30, 2012 compared to the corresponding periods of 2011, while bolstered by additional external aircraft leases and increased operations for the Company's Boeing 767 and Boeing 757 aircraft, were negatively impacted by the discontinuation of the BAX/Schenker North American air network in the fourth quarter of 2011.
Total customer revenues from continuing operations decreased by $41.7 million to $153.8 million during the third quarter of 2012 and by $110.8 million to $452.9 million for the first nine months of 2012 compared to the corresponding periods of 2011. The declines reflect $52.4 million and $168.7 million of revenues during the three and nine month periods ending September 30, 2011, respectively, from services for the BAX/Schenker air network which was discontinued. Revenues from reimbursed fuel and other reimbursed operating expenses declined $23.6 million and $80.3 million during the three and nine month periods ending September 30, 2012, respectively, compared to the corresponding periods of 2011. These declines were also primarily due to the discontinuation of the BAX/Schenker air network. Excluding directly reimbursed revenues, customer revenues decreased by $18.0 million and $30.4 million during the three and nine month periods ending September 30, 2012, respectively, compared to the corresponding periods of 2011. Revenue growth during 2012, driven by additional external aircraft leases by CAM and additional Boeing 767 and Boeing 757 aircraft operations by ACMI Services, was offset by the revenue decline from the discontinuation of the BAX/Schenker air network.
During 2011, the Company executed a new credit facility ("Senior Credit Agreement") with a consortium of banks to expand and extend its borrowing capacity to support growth of the Boeing 767 and 757 aircraft fleet. The Senior Credit Agreement refinanced the Company's previous term and revolving credit loan. In conjunction with the execution of the Senior Credit Agreement, the Company terminated its previous credit agreement, which resulted in the write-off of $2.9 million of unamortized debt issuance costs associated with that credit agreement and the recognition of $3.9

million of losses for certain interest rate swaps previously designated as cash flow hedges of interest payments stemming from the former term loan during the first quarter of 2011.
A summary of our revenues and pre-tax earnings from continuing operations is shown below (in thousands):

                                           Three Months Ending           Nine Months Ending
                                              September 30,                 September 30,
                                           2012           2011           2012           2011
Revenues from Continuing Operations:
CAM                                    $   39,155     $   37,045     $  115,073     $  101,935
ACMI Services
Airline services                          102,863        118,936        300,466        336,436
Reimbursable                               20,454         44,100         57,676        138,014
Total ACMI Services                       123,317        163,036        358,142        474,450
Other Activities                           26,773         26,335         81,876         77,242
Total Revenues                            189,245        226,416        555,091        653,627
Eliminate internal revenues               (35,419 )      (30,936 )     (102,205 )      (89,959 )
Customer Revenues                      $  153,826     $  195,480     $  452,886     $  563,668


Pre-Tax Earnings (Loss) from
Continuing Operations:
CAM, inclusive of interest expense and
impairment charges                     $   17,334     $    9,395     $   50,819     $   36,495
ACMI Services
Airline services                           (1,746 )        2,758        (11,543 )        4,808
Asset impairment charges                        -        (20,383 )            -        (20,383 )
Total ACMI Services                        (1,746 )      (17,625 )      (11,543 )      (15,575 )
Other Activities                            3,373          3,672          8,602          7,001
Net unallocated interest expense             (296 )         (227 )         (961 )       (2,017 )
Net gain (loss) on derivative
instruments                                   294         (1,881 )          956         (5,437 )
Write-off of unamortized debt issuance
costs                                           -              -              -         (2,886 )
Pre-Tax Earnings (Loss) from
Continuing Operations                      18,959         (6,666 )       47,873         17,581
Less Net (gain) loss on derivative
instruments                                  (294 )        1,881           (956 )        5,437
Add Write-off of unamortized debt
issuance costs                                  -              -              -          2,886
Add asset impairment charges                    -         27,144              -         27,144
Adjusted Pre-Tax Earnings              $   18,665     $   22,359     $   46,917     $   53,048

Reimbursable revenues include certain operating costs that are reimbursed to the airlines by their customers. Such costs include fuel used, landing fees and certain aircraft maintenance expenses. The types of costs that are reimbursed varies by customer operating agreement.
Adjusted pre-tax earnings, a non-GAAP measure, is pre-tax earnings excluding asset impairment charges, interest rate derivative gains and losses and the write-off of debt issuance costs. Management uses adjusted pre-tax earnings to compare the performance of core operating results between periods. Adjusted pre-tax earnings should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP.
CAM
Through the CAM subsidiary, the Company offers aircraft leasing to external customers and leases aircraft internally to the Company's airlines. Aircraft leases normally cover a term of five to seven years. In a typical leasing agreement, customers pay rent and maintenance deposits on a monthly basis. As of September 30, 2012, CAM had 53 aircraft in service condition, 32 of them leased internally to the Company's airlines. CAM's revenues grew $2.1 million and $13.1 million for the three and nine months periods ended September 30, 2012, respectively, compared to the corresponding periods of 2011, as a result of additional aircraft leases. Since September 30, 2011, CAM has completed the modification from passenger to freighter of two Boeing 767-200 aircraft, two Boeing 767-300 aircraft and one Boeing 757 aircraft, and placed those aircraft under leases with internal customers.

Revenues from external customers accounted for $0.8 million and $9.0 million of the increased revenue for the three and nine month periods ended September 30, 2012, respectively, driven by five additional aircraft leases placed with external customers since the beginning of 2011. CAM's revenues from internal leases of Boeing 727 and DC-8 freighter aircraft for the three and nine month periods ended September 30, 2012 declined $3.8 million and $13.9 million, respectively, compared to the corresponding periods of 2011 due to the retirement of Boeing 727 and DC-8 aircraft previously operated for BAX/Schenker, but the decline was more than offset by additional Boeing 767 and 757 aircraft leases.
CAM's pre-tax earnings, inclusive of an interest expense allocation, increased $7.9 million and $14.3 million for the three and nine month periods ending September 30, 2012, respectively, compared to the corresponding periods of 2011. During the third quarter of 2011, the Company recorded aircraft impairment charges of $6.8 million related to the BAX/Schenker operations. Excluding the $6.8 million impairment in 2011, improved earnings reflected five additional Boeing 767 and 757 aircraft under lease since September 30, 2011. CAM's pre-tax earnings for 2012 does not reflect $1.0 million of unpaid rents related to a Boeing 767 aircraft under lease with a regional airline. Management expects the regional airline to return the two Boeing 767 aircraft which it leases, during the fourth quarter of 2012.
During 2012, CAM completed the modification from passenger to freighter configuration of one Boeing 767-200 and two Boeing 767-300 aircraft and leased those aircraft internally to a Company airline. CAM has five other passenger Boeing 767-300 and 757-200 aircraft, as discussed further below, that are being modified for future deployment.
ACMI Services Segment
The ACMI Services segment provides airline operations to its customers, typically under contracts providing for a combination of aircraft, crews, maintenance and insurance ("ACMI"). Our customers are usually responsible for supplying the necessary aviation fuel and cargo handling services and reimbursing our airline for other operating expenses, such as landing fees, ramp expenses and certain aircraft maintenance expenses. Aircraft charter agreements, including those for the U.S. Military, usually require the airline to provide full service, including fuel and other operating expenses for a fixed, all-inclusive price. As of September 30, 2012, ACMI Services included 51 in-service aircraft, including 32 leased internally from CAM, six leased from external providers and 13 CAM-owned freighter aircraft which are under lease to DHL and operated by ABX under the CMI agreement.
Revenues from ACMI Services decreased 24% and 25% during the three and nine months periods ended September 30, 2012, respectively, compared to corresponding periods of 2011 as a result of the discontinuation of services for BAX/Schenker's North American air network. Since June 30, 2011, ACMI Services has retired seven Boeing 727 and eight DC-8 freighter aircraft in response to the discontinuation of BAX/Schenker's North American air network in 2011. During the three and nine month periods ended September 30, 2011, ACMI Services revenues included $28.1 million and $94.6 million, respectively, for the reimbursement of fuel and other operating expenses for the BAX/Schenker air network. Airline services revenues, which do not include revenues for the reimbursement of fuel and certain operating expenses, declined 14% and 11%, due to the loss of BAX/Schenker revenues of $24.2 million and $73.8 million during the three and nine month periods ended September 30, 2011, respectively. Revenue declines from BAX/Schenker were offset by revenues from additional Boeing 767 and Boeing 757 aircraft added to the ACMI Services fleet since September 2011. Since September 30, 2011, ACMI Services has added two Boeing 767-200, two Boeing 767-300 and one Boeing 757 aircraft into the operating fleet. Airline services revenues, excluding those from BAX/Schenker, increased $8.1 million and $37.8 million during the three and nine month periods ended September 30, 2012, respectively, compared to the corresponding periods of 2011, driven by these additional Boeing 767 and 757 aircraft. Aircraft block hours flown for customers other than BAX/Schenker increased 6% and 12% during the three and nine month periods ending September 30, 2012, respectively, compared to the corresponding periods of 2011.
ACMI Services incurred pre-tax losses of $1.7 million and $11.5 million for airline services during the three and nine month periods ending September 30, 2012, respectively, compared to pre-tax earnings of $2.8 million and $4.8 million for the corresponding periods of 2011. Operating results during 2012 were negatively impacted by delays in placing aircraft into revenue service, the discontinuation of BAX/Schenker's North American air network, the cost of training flight crew members for the Boeing 767 aircraft, increased pension expenses and higher engine maintenance expenses. During 2012, ABX added three Boeing 767-300 aircraft into its in-service fleet. Delays in placing two of the recently deployed Boeing 767-300 aircraft into incremental revenue service adversely impacted operating results

during 2012. While ATI and CCIA have reduced the number of crewmembers and other employees in the ACMI Services segment due to the termination of the BAX/Schenker network, salaries and benefits expenses during 2012, have included the cost of training senior, former DC-8 crewmembers for the Boeing 767 aircraft and paying crews in advance of revenue service.
To further streamline the operations impacted by the loss of the BAX/Schenker business, we are in the process of merging the airline operations of ATI and CCIA and expect to complete the merger near the beginning of 2013. In September 2012, ATI and CCIA flight crewmembers, as represented by the Air Line Pilots Association International ("ALPA") ratified a collective bargaining agreement which allows for an integrated seniority list. The airlines and ALPA intend to complete the integration of the seniority lists by the end of 2012. Revenues for ACMI Services depends on a number of key factors including regulatory approvals, the cost competitiveness of the airlines, aircraft reliability, market preferences for the type of aircraft that we operate and general economic conditions. Weak economic conditions may continue to slow the pace by which we deploy aircraft into incremental revenue operations and could reduce the services we currently provide to customers. If necessary, we may further reduce staff levels to match with customer demand and aircraft utilization levels, however the degree and timeliness of such cost reductions may not coincide with the revenue reductions. Additionally, new agreements typically involve start-up expenses, including those for crewmember training, proving flights, route authorities, overfly rights, travel and other activities, however, revenue-generating services usually begin sometime later. ATI currently operates four DC-8 combi aircraft for the U.S. Military. In July 2012, the AMC notified ATI that it was awarded a two-year agreement to continue the combi aircraft flights through September of 2014. ATI intends to service the award with its DC-8 combi aircraft and phase-in more modern Boeing 757 combi aircraft starting near the end of 2012, replacing the DC-8 combi aircraft in conjunction with the U.S. Military's preference. Other Activities
The Company sells aircraft parts and provides aircraft maintenance and modification services to other airlines. The Company also operates five U.S. Postal Service ("USPS") sorting facilities and provides ground equipment leasing and facility maintenance services, including fuel services. Other activities also include the management of workers' compensation claims under an agreement with DHL and gains from the reduction in employee post-retirement obligations. External customer revenues from all other activities were $12.7 million and $39.1 million for the three and nine month periods ending September 30, 2012, respectively, compared to $14.7 million and $42.0 million for the three and nine month periods ending September 30, 2011.
The pre-tax earnings from other activities were $3.4 million and $8.6 million for the three and nine month periods ending September 30, 2012, respectively. Pre-tax earnings from other activities decreased $0.3 million and increased$1.6 million for the three and nine month periods ending September 30, 2012, respectively, compared to the corresponding periods of 2011. Lower pre-tax results for the three months ended September 30, 2012 reflect the timing of completion for maintenance projects. Improved results for the first nine months of 2012 primarily reflect process streamlining initiatives at the sorting facilities and higher aircraft maintenance revenues. The Company's contracts with the USPS generated $15.6 million of revenue during the first nine months of 2012. The contracts for three of the USPS facilities were recently renewed with similar economic terms through September of 2014. Discontinued Operations
Pre-tax losses related to the former hub services operations were $0.9 million for the first nine months of 2012 compared to $0.1 million during the first nine months of 2011. The results of discontinued operations primarily contain pension expense for former employees that supported sorting operations under a hub services agreement with DHL, and expenses for certain legal matters associated with those former sorting operations.

Fleet Summary 2012
The Company's aircraft fleet is summarized below as of September 30, 2012 ($'s
in thousands):
                                                ACMI
                                              Services    CAM      Total
In-service aircraft
Aircraft owned
Boeing 767-200                                      15     21           36
Boeing 767-300                                       4      -            4
Boeing 757                                           3      -            3
Boeing 727                                           4      -            4
DC-8                                                 6      -            6
Total                                               32     21           53
Carrying value                                                   $ 637,826
Operating lease
Boeing 767-200                                       4      -            4
Boeing 767-300                                       2      -            2
Total                                                6      -            6
Carrying value                                                   $     887
Aircraft for freighter and combi modification
Boeing 767-300                                       -      3            3
Boeing 757                                           -      2            2
Total                                                -      5            5
Carrying value                                                   $ 102,512

As of September 30, 2012, ACMI Services leased 32 of its in-service aircraft internally from CAM. As of September 30, 2012, 13 of CAM's 21 Boeing 767-200 aircraft shown above were leased to DHL and operated by ABX, while CAM leased eight other Boeing 767-200 aircraft to external airlines.
Aircraft fleet activity during the first nine months of 2012 is summarized below:
- CAM completed the freighter modification of one Boeing 767-200 aircraft and leased the aircraft internally to an airline affiliate.
- We removed one DC-8 aircraft from the in-service fleet as a result of BAX/Schenker's discontinuation of its North American air network and diminished demand for these aircraft types.
- CAM's Boeing 767-200 passenger aircraft was placed in temporary storage when its airframe maintenance cycle expired. The aircraft will remain in storage until it enters the freighter modification process or is prepped for service.
- ABX began to lease a Boeing 767-300 aircraft from an external lessor.
- CAM completed the freighter modification of two Boeing 767-300 aircraft and leased the aircraft internally to an airline affiliate.
- CAM purchased two Boeing 767-300 passenger aircraft for modification into standard freighter aircraft. We expect to complete the modification of one Boeing 767-300 aircraft from passenger to freighter configuration in the fourth quarter of 2012 and the modification of two Boeing 767-300 aircraft from passenger to freighter configuration in 2013. We expect to complete the modification of one Boeing 757 passenger aircraft into a standard freighter configuration during the fourth quarter of 2012 and one Boeing 757 passenger aircraft into a combi configuration near the beginning of 2013.

As of September 30, 2012, ACMI Services included four Boeing 727 aircraft having . . .