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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003Commission File No. 1-11775 TIMCO AVIATION SERVICES, INC. (Exact name of registrant as specified in its charter) DELAWARE
(State or other jurisdiction of
incorporation or organization)
623 Radar Road
Greensboro, NC
(Address of principal executive offices)
    
    65-0665658
(I.R.S. Employer Identification No.)
27410
(Zip Code)
 (336) 668-4410
(Registrants telephone number) Securities registered pursuant to Section 12(b) of the Exchange Act: TITLE OF EACH CLASS
None
    
    NAME OF EACH EXCHANGE
ON WHICH REGISTERED
N/A
 Securities registered pursuant to section 12(g) of the Exchange Act: Common Stock, par value $.001 per share Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ] NO [   ]




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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act, Rule 12b-2). Yes [   ] No [X] As of June 30, 2003, the aggregate market value (based on the closing sales
price of the common stock as reported on the OTC Bulletin Board maintained by
the NASD on such date, which was $0.38 per share) of the common stock held by
non-affiliates was approximately $4.9 million. At April 12, 2004, there were
31,640,994 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants definitive Proxy Statement for its 2004 Annual
Meeting of Stockholders (which Proxy Statement will be filed on or before 120
days after the end of the Registrants fiscal year ended December 31, 2003) are
incorporated by reference into Part III hereof. Certain exhibits listed in Part
IV of this Annual Report on Form 10-K are incorporated by reference from prior
filings made by the Registrant under the Securities Act of 1933, as amended,
and the Securities Exchange Act of 1934, as amended. ii




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PART I FORWARD LOOKING STATEMENTS (All dollar amounts and share amounts contained in this Annual Report on Form
10-K are in thousands, except per share data) This Annual Report on Form 10-K contains forward looking statements. You can
identify these statements by the fact that they use words such as anticipate,
estimate, expect, project, intend, plan, believe, and other words
and terms of similar meaning in connection with any discussion of future
operating or financial performance. These include forward looking statements
on, among other matters:  
    
    our business strategy and our future plans for our business,
    
    anticipated trends and our competitive position in the industry in which we operate, and
    
    our anticipated performance in future periods. These forward looking statements are based on our current expectations and are
subject to a number of risks, uncertainties and assumptions relating to our
operations and results of operations, including, among others:  
    
    the financial health of the U.S. passenger and freight airline
industry, and the impact of the financial health of that industry on
the maintenance, repair, and overhaul (MR&O) industry generally and
our business specifically,
    
    the amount of MR&O business being outsourced by the airline
industry in general and our airline customers in particular,
    
    factors that effect the financial health and well-being of our
airline customers, such as the September 11, 2001 terrorist attacks
and the SARS outbreak,
    
    the effect of competition on our business, including the effects of
competition on the pricing of the services and goods that we provide,
    
    our ability to achieve gross profit margins at which we can be
profitable, including margins on services that we perform on a fixed
price basis,
    
    our ability to generate sufficient working capital from our
operations and from our available credit facilities to meet our
operating requirements and service our indebtedness,
    
    our maintaining good relations with our customers and vendors,
    
    utilization rates for our MR&O facilities,
    
    our ability to manage our business efficiently and achieve both positive income and cash flow from our operations,
    
    our ability to attract and retain qualified personnel in our business,
    
    our ability to integrate future acquisitions, and
    
    future changes in government regulations. Should one or more of the assumptions underlying our forward looking statements
prove incorrect, or should future events occur that change the landscape of our
industry and our customers, the forward looking statements contained in this
report or the future financial results described in this report may not
ultimately come true. We are not obligated, nor do we undertake the obligation,
to revise these forward looking statements to reflect future events or
circumstances. References to TIMCO, we, us and our refer to TIMCO Aviation Services,
Inc. and, unless the context otherwise requires, its subsidiaries. 1




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ITEM 1. BUSINESS General TIMCO Aviation Services, Inc. is among the worlds largest providers of fully
integrated aviation maintenance, repair and overhaul (MR&O) services for major
commercial airlines, regional air carriers, aircraft leasing companies,
government and military units and air cargo carriers. We provide four MR&O
services: TIMCO, which, with its four active locations, is one of the largest
independent providers of heavy aircraft maintenance services in the world;
Aircraft Interior Design and Brice Manufacturing, which specialize in the
refurbishment of aircraft interior components and the manufacture and sale of
aftermarket parts and new aircraft seats; TIMCO Engineered Systems, which
provides engineering services to both our MR&O operations and our customers;
and TIMCO Engine Center, which refurbishes JT8D engines and performs on-wing
repairs for both JT8D and CFM-56 series engines. Visit TIMCO online at
www.timco.aero. Our strategy is to be the vendor of choice to our customers, providing aircraft
maintenance solutions to meet our customers MR&O requirements. The services
that we offer allow our customers to reduce their costs by outsourcing some of
their MR&O functions. We were incorporated in Delaware in 1996 under the name Aviation Sales
Company. We changed our corporate name to TIMCO Aviation Services, Inc. in
February 2002. Our principal operating business, TIMCO, commenced operations in
1992. Our principal executive offices are at 623 Radar Road, Greensboro, North
Carolina 27410, and our telephone number is (336) 668-4410. Industry Overview An industry study published in January 2003 estimated the total MR&O market at
$34.6 billion, as follows:  
    
    Heavy maintenance and modifications comprise 30% ($10.4 billion) of the MR&O market,
    
    Engine maintenance accounts for 29% ($10 billion ) of the MR&O market,
    
    Line maintenance accounts for 23% ($8.0 billion) of the MR&O market, and
    
    Component repair makes up 18% ($6.2 billion) of the MR&O market.  The MR&O market consists of captive in-house operations of airlines and freight
carriers, semi-captive operations that are affiliated with an airline,
independent providers of MR&O services such as TIMCO and facilities operated by
original equipment manufacturers. Based on industry sources, we believe that
approximately 50% of MR&O services required by airlines and freight carriers
are currently outsourced to independent providers like TIMCO, compared to
approximately 33% ten-years ago. We also believe that more MR&O services will
be outsourced in the future, as carriers aggressively pursue outsourcing as a
means to reduce their costs. Some airlines, such as United Air Lines, have
recently closed maintenance facilities and substantially increased the MR&O
requirements that they outsource, and several low fare airlines such as Jet
Blue, Air Tran and Southwest outsource nearly all of their aircraft heavy
maintenance checks. We also believe that other large carriers who have not
outsourced their maintenance in the past are considering doing so in the
future.Passenger airlines and freight carriers incur substantial direct and indirect
operating costs, which are resistant to significant reduction because of labor
agreements, aircraft fleet efficiency, and route structures. At the same time,
they have encountered increasing pricing pressure during the last decade from
new and established discount airlines, known as low cost carriers (LCCs) which
have inherently lower cost structures, and from a reduction in passengers
because of, among other things, economic conditions and the global war on
terrorism. For many airlines, these factors have resulted in lower revenue per
seat mile, without a commensurate offsetting reduction in expenses. While
certain airline expenditures are beyond the direct control of airline
operators, such as the price of fuel, airport security charges, and taxes, we
believe that outsourcing MR&O functions can reduce airline operating costs. We
believe that maintenance generally represents between 10% and 15% of an
airlines costs, and that these costs are currently receiving significant
attention from passenger airlines and freight carriers because they can be
moderated through actions such as outsourcing.Outsourcing of maintenance and repair functions by airlines allows a service
provider such as TIMCO to achieve economies of scale unavailable to airlines
individually. We believe that the trend towards outsourcing by airlines of
a growing portion of their MR&O requirements to large independent service
providers such as TIMCO will continue in the future as these carriers look to
reduce their cost per seat mile by focusing their operations on their core
competency of providing airline services to their customers. 2




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Industry sources also report that while events such as the
September 11th
terrorist attacks, the wars in Iraq and Afghanistan and the SARS outbreak, as
well as generally slow economic growth, have caused a decline in the MR&O
market between 2000 and 2003, the market appears to be recovering and is
expected to return to its historic growth rate (1.5 x GDP) in 2004 and beyond.
We believe that the following factors will affect the recovery of the MR&O
market:  
    
    worldwide economic growth,
    
    fleet growth (net of aircraft retirements), which is expected to
range in the near term (2002-2007) between 4.8% and 7.1% and in the
intermediate-term (2007-2012) between 2.7% and 3.7%,
    
    speed of passenger and cargo traffic recovery,
    
    financial pressure on airlines to improve asset utilization,
    
    the impact of conversions of passenger aircraft to freighters which extends the useful life of particular aircraft,
    
    newer aviation technologies, which are more reliable but more costly and complex to maintain,
    
    increased regulation and concerns about safety,
    
    industry consolidation, which should reduce competition in the long term,
    
    the globalization of the MR&O market,
    
    expiration of aircraft maintenance warranties and the induction for
maintenance servicing programs by newer generation aircraft, and
    
    fuel prices. Operations Airframe Maintenance Services We perform maintenance, repair and modification services on aircraft at TIMCOs
repair stations in Greensboro, North Carolina, Lake City, Florida, Macon,
Georgia and Goodyear, Arizona. We also have a maintenance facility in
Winston-Salem, North Carolina, which we have closed until we develop customers
for this facility. The services performed at each of our airframe maintenance
facilities are as follows: Facilities  
    
    TIMCO  Greensboro (GSO)  GSO is our largest airframe maintenance and
modification facility. GSO primarily supports multi-line major customers
including United Air Lines (B737, B757, B767 and B777), Delta Air Lines
(B777 modifications plus engineering and maintenance services), UPS (DC-8
and A300-600), FedEx (DC-10 and B727) and ABX Air (DC-8). GSO has grown
and adapted to the changing aviation environment by maintaining its market
share of existing older generation aircraft product lines and by
developing new capabilities to support the needs of todays newer
generation aircraft.We have 600,000 square feet of space in GSO in four hangars, three of
which are wide body hangars and one of which is a multi-bay hangar. We
also have a structures center in GSO, in which we repair flight controls
and other components in conjunction with repairs being handled by our
heavy maintenance operations, and a composite center, where we repair and
overhaul advanced composite and bonded aluminum honeycomb assemblies.
    
    TIMCO-Lake City (LCQ)  LCQ has historically competed as a low cost
facility. We currently perform maintenance for various customers in LCQ,
including United Air Lines (B737), America West (B737 and B757), AeroCal
(DC-9) and Mesaba (Saab 340 and Avro RJ85). LCQ has the capacity and
experience to support commercial and government contracts, and we hope to
ultimately make LCQ our primary center for military MR&O services. In that
regard, during 2002, we were awarded SAE AS 9100 Certification at LCQ and
we became part of a FAST team (both prerequisites of government contract
work).The LCQ facility consists of six maintenance hangars, as well as a
dedicated two-bay strip and paint hangar which is capable of supporting
both narrow body and select wide body aircraft. The LCQ facility has over
600,000 square feet of covered hangar space and over 1.3 million square
feet of ramp space. Our facility is located at the Lake City airport. We
control and maintain the taxiways, parking areas and engine run up areas
located at this airport. We also maintain an FAA approved control tower at
this airport. 3




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
    
    TIMCO  Macon (MCN)  TIMCO-MCN has over 140,000 square feet of space
in two hangers and we currently operate three service lines at this
facility. TIMCO-MCN has been customized specifically for the America
West A319/A320 and B737 heavy airframe maintenance operations.
TIMCO-MCN has been the dedicated facility for America West since 2000
and has often been cited as a model for future MR&O/airline
partnerships.
    
    TIMCO-Goodyear (GYR)  TIMCO-GYR is located near the city of Phoenix,
AZ and is TIMCOs newest facility. This facility provides heavy
airframe maintenance support for airlines such as Alaska Airlines,
Allegiant Air, World Airways and leasing customers such as GE Capital,
US Bank, CIT and Finova Capital. The desert location and arid climate
makes TIMCO-GYR an excellent storage location for aircraft, and
TIMCO-GYR has been recognized as a leading provider of maintenance
support for short and medium term aircraft storage needs. Many of
these storage aircraft are later inducted into heavy maintenance at
GYR, just prior to re-entering commercial service.Our GYR operation has over 318,000 square feet of space in two hangars. We
also have 1.5 million square feet of ramp and runway access storage
providing space to park up to 200 aircraft.
    
    TIMCO-Winston Salem  This one-hangar facility, which was formerly the
home base for Piedmont Airlines and a major repair and line station for
U.S. Airways, is currently closed. We hope to utilize this facility in the
future in another airline partnership, similar to our operation in Macon.  Types of heavy-airframe maintenance services providedThe services we offer principally consist of C and D level maintenance
checks, interior crew rest reconfigurations and the conversion of passenger
aircraft to freighter configurations. C and D checks each involve a
different degree of inspection, and the services performed at each level vary
depending upon the individual aircraft operators FAA-approved maintenance
program. C and D level checks are comprehensive checks and usually take a
minimum of several weeks to complete, depending upon the scope of the work to
be performed.The C level check is an intermediate level service inspection that typically
includes testing and servicing of the aircrafts operational systems, external
and internal cleaning and refurbishing, and servicing of the interior. Trained
mechanics visually inspect the external and internal structure of the aircraft,
repair defects and remove corrosion found, all in a manner as required by the
manufacturers maintenance and structural repair manuals. The D level check
includes all of the work accomplished in the C level check, but places a
greater emphasis on the integrity of the aircrafts structure. In the D level
check, the aircraft is disassembled so that the entire structure can be
inspected and evaluated. Once the inspection, evaluation and repairs have been
completed, the aircraft is reassembled and its systems reinstalled to the
detailed tolerances demanded in each systems specifications. Depending upon
the type of aircraft and the FAA-certified maintenance program being followed,
intervals between C level checks can range from 12 to 18 months and 1,000 to
5,000 flight hours, and intervals between D level checks can range from four
to eight years and 10,000 to 25,000 flight hours. Structural inspections
performed during C level and D level checks provide personnel with detailed
information about the condition of the aircraft and the need to perform
additional work or repairs not provided for in the original work scope. Project
coordinators and customer support personnel work closely with the aircrafts
customer service representative in evaluating the scope of any additional work
required and in the preparation of a detailed cost estimate for the labor and
materials required to complete the job.Aircraft modification servicesEach aircraft certified by the FAA is constructed under a Type Certificate.
Anything which is done subsequently to modify the aircraft from its original
type design requires the review and approval of the FAA. These modifications
are authorized by the issuance of a Supplemental Type Certificate (STC) or an
engineering order issued by the airlines engineering department. Typical
modification services performed by TIMOC include reconfiguring passenger
interiors and installing passenger amenities such as telephones, in flight
entertainment systems and crew rest areas. We also modify B777 to include
sleeping quarters for crews on international flights and convert passenger
aircraft to freighter configuration. 4




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Engineering servicesOur engineering services group, which operates as TIMCO Engineered Systems,
provides integrated aircraft engineering and supply-chain management, including
aircraft certification, design and approval of modifications to aircraft
systems and structures, for customers of our heavy aircraft maintenance
operations, and for airlines, leasing companies and aerospace original
equipment manufacturers. Our engineering services group was the first to market
cockpit door bars and has designed, obtained FAA certification for, and
installed over 500 ballistic cockpit doors that are in compliance with FAA
requirements resulting from the September 11, 2001 terrorist attacks.Interiors and Seat Manufacturing ServicesWe have two operations, Brice Manufacturing and Aircraft Interior Design, which
specialize in the refurbishment of aircraft interior components and the
manufacture and sale of aftermarket parts and new aircraft seats.BRICE Manufacturing Company (Brice), is based in Pacoima, California, was
acquired by TIMCO in October 2002. In addition to its ownership of 5,000 PMA
parts, Brice has developed a global customer base for new cabin seats ranging
from basic coach to business class and first class seats. Customers include
Lufthansa, Air New Zealand, LuxAir, GE Capital, AeroMexico, Allegiant and
Qantas. Brice is also an approved vendor for both Boeing and Airbus for new
aircraft deliveries and Brices product offerings include the supply of
palletized seats for installation on C-17 and C-130 military aircraft.Aircraft Interior Design, Inc. (AID), based in Dallas, Texas, is a major
provider of seat overhauls and refurbishment for Southwest Airlines. In
addition to Southwest, AID has significant contracts with Spirit Airlines for
cabin seat overhauls, flight attendant seats and modification/overhaul of their
first class seats. AID also provides crew seat overhauls for ATI, DHL/ASTAR
and Express.Net. In 2004, additional focus will be made by AID on soft goods
campaigns which include cut and sew seat covers, carpet kits and class divider
refurbishment. AID has also provided galley and lavatory component
refurbishment programs to Delta Air Lines in support of Deltas Dallas-Fort
Worth B757 heavy maintenance operation.Engine Repair and Overhaul ServicesTIMCO Engine Center (TEC), located in Oscoda, MI, has complete repair and
overhaul capability for the JT8D and JT8D-200 series engines. On-wing services
have been expanded to include the JT8D and JT8D-200 engines as well as the
CFM-56 engine. The CFM-56 engine services are provided jointly with Snecma
Engine Services. Snecma is a 50% partner of the CFM-56 engine. The CFM-56
on-wing services will expand to TIMCOs airframe locations in the near future.
TEC had significant revenue growth in 2002, much attributed to adding JT8D-200
overhaul capabilities. Spirit Airlines is a major customer of TEC for engine
overhaul and engine on-wing services.Line Maintenance ServicesCommencing in 2003, we began to provide interior line maintenance support for
United Air Lines. We are currently providing these services to United Air
Lines in three cities. We hope in the future to expand the line maintenance
services that we provide for United Air Lines into other cities and to offer
line maintenance services to other airlines. While this is a new business for
us and is only a small part of our revenue at this time, we believe that line
maintenance, which we believe is a $3.2 billion market in North America, offers
substantial growth opportunities for us.Customer baseOur customer base consists of airlines, air cargo carriers, leasing companies,
and government and military units. Our top ten customers accounted for 75.9%
and 81.6% of our 2003 and 2002 income, respectively, and our largest customer,
United Air Lines, which is currently in a Chapter 11 proceeding, accounted for
26.0% and 23.9% of our 2003 and 2002 revenues, respectively.Management information systemsWe operate our business using three decentralized, network-based systems. Each
system is fully integrated in regard to the respective business unit. One
system is utilized in the operation of our heavy airframe maintenance and
modification business. The other two systems are used at each of our component
MR&O businesses. We are currently assessing our systems and expect that in
future periods we will need to upgrade one or more of our systems. However, we
do not currently intend to make significant systems-related capital
expenditures during 2004. 5




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CompetitionThe airline industry and the markets for our products and services are
extremely competitive, and we face competition from a number of sources. Our
competitors include airline and aircraft service companies and other companies
providing maintenance, repair and overhaul services. Some of our competitors
have substantially greater financial and other resources than us. We cannot
assure you that competitive pressures will not materially adversely affect our
business, financial condition or results of operations. In the airframe heavy
maintenance, which currently constitutes approximately 85% of our business, our
major competitors are B.F. Goodrich and ST Mobile Aerospace Engineering, Inc.Government regulationThe aviation industry is highly regulated by the FAA in the United States and
by similar agencies in other countries. We must be certified by the FAA, and in
some cases authorized by the original equipment manufacturers, in order to
repair aircraft components and to perform maintenance and repair services on
aircraft.The FAA regulates the manufacture, repair and operation of all aircraft and
aircraft equipment operated in the United States. FAA regulations are designed
to ensure that all aircraft and aircraft equipment are continuously maintained
in proper condition to ensure safe operation of the aircraft. Similar rules
apply in other countries. All aircraft must be maintained under a continuous
condition monitoring program and must periodically undergo thorough inspection
and maintenance. The inspection, maintenance and repair procedures for the
various types of aircraft and aircraft equipment are prescribed by regulatory
authorities and can be performed only by certified repair facilities utilizing
certified technicians. Certification and conformance is required prior to
installation of a part on an aircraft. We closely monitor the FAA and industry
trade groups in an attempt to understand how possible future regulations might
impact us.We cannot assure you that new and more stringent government regulations will
not be adopted in the future or that any such new regulations, if enacted, will
not materially adversely affect our business, financial condition or results of
operations.Further, our operations are also subject to a variety of worker and community
safety laws. In the United States, the Occupational Safety and Health Act
mandates general requirements for safe workplaces for all employees. Specific
safety standards have been promulgated for workplaces engaged in the treatment,
disposal or storage of hazardous waste. We believe that our operations are in
material compliance with health and safety requirements under the Occupational
Safety and Health Act.Product liabilityOur business exposes us to possible claims for personal injury or death which
may result from the failure of an aircraft or an aircraft part repaired or
maintained by us or from our negligence in the repair or maintenance of an
aircraft or an aircraft part. While we maintain what we believe to be adequate
liability insurance to protect us from claims of this type, based on our review
of the insurance coverages maintained by similar companies in our industry, we
cannot assure you that claims will not arise in the future or that our
insurance coverage will be adequate. Additionally, there can be no assurance
that insurance coverages can be maintained in the future at an acceptable cost.
Any liability of this type, not covered by insurance, could materially
adversely affect our business, financial condition or results of operations.EmployeesAs of December 31, 2003, we employed approximately 3,400 persons. None of our
employees are covered by collective bargaining agreements. We believe that our
relations with our employees are good. 6




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Risk Factors Relating to Our BusinessIn addition to the other information contained in or incorporated by reference
into this Form 10-K, you should carefully consider the following risk factors,
as well as the other information contained in this report:We incurred losses in 2003 and our liquidity remains tight.For the year ended December 31, 2003, we incurred losses from continuing
operations of $3,967. We also had a net stockholders deficit as of December
31, 2003, and continued to require additional cash flow above amounts currently
being provided from operations to meet our working capital requirements.
Additionally, as a result of operating activities, we were not in compliance at
certain times during 2001, 2002, and during the quarter ended March 31,
2003 with debt covenant requirements under our revolving credit and term loan
facilities and our tax retention operating lease (TROL) financing arrangement.
We, however, have obtained a waiver of non-compliance with all financial
covenants and have thereby cured these covenant violations.Our ability to service our debt and note obligations as they come due,
including maintaining compliance with the covenants and provisions under our
debt instruments, is and will continue to be dependent upon our future
financial and operating performance. This performance, in turn, is subject to
various factors, including certain factors beyond our control, such as changes
in conditions affecting the airline industry and changes in the overall
economy. Additionally, our customer base has been adversely impacted in the
past by various factors, such as the state of the general economy, fluctuations
in the price of jet fuel, a significant decline, from calendar year 2000, in
passenger airline travel, the currently on-going war on terrorism, the war in
Iraq, the outbreak of the SARS virus in Asia and a competitive price reduction
in airfare prices. These and other factors may adversely affect our customers
in the future.Cash flow from operations service payments of our debt and note obligations,
thereby reducing funds available for other purposes. Even if we are able to
meet our debt service and other obligations when due, we may not be able to
comply with the covenants and other provisions under our debt and note
obligations. A failure to comply, unless waived by the lenders and noteholders,
would be an event of default and would permit our lenders and noteholders to
accelerate the maturity of these debt and note obligations. It would also
permit them to terminate their commitments to extend credit under the financing
agreements. If we were unable to repay the debt to the lenders or obligations
to the noteholders, or otherwise obtain a waiver, the lenders and holders could
proceed against the collateral securing the financing obligations and notes,
and exercise all other rights available to them. While we expect to be in a
position to continue to meet our obligations in future periods, there can be no
assurance we will be able to do so.Risks associated with the aviation services industry.The condition of the airline industry has a substantial effect on our business,
since our customers consist of airlines, maintenance and repair facilities that
service airlines, as well as original equipment manufacturers. Generally, when
economic factors adversely affect the airline industry, they tend to reduce the
overall demand for maintenance and repair services, causing downward pressure
on pricing and increasing the credit risks associated with doing business with
airlines. Additionally, the price of jet fuel affects the maintenance and
repair markets, since older aircraft, which consume more fuel and which
currently account for a significant portion of our maintenance and repair
services business, become less viable as the price of fuel increases.As discussed above, the September 11, 2001 terrorist attacks against the United
States of America and the resulting increase in airline insurance costs,
additional government mandated passenger taxes and fees, and increased airport
security costs, have had a severe impact on the aviation industry. These
factors, in conjunction with an overall slowdown in the U.S. economy, a
reduction in passenger levels from fiscal 2001 through fiscal 2003, and the
overall instability in the Middle East (including the currently on-going war on
terrorism and the war in Iraq) have resulted in operating losses for U.S.
airline carriers in excess of $10.3 billion for 2001, $8.6 billion for 2002,
and an estimated $2.5 billion for 2003. In addition to these adverse factors,
fiscal 2003 has been further impacted by the outbreak of the SARS virus in
Asia. As a result of these factors, many commercial passenger airlines and
air cargo carriers reported significant reductions in their capacity and have
taken out of service upwards of 20% of their aircraft. This reduction in
capacity has lessened the aircraft maintenance required by such airlines (and
thereby the amount of maintenance being outsourced to companies like TIMCO).
The impact of these factors has resulted with the filing for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Court by several
carriers. The most notable for us has been the filing for protection from
creditors under Chapter 11 by United Air Lines on December 9, 2002 (United was
our largest customer during the last three fiscal years). As of the date of
this report, United Air Lines has not emerged from protection under the
Bankruptcy Court. In addition to United Air Lines, other carriers have
publicly discussed the potential of seeking protection from creditors through a
voluntary bankruptcy filing. As related to us, current exposures to carriers
that are at risk of filing for protection are being continuously evaluated and
monitored, though we have in the past, and may in the future, experience losses
relating to these credit exposures. Additionally, the Company is positioning itself for potential favorable implications of these Chapter 11
filings and resurgence of the airlines as it is anticipated that additional
maintenance outsourcing opportunities could result as these airlines look for
cost reduction alternatives. 7




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We believe that all of the above factors could continue to have a negative
impact on our business in the foreseeable future. In response, we have taken
steps to reduce our costs. These terrorist attacks and related aftermath events
and the overall slowdown in the U.S. economy have also impacted our
competition, with several of our competitors exiting the MR&O business.The loss or a significant downturn in the operations of one or two of our major
customers could materially affect our business.Our ten largest customers accounted for approximately 76% and 82% of our total
revenues for 2003 and 2002, respectively. Of these ten customers, two
represented approximately 26% and 17% of our total revenues, respectively, for
the year ended December 31, 2003. The largest of these customers, United Air
Lines, is currently in reorganization under Chapter 11 of the United States
Bankruptcy Code. No other customer represented more than 10% of our
consolidated revenues for 2003. While the relative significance of customers
varies from period to period, the loss of, or significant curtailments in
purchases of our services by, one or more of our significant customers at any
time has in the past and may in the future adversely affect our revenue and
cash flow.We have incurred losses in the past and we may incur losses in the future.
If we incur losses in the future, our ability to obtain sufficient working
capital for our operations and our ability to service our indebtedness may be
impaired.We incurred losses from continuing operations of $3,967, $24,426 (excluding the
gain from our debt extinguishment), and $131,849, respectively, during the
2003, 2002, and 2001 fiscal years. If we incur losses in the future, we will
likely limit our ability to obtain sufficient working capital for our
operations and our ability to execute our business strategy. In addition, our
ability to service our indebtedness may be harmed because we may not generate
sufficient cash flow from operations to pay principal or interest when due.A large portion of our operating expenses are relatively fixed and
cancellations, reductions or delays in orders by a customer or group of
customers has in the past and could in the future have a material adverse
effect on our business, financial condition or results of operations.We are highly leveraged.We are highly leveraged. This could have important consequences to us,
including:  
    
    our vulnerability to adverse general economic and industry
conditions;
    
    our ability to obtain additional financing for future working
capital expenditures, general corporate or other purposes, particularly
where our current lenders have a lien on all of our assets; and
    
    the requirement that we obtain the consent from our lenders if we
wish to borrow additional amounts. We depend on financing transactions. We are primarily dependent on cash flow from operations and borrowings to meet
our working capital requirements.  
    
    During 2001, we relied primarily on proceeds from sales of our
various business operations and on borrowings under our senior
revolving credit facility to reduce our senior term debt and to fund
our working capital requirements.
    
    During 2002, we relied on proceeds from sales of business
operations, borrowings under our senior revolving credit facility, our
note exchange and rights offering, and our income tax refund to reduce
our senior debt and to fund our working capital requirements.
    
    During 2003, we continued to rely on borrowings under our senior
revolving credit facility and proceeds from our related party term loan
to fund our working capital requirements. We continue to require cash flows above amounts currently being provided from
operations to meet the working capital requirements of our operations. We
cannot assure you that additional financing will be available to us in the
future, if required, for these purposes. 8




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##### 



Our lenders impose significant restrictions on us. Our senior credit facilities and the indenture relating to our 8% senior
subordinated convertible paid-in-kind (PIK) interest notes due 2006 impose
significant operating and financial restrictions on us. These restrictions may
significantly limit our ability to incur additional indebtedness, pay
dividends, repay indebtedness prior to its stated maturity, sell assets or
engage in mergers or acquisitions. In addition, our failure to comply with
these restrictions could result in an event of default which, if not cured or
waived, could materially adversely affect our business, financial condition or
results of operations. Our business is subject to heavy government regulation. The aviation industry is highly regulated by the Federal Aviation
Administration in the United States and by similar agencies in other countries.
We must be certified by the FAA in order to repair aircraft and aircraft
components. We cannot assure you that new and more stringent government regulations will
not be adopted in the future or that any such new regulations, if enacted,
would not materially adversely affect our business, financial condition or
results of operations. Our business is highly competitive. The airline industry and the markets for our products and services are
extremely competitive, and we face competition from a number of sources. Our
competitors include aircraft manufacturers, aircraft part manufacturers,
airline and aircraft service companies and other companies providing
maintenance, repair and overhaul services. Certain of our competitors are
currently experiencing financial difficulties similar to or worse than our own
and several of our competitors have ceased operations or substantially
curtailed their operations during the last few years. Many of these competitors
have responded to their financial difficulties by reducing prices on their
services to increase or retain market share. Any material deterioration in our
financial condition is likely to affect our ability to compete with
price-cutting by our competitors. Some of our competitors have substantially
greater financial and other resources than we do. We cannot assure you that
competitive pressures will not materially adversely affect our business,
financial condition or results of operations. Our business is susceptible to liability claims. Our business exposes us to possible claims for personal injury or death which
may result if we were negligent in repairing an airplane. We cannot assure you
that claims will not arise in the future or that our insurance coverage will be
adequate to protect us in all circumstances. Additionally, we cannot assure you
that we will be able to maintain adequate insurance coverages in the future at
an acceptable cost. Any liability claim not covered by adequate insurance could
materially adversely affect our business, financial condition or results of
operations. We depend on our executive officers and our employees. Our continued success depends significantly upon the services of our executive
officers and upon our ability to attract and retain qualified personnel in all
of our operations. While we have employment agreements with most of our
executive officers and certain of our key employees, most of our employees are
employed on an at-will basis. The loss of one or more of our executive officers
and of a significant number of our other employees without capable replacements
could materially adversely affect our business, financial condition or results
of operations. Our airframe heavy maintenance business (which constitutes more than 85% of our
current business) requires qualified mechanics and other personnel to provide
services requested by our customers, and our ability to meet customer
requirements depends on our ability to attract and retain the mechanics and
other qualified personnel necessary to provide services at the physical
locations of our operations. In that regard, we utilize outside contractors to
provide personnel when we cannot otherwise hire required personnel. While we
have been able to obtain sufficient mechanics and other required personnel to
date, there can be no assurance we will be able to obtain all personnel
required in the future. This may constrain our ability to grow our operations
from their current levels. Control is vested in our principal stockholder. Lacy Harber, our principal stockholder, owns approximately 59% (as of December
31, 2003) of our outstanding common stock. Mr. Harber is able to control the
vote on all matters submitted to the vote of our stockholders and therefore,
able to direct our management and policies, including, but not limited to, the
election of our entire board of directors. 9




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In addition, under such circumstances, we will not, without Mr. Harbers
approval, be able to consummate transactions involving an actual or potential
change in our control, including transactions in which the holders of our
common stock might otherwise receive a premium for their shares over then
current market prices. Our existing stockholders will experience substantial dilution upon the
redemption or maturity of the New Notes or Junior Notes and upon the exercise
of the Harber Warrant. We are obligated to issue additional shares of our common stock if we redeem
our New Notes or Junior Notes. Additionally, if the New Notes or Junior Notes
have not been redeemed prior to maturity, they will automatically convert into
270,276 and 9,320 shares, respectively, of our common stock. Further, we are
obligated to issue 30% of our outstanding common stock, on a fully-diluted
basis (13,560 shares if the warrant were to be exercised today and 139,979
shares if the warrant were to be exercised after the New Notes and the Junior
Notes mature), for nominal consideration upon the exercise of the warrant
issued in May 2003 to our principal stockholder (the Harber Warrant).
Holders of our common stock, as a result of the conversion of the New Notes and
the Junior Notes, and/or the exercise of the Harber Warrant, will face
immediate and substantial dilution in their percentage ownership of the total
outstanding shares of our common stock and a reduction in their voting power.
Conversion of these factors would likely have a material adverse effect on the
prevailing market price of our common stock. Finally, under our 2003 Stock
Incentive Plan, we may grant restricted stock or stock options or warrants to purchase up to 5,800 shares
of our common stock to our officers, directors and employees. See Notes 5, 6,
11 and 15 of Notes to Consolidated Financial Statements for particulars
regarding these matters. If our common stock is deemed a penny stock, its liquidity will be
adversely affected. The price of our common stock fell below $1.00 per share in September 2001. If
the market price for our common stock remains below $1.00 per share
(as it has since the fourth quarter of 2002), our common stock will be deemed to
be a penny stock. So long as our common stock is considered a penny stock, it
will be subject to rules that impose additional sales practices on
broker-dealers who sell our securities. For example, broker-dealers must make a
special suitability determination for the purchaser and have received the
purchasers written consent to the transaction prior to sale. Also, a
disclosure schedule must be prepared before any transaction involving a penny
stock, and disclosure is required about sales commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Monthly statements are also required to be sent disclosing recent
price information for the penny stock held in the account and information on
the limited market in penny stocks. Because of these additional obligations,
some brokers may not effect transactions in penny stocks. This could have an
adverse effect on the liquidity of our common stock. Our common stock is thinly traded. Our stock price may fluctuate more than the
stock market as a whole. As a result of the thin trading market for our stock, its market price may
fluctuate significantly more than the stock market as a whole or the stock
prices of similar companies. Of the 31,641 shares of our common stock currently
outstanding, approximately 59% are currently owned by Lacy Harber, our
principal stockholder. Without a larger float, our common stock will be less
liquid than the stock of companies with broader public ownership, and, as a
result, the trading prices for our common stock may be more volatile. Among
other things, trading of a relatively small volume of our common stock may have
a greater impact on the trading price for our stock than would be the case if
our public float were larger. In addition, sales of a substantial amount of
common stock in the public market, or the perception that these sales may
occur, could adversely affect the market price of our common stock. Possible or
actual sale of any of these shares, particularly by Mr. Harber, may decrease
the market price of our common stock. The market price of our common stock could be depressed by future sales. Future sales of our common stock, or the perception that these sales could
occur, could adversely affect the market price of our common stock. We cannot
assure you as to when, and how many of, the shares of our common stock will be
sold and the effect these sales may have on the market price of our common
stock. In addition, we may issue additional shares of common stock in
connection with possible future acquisitions or other transactions. Although
these securities may be subject to regulatory or contractual resale
restrictions, as these restrictions lapse or if these shares are registered for
sale to the public, they may be sold to the public. In the event we issue a
substantial number of shares of our common stock, which subsequently become
available for unrestricted resale, there could be a material adverse effect on
the prevailing market price of our common stock. 10




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##### 



Adjustments to common stock purchase warrant exercise prices and exercise
dates. We may, in our sole discretion, and in accordance with the terms of the warrant
agreements with the warrant agents, reduce the exercise price of the common
stock purchase warrants issued in the restructuring and the class action
settlement and/or extend the time within which the warrants may be exercised,
depending on such things as the current market conditions, the price of the
common stock and the need for additional capital. Further, in the event that we
issue certain securities or make certain distributions to the holders of our
common stock, the exercise price of the warrants may be reduced. Any such price
reductions (assuming exercise of the warrants) will provide less money for us,
higher incremental expense and possibly adversely affect the market price of
our securities. Impact of warrant exercise on market. In the event of the exercise of a substantial number of warrants within a
reasonably short period of time after the right to exercise commences, the
resulting increase in the amount of our common stock in the trading market
could substantially affect the market price of our common stock. We are subject to significant anti-takeover provisions. Our certificate of incorporation and bylaws contain provisions that may have
the effect of discouraging transactions involving an actual or threatened
change of control. In addition, our board of directors has the authority to
issue up to 1,000 shares of preferred stock in one or more series and to fix
the preferences, rights and limitations of any of these series without
stockholder approval. Our ability to issue preferred stock could discourage
unsolicited acquisition proposals, or make it difficult for a third party to
gain control of us, which could adversely affect the market price of our common
stock. 11




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ITEM 2. PROPERTIES. Our executive offices are located in Greensboro, North Carolina at the
headquarters of our TIMCO airframe maintenance operations. Our ownership
interests and leasehold interests in all of our facilities are pledged to our
senior lenders as collateral for amounts borrowed. See Notes 5 and 15 to our
Consolidated Financial Statements. The following table identifies, as of
December 31, 2003, our principal properties: SQUARE
    
    OWNED ORFACILITY DESCRIPTION
    
    LOCATION
    
    FOOTAGE
    
    LEASEDOffice and Aircraft Maintenance
    
    Greensboro, NC
    
    
    765,000
    
    
    Leased(1)Office and Aircraft Maintenance
    
    Lake City, FL
    
    
    650,000
    
    
    LeasedOffice and Engine Maintenance
    
    Oscoda, MI
    
    
    396,000
    
    
    LeasedOffice and Aircraft Maintenance
    
    Phoenix, AZ
    
    
    370,000
    
    
    Leased(2)Office and Aircraft Maintenance
    
    Winston-Salem, NC
    
    
    115,000
    
    
    Leased(3)Office and Aircraft Maintenance
    
    Macon, GA
    
    
    140,000
    
    
    LeasedOffice and Maintenance
    
    Pacoima, CA
    
    
    70,000
    
    
    LeasedOffice and Warehouse
    
    Miramar, FL
    
    
    545,000
    
    
    Leased(4)Office and Maintenance
    
    Opa Locka, FL
    
    
    55,000
    
    
    Leased(5)Office and Maintenance
    
    Dallas, TX
    
    
    80,000
    
    
    Leased(6)
   (1)
    
    Our corporate headquarters is located at this facility.(2)
    
    This facility is subleased to us until April 2006 by our principal stockholder.(3)
    
    This facility has been closed until we develop
customers for this facility, but has been partially subleased to an unaffiliated third party.(4)
    
    This facility was previously subleased to
Kellstrom Aerospace, LLC. We have recently sold this facility. See Note 15 of Notes to Consolidated Financial Statements for particulars.(5)
    
    This facility is leased from a former director
and executive officer and subleased to an unaffiliated third party.(6)

    
    This facility is subleased to us until October 2012 by our principal stockholder. 12




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ITEM 3. LEGAL PROCEEDINGS. Lawsuits and investigations In 2002, we settled, without admitting liability or wrongdoing, a securities
class action lawsuit arising from allegations regarding our reported financial
results during periods prior to 2000. Additionally, the U.S. Securities and
Exchange Commission initiated an inquiry, in the first quarter of 2000, into
our accounting for certain transactions occurring prior to 2000. We are
cooperating with the SEC in its inquiry. In 2002, we also settled a lawsuit
relating to the closing of our Oscoda, Michigan airframe heavy maintenance
facility. See Note 7 of Notes to Consolidated Financial Statements for the
particulars of these settlements. We are also involved in various other lawsuits and other contingencies arising
out of operations in the normal course of business. In the opinion of
management, the ultimate resolution of these claims and lawsuits will not have
a material adverse effect upon our business, financial position or results of
operations. Environmental Issues We are taking remedial action pursuant to Environmental Protection Agency and
Florida Department of Environmental Protection (FDEP) regulations at
TIMCO-Lake City. Ongoing testing is being performed and new information is
being gathered to continually assess the impact upon us and the magnitude of
required remediation efforts. Based upon the most recent cost estimates
provided by environmental consultants, we believe that the total remaining
testing, remediation and compliance costs for this facility will be
approximately $810. During fiscal 2003, we secured an insurance policy that,
in the future, will partially mitigate our environmental exposures for this
facility and that will also provide the financial assurance required by the
FDEP. Testing and evaluation for all known sites on TIMCO-Lake Citys property is
substantially complete and we have commenced a remediation program. We are
currently monitoring the remediation, which will extend into the future. Based
on current testing, technology, environmental law and clean-up experience to
date, we believe that we have established an accrual for the estimated costs
associated with our current remediation strategies. Additionally, there are other areas adjacent to TIMCO-Lake Citys facility that
could also require remediation. We do not believe that we are responsible for
these areas; however, it may be asserted that TIMCO and other parties are
jointly and severally liable and are responsible for the remediation of these
properties. Accrued expenses in the accompanying December 31, 2003 and 2002 consolidated
balance sheets include $810 and $1,474, respectively, relating to obligations
to remediate the environmental matters described above. Future information and
developments will require us to continually reassess the expected impact of the
environmental matters discussed above. Actual costs to be incurred in future
periods may vary from the estimates, given the inherent uncertainties in
evaluating environmental exposures. These uncertainties include the extent of
required remediation based on future testing and evaluation and the varying
costs and effectiveness of remediation methods. In the opinion of management,
the ultimate resolution of these environmental exposures will not have a
material adverse effect upon the financial condition or result of operations of
the Company. 13




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##### 



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On January 13, 2004, we held our 2003 Annual Stockholders meeting. Stockholders
representing 28,994 shares of our outstanding common stock were present in
person or by proxy at the meeting, constituting 91.6% of our outstanding common
stock. At the meeting, all of our directors were reelected, our 2003 Stock
Incentive Plan was approved, and the decision of our audit committee to retain
KPMG LLP to audit our 2003 financial statements was ratified. The votes taken
at the meeting were as follows: The vote with respect to our directors was as follows: For
    
    WithheldRoy T. Rimmer, Jr.
    
    
    28,897
    
    
    
    97Jack J. Hersch
    
    
    28,946
    
    
    
    48Philip B. Schwartz
    
    
    28,893
    
    
    
    100Steven J. Gerard
    
    
    28,947
    
    
    
    46Stephen E. Gorman
    
    
    28,947
    
    
    
    46
 The vote for and against the approval of the Companys 2003 Stock Incentive
Plan was as follows: For
    
    Against
    
    Abstain21,656
    
    
    204
    
    
    
    33
 The vote to ratify the appointment of our independent auditors for the 2003
fiscal year was as follows: For
    
    Against
    
    Abstain28,969
    
    
    11
    
    
    
    13
 14




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##### 



PART II ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Trading Market for our Common Stock The following information relates to the trading of our common stock, par value
$.001 per share. At December 31, 2003, we believe that there were approximately
4,300 beneficial holders of our common stock. The high and low last sales
prices of our common stock (adjusted for the one-share-for-ten-shares reverse
split which occurred on February 28, 2002) for each quarter during our two most
recent fiscal years as well as for the first and second quarters to date of
2004, as reported by the OTC Bulletin Board are set forth below: HIGH
    
    LOW2002First Quarter
    
    $
    2.30
    
    
    $
    0.83Second Quarter
    
    $
    2.15
    
    
    $
    1.05Third Quarter
    
    $
    1.45
    
    
    $
    0.75Fourth Quarter
    
    $
    0.80
    
    
    $
    0.282003First Quarter
    
    $
    0.93
    
    
    $
    0.30Second Quarter
    
    $
    0.48
    
    
    $
    0.19Third Quarter
    
    $
    0.51
    
    
    $
    0.31Fourth Quarter
    
    $
    0.82
    
    
    $
    0.332004First Quarter
    
    $
    0.87
    
    
    $
    0.60Second
Quarter (through April 12, 2004)
    
    $
    0.80
    
    
    $
    0.70
 No Cash Dividends We have never declared any cash dividends on our common stock, and we do not
expect to pay cash dividends in the future. Future profits, if any, will be
retained by us for use in the operation of our business. There are also
restrictions in our credit agreements limiting our ability to pay cash
dividends. See Note 5 of Notes to Consolidated Financial Statements and Item 7.
Managements discussion and analysis of financial condition and results of
operations  liquidity and capital resources. 15




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ITEM 6. SELECTED FINANCIAL DATA The following table represents our selected consolidated financial information.
The selected financial data set forth below should be read in conjunction with
the Consolidated Financial Statements and notes thereto and Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations which contains a description of the factors that materially affect
the comparability, from period to period, of the information presented herein.
Operating results from continuing operations reflect the results of operations
from our MR&O and leasing operations, including the pre-acquisition operations
for all periods presented of Whitehall Corporation (acquired in July 1998),
Caribe Aviation (acquired in March 1998 and sold in May 2001), and Aerocell
Structures (acquired in September 1997 and sold in July 2002). Discontinued
operations includes the results of operations of our redistribution operations,
new parts distribution operation and our manufacturing operations, all of which
were sold in 2000. Year Ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(In thousands, except per share data)STATEMENT OF OPERATIONS DATA:Operating revenues
    
    $
    371,753
    
    
    $
    338,077
    
    
    $
    264,140
    
    
    $
    181,973
    
    
    $
    242,514Cost of sales
    
    
    307,944
    
    
    
    353,331
    
    
    
    259,647
    
    
    
    179,705
    
    
    
    226,331Gross profit (loss)
    
    
    63,809
    
    
    
    (15,254
    )
    
    
    4,493
    
    
    
    2,268
    
    
    
    16,183Operating expenses
    
    
    41,774
    
    
    
    74,580
    
    
    
    64,305
    
    
    
    16,107
    
    
    
    15,217Income (loss) from operations
    
    
    22,035
    
    
    
    (89,834
    )
    
    
    (59,812
    )
    
    
    (13,839
    )
    
    
    966Interest expense and other
    
    
    16,033
    
    
    
    21,229
    
    
    
    71,416
    
    
    
    (12,892
    )
    
    
    5,919Income (loss) before income taxes and
discontinued operations
    
    
    6,002
    
    
    
    (111,063
    )
    
    
    (131,228
    )
    
    
    (947
    )
    
    
    (4,953
    )Income tax expense (benefit)
    
    
    3,004
    
    
    
    4,810
    
    
    
    621
    
    
    
    (3,800
    )
    
    
    (986
    )Income (loss) from continuing operations
before discontinued operations
    
    
    2,998
    
    
    
    (115,873
    )
    
    
    (131,849
    )
    
    
    2,853
    
    
    
    (3,967
    )Discontinued operations:Operations, net of income taxes
    
    
    (24,721
    )
    
    
    (23,432
    )
    
    
    
    
    
    
    4,169
    
    
    
    3,706Loss on disposal, net of income tax
    
    
    
    
    
    
    (72,325
    )
    
    
    (9,386
    )
    
    
    
    
    
    
    Net (loss) income
    
    $
    (21,723
    )
    
    $
    (211,630
    )
    
    $
    (141,235
    )
    
    $
    7,022
    
    
    $
    (261
    )Basic Earnings (Loss) Per Share:Income (loss) from continuing operations
    
    $
    2.16
    
    
    $
    (77.17
    )
    
    $
    (87.81
    )
    
    $
    0.11
    
    
    $
    (0.13
    )(Loss) income from discontinued operations
    
    
    (17.78
    )
    
    
    (63.77
    )
    
    
    (6.25
    )
    
    
    0.16
    
    
    
    0.12Net (loss) income
    
    $
    (15.62
    )
    
    $
    (140.94
    )
    
    $
    (94.06
    )
    
    $
    0.27
    
    
    $
    (0.01
    )Diluted Earnings (Loss) Per Share:Income (loss) from continuing operations
    
    $
    2.12
    
    
    $
    (77.17
    )
    
    $
    (87.81
    )
    
    $
    0.01
    
    
    $
    (0.13
    )(Loss) income from discontinued operations
    
    
    (17.74
    )
    
    
    (63.77
    )
    
    
    (6.25
    )
    
    
    0.02
    
    
    
    0.12Net (loss) income
    
    $
    (15.62
    )
    
    $
    (140.94
    )
    
    $
    (94.06
    )
    
    $
    0.03
    
    
    $
    (0.01
    )
 16




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##### 



As of December, 311999
    
    2000
    
    2001
    
    2002
    
    2003(In thousands)BALANCE SHEET DATA:Accounts receivable
    
    $
    91,926
    
    
    $
    67,558
    
    
    $
    26,936
    
    
    $
    17,762
    
    
    $
    36,950Inventories
    
    
    90,145
    
    
    
    53,115
    
    
    
    41,544
    
    
    
    21,631
    
    
    
    25,724Working (deficiency) capital
    
    
    (72,846
    )
    
    
    24,673
    
    
    
    (62,747
    )
    
    
    (10,177
    )
    
    
    1,060Total assets
    
    
    710,875
    
    
    
    300,611
    
    
    
    179,285
    
    
    
    131,026
    
    
    
    152,891Total debt and capitalized lease
obligations
    
    
    442,964
    
    
    
    220,861
    
    
    
    227,851
    
    
    
    175,474
    
    
    
    194,263Stockholders equity (deficit)
    
    
    218,522
    
    
    
    6,892
    
    
    
    (131,367
    )
    
    
    (96,762
    )
    
    
    (95,765
    )
 17




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##### 



ITEM 7.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Overview We are among the worlds largest providers of fully integrated aviation
maintenance, repair and overhaul (MR&O) services for major commercial airlines,
regional air carriers, aircraft leasing companies, government and military
units and air cargo carriers. We currently operate four MR&O businesses:
TIMCO, which, with its four active locations, is one of the largest independent
providers of heavy aircraft maintenance services in the world; Aircraft
Interior Design and Brice Manufacturing, which specialize in the refurbishment
of aircraft interior components and the manufacture and sale of aftermarket
parts and new aircraft seats; TIMCO Engineered Systems, which provides
engineering services to both our MR&O operations and our customers; and TIMCO
Engine Center, which refurbishes JT8D engines and performs on-wing repairs for
both JT8D and CFM-56 series engine. On
April 8, 2004, we completed the refinancing of all of our
outstanding senior credit facilities: 
    
    We obtained a new a $35,000 senior secured revolving line of credit
and a $6,400 senior secured term loan from a group of financial
institutions led by CIT Group; and
    
    We obtained an $8,000 senior secured term loan from Hilco Capital,
LP. The
proceeds of these new facilities were primarily used to repay amounts outstanding
under our previous revolving credit and term loan facilities. Additional
borrowings available under the revolving credit portion of these new
facilities
will be used for working capital. As of April 8, 2004, we had availability
under our new revolving credit facility of $10,371. See Notes 5 and 15
of Notes to Consolidated Financial Statements and Liquidity and Capital
Resources-Senior Credit Facilities below for information regarding the new
credit facilities and the credit facilities that they replaced. Additionally, we have refinanced all of the previously outstanding debt due to
our principal stockholder with a new $14,412 term loan. See Notes 5 and 15 of
Notes to Consolidated Financial Statements and Liquidity and Capital
Resources-Related Party Term Loan for information regarding this loan. Finally, we have recently sold our office and warehouse facility located in
Miramar, Florida for a gross purchase price of $26,000. We used a portion of
the proceeds from the sale to repay the $23,824 outstanding principal balance
of our TROL financing arrangement and we used the balance of the proceeds,
net of transaction expenses, to repay amounts outstanding under our
previous term loan facility. See Notes 5 and 15 of Notes
to Consolidated Financial Statements for a complete description of the TROL
financing arrangements. With the completion of these transactions, we have completed a full
restructuring of our credit facilities that establishes a more conventional
senior credit financial structure and eliminates much of the legacy financing
issues that have plagued our business during the last few years. We believe
that these new credit facilities provide us with sufficient working capital to
operate our business in its current configuration, including internal growth.
However, we anticipate that in the future we will need to obtain additional
capital if we decide to make acquisitions or to meet other capital intensive requirements. No
agreements have been reached at this date with respect to any acquisitions.
There can be no assurance that funds will be available when and if they are
required. For the year ended December 31, 2003, we incurred losses from continuing
operations of $3,967. We also had a net stockholders deficit as of December
31, 2003, and continued to require additional cash flow above amounts currently
being provided from operations to meet our working capital requirements.
Additionally, as a result of operating activities, we were not in compliance at
certain times during 2001, 2002, and during the quarter ended March 31,
2003 with debt covenant requirements under our previous revolving credit and
term loan facilities and our TROL financing arrangement. We, however, obtained
a waiver of non-compliance with all financial covenants and thereby cured these
covenant violations. Our ability to service our debt and note obligations, as they come due,
including maintaining compliance with the covenants and provisions under the
our debt instruments, is and will be dependent upon our future financial and
operating performance. This performance, in turn, is subject to various
factors, including certain factors beyond our control, such as changes in
conditions affecting the airline industry and changes in the overall economy.
Additionally, our customer base has been adversely impacted in the
past by various factors, such as the state of the 18




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##### 



general economy, fluctuations in the
price of jet fuel, a significant decline, from calendar year 2000, in passenger
airline travel, the currently on-going war on terrorism, the war in Iraq, the
outbreak of the SARS virus in Asia, and a competitive price reduction in
airfare prices. These and other factors may adversely affect our customers in
the future. Cash flow from operations service payments due on our debt and note
obligations, thereby reducing funds available for other purposes. Even if we
are able to meet our debt service and other obligations when due, we may not be
able to comply with the covenants and other provisions under our debt and note
obligations. A failure to comply, unless waived by the lenders and noteholders,
would be an event of default and would permit the lenders and noteholders to
accelerate the maturity of these debt and note obligations. It would also
permit them to terminate their commitments to extend credit under their
financing agreements. If we were unable to repay the debt to the lenders or
obligations to the noteholders, or otherwise obtain a waiver, the lenders and
holders could proceed against the collateral securing the financing obligations
and notes, and exercise all other rights available to them. While we expect to
be in a position to continue to meet our obligations in future periods, there
can be no assurance we will be able to do so. Results of Operations Operating revenues consist primarily of service revenues and sales of materials
consumed while providing services, net of allowances for any reworks,
discounts, or returns. Cost of sales consists primarily of labor, materials,
overhead, and freight charges. Our operating results have fluctuated in the past and may fluctuate
significantly in the future. Many factors affect our operating results,
including:  
    
    the timing of repair orders and payments from large customers,
    
    the state of the economy generally, the state of the airline
industry generally, and the financial condition of our airline
customers specifically,
    
    competition from other third-party MR&O service providers,
    
    the number of airline customers seeking repair services at any time,
    
    the impact of fixed pricing on gross margins and our ability to accurately project our costs in a dynamic environment,
    
    our ability to fully utilize our hangar space dedicated to maintenance and repair services,
    
    the volume and timing for 727 cargo conversions and the impact
during future periods on airline use of out-of-production aircraft
(such as 727, DC 8, DC 9 and DC 10) and JT8D engines as a result of
increased fuel costs and other factors,
    
    our ability to retain the services of our executive officers
    
    our ability to attract and retain a sufficient number of mechanics
to perform the maintenance, overhaul and repair services requested by
our customers, and
    
    the timeliness of customer aircraft arriving for scheduled
maintenance. Large portions of our operating expenses are relatively fixed. Since we
typically do not obtain long-term commitments from our customers, we must
anticipate the future volume of orders based upon the historic patterns of our
customers and upon discussions with our customers as to their future
requirements. Cancellations, reductions or delays in orders by a customer or
group of customers have in the past and could in the future have a material
adverse effect on our business, financial condition and results of operations. 19




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##### 



Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 The following tables set forth certain information relating to our operations for the periods indicated: Year Ended December 31,2003
    
    2002$
    
    %
    
    $
    
    %(In thousands)Operating revenues:Sales
    
    $
    242,425
    
    
    
    100.0
    %
    
    $
    181,760
    
    
    
    99.9
    %Other
    
    
    89
    
    
    
    0.0
    %
    
    
    213
    
    
    
    0.1
    %Total operating revenues
    
    
    242,514
    
    
    
    100.0
    %
    
    
    181,973
    
    
    
    100.0
    %Cost of sales
    
    
    226,331
    
    
    
    93.3
    %
    
    
    179,705
    
    
    
    98.8
    %Gross profit
    
    
    16,183
    
    
    
    6.7
    %
    
    
    2,268
    
    
    
    1.2
    %Operating expenses
    
    
    15,217
    
    
    
    6.3
    %
    
    
    16,107
    
    
    
    8.9
    %Income (loss) from operations
    
    
    966
    
    
    
    0.4
    %
    
    
    (13,839
    )
    
    
    (7.6
    %)Interest expense
    
    
    9,730
    
    
    
    4.0
    %
    
    
    14,174
    
    
    
    7.8
    %Charge for settlement of class action
litigation
    
    
    
    
    
    
    
    
    
    
    4,410
    
    
    
    2.4
    %Gain resulting from debt extinguishment
    
    
    
    
    
    
    
    
    
    
    (27,279
    )
    
    
    15.0
    %Other income
    
    
    (3,811
    )
    
    
    1.6
    %
    
    
    (4,197
    )
    
    
    2.3
    %Loss before income taxes and discontinued
operations
    
    
    (4,953
    )
    
    
    (2.0
    %)
    
    
    (947
    )
    
    
    (0.5
    %)Income tax benefit
    
    
    (986
    )
    
    
    0.4
    %
    
    
    (3,800
    )
    
    
    (2.1
    %)(Loss) income from continuing operations
before discontinued operations
    
    
    (3,967
    )
    
    
    (1.6
    %)
    
    
    2,853
    
    
    
    1.6
    %Discontinued operations, net of income taxes
    
    
    3,706
    
    
    
    1.5
    %
    
    
    4,169
    
    
    
    2.3
    %Net (loss) income
    
    $
    (261
    )
    
    
    (0.1
    %)
    
    $
    7,022
    
    
    
    3.9
    %
 Operating revenue for the year ended December 31, 2003 increased $60,541 or
33.3% to $242,514, from $181,973 for the same period in 2002. Operating
revenue for the 2002 fiscal year included $3,892 in revenues from the operation
of Aerocell, which was sold in July 2002. Operating revenue for the 2003
fiscal year included $34,543 in combined revenues from the operations
of two facilities (Brice Manufacturing acquired in October 2002 and the
Goodyear, Arizona facility subleased from our principal stockholder in April
2003) that were not in operation during most of the 2002 fiscal year. Without
the revenue from these facilities, comparative 2002 revenues would have been
$176,208 (excluding the revenues for Aerocell and approximately $1,873
of revenues for Brice Manufacturing for the period from October 2002
through December 2002) and comparative 2003 revenues would have been $207,971 (we are
providing this information in order to allow comparison of the revenues derived
from facilities open in both the 2002 and 2003 fiscal years). The increase in revenues for the year ended December 31, 2003 compared to the
revenues for the year ended December 31, 2002 can primarily be attributed to
additional revenues in our aircraft heavy maintenance operations (described
below), in our engine center operation due to a strategic relationship that was
entered into during the second quarter of 2003 with one of our vendors (see
Note 7 of Notes to Consolidated Financial Statements), in our Goodyear, Arizona
facility (which serviced its first aircraft in May 2003), and in our Brice
operation, which was acquired in October 2002, somewhat offset by the loss of
sales volume from our Aerocell operation, which was sold in July 2002. Revenues for the 2003 fiscal year were favorably impacted by a significant
influx of airframe heavy maintenance work to our MR&O operations. Adverse
market conditions, which resulted in severe financial problems for several of
our customers (including our largest customer for fiscal years 2003, 2002, and
2001), resulted in delays of maintenance service work by several of our
significant customers and adversely impacted our results of operations,
particularly for the second half of 2002 and for the first six months of 2003.
Many of these delayed maintenance programs, however, were inducted for service
during the third quarter of 2003. The impact on revenues for the second half
of 2003 was an increase in revenues for our MR&O facilities, including
Goodyear, over the prior year final six month period of 2002 of approximately
$50,025. This increase within our MR&O facilities, coupled with the increased
revenues for our engine center operation, resulted in a $56,190 improvement in
revenues in the second half of 2003 over the prior year final six month period
of 2002. 20




---



##### 



While significantly improved over revenues for the year ended December 31,
2002, our revenues for the year ended December 31, 2003 continued to be
unfavorably impacted by numerous general economic conditions, several of which
continue to impact us in 2004. These include a reduction in market
opportunities due to unfavorable financial conditions, which have caused many
of our customers to delay maintenance or park older aircraft maintained by us
due to fluctuations in fuel prices and reduced passenger levels. Our revenue
also continued to be adversely impacted during 2003 by increased price
competition and downward pricing pressures from airline customers. These
factors forced us during fiscal 2002 and 2003 to reduce pricing and take fixed
priced work at lower rates, which adversely impacted revenues and gross
margins. Additionally, instability in the Middle East, the currently on-going
war on terrorism, the war in Iraq, and the outbreak of the SARS virus in Asia,
have unfavorably impacted airline passenger levels during fiscal 2003, which
has equated to further delays of maintenance service by some of our customers.
Finally, future changes in customer maintenance schedules, similar to those
described above, have impacted us in the past and are likely to impact us in
the future. Gross profit increased to $16,183 for the year ended December 31, 2003 compared
with a gross profit of $2,268 for the year ended December 31, 2002. The
improvement of the gross margin results for the year ended December 31, 2003
compared to the year ended December 31, 2002 was spurred by the receipt of
long-term repetitive customer maintenance programs (referred to in the industry
as nose-to-tail lines, where greater efficiencies are generally achieved),
particularly during the later half of 2003. The first six months of 2002 were
also favorably impacted by a higher proportion of nose-to-tail lines. However,
during the last half of 2002 and the first six months of 2003, because we did
not have significant nose-to-tail lines during these periods, we were forced to
take a higher proportion of single-visit customers (which results in a
deterioration of gross margin results do to lower productivity). At the end of
the second quarter and throughout the final six months of 2003, however, the
increase in nose-to-tail maintenance programs resulted in a significant
improvement to gross margins for the year ended December 31, 2003. The gross
margin results for this increased work was adversely impacted, in part, by
training costs associated with bringing on these programs and general ramp up
costs, particularly at our Goodyear facility. In addition to these maintenance
programs, an overall increase in sales levels, particularly for our engine
center operation, resulted in an improved gross margin. Also, during the third
quarter of 2003 we settled various disputes relating to one of our leased
facilities. As part of this settlement, we were partially alleviated from
paying disputed utility charges. These charges, which were fully accrued,
resulted in a benefit of $463. This benefit is reflected as a reduction to
cost of sales for the year ended December 31, 2003. Finally, as noted below,
the 2002 fiscal year was unfavorably impacted by an increase in inventory
write-downs of $8,334. Gross profit as a percentage of revenues increased to
6.7% for the year ended December 31, 2003, from 1.2% for the year ended
December 31, 2002. Gross profit levels are impacted by the fact that many of the costs of
operating our facilities are relatively fixed and therefore revenues above a
break-even level have a more than proportional favorable impact on gross
margins. Further, gross margins during any particular period are dependent
upon the number and type of aircraft serviced, the contract terms under which
services are performed and the efficiencies that can be obtained in the
performance of such services. Significant changes in any one of these factors
could have a material impact on the amount and percentage of gross profits.
Additionally, gross profit could be impacted in the future by considerations as
to the value of our inventory. While we believe that we have appropriately
valued our inventory at the lower of cost or market value, additional
allowances may be required in the future, depending on the market for aircraft
parts and the fleet types of the parts in our inventory compared to the types
of aircraft for which we are performing maintenance procedures. Due to the
then current market conditions for our aircraft parts, during the 2002 fiscal
year, we increased the valuation allowances for our inventory by $8,334.
During 2003, we continued to evaluate all market and industry exposures in
connection with our adjustments to inventory valuations. Based on these
current evaluations, we recorded an inventory charge of $265 for the year ended
December 31, 2003. While a minimal inventory adjustment was required during
the 2003 fiscal year, we cannot assure you that additional, more significant
adjustments to inventory values will not be required in future periods. Operating expenses decreased $890 or 5.5% to $15,217 for the year ended
December 31, 2003, compared with $16,107 for the year ended December 31, 2002.
Operating expenses as a percentage of revenues were 6.3% for the year ended
December 31, 2003 compared to 8.9% for the year ended December 31, 2002. For
the most part, reductions in operating expenses achieved through the sale of
Aerocell in July 2002 and from economies of scale due to increased revenues
were offset by operating expenses recognized in the operation of Brice
Manufacturing Company, that was acquired in October 2002, and expenses incurred
in the start-up and conducting of operations at the Goodyear facility. In addition to the fluctuations in operating expenses that were the result of
changes, year-over-year, in our operating units, we recognized several offsets
to operating expenses for the twelve month period ended December 31, 2003. As
a result of revised environmental estimates from our environmental consultants
for our Lake City facility, we were able to reverse $400 of our environmental
accrual. Also, during 2003, we resolved a long standing customer dispute and
collected $925 of accounts receivable that was previously fully reserved. As
well, during the twelve month period ended December 31, 2003, we terminated a
lease agreement with a third party for an abandoned facility in 21




---



##### 



Burnsville,
Minnesota. As a result of this lease termination, we eliminated a $300 accrual
previously established for our operating lease commitment. Additionally, we
eliminated a $300 environmental accrual that had been established for property
sold in a prior year, as it was determined in 2003 that we no longer had any
environmental exposures for this property. Also, during the 2003 fiscal year,
we entered into an operating agreement with a third party vendor. As a result
of this agreement and modifications made to an accounts receivable balance due
from this vendor within the operating agreement, we eliminated the need for a
reserve of $300 against this receivable balance. In addition, during fiscal
2003 we were able to extend a sublease agreement with a third party for a
facility that we currently lease in Opa Locka, Florida. As a result of this
sublease extension, we eliminated a $300 accrual previously established for the
shortfall in the operating lease commitment and the amount of the original
sublease income. Finally, as a result of a revised estimate of retrospective
premiums for workers compensation insurance, we reduced our accrual for
workers compensation by $400 during fiscal 2003. All of these offsets are
reflected as reductions in operating expenses for the year ended December 31,
2003. Operating expenses for the year ended December 31, 2002, however, were
unfavorably impacted by a $1,150 settlement charge with former Oscoda, Michigan
employees. This settlement was the result of a suit against us for alleged
violations of the Worker Adjustment and Retraining Notification Act (see Note 7
to Notes to Consolidated Financial Statements and Item 3. Legal Proceedings).
Additionally, during the twelve month period ended December 31, 2002, we
recorded accounts receivable valuation allowances of approximately $1,300 for
customers with identified credit exposures, including our largest customer. As a result of these factors, income from operations was $966 for the year
ended December 31, 2003, compared to a loss from operations of $13,839 for the
year ended December 31, 2002. Interest expense (excluding amortization of deferred financing fees) for the
year ended December 31, 2003 decreased by $1,784 or 20.6% to $6,863, from
$8,647 for the year ended December 31, 2002. The decrease for the 2003 fiscal
year as compared to the 2002 fiscal year is primarily attributable to
completion of the Note Exchange and Rights Offering which eliminated interest
expense on $149,000 of notes since the end of February 2002 (see Note 10 of the
Notes to the Consolidated Financial Statements for an explanation as to why
interest is not recorded on the New Notes), on average a lower outstanding debt
balance as a result of selling Aerocell and using a substantial portion of the
proceeds to reduce our debt, completion of our July 2002 senior debt restructuring and
slightly lower interest rates from period to period. This reduction was
partially offset by non-cash interest expense (since the note is a PIK
instrument) of $764 on our $8,250 related party loan with our majority
stockholder (which was substantially funded by July 3, 2003) and by the
accretion of our Junior Notes to their redemption value. This accretion, which
approximated $450 for 2003 as compared to $113 for 2002, is a non-cash item
(since the note is a PIK instrument), and is included as a component of
interest expense within the accompanying consolidated results of operations. Amortization of deferred financing costs was $2,867 for the twelve months ended
December 31, 2003 compared to $5,527 for the twelve months ended December 31,
2002. The decrease for the 2003 fiscal year as compared to the 2002 fiscal
year is primarily attributable to the completion of amortization of deferred
financing costs associated with a previous senior credit facility, which was
refinanced in July 2002. Additionally, deferred financing fees related to the
July 2002 credit facility were significantly less then those of the previous
credit facility. Amortization of deferred financing fees incurred in
conjunction with our May 14, 2003 amendment to our July 2002 credit facility
and TROL financing arrangement, in addition to deferred financing fees incurred
in conjunction with the warrant that was extended to our majority stockholder
in conjunction with securing our related party term loan, partially offset the
reduced fees from our senior debt refinancing. The warrant valuation, as
determined by an independent business valuation specialist through a fair
market value assessment of the Company, was recorded at $1,258 as of May 14,
2003 and is being amortized over the term of the related party term loan. During 2002, we recorded a charge related to an agreement to settle a
then-outstanding class action securities lawsuit. The ultimate charge
recognized in fiscal 2002 related to this settlement, adjusted for gains that
resulted through revaluations of the securities to be issued in this settlement
up through the effective date of September 20, 2002, totaled $4,410. See Note
7 of Notes to Consolidated Financial Statements. During 2002, we recognized a $27,279 extraordinary gain relating to the note
exchange. See Note 10 of Notes to Consolidated Financial Statements. On
January 1, 2003, we adopted SFAS No. 145, Rescission of FASB Statement No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. As
a result of adoption of SFAS No. 145, we have reclassified the $27,279 gain on
debt extinguishment to be included within continuing operations. Other income  net was $3,811 for the twelve month period ended December 31,
2003 compared with $4,197 for the same period in 2002. Other income  net for
fiscal 2003 was primarily comprised of rent from the Companys Miramar facility
(approximately $2,750) and a 22




---



##### 



gain on the settlement of outstanding purchase price adjustments
and other obligations and funds held in escrow related to the sale of Aerocell
(approximately $570). See Note 3 of the Notes to the Consolidated Financial
Statements. Other income  net for fiscal 2002 was primarily comprised of rent
from the Companys Miramar facility ($2,350), a portion of the gain on the
global settlement with Kellstrom (approximately $700), and the gain on sale of
the Aerocell operations (approximately $300). The Miramar facility
was sold in March 2004 and the sublease between us and Kellstrom was
assigned to the buyer as part of the sale. See discussion below and
in Note 15 of Notes to Consolidated Financial Statements. As a
result, the rental income reported in 2003 and 2002 and included in
other income  net for these periods will not continue in future
periods. As a result of the above factors, our loss before income taxes and discontinued
operations for the year ended December 31, 2003 was $4,953, compared to our
loss before income taxes and discontinued operations of $947 for the year ended
December 31, 2002. Without the $27,279 gain on debt extinguishment relating to
the note exchange (which as a result of adopting SFAS No. 145 we have
reclassified to be included within continuing operations), comparative 2002
twelve month loss before income taxes and discontinued operations would have
been $28,226 (we believe that comparison of our twelve month loss before income
taxes and discontinued operations of 2003 to the comparable period of 2002 loss
before income taxes and discontinued operations without the effect of the
above-described gain on extinguishment of debt provides a useful measure for
investors to compare our period-to-period results of operations). During 2003, we recognized a net $789 income tax benefit as a result of the
Internal Revenue Service (IRS) completing audits of our 1996, 1997, 1998 and
1999 federal income tax returns. Based on the findings in the IRS agents
report, we eliminated a $1,000 accrual for tax exposure matters and established
an income tax receivable for $177. This benefit was partially offset by a $388
provision for state income taxes. Additionally, during fiscal 2003, we
recognized an income tax benefit of $197 for the receipt of miscellaneous
federal and state carryback refunds. The aggregate income tax benefit of these
events is $986. We recorded a $3,800 tax benefit during fiscal 2002 as a result of the passage
of legislation which permits businesses to carry net operating losses back to
offset taxable income from the previous five years (compared to two years under
prior law). Prior to the passage of this legislation, these net operating
losses were fully reserved due to the uncertainty that we would generate
taxable income in the near future sufficient to benefit from these net
operating losses. As of December 31, 2003, we had net operating loss carryforwards of $49,233.
These net operation loss carryforwards include a limitation on net operating
losses that can be carried forward subsequent to our capital and equity
restructuring (completed in February 2002), net operating losses generated
during a portion of 2002 (from March 1, 2002 through December 31, 2002) and
generated for the full year of 2003. As of December 31, 2003, we have
established a valuation allowance for the full balance of these net operating
loss carryforwards due to the uncertainty that we will be able to utilize these
net operating loss carryforwards in future periods. See Note 8 of Notes to
Consolidated Financial Statements. For the reasons set forth above, loss from continuing operations for the twelve
months ended December 31, 2003 was $3,967, or $0.13 per basic share and diluted
share, compared to income of $2,853, or $0.11 per basic share and $0.01 per
diluted share, for the twelve months ended December 31, 2002. Income from discontinued operations for the year ended December 31, 2003 was
$3,706, or $0.12 per basic share and per diluted share, compared to income of
$4,169, or $0.16 per basic share and $0.02 per diluted share for the year ended
December 31, 2002. Income from discontinued operations for the 2003 fiscal
year includes approximately $2,770 resulting from the elimination and
settlement of obligations relating to our redistribution operations
and new parts bearings operations, and changes in estimates of accruals for remaining exposures based on our continuous evaluation of such exposures, and a gain on the sale of our Covington facility
of approximately $410. Additionally, income from discontinued operations for
2003 and 2002 contains collections on receivables retained from the sale of our
redistribution operations that had been fully reserved and the sale of residual
inventory that remains from the sale of our redistribution operation and new
parts bearings operation. Also, income from discontinued operations for the
year ended December 31, 2002 includes a portion ($900) of the gain on the
Kellstrom settlement and the lease of equipment to Kellstrom for a portion of
the year ($540). 23




---



##### 



Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 The following tables set forth certain information relating to our operations for the periods indicated: 2002
    
    2001$
    
    %
    
    $
    
    %(In thousands)Operating revenues:Sales, net
    
    $
    181,760
    
    
    
    99.9
    %
    
    $
    262,303
    
    
    
    99.3
    %Other
    
    
    213
    
    
    
    0.1
    %
    
    
    1,837
    
    
    
    0.7
    %Total operating revenues
    
    
    181,973
    
    
    
    100.0
    %
    
    
    264,140
    
    
    
    100.0
    %Cost of sales
    
    
    179,705
    
    
    
    98.8
    %
    
    
    259,647
    
    
    
    98.3
    %Gross profit
    
    
    2,268
    
    
    
    1.2
    %
    
    
    4,493
    
    
    
    1.7
    %Operating expenses
    
    
    16,107
    
    
    
    8.9
    %
    
    
    64,305
    
    
    
    24.3
    %Loss from operations
    
    
    (13,839
    )
    
    
    (7.6
    %)
    
    
    (59,812
    )
    
    
    (22.6
    %)Interest expense
    
    
    14,174
    
    
    
    7.8
    %
    
    
    25,778
    
    
    
    9.8
    %Charge for settlement of class action litigation
    
    
    4,410
    
    
    
    2.4
    %
    
    
    
    
    
    
    Gain resulting from debt extinguishment
    
    
    (27,279
    )
    
    
    15.0
    %
    
    
    
    
    
    
    Other (income) expense
    
    
    (4,197
    )
    
    
    2.3
    %
    
    
    45,638
    
    
    
    17.3
    %Loss before income taxes and discontinued operations
    
    
    (947
    )
    
    
    (0.5
    %)
    
    
    (131,228
    )
    
    
    (49.7
    %)Income tax (benefit) expense
    
    
    (3,800
    )
    
    
    (2.1
    %)
    
    
    621
    
    
    
    0.2
    %Income (loss) from continuing operations
    
    
    2,853
    
    
    
    1.6
    %
    
    
    (131,849
    )
    
    
    (49.9
    %)Discontinued operations, net of income taxes
    
    
    4,169
    
    
    
    2.3
    %
    
    
    (9,386
    )
    
    
    (3.6
    %)Net income (loss)
    
    $
    7,022
    
    
    
    3.9
    %
    
    $
    (141,235
    )
    
    
    (53.5
    %)
 Operating revenue for the year ended December 31, 2002 decreased $82,167 or
31.1% to $181,973, from $264,140 for the year ended December 31, 2001.
Operating revenue for the year ended December 31, 2001 included $34,702 from
facilities and operations that were closed or sold during 2001. Additionally,
revenues from the operations of Aerocell Structures of $3,892 in fiscal 2002
(business sold August 1, 2002) and $16,609 in fiscal 2001 are included within
operating revenues. Operating revenues for the 2002 fiscal year were favorably
impacted by revenues from our Brice Manufacturing operation, which was acquired
in October 2002. The level of revenues from October 2002 to December 2002
approximated $1,873. Excluding the revenue from these facilities and
operations, comparative fiscal 2002 and 2001 revenues would have been $176,208
and $212,829, respectively (we are providing this information in order to
allow comparison between the revenues derived from facilities open in both
fiscal 2002 and fiscal 2001). The decrease in revenue is primarily attributable to decreased revenue from our
heavy airframe maintenance operations. This decrease was generally caused by a
reduction in market opportunities due to adverse market conditions, which have
caused many of our customers to delay maintenance on their aircraft or park
older aircraft maintained by us due to rising fuel prices, reduced passenger
levels, and general economic conditions. Our revenue was also adversely
impacted during 2002 by increased price competition and downward pricing
pressures from airline customers, and, during 2001, by increased competition in
the airframe heavy maintenance business. These factors forced us during fiscal
2001 and 2002 to reduce pricing and take fixed priced work at lower rates,
which adversely impacted revenues and gross margins. Further, during this
period, several of our customers, including our largest customer for 2001 and
2002, experienced severe adverse financial problems of their own, and in some
cases substantially delayed their on-going maintenance due to their situation,
which further adversely impacted our operating results for the period. In
addition, revenue decreased due to the sale of our Aerocell flight surface
maintenance operation at the end of July 2002, the sale of our Caribe MR&O
operation in the second quarter of 2001, the consolidation of our Winston
Salem, North Carolina heavy airframe maintenance facility into our Greensboro,
North Carolina operations and the closure of our Oscoda airframe heavy
maintenance MR&O operation. Finally, 2001 revenues included revenues from sales
of leased assets from our leasing portfolio. All such leases have now expired
and all leased assets have been sold. Gross profit decreased to $2,268 for the year ended December 31, 2002, compared
with a gross profit of $4,493 for the year ended December 31, 2001. This
deterioration is due primarily to inventory valuation charges recorded during
the second and fourth quarter of 2002 (see discussion below). These charges
completely offset operating efficiencies, resulting in a higher revenue
realization per labor hour, and cost reductions achieved through consolidation
of operations. Additionally, company-wide salary and benefit reductions
implemented in 2001 have favorably impacted our gross margin in 2002. Gross
profit results for the second half of 2002, as compared to the first
half of 2002, 24




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have been unfavorably impacted by the
completion of significant, long-duration maintenance work for specific aircraft
types, the receipt of new one-off aircraft types, and delayed customer
maintenance. While the receipt of one-off aircraft types present significant
opportunities to TIMCO, the short-term impact is a lower revenue realization
per labor hour. Our fiscal 2001 and fiscal 2002 cost of sales were also
impacted by the reduction in revenue described above relative to our primarily
fixed cost structure and the impact of price competition and fixed pricing on
all of our heavy airframe maintenance operations. Gross profit as a percentage
of revenues decreased to 1.2% for the year ended December 31, 2002, from 1.7%
for the year ended December 31, 2001. Our gross profit levels in 2001 and 2002 were impacted by the factors described
above. Additionally, during 2002 we substantially increased our valuation
allowance against our current inventory. As a result of market conditions in
the aircraft parts market, during the second quarter ended June 30, 2002, we
recognized inventory write-downs of $1,600. In addition, as a result of the
general economy, the current state of the airline industry, the economic
condition of a number of our significant airline customers (including our
largest customer, which is currently in a Chapter 11 bankruptcy proceeding) and
the current on-going war in the Middle East, as well as exposures generated
through actions of our customer base as related to aircraft fleet type and our
inventory as related to these aircraft fleets, during the fourth quarter ended
December 31, 2002, we elected to recognize additional inventory write-downs of
$6,734. Operating expenses decreased $48,198 or 75.0% to $16,107 for the year ended
December 31, 2002, compared with $64,305 for the year ended December 31, 2001.
Operating expenses as a percentage of revenues were 8.9% for the year ended
December 31, 2002, compared to 24.3% for the year ended December 31, 2001.
Included in operating expenses for the year ended December 31, 2001 are an
aggregate of $25,000 in non-cash adjustments to the carrying value of certain
of our long-lived assets, including the write-off of goodwill and certain fixed
assets associated with the closure of the Oscoda, Michigan heavy airframe
maintenance facility and an impairment relating to the Oscoda, Michigan engine
overhaul operation, Winston-Salem heavy airframe facility, and an allowance for
a receivable from an airframe customer that was experiencing significant
financial difficulties. These costs were partially offset by a reduction in
operating expenses resulting from the closure of two heavy airframe maintenance
facilities during 2001 and the savings associated with the consolidation of the
operations of Aircraft Interior Design. The remaining reduction in operating
expenses from prior year is mainly due to the lower sales volumes noted above,
the closing of our Miramar headquarters and moving those offices to our
Greensboro location, the sale of Caribe and Aerocell, the salary and benefit
reductions noted above, and a year-over-year headcount reduction (including
Aerocell) of approximately 300 employees. These reduction have been partially
offset by operating expenses of $440 for Brice Manufacturing, which was
acquired in October 2002, $1,150 settlement charges with former Oscoda,
Michigan employees (see Item 3. Legal Proceedings), and the recording in 2002
of accounts receivable valuation allowances of approximately $1,300 for
customers with identified credit exposures, including our largest customer. As a result of these factors, our loss from operations was $13,839 for the year
ended December 31, 2002, compared to a loss from operations of $59,812 for the
year ended December 31, 2001. Interest expense (excluding amortization of deferred financing fees) for the
twelve months ended December 31, 2002 decreased by $11,256 million or 56.3% to
$8,647, from $19,903 million for the twelve months ended December 31, 2001. The
decrease is primarily attributable to completion of the note exchange and
rights offering which eliminated interest expense on $149,000 of notes since
the end of February 2002 (see Note 10 of the Notes to the Consolidated
Financial Statements for an explanation as to why interest is not recorded on
the New Notes), lower outstanding debt balances as a result of selling Aerocell
and Caribe and using a portion of these proceeds to pay debt obligations,
completion of the restructuring and slightly lower interest rates from period
to period. These reductions have been partially offset by the accretion of our
Junior Notes, which will mature in January 2007, to their redemption value.
This accretion, which approximated $113 for 2002 and is a non-cash item (since
the note is a PIK instrument), is included as a component of interest expense. Amortization of deferred financing costs, which is included within interest
expense, was $5,527 for the year ended December 31, 2002, compared to $5,875
for fiscal 2001. We recorded a charge of $8,000 during the first quarter of 2002 related to an
agreement to settle our outstanding class action securities litigation. For the
period ended June 30, 2002, since the settlement had not yet become final, the
securities to be issued in this settlement were revalued, resulting in a gain
which we recorded of $1,875. For the quarter ended September 30, 2002, based on
the settlement becoming final September 20, 2002, we again revalued the
securities to be issued in this settlement and recorded a gain of $1,715. As a
result of this settlement becoming final, this gain establishes the final
valuation of the securities to be issued, and, accordingly, we have recorded
charges of $4,410 for the 2002 fiscal year relating to the settlement. See Note
7 of Notes to Consolidated Financial Statements. 25




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During the first quarter of 2002, we recognized a $27,279, extraordinary gain
relating to the note exchange. On January 1, 2003, we adopted SFAS No. 145,
Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. As a result of adoption of SFAS No. 145,
we have reclassified the $27,279 gain on debt extinguishment to be included
within continuing operations. During 2001, we recorded a charge of $37,900 to write-off the notes receivable
due from KAV. There was no comparable charge in 2002. See Note 3 of Notes to
Consolidated Financial Statements for a description of our 2002 global
settlement of outstanding matters with Kellstrom. Other income  net was $4,197 for the year ended December 31, 2002. Other
income  net for fiscal 2002 is mainly comprised of rent of the Companys
Miramar facility located in Miami, Florida (approximately $2,350), a portion of
the gain on the global settlement with Kellstrom (approximately $700), and the
gain on sale of the Aerocell operations (approximately $300). Other expense -
net was $45,638 for the year ended December 31, 2001. Other expense  net for
fiscal 2001 included a gain on the sale of the Caribe operations and income on
a lease deposit totaling approximately $7,900 offset by equity method losses of
affiliates of approximately $6,600, a charge to fully reserve the notes
receivable due from KAV in the amount of $37,900 (as discussed above), and a
charge of approximately $9,000 relating to our purchase obligation on the
property securing our TROL financing in which the obligation price exceeded the
fair market value of the property. Included within the loss from affiliates is
a charge of approximately $6,300 to fully reserve our investment in a limited
liability corporation that was established to convert certain Boeing 727
aircraft from passenger configuration to cargo configuration. As a result of the above factors, our loss from continuing operations before
income taxes and discontinued operations for the twelve months ended December
31, 2002 was $947, compared to $131,228 for the twelve months ended December
31, 2001. We recorded a $3,800 tax benefit during the first quarter of 2002 as a result
of the passage of legislation which permits businesses to carry net operating
losses back to offset taxable income from the previous five years (compared to
two years under prior law). Prior to the passage of this legislation, we had
established valuation allowances for these deferred tax assets due to the
uncertainty that we would generate taxable income in the foreseeable future
sufficient to benefit from these net operating losses. As of December 31, 2002, we had net operating loss carryforwards of $33,049.
These net operating loss carryforwards include a limitation on net operating
losses that can be carried forward subsequent to our capital and equity
restructuring (completed in February 2002) and net operating losses generated
during the current year. As of December 31, 2002, we have established a
valuation allowance for the full balance of these net operating loss
carryforwards due to the uncertainty that we would generate sufficient taxable
income to utilize these net operating loss carryforwards in future periods. See
Note 8 of Notes to Consolidated Financial Statements. For the reasons set forth above, our income from continuing operations for the
year ended December 31, 2002 was $2,853, or $0.11 per basic share and $0.01 per
diluted share, compared to a loss of $131,849, or $87.81 per basic share and
diluted share, for the year ended December 31, 2001. Income from discontinued operations for the twelve month period ended December
31, 2002 was $4,169 or $0.16 per basic share and $0.02 per diluted share,
compared to a loss of $9,386, or $6.25 per basic share and diluted share for
the twelve month period ended December 31, 2001. Income from discontinued
operations for the year ended December 31, 2002 is primarily comprised of
collections on receivables retained from the sale of our redistribution
operations that had been written-off in 2001 (approximately $1,100), lease of
equipment to Kellstrom for a portion of the year (approximately $540), and a
portion of the gain on the Kellstrom settlement (approximately $900). The 2001
fiscal year included approximately $7,700 of charges to assets whose
realization was adversely impacted by the operations of KAV and the financial
condition of Kellstrom. 26




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Liquidity and capital resources Liquidity Below is a table setting forth our contractual payment obligations and other
commercial commitments as of December 31, 2003, but adjusted for the
refinancing of our senior credit facility, our senior term loans, and our
related party term loan all performed in April 2004, which have been aggregated
in order to facilitate an understanding of our liquidity: Contractual
    
    
    
    
    
    Less than
    
    
    
    
    
    Payments due by periodObligations
    
    Total
    
    One Year
    
    1-3 years
    
    4-5 years
    
    After 5 yearsRevolving
Credit Facility
    
    $
    14,705
    
    
    $
    14,705
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-Term Debt
    
    
    151,860
    
    
    
    291
    
    
    
    118,128
    (a)
    
    
    33,441
    (a)
    
    
    Capital Leases
    
    
    27,698
    
    
    
    1,510
    (b)
    
    
    22,838
    (b)
    
    
    336
    
    
    
    3,014Operating Leases
    
    
    42,804
    
    
    
    4,636
    
    
    
    8,785
    
    
    
    7,141
    
    
    
    22,242Total
contractual cashobligations
    
    $
    237,067
    
    
    $
    21,142
    
    
    $
    149,751
    
    
    $
    40,918
    
    
    $
    25,256
 Other
    
    
    
    
    
    Less than
    
    Payments due by periodCommercial
    
    Total
    
    One Year
    
    1-3 years
    
    4-5 years
    
    After 5 yearsCommitmentsPurchase Commitments
    
    $
    1,700
    
    
    $
    1,200
    
    
    $
    500
    
    
    $
    
    
    
    $
    Letters of Credit
    
    
    9,155
    
    
    
    9,155
    
    
    
    
    
    
    
    
    
    
    
    Total Other
Commercial Commitments
    
    $
    10,855
    
    
    $
    10,355
    
    
    $
    500
    
    
    $
    
    
    
    $
    
  (a)
    
    Included within these amounts are $115,800 of our New Senior
Subordinated Notes and $3,063 of our Junior Subordinated Notes. If
not redeemed or repurchased by the Company prior to the maturity
dates of these obligations, these notes automatically convert to
270,276 shares and 9,320 shares, respectively, of our authorized but
unissued common stock.(b)
    
    Includes $23,824 of obligations under our TROL financing
arrangement that was repaid in full on March 31, 2004. See Note 15
of Notes to Consolidated Financial Statements. We are also committed under employment agreements with most of our executive
officers and several of our key employees. We believe that we will meet our working capital requirements during 2004 from
funds available under our recently established revolving credit facility with
the CIT Group and from our operations. We may also sell individual assets or
our equity securities, or borrow additional funds, to the extent required and
available. While we expect that required financing will be available to meet
our working capital requirements, there can be no assurance of this fact. 27




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Cash Net cash used in our continuing operating activities during the fiscal year
ended December 31, 2003 was $13,728, compared to net cash provided by
continuing operating activities during 2002 of $6,600. Cash used in operating
activities for the 2003 fiscal year was primarily the result of operations,
adjusted for non-cash charges, of approximately $4,600 and increases in
accounts receivable, inventories and other current assets of $18,350, $4,358
and $1,397, respectively, partially offset by increases in trade payables of
$6,881 and customer deposits of $1,026. The increases in accounts receivable
and inventory provided additional borrowing base for our revolving credit
facility which, as noted below, funded this use of cash. Cash used in investing activities during the fiscal year ended December 31,
2003 was $2,304, compared to cash provided by investing activities during the
fiscal year ended December 31, 2002 of $6,477. The cash used in investing
activities for 2003 was for the purchase of fixed assets. Cash provided by
financing activities for the year ended December 31, 2003 was $17,345, compared
to cash used in financing activities for the year ended December 31, 2002 of
$15,999. Cash provided by financing activities for 2003 was primarily comprised
of net borrowings under the Amended Credit Facility of $12,526 and proceeds
from our related party term loan of $6,950, partially offset by payments on
capital leases and payments for deferred financing fees. Cash of $49 was used
in our discontinued operations for the year ended December 31, 2003, compared
to $3,261 of cash provided by our discontinued operations for the year ended
December 31, 2002. Senior Credit Facilities On April 8, 2004, we
closed on a refinancing of our senior credit facilities. First, we
entered into an agreement with the CIT Group in which we
obtained a $35,000 senior secured revolving line of credit (the CIT Group
Revolving Line of Credit) and a $6,400 senior secured term loan (the CIT
Group Term Loan, and collectively with the CIT Group Revolving Line of Credit,
the CIT Group Credit Facility). We used the proceeds from the CIT Group
Credit Facility to repay all amounts outstanding under our previously
outstanding revolving credit facility, to repay the warrant repurchase obligation due to a previous
lender (as described below and in Note 7 to Notes to Consolidated Financial
Statements) and for working capital. The CIT Group Revolving Line of Credit is due December 31, 2007 and bears
interest, at our option, at (a) Prime plus an advance rate ranging from 0.00%
to 0.75% with the advance rate contingent on our leverage ratio, or (b) LIBOR
plus an advance rate ranging from 2.50% to 4.00% with the advance rate
contingent on our leverage ratio. The CIT Group Term Loan is due in quarterly
installments of $291, commencing on October 1, 2004, with the final quarterly
installment due on December 31, 2007. The CIT Group Term Loan bears interest
at the prevailing rate of the CIT Group Revolving Line of Credit plus one
percent. Also, the CIT Group Credit Facility contains certain financial
covenants regarding our financial performance and certain other covenants,
including limitations on the incurrence of additional debt. In
addition, an event of default under the Hilco Term Loan (described below) will
also result in a default under the CIT Group Credit Facility. Borrowings under
the CIT Group Credit Facility are secured by a lien on substantially all of our
assets. Borrowings under the CIT Group Revolving Line of Credit are
based on a borrowing base formula that takes into account the value of
our receivables and inventory from time to time. Further, the amount
we can borrow under the CIT Group Revolving Line of Credit is
affected by various availability reserves that are established by the
lenders under the financing agreement and our borrowings under the
CIT Group Revolving Line of Credit are capped based on the ratio of
our debt to EBITDA and by the maximum amount of the CIT Group
Revolving Line of Credit. At April 8, 2004, our availability
under the CIT Group Revolving Line of Credit was $10,371. Additionally, simultaneously
with obtaining the CIT Group Credit Facility, we borrowed $8,000 from
Hilco Capital LP. (the Hilco Term Loan). We
used the proceeds from the Hilco Term Loan to repay amounts outstanding under
our previously outstanding revolving credit facility and term loan
facilities. The Hilco Term
Loan matures on December 31, 2007 and bears interest at Prime plus an advance
rate ranging from 3.00% and 6.00% with the advance rate contingent
upon our meeting (from time to time) a ratio
of our secured debt to EBITDA. The Hilco Term Loan bears PIK
interest ranging from 2.00% to 5.00% with the prevailing rate also being
contingent upon the ratio of our level of secured debt to EBITDA. At no
time during the term of the Hilco Term Loan, however, will the combined cash and PIK
interest rates be less then 9.00% nor greater then 18.00% per annum. Also, the
Hilco Term Loan contains certain financial covenants regarding our financial
performance and certain other covenants, including limitations on the
incurrence of additional debt. In addition, an event of default under the CIT
Group Credit Facility (described above) will also result in a default under the
Hilco Term Loan. Borrowings under the Hilco Term Loan are secured by a lien on
substantially all of our assets. In connection with our refinancing, we settled in full our warrant repurchase
obligation to our previous lender by paying $870 in cash. 28




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Related Party Term Loan On April 8, 2004, we
refinanced (effective March 31, 2004) all of our previously
outstanding debt (principal plus accrual and unpaid interest) due to
our principal stockholder with a new $14,412 term loan due on January 31, 2008
(the LJH Term Loan). The LJH Term Loan combines the $5,000 loan from our
principal stockholder which replaced the BofA term loan, the $6,050 related
party term loan made in May 2003, the $1,300 loan relating to the Brice
acquisition, the $900 obligation related to the AMS inventory purchase, and PIK
interest previously accrued on these obligations. The LJH Term Loan bears
interest at 18% per annum, 6% of which is payable in cash and the balance of
which will be PIK. The LJH Term Loan is pari-passu with the New
Notes, but is secured. The LJH Term Loan also contains
cross acceleration provisions if our obligations to the CIT Group and Hilco are
accelerated. Previous Credit Facilities The CIT Group Credit Facility, the Hilco Term Loan and the LJH Term Loan
replaced a revolving credit and term loan facility from a group of lenders led
by Citicorp USA Inc. and UPS Capital Corporation, a $5,000 term loan
from our principal stockholder that in January 2004, replaced a
$5,000 term loan previously obtained
from Bank of America (which Bank of America term loan had been credit supported by
several individuals, including our principal stockholder),
and several previous loans made to us by our principal stockholder. See Note 5
of Notes to Consolidated Financial Statements for information regarding these
prior financing arrangements. Senior Subordinated Notes New Notes We have issued $100,000 face value in aggregate principal amount of our 8%
senior subordinated convertible PIK notes (New Notes). Our New Notes, which
mature on December 31, 2006, bear interest at the rate of 8.0% per annum from
the date of issuance, and are payable at our option either in cash or
paid-in-kind through the issuance of additional New Notes, semiannually on June
30 and December 31 of each year. We expect to elect to pay interest in-kind. If
we do not pay interest in cash as of an interest payment date, we will
automatically be deemed to have paid such interest in-kind and additional New
Notes in the amount of such interest payment will automatically be deemed to be
outstanding from such date forward. The New Notes are general unsecured obligations, subordinated in right of
payment to all current and future senior debt. The New Notes are fully and
unconditionally guaranteed, on a senior subordinated basis, by substantially
all of our existing subsidiaries and each subsidiary that we organize in the
future, unless such subsidiary is designated as an unrestricted subsidiary (the
Subsidiary Guarantors). Subsidiary guarantees are joint and several, full and
unconditional, general unsecured obligations of the Subsidiary Guarantors.
Additionally, there are no significant restrictions that would preclude the
parent company from obtaining funds, either through loan or dividend, from each
Subsidiary Guarantor. Subsidiary guarantees are subordinated in right of
payment to all existing and future senior debt of Subsidiary Guarantors,
including the CIT Group Credit Facility and the Hilco Term Loan, and are also
effectively subordinated to all secured obligations of Subsidiary Guarantors to
the extent of the assets securing such obligations, including the CIT Group
Credit Facility, the Hilco Term Loan and the LJH Term Loan. The indenture for the New Notes (i) permits us to incur indebtedness equal to
the greater of $95,000 or an unlimited amount to the extent that we satisfy a
fixed charge coverage ratio of 2.25 to 1.00, (ii) requires us, upon a change of
control or certain asset sales, to repurchase the New Notes at a price equal to
the redemption price which we would be obligated to pay if we redeemed the New
Notes on the date of the change of control or asset sale; and (iii) does not
contain a provision requiring acceleration of any premium due upon acceleration
of the New Notes upon an event of default by reason of any willful action (or
inaction) taken (or not taken) by us with the intention of avoiding the
prohibition on the redemption of New Notes. The New Notes are redeemable for cash at our option at the following
percentages of par plus accrued interest on the par value through the date of
redemption: 2004  73.0%, 2005  75.625% and 2006  77.5%. The New Notes
also provide that the holders will receive an aggregate of 3,003 shares of
common stock if the New Notes are redeemed in 2004, 2005 or 2006. If the New Notes have not already been redeemed or repurchased, the New Notes,
including those New Notes previously issued as paid-in-kind interest and all
accrued but unpaid interest, will automatically convert on December 31, 2006
into an aggregate of 270,276 shares of our common stock. Holders of New Notes
will not receive any cash payment representing principal or accrued and unpaid
interest upon conversion; instead, holders will receive a fixed number of
shares of common stock and a cash payment to account for any fractional shares. 29




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##### 



Old Notes In 1998, we sold $165,000 of our 8 1/8% senior subordinated notes due 2008
(Old Notes) at a price of 99.395%. As a result of the Note Exchange, $16,247
in aggregate principal amount of the Old Notes remain outstanding. Interest on
the Old Notes is payable on February 15 and August 15 of each year. The Old
Notes are general unsecured obligations, subordinated in right of payment to
all existing and future senior debt, including indebtedness outstanding under
the CIT Group Credit Facility and the Hilco Term Loan, and under senior credit
facilities which may replace these facilities in the future, and to the LJH
Term Loan and the New Notes. In addition, the Old Notes are effectively
subordinated to all secured obligations to the extent of the assets securing
such obligations, including the CIT Group Credit Facility, the Hilco Term Loan
and the LJH Term Loan. As a result of the note exchange that we completed in
2002 (see Note 10 of Notes to Consolidated Financial Statements), substantially
all of the covenants contained in the indenture relating to the Old
Notes was extinguished. The Old Notes are fully and unconditionally guaranteed, on a senior
subordinated basis, by substantially all of our existing subsidiaries and each
subsidiary that we organize in the future, unless such subsidiary is designated
as an unrestricted subsidiary (the Subsidiary Guarantors). Subsidiary
guarantees are joint and several, full and unconditional, general unsecured
obligations of the Subsidiary Guarantors. Additionally, there are no
significant restrictions that would preclude the parent company from obtaining
funds, either through loan or dividend, from each Subsidiary Guarantor.
Subsidiary guarantees are subordinated in right of payment to all existing and
future senior debt of Subsidiary Guarantors, including the CIT Group Credit
Facility, the Hilco Term Loan, the LJH Term Loan and the New Notes, and are
also effectively subordinated to all secured obligations of Subsidiary
Guarantors to the extent of the assets securing such obligations, including the
CIT Group Credit Facility, the Hilco Term Loan and the LJH Term Loan. Junior Subordinated Notes We have issued $4,000 face value in aggregate principal amount of our 8% junior
subordinated convertible PIK notes (Junior Notes) due 2007. The Junior Notes
are payable at our option either in cash or paid-in-kind through the issuance
of additional notes semiannually on June 30 and December 31 of each year. If we
do not pay interest in cash as of an interest payment date, we will
automatically be deemed to have paid such interest in-kind and additional
Junior Notes in the amount of such interest payment will automatically be
deemed to be outstanding from such date forward. The Junior Notes are general
unsecured obligations and are subordinated in right of payment to all current
and future senior debt, including the CIT Group Credit Facility, the Hilco Term
Loan, the LJH Term Loan, the New Notes and the Old Notes. The Junior Notes are redeemable for cash at the Companys option at the
following percentages of par plus accrued interest on the par value through the
date of redemption: 2004  73.0%, 2005  75.625% and 2006  77.5%. The
Junior Notes also provide that the holders will receive an aggregate of 104
shares of common stock if the Junior Notes are redeemed in 2004, 2005 or 2006. If the Junior Notes have not already been redeemed or repurchased, the Junior
Notes, including those Junior Notes previously issued as paid-in-kind interest
and all accrued but unpaid interest, will automatically convert on January 2,
2007 into an aggregate of 9,320 shares of common stock. Holders of Junior Notes
will not receive any cash payment representing principal or accrued and unpaid
interest upon conversion; instead, holders will receive a fixed number of
shares of common stock and a cash payment to account for any fractional shares. TROL Financing On March 31, 2004, we sold our office and warehouse facility located in
Miramar, Florida for a gross purchase price of $26,000. We used a portion of
the proceeds from the sale to repay the outstanding principal balance of our
TROL financing arrangement. See Note 5 of Notes to Consolidated Financial
Statements for a complete description of the TROL financing arrangements. The
balance of the funds from this sale, net of transaction expenses,
were used to repay amounts outstanding under our previous term loan
facility. Critical Accounting Policies and Estimates Financial Reporting Release No. 60 encourages all companies to include a
discussion of critical accounting policies or methods used in the preparation
of the financial statements. Our consolidated financial statements include a
summary of the significant accounting policies and methods used in the
preparation of our consolidated financial statements. 30




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##### 



Revenue Recognition Revenues from MR&O services are recognized and unbilled receivables are
recorded based upon the percentage of completion method. Unbilled receivables
are billed on the basis of contract terms (generally upon completion of an
aircraft) and deliveries. Revenues related to engine overhaul services are
recognized upon shipment of the overhauled engine. We regularly review our
progress on percentage-of-completion contracts and review the estimated costs
of fulfilling its obligations. If we do not accurately estimate the scope of
the work to be performed or do not manage these contracts properly within the
planned periods of time or satisfy it obligations under the contracts, then
future revenue and margins may be significantly and negatively affected, or
losses on existing contracts may need to be recognized. Any resulting
reductions in revenues, margins or contract losses could be material to our
results of operations. Use of Estimates Managements discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of our financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and the related disclosure of
contingent assets and liabilities. On an ongoing basis, management evaluates
these estimates, including those related to estimated losses on disposal of
discontinued operations, the provision to reduce inventory to the lower of cost
or fair value, the estimated profit or loss to be recognized as aircraft
maintenance, design and construction services are performed, the allowances for
doubtful accounts and notes receivable, the realizability of its investment in
affiliates, the recovery of long lived assets and goodwill, medical benefit
accruals, the estimated fair values of facilities under capital leases and
allowances for litigation and environmental costs. Management bases their
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions and conditions. Inventory Valuation Inventories, which consist primarily of new, overhauled, serviceable and
repairable aircraft parts, are stated at the lower of cost or market on
primarily a specific identification basis and aircraft parts usage analysis.
Though we believe that we have adequately provided for any such declines in
inventory value, any unanticipated change in technology or customer aircraft
fleet for which our inventory relates could significantly affect the value of
our inventory and thereby adversely affect gross margins and results of
operations. Customer demand, general economic conditions and industry market
factors may also impact the value of our inventory. In instances where bulk
purchases of inventory items are made, cost is determined based upon an
allocation by management of the bulk purchase price to the individual
components. Expenditures required for the recertification of parts are
capitalized as inventory and are expensed as the parts associated with the
recertification are sold. Accounts Receivable  Allowance for Doubtful Accounts Substantially all of our accounts receivable are due primarily from airlines,
aircraft leasing companies and air cargo carriers. During 2002 and 2003, there
has been significant change in the aviation industry, including the filing for
bankruptcy protection under Chapter 11 of the United States Bankruptcy Court by
certain carriers. This in turn has affected service providers within the
aviation industry and has resulted in us experiencing higher credit losses. We
continuously perform credit evaluations of our customers, considering numerous
inputs including the customers financial position, past payment history, cash
flows, historical loss experience and economic conditions. While management
believes that adequate allowances for doubtful accounts have been provided in
the consolidated financial statements, it is possible that we could experience
additional unexpected credit losses. Goodwill Valuation As of January 1, 2002, we adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 represents
a substantial change in the accounting for goodwill. SFAS No. 142 requires that
goodwill no longer be amortized, but that goodwill be tested for impairment by
comparing the reporting units carrying value to its fair value as of January
1, 2002 and as of an annual assessment date. 31




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##### 



In accordance with SFAS No. 142, we have elected July 31st as our annual
impairment assessment date. We completed our initial impairment assessment as
of January 1, 2002 and our annual impairment assessment as of July 31, 2002 and
2003, and concluded that no impairment charge was required. Any impairment
charges in the future, based on the evaluation requirements under SFAS No. 142,
could be material to the Companys results of operations. Long-Lived Assets Management reviews long-lived assets, which consists of property, plant and
equipment, for impairment whenever events or changes in circumstances indicate
that the carrying value of the asset may not be recovered. Recoverability of
long-lived assets to be held and used is evaluated by a comparison of the
carrying amount of the asset to future net undiscounted cash flows expected to
be generated by the asset group. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized for the excess
of the carrying amount over the fair value of the asset. Assets to be disposed
of are reported at the lower of the carrying value or fair value less cost to
sell when we have committed to a disposal plan. In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. We adopted SFAS No. 144 as of
January 1, 2002 with no material impact to our consolidated financial
statements. Recently Issued Accounting Standards In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure; an amendment of FASB Statement No.
123. This Statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. Additionally, this Statement amends the disclosure requirements
of Statement No. 123 to require prominent disclosures in both annual and
interim financial statements regarding the method of accounting used for
stock-based employee compensation and the effect of the method used on reported
results. We have currently decided to continue to use the intrinsic value
method for accounting for stock-based employee compensation. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Under Statement 4, all gains and losses from extinguishment of debt were
required to be aggregated and, if material, classified as an extraordinary
item, net of related income tax effect. This Statement eliminates Statement 4
and as a result, gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria in APB No. 30.
This Statement became effective for us on January 1, 2003. As a result of
adoption, we have reclassified the $27,279 gain on debt extinguishment to be
included with continuing operations. In January 2003, the FASB issued Interpretation 46, Consolidation of Variable
Interest Entities. This Interpretation was subsequently revised in December
2003. This Interpretation clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support. An
enterprise shall consolidate a variable interest entity, as defined, if that
enterprise has a variable interest that will absorb a majority of the entitys
expected losses, receive a majority of the entitys expected residual returns,
or both. Based on the revision performed in December 2003, this Interpretation
becomes effective for us beginning with the first quarter of fiscal 2004
(ending March 31, 2004). We have evaluated this Interpretation and do not
anticipate any material impact on our consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This
Statement establishes standards for how to classify and measure certain
financial instruments with characteristics of both liabilities and equity.
This Statement became effective for any financial instruments that we entered
into or modified after May 31, 2003, and otherwise became effective for us on
July 1, 2003. During fiscal 2003, we have adopted SFAS No. 150 with no
material impact on our consolidated financial statements. 32




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##### 



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. We are exposed to market risk for changes in interest rates. We have no
exposure to foreign currency exchange rates or to commodity price risk. We do
not hold or issue any financial instruments for trading or other speculative
purposes. Our obligations under our Amended Revolving Credit Facility and our $5,000 BofA
senior term loan bear interest at floating rates and therefore, we are impacted
by changes in prevailing interest rates. However, our $3,500 Amended Term Loan,
our $8,250 term loan from our principal stockholder, and our New Notes, Old
Notes, and Junior Notes all bear fixed interest rates and therefore we are not
subject to the risk of interest rate fluctuations. A 10% change in market
interest rates that affect our financial instruments would impact earnings
during 2003 by approximately $120 before taxes and would change the fair value
of our financial instruments by approximately $10,100. The table below provides information about our market sensitive financial
instruments and constitutes a forward-looking statement. Our major market
risk exposure is changing interest rates in the United States and fluctuations
in the London Interbank Offered Rate. Our policy is to manage interest rates
through use of a combination of fixed and floating rate debt. The table below
assumes the December 31, 2003 interest rates remain constant. (in thousands)Fair ValueDecember 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total
    
    2003Long term debt:Fixed rate debt
    
    $
    3,500
    
    
    
    
    
    
    
    124,050
    
    
    
    3,063
    
    
    
    16,247
    
    
    
    
    
    
    $
    146,860
    
    
    $
    140,169Average
actualinterest rate
    
    
    12.00
    %
    
    
    
    
    
    
    8.53
    %
    
    
    8.00
    %
    
    
    8.125
    %Variable ratedebt
    
    $
    19,705
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    19,705
    
    
    $
    19,705Average
actualinterest rates
    
    
    5.86
    %
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial information required by Item 8 is included elsewhere in this
report (see Part IV, Item 15). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. For all periods included within this filing on Form 10-K, there were no
disagreements with our accountants on accounting principles or practices,
financial statement disclosure or auditing scope or procedures which, if not
resolved to our accountants satisfaction, would have caused them to make
reference to such matters in their audit report on our consolidated financial
statements. 33




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ITEM 9A. CONTROLS AND PROCEDURES  (a)
    
    Our Chief Financial Officer and Chief Executive Officer evaluated our
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act)). Based on that evaluation, these
officers have concluded that as of December 31, 2003 our disclosure
controls and procedures were effective in timely alerting them to
material information relating to our company (including our
consolidated subsidiaries) required to be included in our reports
filed or submitted by us under the Exchange Act.As of December 31, 2003, the Company has carried out an evaluation,
under the supervision and with the participation of the Companys
management, including the Companys principal executive officer and
the Companys principal financial officer, of the effectiveness of the
design and operation of the Companys disclosure controls and
procedures. Based on such evaluation, the Company principal executive
officer and principal financial officer concluded that the Companys
disclosure controls and procedures are effective.(b)
    
    There have been no significant changes in the Companys internal
controls or in other factors that could significantly affect the
internal controls subsequent to the date of their evaluation in
connection with the preparation of this annual report on Form 10-K. 34




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PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by Item 10 is hereby incorporated by reference from
the Registrants Proxy Statement for its 2004 Annual Meeting of Stockholders,
which Proxy Statement will be filed within 120 days after the end of the fiscal
year ended December 31, 2003. We have adopted a Code of Ethical Conduct. A copy of the form of the Code is
an exhibit to this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. The information required by Item 11 is hereby incorporated by reference from
the Registrants Proxy Statement for its 2004 Annual Meeting of Stockholders,
which Proxy Statement will be filed within 120 days after the end of the fiscal
year ended December 31, 2003. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by Item 12 is hereby incorporated by reference from
the Registrants Proxy Statement for its 2004 Annual Meeting of Stockholders,
which Proxy Statement will be filed within 120 days after the end of the fiscal
year ended December 31, 2003. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by Item 13 is hereby incorporated by reference from
the Registrants Proxy Statement for its 2004 Annual Meeting of Stockholders,
which Proxy Statement will be filed within 120 days after the end of the fiscal
year ended December 31, 2003. ITEM 14. PRINCIPAL ACCOUNTING FEES AND PROCEDURES. The information required by Item 14 is hereby incorporated by reference from
the Registrants Proxy Statement for its 2004 Annual Meeting of Stockholders,
which Proxy Statement will be filed within 120 days after the end of the fiscal
year ended December 31, 2003. 35




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##### 



PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (A) DOCUMENTS FILED AS PART OF THIS REPORT. The consolidated balance sheets as
of December 31, 2003 and December 31, 2002 and the related consolidated
statements of operations and stockholders equity and cash flows for each of
the three years in the period ended December 31, 2003 are filed as part of this
report: PAGE(1) Financial StatementsIndependent Auditors Reports
    
    
    F-2Consolidated Balance Sheets at December 31, 2003 and 2002
    
    
    F-4Consolidated Statements of Operations for each of the three years in the period ended December 31, 2003
    
    
    F-5Consolidated Statements of Stockholders Equity (Deficit) and Comprehensive Income (Loss) for each of the three years in the period ended
December 31, 2003
    
    
    F-6Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2003
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-9(2) Consolidated Financial Statement SchedulesSchedule II  Valuation and Qualifying Accounts for the three years ended December 31, 2003
    
    
    F-35
 (3)
    
    Exhibits3.1
    
    Certificate of Incorporation of Aviation Sales and amendment thereto (2)3.2
    
    Second Amendment to Certificate of Incorporation (4)3.3
    
    Third Amendment to Certificate of Incorporation (25)3.4
    
    Bylaws (2)4.1
    
    Indenture, dated as of February 17, 1998, among Aviation Sales, the Subsidiary Guarantors named therein and SunTrust Bank, Central Florida, National Association, Trustee (3)4.2
    
    Form of Supplemental Indenture among Aviation Sales, the Subsidiary Guarantors named therein and the Trustee (24)4.3
    
    Common Stock Purchase Warrant Certificate issued on February 18, 2000 to Citicorp USA, Inc.(10)4.4
    
    Amendment to Warrant between Citicorp USA, Inc. and the Company (26)4.5
    
    Form of Common Stock Purchase Warrants issued in February 2001 (16)4.6
    
    Indenture, dated as of February 28, 2002 among TIMCO Aviation Services, Inc., the Subsidiary Guarantors named therein and Trustee with respect to the 8% Senior Subordinated Convertible PIK
Notes due 2006(22)4.7
    
    Warrant Agreement (22)4.8
    
    Common Stock Purchase Warrant issued in the restructuring (22)4.9
    
    Form of Warrants issued to LJH Ltd. and Don A. Sanders in September 2002 (31)4.10
    
    Warrant issued to LJH Ltd. on May 14, 2003 (31)10.1
    
    Fourth Amended and Restated Credit Agreement dated May 31, 2000 by and among Aviation Sales, certain of our Subsidiaries and Citicorp USA, Inc., as Agent (11)
 36




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##### 



10.2
    
    Lease dated July 22, 1998 by and between Ben Quevedo, Ltd. and Caribe (7)10.3
    
    1996 Director Stock Option Plan (4)10.4
    
    1996 Stock Option Plan (4)10.5
    
    TIMCO Aviation Services, Inc. 2001 Stock Option Plan (30)10.6
    
    Reserved10.7
    
    Credit Agreement dated as of December 17, 1998 among First Security Bank, National Association, as Owner Trustee for the Aviation Sales Trust 1998- 1, as Lessor,
NationsBank, National Association, as Administrative Agent, and the several Lenders thereto (6)10.8
    
    Lease Agreement dated as of December 17, 1998 between First Security Bank, National Association, as Owner Trustee under Aviation Sales Trust 1998-1, as Lessor,
and Aviation Sales, as Lessee (6)10.9
    
    Guaranty Agreement (Series A Obligations) between Aviation Sales, substantially all of our subsidiaries and NationsBank, National Association, as Agent for the
Series A Lenders, dated as of December 17, 1998(6)10.10
    
    Guaranty Agreement (Lease Obligations) between substantially all of the subsidiaries of Aviation Sales and First Security Bank, National Association, as Owner
Trustee for the Aviation Sales Trust 1998-1, dated as of December 17, 1998 (6 )10.11
    
    Participation Agreement between Aviation Sales as Construction Agent and Leases, First Security Bank, National Association, as Owner Trustee, the Various Banks
and other lending institutions as the Holders and Lenders, and NationsBank, National Association, as Administrative Agent, dated as of December 17, 1998 (6)10.12
    
    Amendment No. 1 to Participation Agreement between Aviation Sales as Construction Agent and Leases, First Security Bank, National Association, as Owner Trustee,
the Various Banks and other lending institutions as the Holders and Lenders, and NationsBank, National Association, as Administrative Agent, dated as of February
18, 2000 (10)10.13
    
    Amendment Agreement No. 2 for Lease Agreement and Certain Other Operative Agreements, dated May 31, 2000 (11)10.14
    
    Amendment No. 1, dated as of August 14, 2000, to the Fourth Amended and Restated Credit Agreement (12)10.15
    
    Amendment Agreement No. 3 for Lease Agreement and Certain Other Operative Agreements (12)10.16
    
    Asset Purchase Agreement by and among Barnes Group Inc., Aviation Sales, Aviation Sales Manufacturing Company, AVS/Kratz-Wilde Machine Company and Apex
Manufacturing, Inc. dated as of August 3, 2000(13)10.17
    
    Amendment No. 1 dated September 7, 2000 to the Asset Purchase Agreement by and among Barnes Group Inc., Aviation Sales, Aviation Sales Manufacturing Company,
AVS/Kratz-Wilde Machine Company and Apex Manufacturing, Inc. dated as of August 3, 2000 (13)10.18
    
    Amendment No. 2 dated as of November 14, 2000 to Fourth Amended and Restated Credit Agreement (14)10.19
    
    Amendment Agreement No. 4 for Lease Agreement and Certain Other Operative Agreements (14)10.20
    
    Asset Purchase Agreement among Aviation Sales, Aviation Sales Distribution Services Company (ASDC) and Kellstrom, dated September 20, 2000 (15)10.21
    
    Letter Agreement to Asset Purchase Agreement, dated November 28, 2000(15)
 37




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##### 



10.22
    
    Inventory Purchase Agreement among KAV, Aviation Sales and ASDC, dated September 30, 2000(15)10.23
    
    Letter Amendment to Inventory Purchase Agreement, dated November 28, 2000(15)10.24
    
    Form of KAV Senior Subordinated Note (15)10.25
    
    Form of KAV Junior Subordinated Note (15)10.26
    
    Operating Agreement of KAV, dated September 20, 2000, between Aviation Sales and Kellstrom (15)10.27
    
    Letter Agreement between Kellstrom, KAV and Aviation Sales, dated December 1, 2000, with respect to the payment of KAV Operating Expenses (15)10.28
    
    Consignment Agreement between KAV and Kellstrom, dated December 1, 2000(15)10.29
    
    Equipment Lease Agreement, dated December 1, 2000, among Aviation Sales, ASDC and Kellstrom (15)10.30
    
    Lease Agreement, dated December 1, 2000, among ASDC and Kellstrom (Pearland) (15)10.31
    
    Lease Agreement, dated December 1, 2000, between Kellstrom and Aviation Sales (Miramar)(15)10.32
    
    Non-Competition Agreement, dated December 1, 2000, among ASDC, Aviation Sales and Kellstrom(15)10.33
    
    License Agreement, dated December 1, 2000, among Aviation Sales, ASDC and Kellstrom (15)10.34
    
    Cooperation Agreement, dated December 1, 2000, between Kellstrom and Aviation Sales (15)10.35
    
    Letter Agreement, dated December 1, 2000, between Kellstrom and Aviation Sales (Equipment)(15)10.36
    
    Letter Agreement, dated December 1, 2000, between Kellstrom and Aviation Sales (Pearland)(15)10.37
    
    Consent and Amendment No. 3, dated November 28, 2000, to the Fourth Amended and Restated Credit Agreement dated as of May 31, 2000, as amended(15)10.38
    
    Amendment and Consent Agreement No. 5 for Participation Agreement and Certain Other Operative Agreements, dated as of December 1, 2000(15)10.39
    
    Agreement, dated February 14, 2001, between various subsidiaries of Aviation Sales and Bank of America, N.A.(16)10.40
    
    $10.0 million Term Loan Note, dated February 14, 2001(16)10.41
    
    Form of Limited Guaranty in favor of Bank of America, N.A.(16)10.42
    
    Amendment No. 4, Consent and Waiver, dated February 14, 2001, to the Fourth Amended and Restated Credit Agreement dated as of May 31, 2000, as amended(16)10.43
    
    Amendment and Consent Agreement No. 7 for Lease Agreement and Certain Other Operative Agreements, dated as of February 14, 2001(16)10.44
    
    Stock Purchase Agreement, dated December 15, 2000, among Wencor West, Inc. Aviation Sales and ASDC (15)10.45
    
    Amendment No. 5 and Waiver, dated as of April 17, 2001 to Fourth Amended and Restated Credit Agreement dated as of May 31, 2000, amended (17)10.46
    
    Amendment and Consent Agreement No. 8 for Lease Agreement and Certain Other Operative Agreements (17)
 38




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##### 



10.47
    
    Asset Purchase Agreement dated May 25, 2001 among Aviation Sales, Caribe Aviation, Inc. and Hamilton Sundstrand Service Corporation(18)10.48
    
    $13 million Replacement Term Loan Note, dated May 24, 2001(18)10.49
    
    Amendment No. 6 and Consent, dated May 21, 2001, to the Fourth Amended and Restated Credit Agreement dated as of May 31, 2000, as amended(18)10.50
    
    Amendment No. 7, Consent and Waiver, dated May 23, 2001, to the Fourth Amended and Restated Credit Agreement dated as of May 31, 2000, as amended (18)10.51
    
    Amendment and Consent Agreement No. 9 for Lease Agreement and Certain Other Operative Agreements, dated as of May 21, 2001 (18)10.52
    
    Amendment and Consent Agreement No. 10 for Lease Agreement and Certain Other Operative Agreements, dated as of May 24, 2001 (18)10.53
    
    Amendment No. 8, Consent and Waiver, dated August 30, 2001 to Fourth Amended and Restated Credit Agreement (19)10.54
    
    Consent, Waiver and Forbearance Agreement No. 11 for Lease Agreement and Certain Operative Agreements, dated as of September 11, 2001 (19)10.55
    
    Amendment No. 8, Consent and Waiver, dated as of November 27, 2001, to Fourth Amended and Restated Credit Agreement (21)10.56
    
    Consent, Waiver and Forbearance Agreement No. 12 for Lease Agreement and certain other Operation Agreements dated as of November 27, 2001 (21)10.57
    
    Employment Agreement between Aviation Sales and Gil West (22)10.58
    
    Form of Waiver and Consent, dated April 18, 2002, to Fourth Amended and Restated Credit Agreement (25)10.59
    
    Form of Amendment and Waiver Agreement No. 13 for Lease Agreement and certain other Operative Agreements (25)10.60
    
    Stipulation of Settlement, dated as of May 6, 2002 (27)10.61
    
    Description of Securities to be issued in connection with class action settlement (27)10.62
    
    Fifth Amended and Restated Credit Agreement dated as of July 12, 2002 (26)10.63
    
    Amendment and Consent Agreement No. 14 for Lease Agreement and Certain Other Operative Agreements (26)10.64
    
    Replacement Term Loan Note in the principal amount of $5.0 million in favor of Bank of America, N.A. (26)10.65
    
    Second Amendment to Limited Guaranty of LJH Ltd. (26)10.66
    
    Second Amendment to Limited Guaranty of Don A. Sanders (26)10.67
    
    Replacement Term Loan Note in the principal amount of $2.5 million in favor of Bank of America, N.A. (26)10.68
    
    Second Amendment to Limited Guaranty of James Investments, Inc. (26)
 39




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##### 



10.70
    
    Guaranty by the Company and subsidiaries of the $5.0 million and the $2.5 million term loans due to Bank of America, N.A. (26)10.71
    
    Term Loan Note in principal amount of $1.0 million in favor of Benito and Martha Quevedo (26)10.72
    
    Loan Parties Agreement, dated as of July 12, 2002, relating to the $1.0 million in favor of Benito and Martha Quevedo (26)10.73
    
    Guaranty by the Company and subsidiaries of the $1.0 million in favor of Benito and Martha Quevedo (26)10.74
    
    Memorandum of Purchase and Sale between ASDC, the Company and Quevedo Family Limited Partnership, dated as of July 12, 2002 (26)10.75
    
    Security Agreement, dated as of July 12, 2002, among the Company, its subsidiaries, Benito and Martha Quevedo, James Investments, Inc., LJH Ltd. and Don A.
Sanders (26)10.76
    
    Agreement, dated as of July 12, 2002, among Benito and Martha Quevedo, James Investments, Inc., LJH Ltd. and Don A. Sanders (26)10.77
    
    Amended and Restated Intercreditor Agreement between Citicorp USA, Inc., as Agent, and Bank of America, N.A. (26)10.78
    
    Intercreditor Agreement among Citicorp USA, Inc., as Agent, Benito and Martha Quevedo, James Investments, Inc., LJH Ltd. and Don A. Sanders (26)10.79
    
    Post-Closing Resolution Agreement among the Company, ASDC and Kellstrom, dated as of June 10, 2002 (26)10.80
    
    First Amendment to Non-Competition Agreement (26)10.81
    
    First Amendment to Miramar Lease between the Company and Kellstrom (26)10.82
    
    Assignment of Amended Miramar Lease from Kellstrom to KIAC, Inc. (26)10.83
    
    Assignment of Amended Miramar Lease from KIAC, Inc. to Kellstrom Aerospace, LLC (26)10.84
    
    Consignment Agreement between KAV, Kellstrom Commercial Aerospace, Inc. and Bank of America, N.A. (26)10.85
    
    Amended and Restated Loan and Security Agreement between Bank of America, N.A. and KAV (26)10.86
    
    Proceeds Sharing Agreement (26)10.87
    
    AVS Investor Mutual Release (26)10.88
    
    KAV Mutual Release (26)10.89
    
    AVS/ASDC Mutual Release (26)10.90
    
    Asset Purchase Agreement, dated as of July 31, 2002, by and among Airborne Nacelle Services, Inc., Aerocell Structures, Inc. and TIMCO Aviation Services, Inc.
(28)10.91
    
    Amendment No. 1 and Waiver, dated as of September 27, 2002, to Fifth Amended and Restated Credit Agreement, dated as of July 12, 2002 (29)10.92
    
    Amendment No. 2, Consent and Waiver, dated as of October 11, 2002, to Fifth Amended and Restated Credit Agreement, dated as of July 12, 2002 (29)
 40




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##### 



10.93
    
    Stock Purchase Agreement between Ducommun Incorporated and TIMCO Aviation Services, Inc., dated as of
October 2, 2002 (29)10.94
    
    Purchase and Sale Agreement, dated October 4, 2002, between LJH, Ltd. and AVSRE, L.P. relating to the
purchase of the Companys Dallas, Texas facilities (29)10.95
    
    Lease between LJH, Ltd., as landlord, and Aircraft Interior Design, Inc., as tenant, dated October 4, 2002,
for the property located at 2659 Nova Drive, Dallas, Dallas County, Texas (29)10.96
    
    Subordinated Term Promissory Note, dated October 11, 2002, made in favor of LJH, Ltd. in the original
amount of $1.3 million (29)10.97
    
    Keepwell Agreement, dated as of October 11, 2002, by LJH, Ltd. in favor of the Companys senior revolving
credit lenders (29)10.98
    
    Amendment No. 4, Consent and Limited Waiver to Fifth Amended and Restated Credit Agreement (31)10.99
    
    Amendment, Consent and Waiver Agreement No. 16 for Lease Agreement and Certain Other Operative Agreements
(31)10.100
    
    Term Promissory Note in the face amount of $7,350,000 in favor of LJH, Ltd. (31)10.101
    
    Sublease Agreement between LJH, Ltd. and the Company for the Goodyear facility (31)10.102
    
    Employment Agreement between the Company and Roy T. Rimmer, Jr. (31)10.103
    
    Stock Option Agreement between the Company and Roy T. Rimmer, Jr. (31)10.104
    
    Employment Agreement between the Company and C. Robert Campbell (31)10.105
    
    Employment Agreement between the Company and Jack Arehart (31)10.106
    
    Amendment to Employment Agreement between the Company and Roy T. Rimmer, Jr. (1)10.107
    
    Employment Agreement between the Company and Don Mitacek (1)10.108
    
    2003 Stock Incentive Plan (32)10.109
    
    Purchase and Sale Agreement, dated as of February 5, 2004, between the Company and Keystone Operating
Partnership, L.P. relating to the sale of the Miramar property (1)10.110
    
    Amendment No. 5 to Fifth Amended and Restated Credit Agreement (1)10.111
    
    Amendment No. 6 to Fifth Amended and Restated Credit Agreement (1)10.112
    
    Term Note to LJH, Ltd., dated as of
January 31, 2004, in the amount of $5.0 million (1)10.113
    
    Financing Agreement dated as of
April 5, 2004 between the Company, The CIT Group/Business Credit,
Inc. and the Lenders (1)10.114
    
    Financing Agreement between the
Company and Hilco Capital LP (1)10.115
    
    Intercreditor Agreement between The
CIT Group/Business Credit, Inc., Hilco Capital LP and the Company (1)10.116
    
    Amended and Restated Consolidated
Term Promissory Note in favor of LJH, Ltd. (1)10.117
    
    Amended and Restated Security
Agreement between the Company and LJH, Ltd. (1)10.118
    
    Amended and Restated Guaranty
Agreement in favor of LJH, Ltd. (1)10.119
    
    Intercreditor Agreement between the
Company, The CIT Group/Business Credit, Inc., Hilco Capital LP and
LJH, Ltd. (1)10.120
    
    Equipment Lease Agreement between
the Company and LJH, Ltd. (1)
 41




---



##### 



14.1
    
    Code of Ethical Conduct (1)21.1
    
    Subsidiaries of the Company (31)23.1
    
    Consent of KPMG LLP (1)25.1
    
    Statement of Eligibility of Trustee on Form T-1 (22)31.1
    
    Certifications by CEO and CFO under Section 302 of Sarbanes-Oxley Act of 200232.1
    
    Certifications of CEO and CFO under Section 906 of Sarbanes-Oxley Act of 2002
    Notes to Exhibits(1)
    
    Filed herewith(2)
    
    Incorporated by reference to Aviation Sales Registration Statement on
Form S-1 dated April 15, 1996 (File No. 333-3650)(3)
    
    Incorporated by referenced to Aviation Sales Registration Statement on
Form S-4 dated March 26, 1998 (File No. 333-48669)(4)
    
    Incorporated by reference to Amendment No. 1 to Aviation Sales
Registration Statement on Form S-1 dated June 6, 1996 (File
No. 333-3650)(5)
    
    Incorporated by reference to Aviation Sales Annual Report on Form 10-K
for the year ended December 31, 1996(6)
    
    Incorporated by reference to Aviation Sales Current Report on Form 8-K
dated December 17, 1998(7)
    
    Incorporated by reference to Aviation Sales Annual Report on Form 10-K
for the year ended December 31, 1998(8)
    
    Incorporated by reference to Aviation Sales Quarterly Report on Form 10-Q
for the quarter and six months ended June 30, 1999(9)
    
    Incorporated by reference to Aviation Sales Current Report on Form 8-A
filed November 15, 1999(10)
    
    Incorporated by reference to Aviation Sales Current Report on Form 8-K
filed on March 27, 2000(11)
    
    Incorporated by reference to Aviation Sales Current Report on Form 8-K
filed on June 13, 2000(12)
    
    Incorporated by reference to Aviation Sales Quarterly Report on Form
10-Q for the quarter and six months ended June 30, 2000(13)
    
    Incorporated by reference to Aviation Sales Current Report on Form 8-K
filed on September 22, 2000(14)
    
    Incorporated by reference to Aviation Sales Quarterly Report on Form
10-Q for the quarter and nine months dated
September 30, 2000(15)
    
    Incorporated by reference to Aviation Sales Current Report on Form 8-K
filed on December 18, 2000(16)
    
    Incorporated by reference to Aviation Sales Current Report on Form 8-K
filed on March 1, 2001(17)
    
    Incorporated by reference to Aviation Sales Annual Report on Form 10-K
for the year ended December 31, 2000(18)
    
    Incorporated by reference to Aviation Sales Current Report on Form 8-K
filed May 25, 2001(19)
    
    Incorporated by reference to Aviation Sales Quarterly Report on Form
10-Q for the quarter and six months ended June 30, 2001. 42




---



##### 



(20)
    
    Previously filed with Aviation Sales Registration Statement on Form S-4
filed September 14, 2001.(21)
    
    Incorporated by reference from Aviation Sales Quarterly Report on Form
10-Q for the quarter and nine months ended
September 30, 2001.(22)
    
    Previously filed with Aviation Sales Amendment No. 2 to Registration
Statement on Form S-4 filed December 13, 2001.(23)
    
    Incorporated by reference to Aviation Sales Current Report on Form 8-K
filed March 5, 2002(24)
    
    Previously filed with Aviation Sales Amendment No. 3 to Registration
Statement on Form S-4 filed January 9, 2002.(25)
    
    Incorporated by reference to Annual Report on Form 10-K for the fiscal
year ended December 31, 2001(26)
    
    Incorporated by reference to Form 8-K dated July 12, 2002(27)
    
    Incorporated by reference to Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002(28)
    
    Incorporated by reference to Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002(29)
    
    Incorporated by reference to Quarterly Report of Form 10-Q for the
quarter ended September 30, 2002(30)
    
    Incorporated by reference to Aviation Sales proxy statement dated
January 9, 2002(31)
    
    Incorporated by reference from the Companys 2002 Annual Report on Form
10-K(32)
    
    Incorporated by reference to the Companys proxy statement dated December
1, 2003 (B) REPORTS ON FORM 8-K The Company did not file a Current Report on Form 8-K during the fourth quarter
of 2003. (C) EXHIBITS For exhibits, see Item 14(A)(3) above. 43




---



##### 



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. TIMCO AVIATION SERVICES, INC.
(Registrant) BY: /s/ Roy T. Rimmer, Jr.
Roy T. Rimmer, Jr., Chairman and Chief Executive
Officer
    
    April 12, 2004
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. SIGNATURE AND TITLE:
    
    DATE:/s/ Roy T. Rimmer, Jr.
Roy T. Rimmer, Jr.
Chairman and Chief Executive Officer
(Principal Executive Officer)
    
    April 12, 2004/s/ Gil WestGil West
President (Principal Operating Officer)
    
    April 12, 2004/s/ C. Robert Campbell
C. Robert Campbell
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
    
    April 12, 2004/s/ Jack HerschJack Hersch
Director
    
    April 12, 2004/s/ Philip B. Schwartz
Philip B. Schwartz
Director
    
    April 12, 2004
 44




---



##### 



SIGNATURE AND TITLE:
    
    DATE:/s/ Steven L. Gerard

Steven L. Gerard
Director
    
    April 12, 2004/s/ Stephen E. Gorman
Stephen E. Gorman
Director
    
    April 12, 2004
 45




---



##### 



CONSOLIDATED FINANCIAL STATEMENTS OF TIMCO AVIATION SERVICES, INC.
AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2001, 2002 and 2003 REPORT TITLE
    
    PAGE NO.Independent Auditors Reports
    
    
    F-2Consolidated Balance Sheets
    
    
    F-4Consolidated Statements of Operations
    
    
    F-5Consolidated Statements of Stockholders Equity (Deficit)
and Comprehensive Income (Loss)
    
    
    F-6Consolidated Statements of Cash Flows
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-9Schedule II  Valuation and Qualifying Accounts
    
    
    F-35
 F-1




---



##### 



Independent Auditors Report The Board of Directors
TIMCO Aviation Services, Inc. and subsidiaries: We have audited the accompanying consolidated balance sheets of TIMCO Aviation
Services, Inc. and subsidiaries as of December 31, 2003 and 2002 and the
related consolidated statements of operations, stockholders deficit and
comprehensive income (loss) and cash flows for the years then ended. In
connection with our audits of the 2003 and 2002 consolidated financial
statements, we also have audited the financial statement schedule of valuation
and qualifying accounts for the years ended December 31, 2003 and 2002. These
consolidated financial statements and financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits. The consolidated statements of operations, stockholders
equity (deficit) and comprehensive loss and cash flows and financial statement
schedule of valuation and qualifying accounts for the year ended
December 31, 2001 of
TIMCO Aviation Services, Inc. and subsidiaries were audited by other auditors
who have ceased operations. Those auditors report on such consolidated
financial statements and financial statement schedule was dated April 16, 2002,
except with respect to the matter discussed in the first paragraph of the
Liquidity section of note 1, as to which the date was April 19, 2002. Such
report was unqualified, before the revision described in note 13 to the
accompanying consolidated financial statements, and included an explanatory
paragraph which raised substantial doubt about the Companys ability to
continue as a going concern. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the 2003 and 2002 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of TIMCO
Aviation Services, Inc. and subsidiaries as of December 31, 2003 and 2002, and
the results of their operations and their cash flows for the years then ended
in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the related financial statement
schedule for the years ended December 31, 2003 and 2002, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein. As discussed above, the 2001 consolidated financial statements of TIMCO
Aviation Services, Inc. and subsidiaries were audited by other auditors who
have ceased operations. As described in note 13, these consolidated financial
statements have been revised to include the transitional disclosures required
by Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, which was adopted by the Company as of January 1, 2002. In
our opinion, the disclosures for 2001 in note 13 are appropriate. However, we
were not engaged to audit, review, or apply any procedures to the 2001
consolidated financial statements of the TIMCO Aviation Services, Inc. and
subsidiaries other than with respect to such disclosures and, accordingly, we
do not express an opinion or any other form of assurance on the 2001
consolidated financial statements taken as a whole. KPMG LLP Greensboro, North Carolina
March 26, 2004, except for note 15,
which is as of April 8, 2004 F-2




---



##### 



The following report is a copy of a previously issued Report of Independent
Public Accountants. This report relates to prior years financial statements.
This report has not been reissued by Arthur Andersen LLP. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To TIMCO Aviation Services, Inc.: We have audited the accompanying consolidated balance sheets of TIMCO Aviation
Services, Inc. (a Delaware corporation formerly known as Aviation Sales
Company) and subsidiaries as of December 31, 2000 and 2001, and the related
consolidated statements of operations, stockholders equity (deficit) and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements and the schedule referred to below are the responsibility
of the Companys management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TIMCO Aviation Services, Inc.
and subsidiaries as of December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted
in the United States. The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1, 7 and 11,
the Companys senior debt ($59.3 million at December 31, 2001) comes due in
July 2002 and August 2002, and the Company has insufficient liquidity to repay
these loans. This matter raises substantial doubt as to the Companys ability
to continue as a going concern. Managements plans in regard to this matter are
discussed in Notes 1, 7 and 11. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commissions rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole. Arthur Andersen LLP Miami, Florida,
April 16, 2002 (except with respect to the matter discussed in the first
paragraph of the Liquidity section of Note 1, as to which the date is April 19,
2002). F-3




---



##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31,2003
    
    2002(In thousands, except share data)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,603
    
    
    $
    339Accounts receivable, net of allowance of $5,612 and $9,704 in 2003
and 2002, respectively
    
    
    36,950
    
    
    
    17,762Inventories
    
    
    25,724
    
    
    
    21,631Net assets of discontinued operations
    
    
    459
    
    
    
    Prepaid insurance
    
    
    1,325
    
    
    
    2,316Other current assets
    
    
    3,661
    
    
    
    1,272Total current assets
    
    
    69,722
    
    
    
    43,320Fixed assets, net
    
    
    55,100
    
    
    
    58,310Other Assets:Goodwill
    
    
    26,124
    
    
    
    26,124Deferred financing costs, net
    
    
    1,590
    
    
    
    2,206Other
    
    
    355
    
    
    
    1,066Total other assets
    
    
    28,069
    
    
    
    29,396Total assets
    
    $
    152,891
    
    
    $
    131,026LIABILITIES AND STOCKHOLDERSDEFICITCurrent Liabilities:Accounts payable
    
    $
    21,446
    
    
    $
    14,564Accrued expenses
    
    
    14,554
    
    
    
    16,460Accrued interest
    
    
    992
    
    
    
    854Revolving loan
    
    
    14,705
    
    
    
    2,179Customer deposits
    
    
    12,586
    
    
    
    11,560Current maturities of capital lease obligations
    
    
    1,510
    
    
    
    1,101Current maturities of notes payable to financial institutions
    
    
    291
    
    
    
    Net liabilities of discontinued operations
    
    
    278
    
    
    
    3,574Other
    
    
    2,300
    
    
    
    3,205Total current liabilities
    
    
    68,662
    
    
    
    53,497Long-term Liabilities:Senior subordinated notes, net:New notes due 2006
    
    
    115,800
    
    
    
    115,800Old notes due 2008
    
    
    16,247
    
    
    
    16,247Capital lease obligations, net of current portion
    
    
    26,188
    
    
    
    27,734Term loan with a related party
    
    
    8,250
    
    
    
    1,300Notes payable to financial institutions, net of current portion
    
    
    8,209
    
    
    
    8,500Junior subordinated notes due 2007, net
    
    
    3,063
    
    
    
    2,613Deferred income
    
    
    1,473
    
    
    
    1,641Other long-term liabilities
    
    
    764
    
    
    
    456Total long-term liabilities
    
    
    179,994
    
    
    
    174,291Commitments and Contingencies (See notes)Stockholders Deficit:Preferred stock, $.01 par value, 1,000,000 shares authorized, none
outstanding, 15,000 shares designated Series A Junior participating
    
    
    
    
    
    
    Common stock, $.001 par value, 500,000,000 shares authorized, 31,640,994
issued and outstanding at December 31, 2003 and 2002
    
    
    32
    
    
    
    32Additional paid-in capital
    
    
    182,088
    
    
    
    180,830Accumulated deficit
    
    
    (277,885
    )
    
    
    (277,624
    )Total stockholders deficit
    
    
    (95,765
    )
    
    
    (96,762
    )Total liabilities and stockholders deficit

    
    $
    152,891
    
    
    $
    131,026
 The accompanying notes are an integral part of these consolidated financial statements. F-4




---



##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31,2003
    
    2002
    
    2001(In thousands, except per share and share data)Operating Revenues:Sales, net
    
    $
    242,425
    
    
    $
    181,760
    
    
    $
    262,303Other
    
    
    89
    
    
    
    213
    
    
    
    1,837Total operating revenues
    
    
    242,514
    
    
    
    181,973
    
    
    
    264,140Cost of sales
    
    
    226,331
    
    
    
    179,705
    
    
    
    259,647Gross profit
    
    
    16,183
    
    
    
    2,268
    
    
    
    4,493Operating expenses
    
    
    15,217
    
    
    
    16,107
    
    
    
    64,305Income (loss) from operations
    
    
    966
    
    
    
    (13,839
    )
    
    
    (59,812
    )Interest expense
    
    
    9,730
    
    
    
    14,174
    
    
    
    25,778Gain resulting from debt extinguishment
    
    
    
    
    
    
    (27,279
    )
    
    
    Charge for settlement of class action litigation
    
    
    
    
    
    
    4,410
    
    
    
    Charge for valuation allowance on notes receivable from KAV Inventory, LLC
    
    
    
    
    
    
    
    
    
    
    37,900Other (income) expense  net
    
    
    (3,811
    )
    
    
    (4,197
    )
    
    
    7,738Loss before income taxes and discontinued operations
    
    
    (4,953
    )
    
    
    (947
    )
    
    
    (131,228
    )Income tax (benefit) expense
    
    
    (986
    )
    
    
    (3,800
    )
    
    
    621(Loss) income from continuing operations before discontinued operations
    
    
    (3,967
    )
    
    
    2,853
    
    
    
    (131,849
    )Discontinued Operations:Operations, net of income taxes
    
    
    3,706
    
    
    
    4,169
    
    
    
    Loss on disposal, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (9,386
    )Net (loss) income
    
    $
    (261
    )
    
    $
    7,022
    
    
    $
    (141,235
    )Basic (Loss) Income Per Share:(Loss) income from continuing operations
    
    $
    (0.13
    )
    
    $
    0.11
    
    
    $
    (87.81
    )Income (loss) from discontinued operations
    
    
    0.12
    
    
    
    0.16
    
    
    
    (6.25
    )Net (loss) income
    
    $
    (0.01
    )
    
    $
    0.27
    
    
    $
    (94.06
    )Diluted (Loss) Income Per Share:(Loss) income from continuing operations
    
    $
    (0.13
    )
    
    $
    0.01
    
    
    $
    (87.81
    )Income (loss) from discontinued operations
    
    
    0.12
    
    
    
    0.02
    
    
    
    (6.25
    )Net (loss) income
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    (94.06
    )Weighted average shares outstanding:Basic
    
    
    31,640,994
    
    
    
    26,015,218
    
    
    
    1,501,532Diluted
    
    
    31,640,994
    
    
    
    255,486,344
    
    
    
    1,501,532
 The accompanying notes are an integral part of these consolidated financial statements. F-5




---



##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT) and
COMPREHENSIVE INCOME (LOSS) RetainedAdditional
    
    Earnings
    
    TotalPaid-in
    
    (Accumulated
    
    StockholdersCommon Stock
    
    Capital
    
    Deficit)
    
    Equity (Deficit)(In thousands, except per share and share data)Shares
    
    AmountBalance as of December 31, 2000
    
    
    1,501,532
    
    
    $
    2
    
    
    $
    150,301
    
    
    $
    (143,411
    )
    
    $
    6,892Net loss and comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (141,235
    )
    
    
    (141,235
    )Warrants issued to
stockholders for providing
credit support
    
    
    
    
    
    
    
    
    
    
    2,892
    
    
    
    
    
    
    
    2,892Warrants issued to
stockholders in connection with
the sale of an asset
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    46Warrants issued to third
parties
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    38Balance as of December 31, 2001
    
    
    1,501,532
    
    
    
    2
    
    
    
    153,277
    
    
    
    (284,646
    )
    
    
    (131,367
    )Net income and comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,022
    
    
    
    7,022Net proceeds from issuance of
common stock to stockholders
in connection with rights
offering
    
    
    24,024,507
    
    
    
    24
    
    
    
    19,782
    
    
    
    
    
    
    
    19,806Common stock issued to senior
subordinated noteholders in
connection with note exchange
offer
    
    
    4,504,595
    
    
    
    5
    
    
    
    3,744
    
    
    
    
    
    
    
    3,749Warrants issued to senior
subordinated noteholders in
connection with note exchange
offer
    
    
    
    
    
    
    
    
    
    
    785
    
    
    
    
    
    
    
    785Common stock issued to third
party for services
    
    
    360,360
    
    
    
    
    
    
    
    631
    
    
    
    
    
    
    
    631Common stock issued in settlement
of class action litigation
    
    
    1,250,000
    
    
    
    1
    
    
    
    1,149
    
    
    
    
    
    
    
    1,150Warrants issued in settlement
of class action litigation
    
    
    
    
    
    
    
    
    
    
    760
    
    
    
    
    
    
    
    760Warrants issued to shareholders
for credit support
    
    
    
    
    
    
    
    
    
    
    702
    
    
    
    
    
    
    
    702Balance as of December 31, 2002
    
    
    31,640,994
    
    
    
    32
    
    
    
    180,830
    
    
    
    (277,624
    )
    
    
    (96,762
    )Net loss and comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (261
    )
    
    
    (261
    )Warrant issued to stockholder
for note payable origination
    
    
    
    
    
    
    
    
    
    
    1,258
    
    
    
    
    
    
    
    1,258Balance as of December 31, 2003
    
    
    31,640,994
    
    
    $
    32
    
    
    $
    182,088
    
    
    $
    (277,885
    )
    
    $
    (95,765
    )
 The accompanying notes are an integral part of these consolidated financial statements. F-6




---



##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31,2003
    
    2002
    
    2001(In thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
    
    $
    (261
    )
    
    $
    7,022
    
    
    $
    (141,235
    )Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:(Income) loss from discontinued operations
    
    
    (3,706
    )
    
    
    (4,169
    )
    
    
    9,386Paid-in-kind interest note obligations
    
    
    1,214
    
    
    
    113
    
    
    
    Gain on Aerocell settlement, net of cash proceeds
    
    
    (455
    )
    
    
    
    
    
    
    Gain on restructuring of debt
    
    
    
    
    
    
    (27,279
    )
    
    
    Charge for class action settlement
    
    
    
    
    
    
    4,410
    
    
    
    Gain on sale leaseback transaction
    
    
    
    
    
    
    (1,811
    )
    
    
    Gain on Kellstrom settlement, net of cash proceeds
    
    
    
    
    
    
    (1,173
    )
    
    
    Gain on sale of subsidiary
    
    
    
    
    
    
    (279
    )
    
    
    (5,664
    )Depreciation and amortization
    
    
    5,514
    
    
    
    5,530
    
    
    
    9,106Amortization of deferred financing costs
    
    
    2,867
    
    
    
    5,527
    
    
    
    5,875(Recovery in) provision for doubtful accounts
    
    
    (838
    )
    
    
    846
    
    
    
    9,502Provision for inventory obsolescence
    
    
    265
    
    
    
    8,334
    
    
    
    2,699Charge to reserve notes receivable from KAV Inventory, LLC
    
    
    
    
    
    
    
    
    
    
    37,900Write-down of long-lived assets
    
    
    
    
    
    
    
    
    
    
    33,940Equity loss of affiliate, net of income taxes
    
    
    
    
    
    
    
    
    
    
    6,573Proceeds from sale of equipment on lease, net of gain
    
    
    
    
    
    
    
    
    
    
    3,282Income on non-refundable lease deposit
    
    
    
    
    
    
    
    
    
    
    (2,204
    )Expense from issuances of warrants
    
    
    
    
    
    
    
    
    
    
    84Change in working capital:Accounts receivable
    
    
    (18,350
    )
    
    
    7,831
    
    
    
    28,680Inventories
    
    
    (4,358
    )
    
    
    8,632
    
    
    
    2,321Other current assets
    
    
    (1,397
    )
    
    
    6,716
    
    
    
    1,278Other non-current assets
    
    
    712
    
    
    
    2,708
    
    
    
    5,151Accounts payable
    
    
    6,881
    
    
    
    (10,995
    )
    
    
    (2,047
    )Accrued expenses
    
    
    (1,313
    )
    
    
    (5,971
    )
    
    
    (1,816
    )Customer deposits
    
    
    1,026
    
    
    
    (2,081
    )
    
    
    7,261Deferred income
    
    
    (168
    )
    
    
    1,605
    
    
    
    Other liabilities
    
    
    (1,361
    )
    
    
    1,084
    
    
    
    7,504Net cash (used in) provided by operating activities
    
    
    (13,728
    )
    
    
    6,600
    
    
    
    17,576CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of fixed assets
    
    
    (2,304
    )
    
    
    (3,560
    )
    
    
    (778
    )Proceeds from sale of subsidiary
    
    
    
    
    
    
    9,062
    
    
    
    21,290Proceeds from sale leaseback with related party, net of transaction fees
    
    
    
    
    
    
    2,246
    
    
    
    Cash used in acquisitions, net of cash acquired
    
    
    
    
    
    
    (1,271
    )
    
    
    Payments from related parties
    
    
    
    
    
    
    
    
    
    
    1,792Investment in joint venture
    
    
    
    
    
    
    
    
    
    
    (339
    )Net cash (used in) provided by investing activities
    
    $
    (2,304
    )
    
    $
    6,477
    
    
    $
    21,965
 The accompanying notes are an integral part of these consolidated financial statements. F-7




---



##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS
OF CASH FLOWS(Continued) For the Years Ended December 31,2003
    
    2002
    
    2001(In thousands)CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings of amounts under senior debt facility
    
    $
    244,464
    
    
    $
    200,910
    
    
    $
    314,510Repayment of amounts under senior debt facility
    
    
    (231,938
    )
    
    
    (210,805
    )
    
    
    (346,825
    )Proceeds of term loan with related party
    
    
    6,950
    
    
    
    1,300
    
    
    
    Payments on capital leases
    
    
    (1,138
    )
    
    
    (476
    )
    
    
    (9,000
    )Payment of deferred financing costs
    
    
    (993
    )
    
    
    (3,122
    )
    
    
    (3,794
    )Issuance of common stock in rights offering
    
    
    
    
    
    
    19,806
    
    
    
    Payment of term loan with financial institutions
    
    
    
    
    
    
    (13,500
    )
    
    
    (5,500
    )Payment for old notes in note exchange offer
    
    
    
    
    
    
    (5,081
    )
    
    
    Payment of expenses related to exchange offer
    
    
    
    
    
    
    (5,031
    )
    
    
    Proceeds of term loan with financial institutions
    
    
    
    
    
    
    
    
    
    
    12,000Payments on equipment loans
    
    
    
    
    
    
    
    
    
    
    (998
    )Net cash provided by (used in) financing activities
    
    
    17,345
    
    
    
    (15,999
    )
    
    
    (39,607
    )Net cash (used in) provided by discontinued operations
    
    
    (49
    )
    
    
    3,261
    
    
    
    66NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    1,264
    
    
    
    339
    
    
    
    CASH AND CASH EQUIVALENTS, beginning of period
    
    
    339
    
    
    
    
    
    
    
    CASH AND CASH EQUIVALENTS, end of period
    
    $
    1,603
    
    
    $
    339
    
    
    $
    SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Interest paid
    
    $
    5,105
    
    
    $
    7,362
    
    
    $
    12,470Income taxes (refunded) paid
    
    $
    (167
    )
    
    $
    (11,458
    )
    
    $
    60SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:Value of warrant issued to stockholder in exchange for note payable origination
    
    $
    1,258
    
    
    $
    
    
    
    $
    Value of common stock and warrants issued in connection with note exchange offer and
loan origination
    
    $
    
    
    
    $
    4,534
    
    
    $
    Value of common stock and warrants issued in connection with settlement of class
action litigation
    
    $
    
    
    
    $
    1,910
    
    
    $
    Value of warrants issued to stockholders for providing credit support
    
    $
    
    
    
    $
    702
    
    
    $
    2,892Value of common stock issued to third party for services
    
    $
    
    
    
    $
    631
    
    
    $
    38Acquisition of capitalized lease asset
    
    $
    
    
    
    $
    
    
    
    $
    34,240Notes received from sale of inventory to KAV Inventory, LLC
    
    $
    
    
    
    $
    
    
    
    $
    8,500Value of warrants issued to stockholders in connection with the sale of an asset
    
    $
    
    
    
    $
    
    
    
    $
    46
 The accompanying notes are an integral part of these consolidated financial statements. F-8




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and Shares in Thousands, Except Per Share Data) NOTE 1  DESCRIPTION OF BUSINESS, LIQUIDITY, AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES DESCRIPTION OF BUSINESS TIMCO Aviation Services, Inc. (the Company) is a Delaware corporation, which
through its subsidiaries, provides aircraft maintenance, repair and overhaul
(MR&O) services to commercial passenger airlines, air cargo carriers,
aircraft leasing companies, maintenance and repair facilities and aircraft
parts redistributors throughout the world. In July 2002, the Company sold its
flight surface repair operation, Aerocell Structures, Inc., based in Hot
Springs, Arkansas. Additionally, in May 2001 the Company sold its component
repair operation, Caribe Aviation, based in Miramar, Florida. The results of
these two businesses are included in the accompanying consolidated results from
continuing operations through the period of their respective sale. Also, in
December 2000, the Company sold substantially all of the assets of its parts
redistribution operation, new parts distribution operation and manufacturing
operations. The results of operations for these businesses and the results of
transactions subsequent to December 2000 related to these businesses are
included in the accompanying consolidated statements of operations as
discontinued operations. See Note 3 for further discussion. On February 28, 2002, the Company completed a significant restructuring of its
capital and equity, including a note exchange and rights offering. See Note 10
for further discussion. Concurrent with the completion of the note exchange and
rights offering, the Company changed its capitalization by increasing the
number of its authorized shares of common stock from 30,000 shares to 500,000
shares and by reducing the number of its issued and outstanding shares of
common stock by converting every ten shares of its issued and outstanding
common stock into one share. Additionally, the Company changed its corporate
name from Aviation Sales Company to TIMCO Aviation Services, Inc. All share
and per share data contained herein reflects completion of the
one-share-for-ten-shares reverse stock split. LIQUIDITY For the year ended December 31, 2003, the Company incurred a loss from
continuing operations of $3,967. The Company also had a net stockholders
deficit as of December 31, 2003 and continued to require additional cash flow
above amounts currently being provided from operations to meet its working
capital requirements. Additionally, at certain times during 2001, 2002, and
during the quarter ended March 31, 2003, the Company was out of
compliance with the financial covenants contained in its then existing Amended
Credit Facility and Tax Retention Operating Lease (TROL) financing
arrangements. The Company, however, has obtained a waiver of non-compliance
with all financial covenants and has thereby cured these covenant violations,
which included non-payment defaults under their respective facilities that were
waived on April 19, 2002, that have occurred during 2001, 2002, and during the quarter ended March 31, 2003. See Note 5 for particulars. The Companys ability to service its debt obligations as they come due,
including maintaining compliance with the covenants and provisions of all of
its debt obligations is dependent upon the Companys future financial and
operating performance. That performance, in turn, is subject to various
factors, including certain factors beyond the Companys control, such as
changes in conditions affecting the airline industry and changes in the overall
economy. Additionally, as a result of the state of the general economy,
fluctuations in the price of jet fuel, a significant decline, from calendar
year 2000, in passenger airline travel, the currently on-going war on
terrorism, the war in Iraq, the outbreak of the SARS virus in Asia, and a
competitive price reduction in airfare prices, the airline industry, and thus
the Companys customer base, has been significantly impacted. The result for
some carriers has been the filing for protection under Chapter 11 of the United
States Bankruptcy Code. These factors have also resulted in some of the
Companys competitors exiting the maintenance, repair, and overhaul business. The Company is highly leveraged and has significant obligations under its
outstanding debt and lease agreements. As a result, significant amounts of cash
flow from operations is required to make required payments of the Companys
debt and lease obligations, thereby reducing funds available for other
purposes. Even if the Company is able to meet its debt service and other
obligations when due, the Company may not be able to comply with the covenants
and other provisions under its debt instruments. A failure to comply, unless
waived by the lenders and noteholders, would be an event of default and would
permit the lenders to accelerate the maturity of these debt obligations. It
would also permit the lenders to terminate their commitments to extend
additional credit under their financing agreements. Our senior credit
facilities provide for the termination of the financing agreements and
repayment of all obligations in the event of a material adverse change in the
Companys business, as defined. If the Company was unable to meet its
obligations under its debt instruments, or if the Company could not obtain
waivers F-9




---



##### 



of defaults under any such
agreements (including defaults caused by the failure to meet financial covenants), the lenders could
proceed against the collateral securing these financing obligations and
exercise all other rights available to them. While the Company expects that it
will make all required debt payments and meet all financial covenants in 2004,
there can be no assurance that it will be able to do so. The Company has recently refinanced its senior debt. On April 8, 2004, the
Company closed on an agreement with the CIT Group in which the Company
obtained a $35,000 senior secured revolving line of credit (the CIT Group
Revolving Line of Credit) and a $6,400 senior secured term loan (the CIT
Group Term Loan, and collectively with the CIT Group Revolving Line of Credit,
the CIT Group Credit Facility). The CIT Group Credit Facility matures on
December 31, 2007. Effective on the same date, the Company obtained an $8,000 senior
secured term loan from Hilco Capital LP (the Hilco Term Loan) and refinanced
the $14,412 of aggregate term debt due to its principal stockholder. For
details of the new financings, see Note 15. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Investments in joint ventures are
accounted for under the equity method of accounting. All significant
intercompany transactions and balances have been eliminated. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Principal estimates made by the Company include the estimated losses on
disposal of discontinued operations, provisions to reduce inventory to the
lower of cost or fair value, the estimated profit or loss to be recognized as
aircraft maintenance, design and construction services are performed, the
allowances for doubtful accounts and notes receivable, the realizability of its
investment in affiliates, the recoverability of its long-lived assets and
goodwill, medical benefit accruals, the estimated fair value of the facilities
under capital leases, and the accruals for litigation and environmental costs.
A principal assumption made by the Company is that inventory will be utilized
in the normal course of business and may be held for a number of years. RECLASSIFICATIONS Certain amounts in the 2002 financial statements have been reclassified to
conform with the 2003 presentation. CASH AND CASH EQUIVALENTS The Company considers all deposits with an original maturity of three months or
less to be cash equivalents. REVENUE RECOGNITION Revenues from aircraft maintenance service are recognized and unbilled
receivables are recorded based upon the percentage of completion method.
Unbilled receivables are billed on the basis of contract terms (which are
generally on completion of an aircraft) and deliveries. The Company changed its
method of accounting for revenue at its engine overhaul facility in the second
quarter of 2001, whereby such revenues are recognized upon shipment of the
overhauled engine. Prior to this change, revenue was recognized as services
were performed based upon a percentage of completion method. The change in the
method of accounting for revenue at the Companys engine overhaul facility did
not have a material impact on the Companys financial position or current or
prior period results of operations. Also, the Company exchanges rotable parts
in need of service or overhaul for new, overhauled or serviceable parts in its
inventory for a fee. Fees on exchanges are recorded as sales at the time the
unit is shipped. In addition, gain on sales of equipment on lease is included
in other operating revenue in the accompanying consolidated statements of
operations. ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK The Company provides MR&O services to commercial airlines, air cargo carriers,
distributors, maintenance facilities, corporate aircraft operators and other
companies. The Company performs periodic credit evaluations of its customers
financial conditions and provides allowances for doubtful accounts as required.
Accrued sales not billed for aircraft maintenance services are billed on the
basis of contract terms (which are generally on completion of an aircraft) and
deliveries. Accrued sales not billed amounted to $11,247 and $9,320 at December
31, 2003 and 2002, respectively, and are included in accounts receivable in the
accompanying consolidated balance sheets. F-10




---



##### 



Additionally, billings in excess of costs approximated $2,275
and $3,205 at December 31, 2003 and 2002, respectively, and are included in
other current liabilities in the accompanying consolidated balance sheets. The Companys top ten customers accounted for approximately 75.9%, 81.6%, and
76.4% of operating revenues, respectively, for the years ended December 31,
2003, 2002 and 2001. One customer accounted for 26.0%, 23.9%, and 31.8%, a
second customer accounted for 17.1%, 18.3%, and 10.2%, a third customer
accounted for 6.6%, 11.9%, and 9.1%, and a fourth customer accounted for 5.7%,
10.5%, and 6.6%, of operating revenues for the years ended December 31, 2003,
2002 and 2001, respectively. No other customer accounted for more than 10% of
operating revenues during fiscal years 2003, 2002 and 2001. While the relative
significance of any particular customer varies from period to period, the loss
of, or significant curtailments of purchases of our services by, one or more of
our significant customers at any time, would adversely affect our revenue and
cash flow. As of December 31, 2003, one customer accounted for 20.3%, a second customer
accounted for 14.4%, a third customer accounted for 14.2%, and a fourth
customer accounted for 10.6% of accounts receivable. As of December 31, 2002,
one customer accounted for 17.4%, a second customer accounted for 15.3%, and a
third customer accounted for 12.6% of accounts receivable. In each case, the
largest customer is an airline that is currently in a proceeding under Chapter
11 of the United States Bankruptcy Code. As a result of these and other credit
exposures identified within our customer base (including exposures relating to
the Companys largest customer), during the fourth quarter of 2002 the Company
recorded additional bad debt provision of approximately $1,300. INVENTORIES Inventories, which consist primarily of new, overhauled, serviceable and
repairable aircraft parts, are stated at the lower of cost or fair value on
primarily a specific identification basis and aircraft parts usage analysis. In
instances where bulk purchases of inventory items are made, cost is determined
based upon an allocation by management of the bulk purchase price to the
individual components. Expenditures required for the recertification of parts
are capitalized as inventory and are expensed as the parts associated with the
recertification are sold. Cost of inventory includes raw materials, labor and
overhead. The Company maintains raw materials, work in progress and finished
goods inventories in support of its operations. At December 31, 2003 and 2002,
inventories consisted of the following: 2003
    
    2002Finished goods
    
    $
    14,268
    
    
    $
    12,469Work in progress
    
    
    10,136
    
    
    
    8,353Raw materials
    
    
    1,320
    
    
    
    715A-300 aircraft
    
    
    
    
    
    
    94$
    25,724
    
    
    $
    21,631
 The Company records a valuation allowance to inventory to reduce the carrying
value of its inventory to the lower of cost or market value. In determining
fair value, the Company assumes that its inventory will be utilized in the
normal course of business and not on a liquidation basis. Such inventory may be
held for periods beyond one year. Provisions for reduction of inventory values
during 2003, 2002, and 2001 were $265, $8,334, and $2,699, respectively. INVESTMENTS In August 1999, the Company obtained a 50% interest in a limited liability
corporation that designs, manufactures and installs an FAA approved conversion
kit that converts certain Boeing 727 aircraft from passenger configuration to
cargo configuration. The initial investment was $2,500. During 2000 and 2001,
the Company invested an additional $3,734 and $339, respectively, in the form
of cash advances and services. The Company accounts for this investment under
the equity method. Sales to date have been minimal and the Company has incurred
losses to date in fulfilling these sales. Realizability of this investment is
dependent on the ability of the limited liability corporation to attract new
business during future periods at rates sufficient to cover its costs including
the investment made by the Company. As a result of economic and industry
conditions, the Company wrote down the full carrying value of this investment
(approximately $6,400) in the third quarter of 2001. Such write-down was
reflected in operating expenses within the accompanying consolidated statement
of operations. The Company has no additional funding obligations or guarantees
of liabilities for this limited liability corporation. F-11




---



##### 



There was no carrying value of equity investments on the consolidated balance
sheets at December 31, 2003 and 2002. Summarized results of operations for
equity investments for the years ended December 31, 2003, 2002 and 2001 are as
follows: 2003
    
    2002
    
    2001Net sales
    
    $
    
    
    
    $
    
    
    
    $
    1,450Gross profit
    
    
    
    
    
    
    
    
    
    
    (215
    )Net income (loss)
    
    
    
    
    
    
    
    
    
    
    (215
    )
 NOTES RECEIVABLE FROM KAV INVENTORY, LLC The Company holds notes, aggregating $37,900, from KAV Inventory, LLC (KAV),
a 50% owned limited liability company which acquired all of the aircraft and
engine spare parts inventory and the engine inventory of the Companys
redistribution operation as discussed in Note 3. These notes bear interest at
14% and are subordinated in all respects to certain institutional financing of
KAV. Because of the contingencies related to collectibility, recognition of
interest income under the notes has been deferred and such interest will be
recognized as collected, which will follow collection of all outstanding
principal amounts. During 2001, for the reasons discussed in Note 3, the
Company recorded a valuation allowance for the full value of these notes.
Overall sales activities for this entity in 2003 and 2002 have been minimal. EQUIPMENT ON LEASE The Company previously leased equipment to customers in the airline industry on
a worldwide basis through noncancellable operating leases ranging from one to
ten year terms. Operating lease income has been recognized on a straight-line
basis over the term of the underlying leases and is included in other operating
revenue in the accompanying consolidated statements of operations. The cost of
equipment on lease is amortized, principally on a straight-line basis, to the
estimated remaining net realizable value over the shorter of the lease term or
the economic life of the equipment. The Company has liquidated its leased
assets portfolio as of December 31, 2003, with all equipment leases expiring,
and the Company is no longer in the equipment leasing business. The cost and
accumulated amortization of equipment on lease are as follows: December 31,2003
    
    2002Equipment on lease, at cost
    
    $
    1,034
    
    
    $
    1,034Accumulated amortization
    
    
    (1,034
    )
    
    
    (1,034
    )$
    0
    
    
    $
    0
 Amortization expense on equipment on lease amounted to $0, $360, and $244,
respectively, for the years ended December 31, 2003, 2002 and 2001. FIXED ASSETS, NET Fixed assets are stated at cost, and at December 31, 2003 and 2002, consisted
of the following: Depreciable Life
    
    2003
    
    2002Capitalized lease assets
    
    25 & 40 years
    
    $
    29,617
    
    
    $
    29,617Machinery and equipment
    
    3 to 7 years
    
    
    36,809
    
    
    
    35,502Furniture and fixtures
    
    3 to 5 years
    
    
    2,453
    
    
    
    2,441Leasehold improvements
    
    Shorter of lease term or useful life
    
    
    30,818
    
    
    
    29,84499,697
    
    
    
    97,404Accumulated depreciation
    
    
    
    
    (44,597
    )
    
    
    (39,094
    )$
    55,100
    
    
    $
    58,310
 F-12




---



##### 



For financial reporting purposes, the Company provides for depreciation of
fixed assets using the straight-line method at annual rates sufficient to
amortize the cost of the assets less estimated salvage values over the assets
estimated useful lives. Maintenance and repair expenditures are charged to
expense as incurred, and expenditures for improvements and major renewals are
capitalized. The carrying amounts of assets which are sold or retired and the
related accumulated depreciation are removed from the accounts in the year of
disposal, and any resulting gain or loss is reflected in the statement of
operations. Depreciation expense amounted to $5,514, $5,170, and $6,768
respectively, for the years ended December 31, 2003, 2002 and 2001. Impairments of long-lived assets are recognized when events or changes in
circumstances indicate that the carrying amount of the asset, or related groups
of assets, may not be recoverable and the Companys estimate of undiscounted
cash flows over the assets remaining estimated useful life are less than the
assets carrying value. Measurement of the amount of impairment may be based
upon appraisals, market values of similar assets or estimated discounted future
cash flows resulting from the use and ultimate disposition of the asset. Due to
the then current economic environment and the depressed status of the aviation
industry, including the market for overhaul services relating to JT8D engines
and components, heavy airframe maintenance relating to earlier generation
aircraft and refurbishment of interiors, and based upon the results of
operations of the Company, during the year ended December 31, 2001 the Company
recognized charges totaling $15,690 relating to an impairment of leasehold
improvements and fixed assets related to these operations, which is included in
operating expenses in the consolidated statement of operations. Additionally,
the Company recognized in 2001 a charge of $2,853 relating to impairment of
leasehold improvements at another facility. Throughout fiscal years 2002 and
2003, the Company has reviewed the carrying value of long-term fixed assets for
impairment and has concluded that the estimated future operating cash flows
anticipated to be generated during the remaining life of these assets support
the current net carrying value of these assets, thus, no impairment charges
have been recorded for such periods. In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 replaces SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of and the accounting and reporting provisions of
Accounting Principles Board Opinion (APB) No. 30, Reporting the Results Of
Operations  Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
SFAS No. 144 establishes a single accounting model for assets to be disposed of
by sale whether previously held and used or newly acquired. SFAS No. 144 was
effective for fiscal years beginning after December 15, 2001. The Company
adopted SFAS No. 144 effective January 1, 2002 with no material impact on its
consolidated financial statements. INTANGIBLE ASSETS Costs associated with obtaining financing are included in the accompanying
consolidated balance sheets as deferred financing costs and are being amortized
over the terms of the loans to which such costs relate. Amortization of
deferred financing costs included in continuing operations for the years ended
December 31, 2003, 2002 and 2001 was $2,867, $5,527, and $5,875, respectively,
and is included in interest expense in the accompanying consolidated statements
of operations. During 2002, in conjunction with the Companys capital and
equity restructuring (see Note 10), deferred financing costs of $2,728 were
written off. In accordance with SFAS No. 15, this charge was included as a
reduction to the gain on restructuring of debt that was recorded and included
within the accompanying consolidated statement of operations for the year ended
December 31, 2002. The cost and accumulated amortization of deferred financing
costs as of December 31, 2003 and 2002 is as follows: 2003
    
    2002Original basis
    
    $
    27,111
    
    
    $
    24,860Accumulated amortization
    
    
    (25,521
    )
    
    
    (22,654
    )$
    1,590
    
    
    $
    2,206
 Goodwill amortization expense was $0 for the fiscal years ended December 31,
2003 and 2002 and $1,900 for fiscal 2001. As previously discussed, the then current economic environment and depressed
status of the aviation industry, including the market for JT8D engine overhaul
services, caused the Company to determine that the goodwill relating to its
engine overhaul facility was impaired. Accordingly, during the year ended
December 31, 2001, the Company recorded a charge of $6,397 to write off the
carrying value of the goodwill, which is included in operating expenses in the
accompanying consolidated statement of operations for the year ended December
31, 2001. F-13




---



##### 



In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Intangible Assets. SFAS No. 142 eliminates the requirement to amortize
goodwill and indefinite-lived intangible assets, addresses the amortization of
intangible assets with defined lives and addresses the impairment testing and
recognition for goodwill and intangible assets. SFAS No. 142 applies to
goodwill and intangible assets arising from transactions completed before and
after the Statements effective date of January 1, 2002 and requires that
goodwill no longer be amortized, but tested for impairment at least annually.
The Company recorded no goodwill amortization for the years ended December 31,
2003, 2002 and $1,900 for 2001. At December 31, 2003, the Company had goodwill
of $26,124, which is subject to the new impairment tests prescribed under the
statement. The Company adopted SFAS No. 142 on January 1, 2002. In accordance
with SFAS No. 142, the Company has elected July 31st as it annual impairment
assessment date. The Company has completed its initial impairment assessment as
of January 1, 2002, and its annual impairment assessments as of July 31, 2002
and July 31, 2003, and has concluded that no impairment charge was required.
Absent a significant change in the Companys operating environment, the
Companys assessment of goodwill impairment will next be re-evaluated as of
July 31, 2004 (the annual assessment date). CUSTOMER DEPOSITS In the normal course of its business, the Company may receive payments from
customers in excess of costs that it has expensed on contracts. These deposits
do not typically extend beyond a short-term period. DEFERRED INCOME Advance payments and deposits received on operating leases have been initially
deferred and subsequently recognized as the Companys obligations under the
lease agreements are fulfilled. As previously discussed, as of December 31,
2002 all lease agreements have expired and the Company is no longer in the
equipment leasing business. As discussed in Note 6, during the fourth quarter of 2002 the Company sold its
real estate and fixtures located at one of the Companys subsidiaries to the
Companys principal stockholder. Simultaneous with this sale, the Company
entered into a lease agreement with the principal stockholder for significantly
all of these assets. As the lease agreement qualifies for sale-leaseback
accounting, the Company has deferred the gain on sale of approximately $1,700
and will amortize this gain to income over the 10-year term of the lease
agreement. The unamortized deferred income as of December 31, 2003 and 2002,
which approximated $1,473 and $1,641, respectively, is reflected as deferred
income within the accompanying consolidated balance sheets. ENVIRONMENTAL COSTS Environmental expenditures that relate to current operations are expensed as
incurred. Remediation costs that relate to existing conditions caused by past
operations are accrued when it is probable that these costs will be incurred
and can be reasonably estimated. Environmental expenses are included in
operating expenses in the accompanying consolidated statements of operations. STOCK COMPENSATION PLANS As permissible under SFAS No. 123, Accounting For Stock-Based Compensation,
the Company accounts for all stock-based compensation arrangements using the
intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, Accounting For Stock Issued To Employees, as interpreted by Financial
Accounting Standards Board (FASB) Interpretation No. 44, Accounting For
Certain Transactions Involving Stock Compensation. Accordingly, no
compensation cost is recognized for stock option awards granted to employees at
or above fair market value. The following table illustrates the effects on net income and earnings per
share if the Company had applied the fair value recognition of FASB Statement
No. 123 to stock-based employee compensation: Years Ended December 31,2003
    
    2002
    
    2001Net (loss) income  as reported
    
    $
    (261
    )
    
    $
    7,022
    
    
    $
    (141,235
    )Additional expense
    
    
    (703
    )
    
    
    (2,391
    )
    
    
    (2,170
    )Net (loss) income  pro forma
    
    
    (964
    )
    
    
    4,631
    
    
    
    (143,405
    )Net (loss) income per share, basic  as reported
    
    
    (0.01
    )
    
    
    0.27
    
    
    
    (94.06
    )Net (loss) income per share, diluted  as reported
    
    
    (0.01
    )
    
    
    0.03
    
    
    
    (94.06
    )Net (loss) income per share, basic  pro forma
    
    
    (0.03
    )
    
    
    0.18
    
    
    
    (95.51
    )Net (loss) income per share, diluted  pro forma
    
    
    (0.03
    )
    
    
    0.02
    
    
    
    (95.51
    )
 F-14




---



##### 



INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS 109, deferred tax assets or
liabilities are computed based upon the difference between the financial
statement and income tax bases of assets and liabilities using the enacted
marginal tax rate applicable when the related asset or liability is expected to
be realized or settled. Deferred income tax expenses or benefits are based on
the changes in the asset or liability from period to period. If available
evidence suggests that it is more likely than not that some portion or all of
the deferred tax assets will not be realized, a valuation allowance is required
to reduce the deferred tax assets to the amount that is more likely than not to
be realized. Future changes in such valuation allowance would be included in
the provision for deferred income taxes in the period of change. See Note 8. FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, customer deposits, and liabilities and assets of discontinued
operations approximate fair value due to the short maturity of the instruments
and the provision for what management believes to be adequate reserves for
potential losses. Management believes the fair values of the revolving loan,
BofA Term Loan, and capital leases approximate the carrying amounts of the
obligations in the accompanying consolidated balance sheets because management
believes the interest rate of those obligations to be fair market interest
rates. At December 31, 2003, the aggregate carrying value of the New Notes, Old
Notes, Junior Notes, note payable to related party, and Amended Term Loan
approximated $146,860, while the fair value of these obligations approximated
$140,169. COMPREHENSIVE INCOME (LOSS) For all periods presented, comprehensive income (loss) is equal to net income
or loss. SEGMENT REPORTING The Company operates its businesses as a single segment: airline MR&O services. RECENTLY ISSUED ACCOUNTING STANDARDS In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure; an amendment of FASB Statement No.
123. This Statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. Additionally, this Statement amends the disclosure requirements
of Statement No. 123 to require prominent disclosures in both annual and
interim financial statements regarding the method of accounting used for
stock-based employee compensation and the effect of the method used on reported
results. The Company has currently decided to continue to use the intrinsic
value method for accounting for stock-based employee compensation. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Under Statement 4, all gains and losses from extinguishment of debt were
required to be aggregated and, if material, classified as an extraordinary
item, net of related income tax effect. This Statement eliminates Statement 4
and as a result, gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria in APB No. 30.
This Statement became effective for the Company on January 1, 2003. As a
result of adoption, the Company has reclassified the 2002 gain of $27,279 on
debt extinguishment to be included within continuing operations. In January 2003, the FASB issued Interpretation 46, Consolidation of Variable
Interest Entities. This Interpretation was subsequently revised in December
2003. This Interpretation clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support. An
enterprise shall consolidate a variable interest entity, as defined, if that
enterprise has a variable interest that will absorb a majority of the entitys
expected losses, receive a majority of the entitys expected residual returns,
or both. Based on the revision performed in December 2003, this Interpretation
becomes effective for the Company beginning with the first quarter of fiscal
2004 (ending March 31, 2004). The Company has evaluated this Interpretation
and does not anticipate any material impact on the consolidated financial
statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This
Statement establishes standards for how to classify and measure certain
financial instruments with characteristics of both liabilities and equity.
This Statement became effective for any financial instruments that the Company
entered into or modified after May 31, 2003, and otherwise became effective for
the Company on July 1, 2003. During fiscal 2003, the Company adopted SFAS No.
150 with no material impact on the consolidated financial statements. F-15




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##### 



NOTE 2BUSINESS COMBINATIONS In October 2002, the Company completed the purchase of the outstanding stock of
Brice Manufacturing Company (Brice) for a purchase price of $1,272 and the
assumption of approximately $1,385 of liabilities. Brice, located in Pacoima,
California, manufactures and markets an extensive range of aircraft seats, seat
related products and services to airlines, leasing companies, airframe
manufacturers, and overhaul facilities throughout the world. The acquisition
has been accounted for under the purchase method of accounting and accordingly,
the purchase price has been fully allocated to the assets purchased and
liabilities assumed based upon the fair values at the date of acquisition. The
result of operations for Brice have been included in the accompanying
consolidated statement of operations from the date of acquisition. The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition: Accounts receivable
    
    $
    779Inventory
    
    
    1,366Property and equipment, net
    
    
    405Other assets
    
    
    107Total assets acquired
    
    $
    2,657Accounts Payable
    
    $
    324Accrued Expenses
    
    

    1,061Total liabilities assumed
    
    $
    1,385
 The Company financed its purchase of Brice through a $1,300 loan from the
Companys principal stockholder. The principal stockholder also agreed to loan
the Company additional amounts equal to the Companys costs relating to the
Brice acquisition and amounts required to fund any monthly shortfalls of
earnings before interest, taxes, depreciation and amortization (EBITDA) from
Brices operations (the Keepwell agreement). From the date of acquisition
through May 14, 2003, there was approximately $60 of funding requirements. The
Companys note to its principal stockholder was unsecured, bore interest at
LIBOR plus 5.5% and was due on the earlier of January 31, 2004 or the
termination of the revolving credit facility. On May 14, 2003, in conjunction
with the $6,050 term loan received from the Companys principal stockholder,
the terms of this $1,300 loan were modified. See Notes 5 and 15. NOTE 3SALE OF ASSETS AND OPERATING ENTITIES In December 2003, the Company entered into an agreement to sell an idle
facility located in Covington, Kentucky. This facility was previously part of
the Companys manufacturing operations and had no operations since fiscal 2000.
The net sales price was $454 and is included within net assets of discontinued
operations as of December 31, 2003 within the accompanying consolidated balance
sheet. The resulting gain on this sale of $411 is included within income from
discontinued operations within the accompanying consolidated statement of
operations for the year ended December 31, 2003. The cash proceeds related to
this sale were fully funded in February 2004. In addition, during fiscal year
2003 the Company recognized income from discontinued operations of
approximately $2,770 resulting from the elimination and settlement of
obligations relating to its redistribution operations
and new parts bearings operations, both of which were sold in December 2000 and
further discussed below, and changes in estimates of accurals for
remaining exposures based on a continuous evaluation of such exposures. In July 2002, the Company completed the sale of substantially all of the assets
and business of its Aerocell Structures (Aerocell) operation. The net sales
price was $9,600 (subject to the post-closing adjustments described below), of
which $9,062 was received in cash at the closing. The results of operations
for Aerocell are included within income from continuing operations through the
date of its sale. The Company used the proceeds of the Aerocell sale to repay
$7,000 of term loans and for working capital. See Note 5.
Pursuant to the asset purchase agreement relating to the Aerocell sale, the
Company represented to the buyer that the value of the Aerocell assets at the
closing date were at least $11,700. The agreement provided procedures relating
to the determination of the closing date value of the Aerocell assets and
required a post-closing payment to the purchaser (on a dollar-for-dollar basis)
if it was ultimately determined that the closing date value of the Aerocell
assets were lower than the targeted amount. The Agreement also provided that
certain funds held in escrow ($500) were to be held to support certain
indemnification rights provided in the Agreement, and, provided that no claims
for indemnity had been asserted, the funds being held in escrow were to be
released one year after the Closing Date. There was also certain inventory of
Aerocell which the Company would have to pay up to $200 in cash one year from
the closing if that inventory was not sold or consumed by that date. For all contingency exposures relating to the sale of Aerocell, which included
working capital adjustments and inventory repurchases, the Company had recorded
certain accruals as of December 31, 2002, in the aggregate amount of $455.
During fiscal 2003, however, the Company entered into an agreement that
globally settled all unresolved purchase price issues and inventory repurchase
obligations. As part of this settlement, the Company released approximately
$350 of the funds held in escrow to the purchaser. Further, as a result of the
settlement, the Company was released from all contingencies for working capital
adjustments and inventory repurchases. In light of the settlement, during
fiscal 2003 the Company reversed all accruals for contingency exposures and has
received the net cash amount of the escrow funds F-16




---



##### 



(approximately $115). The total gain resulting from
the settlement ($570) has been reflected within other income  net in the
accompanying consolidated statement of operations for the year ended December
31, 2003. In May 2001, the Company completed the sale of the assets of its Caribe
Aviation (Caribe) component repair MR&O operation. The purchase price was
$22,500, of which $21,750 was received in cash at the closing and the balance
was received in 2002. The Company used $10,000 of the proceeds from the sale of
Caribe to repay the borrowings under its then outstanding revolving credit
facilities and $5,500 to repay borrowings under the Companys then outstanding
term loans. The balance, net of expenses of $460, was used for working capital.
In addition, the purchaser acquired the real estate and facility on which the
Caribe operation was located for an aggregate purchase price of $8,500. The
proceeds from the sale of the real estate and facility were used to reduce the
principal balance of the Companys outstanding tax retention operating lease
(TROL) financing. See Note 5. During 2001, the Company recognized a gain on the sale of Caribe Aviation and
income on a non-refundable lease deposit that had previously been recorded as a
long-term liability totaling $7,868 in the aggregate. These amounts are
recorded in other (income) expense in the accompanying consolidated statements
of operations. In addition, during 2001 the Company received settlements on
accounts receivable of its former redistribution operation that had previously
been fully reserved. These collections, totaling $2,645, are recorded as an
offset to the loss from discontinued operations in the accompanying
consolidated statements of operations. During 2000, the Company sold substantially all of the assets of its parts
redistribution operation, its new parts operation and its manufacturing
operations. The proceeds of these sales were used to repay senior indebtedness. In December 2000, the Company completed the sale of substantially all of the
assets and business of its redistribution operation in a series of transactions
intended to constitute a single transaction (the Transaction). As part of
the Transaction, the Company acquired a 50% interest in a limited liability
company, KAV Inventory, LLC (KAV). KAV was organized by the Company and
Kellstrom Industries, Inc. (Kellstrom). Substantially all of the aircraft and
engine spare parts inventory and the engine inventory of the Companys
redistribution operation, as well as certain rotable parts inventories from two
of the Companys MR&O operations, were sold to KAV for 89% of the closing date
book value of such inventory ($148,600, subject to post-closing adjustments). Consideration for the sale of inventory was comprised of cash of approximately
$105,500 (borrowed by KAV from a financial institution without recourse to the
Company other than the letter of credit referred to below), two senior
subordinated notes, each in the principal amount of $13,700 (one of which was
sold to Kellstrom in the second component of the Transaction for $13,700 in
cash), and one junior subordinated note in the principal amount of $15,700. The
notes bear interest at 14% per annum and are subordinated in all respects to
KAVs institutional financing. In addition, the Company issued an $8,500 letter
of credit to secure, in part, KAVs institutional financing (see discussion
below). Further, the Company and Kellstrom each advanced $2,300 to KAV to allow
it to pay fees and costs relating to its institutional financing. The Company
and Kellstrom are entitled to receive reimbursement of these advances after
payment of the institutional financing and prior to repayment of the senior
subordinated notes. KAVs sole business is the liquidation of the inventory it acquired from the
Company. As part of the Transaction, KAV entered into an agreement to consign
all of its inventories to Kellstrom. The consignment agreement specifies that
all of the proceeds from sales of the inventory, less a consignment commission
to Kellstrom of 20%, will be used to pay interest and principal on KAVs
institutional debt. After the institutional debt is paid in full, proceeds from
the sale of inventory would be used to reimburse the Company and Kellstrom for
advances made to KAV to allow it to pay fees and costs relating to its
institutional financing, to pay adjustment notes, if any, resulting from post
closing adjustments to the closing date book value of the inventory or notes
arising from a draw on the letter of credit and thereafter to pay interest and
principal on the two $13,700 senior notes. Interest and principal on the
$15,700 junior note would be paid from the remaining proceeds from the sale of
inventory, less a 35% consignment commission to Kellstrom. Under the
consignment agreement, the Company has approval rights relating to the sale
price of certain inventory. Because of the uncertainty regarding the collection
of the notes, interest income on the notes is not being recognized and the
Company has established valuation allowances for the principal balance of the
notes. The projections of cash distributions to the Company are highly
dependent upon the timing of the sales and the sale prices obtained by the
Purchaser for KAVs inventory, and the Company presently believes it to be
unlikely that any further amounts will ever be collected by the Company on
these notes. The second component of the Transaction consisted of a sale of certain
non-inventory assets of the redistribution operation to Kellstrom including one
of the $13,700 senior subordinated notes described above, net of certain
payables assumed by Kellstrom, for approximately $21,500, all of which was paid
in cash. Under the terms of the Transaction, Kellstrom had the right after one
year from the date of the Transaction to require the Company to repurchase
receivables sold in accordance with the Transaction to the extent they remain
uncollected. As of December 31, 2001, $5,238 of receivables sold pursuant to
the Transaction had not been collected by Kellstrom and Kellstrom sought to put
such receivables back to the Company. In addition, the purchase price for the
sale of inventory and non-inventory assets was subject to post-closing
adjustments as set forth in the Transaction agreements. See discussion below
regarding the Post-Closing Resolution Agreement that globally settled
outstanding issues with Kellstrom, including receivables that were sold
pursuant to the Transaction and purchase price adjustments for inventory and
non-inventory assets. F-17




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##### 



In addition, as part of the sale of the redistribution operation as described
above, Kellstrom leased from the Company its 545,000 square foot facility in
Miramar, Florida and, for a one-year period, certain furniture, fixtures and
equipment used in the redistribution operation. Kellstrom had an option to
acquire the furniture, fixtures and equipment during the term of the lease and
after one year the Company had an option to require Kellstrom to acquire the
assets, which could be extended by Kellstrom for six months under certain
circumstances. Kellstrom had also entered into a sublease agreement relating to
the redistribution operations warehouse and corporate headquarters facility
for a five-year period, with the right to renew for five consecutive five-year
periods at a market rental rate. The Company also entered into a
non-competition agreement whereby the Company was restricted from engaging in
the redistribution business for a period of up to five years. In addition, the
Company entered into a cooperation agreement under which it agreed to provide
repair services for the KAV parts inventory and Kellstroms parts inventory and
Kellstrom agreed to supply parts to the Companys MR&O operations. Similar to
items described above in the second component of the Transaction, most items
described herein have been modified by the Post-Closing Resolution Agreement
established during fiscal 2002. See discussion below regarding this global
settlement. In July 2001, KAVs institutional lender advised KAV that it was in default
under its loan agreement and on October 5, 2001, the lender exercised its
rights to call the outstanding institutional financing. Additionally, on
October 18, 2001, the lender drew against the Companys $8,500 letter of credit
which immediately reduced KAVs institutional financing by $8,500 and increased
the Companys notes receivable from KAV by $8,500. Kellstrom filed for
bankruptcy in February 2002. As a result of these matters, and due to poor
economic conditions in the redistribution industry and the aviation industry as
a whole and lower than projected sales levels by KAV, during the quarter ended
June 30, 2001 the Company recorded a valuation allowance against both the
$13,700 senior note and the $15,700 junior note due from KAV which it holds.
Additionally, the Company reserved $8,500 during the quarter ended September
30, 2001 for the additional note receivable from KAV that arose on October 18,
2001 when the Companys letter of credit was drawn against. For the same
reasons, during the 2001 second and third quarters, the Company recorded
reserves totaling $5,081 and $2,600, respectively, relating to net assets of
discontinued operations whose realizability is impacted by the operations and
financial conditions of Kellstrom and KAV. In total, aggregate charges relating
to these matters were $45,581 for the year ended December 31, 2001. In July 2002, the Company closed on the transactions contemplated by the
Post-Closing Resolution Agreement, dated as of June 10, 2002 (the PCRA)
between the Company and Kellstrom. This settlement resolved and settled
globally outstanding disputes between the Company and Kellstrom (the
Settlement) relating to matters arising out of the Companys December 2000
sale of substantially all of the assets of its redistribution operation to
Kellstrom and which are discussed above. As part of the Settlement:  a.
    
    Kellstrom purchased certain furniture, fixtures and equipment (FF&E), approximately $7,700,
net, from Aviation Sales Distribution Services Company (ASDC), a subsidiary of the Company,
which equipment is being used by Kellstrom in the operation of its business;b.
    
    Kellstrom put certain uncollected, fully reserved accounts receivable, which were sold by
ASDC to Kellstrom as part of the sale of the assets of the redistribution operation to the
Company in accordance with the terms of the Asset Purchase Agreement, dated December 1, 2000,
among Kellstrom, the Company and ASDC (the APA);c.
    
    Kellstrom and the Company resolved outstanding purchase price adjustment disputes under the APA;d.
    
    The Company and Kellstrom settled and setoff amounts (approximately $1,200) due and owing in
the ordinary course between Kellstrom and the Company, including certain rental amounts owed by
Kellstrom under the Miramar Lease (defined below);e.
    
    Kellstroms sub-lease (the Miramar Lease) of the Companys 525,000 square foot Miramar,
Florida warehouse and office facility (the Miramar Facility) was amended (the Amended
Kellstrom Lease) to provide for a term of twenty (20) years with an annual minimum rental of
$2,750 for the first five years, $3,000 for years six through ten and at fair market value
thereafter (all subject to CPI increases). Further, the Amended Kellstrom Lease provides
Kellstrom with a one-time right to terminate the Amended Kellstrom Lease upon the completion of
the 7th lease year after the closing of the Settlement;f.
    
    The Non-Competition Agreement between the Company and Kellstrom was amended to, among other
things, allow the Companys Aerocell Structures flight surfaces MR&O operation to exchange
flight surfaces with its customers and to allow the Company, during the six months following
the completion of the Settlement, to sell up to $4,000 of aircraft parts in the open market;
andg.
    
    The Cooperation Agreement between Kellstrom and the Company, which obligated the Company to
purchase aircraft parts from Kellstrom, was terminated. F-18




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##### 



The closing of the Settlement resulted in a net cash payment to the Company of
approximately $400. For the year ended December 31, 2002, the Company has
recorded a gain of $1,600 for the Settlement transactions described above. This
gain has been included within other income, net ($700) and income from
discontinued operations ($900) within the accompanying consolidated statement
of operations. The closing of the Settlement occurred in connection with the sale of
Kellstroms business to an entity, Kellstrom Aerospace, LLC, organized by
Inverness Management LLC. As part of that sale, the Amended Kellstrom Lease was
assigned to Kellstrom Aerospace LLC. Such sale, and the terms of the
Settlement, were approved by the Bankruptcy Court in Kellstroms Chapter 11
bankruptcy proceeding. In addition, simultaneous with the Settlement, the Company resolved certain
purchase price adjustment issues with KAV under the Inventory Purchase
Agreement, dated December 1, 2000, among the Company, ASDC and KAV. Further,
the consignment agreement between KAV and Kellstrom (which has been assigned to
Kellstrom Aerospace, LLC) and the loan arrangement between KAV and Bank of
America were simultaneously amended. In December 2000, the Company completed the sale of the stock of its
subsidiary, Aviation Sales Bearings Company. As part of the transaction, the
Company retained certain accounts receivable and inventories. Such retained
assets are being sold and collected pursuant to consignment and collection
agreements executed with the purchaser. Due to the age of these receivables and
inventory, the Company recorded a charge of $2,800 during the year ended
December 31, 2001 to provide a full reserve against any uncollected receivables
and inventory still on hand. Collection of these receivables and sales of these
inventories are included within income (loss) of discontinued operations within
the accompanying consolidated statements of operations. The net income (loss) of these operations (collectively the Companys parts
redistribution operations, new parts distribution operations, and manufacturing
operations) prior to their respective disposal dates (net of income taxes) is
included in the accompanying consolidated statements of operations under
discontinued operations. Previously issued financial statements have been
changed to reflect those operations as discontinued operations. The provision for loss on disposal of discontinued operations reflected in the
accompanying consolidated statement of operations for 2001 of $9,386 includes
the write-down of the assets of the operations to estimated net realizable
values and accruals for certain liabilities offset by certain recoveries. No
expected tax benefit has been recorded relating to the provision for loss on
disposition as all loss carrybacks relating to the discontinued operations have
been utilized and the Company has provided a full valuation allowance on its
deferred tax assets (see Note 8). A summary of the assets and liabilities of the discontinued operations as of
December 31, 2003 and 2002 is as follows: 2003
    
    2002Accounts receivable, net
    
    $
    5
    
    
    $
    Inventories, net
    
    
    
    
    
    
    Fixed assets at net realizable value
    
    
    454
    
    
    
    Assets of discontinued operations
    
    
    459
    
    
    
    Accounts payable and accrued expenses
    
    
    (228
    )
    
    
    (3,524
    )Notes payable
    
    
    (50
    )
    
    
    (50
    )Liabilities of discontinued operations
    
    $
    (278
    )
    
    $
    (3,574
    )
 The above asset amounts are net of valuation allowances of $5,015 and $9,466 as
of December 31, 2003 and 2002, respectively. NOTE 4ADJUSTMENTS TO CARRYING VALUE OF CERTAIN ASSETS AND OTHER CHARGES During the year ended December 31, 2001, the Company recorded charges totaling
$14,862 relating to costs associated with a closed facility, environmental
accruals, long-lived asset impairments, severance for certain employees and
provisions for customer specific inventory. Of these charges, $643 is included
in cost of sales and $14,219 is included in operating expense in the
accompanying consolidated statements of operations for the year ended December
31, 2001. As of December 31, 2003 and 2002, $0 and $841, respectively, are
included within accrued liabilities for the above identified exposures. F-19




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##### 



NOTE 5LONG-TERM DEBT Long-term debt at December 31, 2003 and 2002 consisted of the following: 2003
    
    2002New Senior Subordinated Notes, due in 2006
interest (paid-in-kind) at 8.000% (New Notes)
    
    $
    115,800
    
    
    $
    115,800Old Senior Subordinated Notes, due in 2008
interest at 8.125% (Old Notes)
    
    
    16,247
    
    
    
    16,247Junior Subordinated Notes, due in 2007
interest (paid-in-kind) at 8.000% (Junior Notes)
    
    
    3,063
    
    
    
    2,613Tax Retention Operating Lease Financing,
due in 2005, interest at Prime plus 3.250% to 4.000%
(7.250% to 8.000%) (TROL)
    
    
    23,824
    
    
    
    24,859Amended Revolving Credit Facility, due in 2004
interest at Prime plus 3.000% (7.000%)
    
    
    14,705
    
    
    
    2,179Term loan with a related party, due in 2006
interest (paid-in-kind) at 16.000%
    
    
    8,250
    
    
    
    Amended BofA Term Loan, due in 2004
interest at LIBOR plus 2.000% (3.380%)
    
    
    5,000
    
    
    
    5,000Amended senior term loan with a financial institution,
due in 2004, interest at 12%
    
    
    3,500
    
    
    
    3,500Term loan with a related party, due in 2004
interest at LIBOR plus 5.500% (6.880%)
    
    
    
    
    
    
    1,300Total debt
    
    
    190,389
    
    
    
    171,498Less  Current maturities
    
    
    16,267
    
    
    
    3,064Total long-term debt
    
    $
    174,122
    
    
    $
    168,434
 The above long-term debt includes the Companys TROL financing arrangement,
which was repaid in full on March 31, 2004 (see Note 15), but does not include
other capital lease obligations. See Note 7 for a summary of the Companys
capital lease obligations. The aggregate maturities of long-term debt,
adjusted for the refinancing completed in April 2004 and the repayment of the
TROL financing arrangement completed in March 2004, for the five years
subsequent to December 31, 2003 are $14,996, $1,164, $116,964, $8,944, $24,497,
and $0 thereafter. Subsequent to December 31, 2003, the Amended Revolving
Credit Facility, the Amended Senior Term Loan, the Amended BofA Term Loan and
the term loan with a related party were refinanced. See Note 15. 8% SENIOR SUBORDINATED PIK NOTES DUE 2006 On February 28, 2002, in connection with the note exchange portion of the
restructuring (see Note 10), the Company issued $100,000 face value in
aggregate principal amount of 8.0% senior subordinated convertible paid-in-kind
(PIK) notes (New Notes), which mature on December 31, 2006. The New Notes
bear interest from the date of issuance and are payable at the Companys option
either in cash or paid-in-kind through the issuance of additional New Notes
semiannually on June 30 and December 31 of each year. If the Company does not
pay interest in cash as of an interest payment date, the Company will
automatically be deemed to have paid such interest in-kind and additional New
Notes in the amount of such interest payment will automatically be deemed to be
outstanding from such date forward. The New Notes are general unsecured obligations and are subordinated in right
of payment to all current and future senior debt. The New Notes are fully and
unconditionally guaranteed by substantially all of the Companys existing
subsidiaries and each subsidiary that will be organized in the future by the
Company, unless such subsidiary is designated as an unrestricted subsidiary.
Subsidiary guarantees are joint and several, full and unconditional, general
unsecured obligations of the subsidiary guarantors. Additionally, there are no
significant restrictions that would preclude the parent company from obtaining
funds, either through loan or dividend, from the subsidiary guarantor.
Subsidiary guaranties are subordinated in right of payment to all existing and
future senior debt of subsidiary guarantors, including the Amended Credit
Facility and the $5,000 BofA Term Loan, and are also effectively subordinated
to all secured obligations of subsidiary guarantors to the extent of the assets
securing their obligations, including the Amended Credit Facility, the $5,000
BofA Term Loan and the $8,250 related party term loan. The indenture for the New Notes (i) permits the Company to incur indebtedness
equal to the greater of $95,000 or an amount that satisfies a fixed charge
coverage ratio of 2.25 to 1.00, (ii) requires the Company, upon a change of
control or certain asset sales, to repurchase the New Notes at a price equal to
the redemption price which the Company would be obligated to pay if it redeemed
the New Notes on the date of the change of control or asset sale; and (iii)
does not contain a provision requiring acceleration of any premium
due upon acceleration of F-20




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##### 



the New Notes upon an event of default by
reason of any willful action (or inaction) taken (or not taken) by the Company
with the intention of avoiding the prohibition on the redemption of New Notes. The New Notes are redeemable for cash at the Companys option at the following
percentages of par plus accrued interest on the par value through the date of
redemption: 2004  73.0%, 2005  75.625% and 2006  77.5%. The New Notes also
provide that the holders will receive an aggregate of 3,003 shares of common
stock if the New Notes are redeemed in 2004, 2005 or 2006. If the New Notes have not already been redeemed or repurchased, the New Notes,
including those New Notes previously issued as paid-in-kind interest and all
accrued but unpaid interest, will automatically convert on December 31, 2006
into an aggregate of 270,276 shares of common stock. Holders of New Notes will
not receive any cash payment representing principal or accrued and unpaid
interest upon conversion; instead, holders will receive a fixed number of
shares of common stock and a cash payment to account for any fractional shares. 8 1/8% SENIOR SUBORDINATED NOTES DUE 2008 In 1998, the Company sold $165,000 of senior subordinated notes (Old Notes)
with a coupon rate of 8.125% at a price of 99.395%, which mature on February
15, 2008. On February 28, 2002, $149,000 face value of these notes were
cancelled as part of the note exchange in exchange for cash and securities, and
substantially all of the covenants contained in the indenture
relating to the remaining Old Notes was extinguished. As a result of the
exchange offer and consent solicitation, $16,247 in aggregate principal amount,
net of discount, of Old Notes remain outstanding at December 31, 2003 and 2002.
See Note 10 for a description of the note exchange. Interest on the Old Notes
is payable on February 15 and August 15 of each year. The Old Notes are general
unsecured obligations of the Company, subordinated in right of payment to all
existing and future senior debt, including indebtedness outstanding under the
Amended Credit Facility and the $5,000 BofA Term Loan, and under facilities
that may replace such facilities in the future, and to the $8,250 related party
term loan and the New Notes. In addition, the Old Notes are effectively
subordinated to all secured obligations to the extent of the assets securing
such obligations, including the Amended Credit Facility, the $5,000 BofA Term
Loan, and the $8,250 related party term loan. The Old Notes are fully and unconditionally guaranteed, on a senior
subordinated basis, by substantially all of the Companys existing subsidiaries
and each subsidiary that will be organized in the future by the Company, unless
such subsidiary is designated as an unrestricted subsidiary. Subsidiary
guarantees are joint and several, full and unconditional, general unsecured
obligations of the subsidiary guarantors. Additionally, there are no
significant restrictions that would preclude the parent company from obtaining
funds, either through loan or dividend, from the subsidiary guarantors.
Subsidiary guarantees are subordinated in right of payment to all existing and
future senior debt of subsidiary guarantors, including the Amended Credit
Facility, $5,000 BofA Term Loan, the $8,250 related party term loan and the New
Notes, and are also effectively subordinated to all secured obligations of
subsidiary guarantors to the extent of the assets securing their obligations,
including the Amended Credit Facility, the $5,000 BofA Term Loan, and the
$8,250 related party term loan. The senior subordinated notes are redeemable, at the Companys option, in whole
or in part, at any time after February 15, 2003, at the following redemption
prices, plus accrued and unpaid interest and liquidated damages, if any, to the
redemption date: (i) 2004102.708%; (ii) 2005101.354%; and (iii) 2006 and
thereafter100%. Upon the occurrence of a change in control, the Company will
be required to make an offer to repurchase all or any part of each holders
senior subordinated notes at a repurchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest and liquidated damages, if
any, thereon to the repurchase date. There can be no assurance that the Company
will have the financial resources necessary to purchase the senior subordinated
notes upon a change in control or that such repurchase will then be permitted
under the Amended Credit Facility or any senior facility that replaces the
Amended Credit Facility in the future. 8% JUNIOR SUBORDINATED PIK NOTES DUE 2007 As discussed in Note 7, the Companys settlement of its outstanding class
action litigation became effective on September 20, 2002. As part of this
settlement agreement, the Company issued $4,000 face value in aggregate
principal amount of the Companys new junior subordinated convertible PIK notes
(Junior Notes). These notes bear interest at 8% and mature on January 2,
2007. The Junior Notes bear interest from September 20, 2002 and are payable at
the Companys option either in cash or paid-in-kind through the issuance of
additional notes semiannually on June 30 and December 31 of each year. If the
Company does not pay interest in cash as of an interest payment date, the
Company will automatically be deemed to have paid such interest in-kind and
additional Junior Notes in the amount of such interest payment will
automatically be deemed to be outstanding from such date forward. The Junior
Notes have been recorded as of September 20, 2002 (the effective date) at the
then current redemption value of $2,500. The discount is being accreted to the
maturity redemption value, due in January 2007, of approximately $4,400. The
Junior Notes are general unsecured obligations and are subordinated in right of
payment to all current and future senior debt, including the Companys Amended
Credit Facility and the $5,000 BofA Term Loan, to the $8,250 related party term
loan, and to the New Notes and the Old Notes. F-21




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The Junior Notes are redeemable for cash at the Companys option at the
following percentages of par plus accrued interest on the par value through the
date of redemption: 2004  73.0%, 2005  75.625% and 2006  77.5%. The Junior
Notes also provide that the holders will receive an aggregate of 104 shares of
common stock if the Junior Notes are redeemed in 2004, 2005 or 2006. If the Junior Notes have not already been redeemed or repurchased, the Junior
Notes, including those Junior Notes previously issued as paid-in-kind interest
and all accrued but unpaid interest, will automatically convert on January 2,
2007 into an aggregate of 9,320 shares of common stock. Holders of Junior Notes
will not receive any cash payment representing principal or accrued and unpaid
interest upon conversion; instead, holders will receive a fixed number of
shares of common stock and a cash payment to account for any fractional shares. TAX RETENTION OPERATING LEASE (TROL) FINANCING In July 2002, the Company entered into an agreement amending its TROL financing
arrangement (the Amended TROL Financing Agreement) initially established in
December 1998 and, as amended, scheduled to mature in July 2002. Under the
terms of the Amended TROL Financing Agreement, the maturity date of the TROL
financing was extended until June 30, 2005 and the base monthly rental under
the TROL was increased to the greater of: (i) the amount being received by the
Company under its sublease for the Companys Miramar facility plus, commencing
July 1, 2003, an additional monthly payment by the Company, or (ii) $210. The TROL financing arrangement was originally utilized to develop two
facilities: (i) a corporate headquarters and warehouse facility, which is
currently subleased to Kellstrom Aerospace, LLC, and (ii) a facility to house
the Companys Caribe operations, which was sold in May 2001. Substantially all
of the Companys subsidiaries have guaranteed the Companys obligations under
the lease. Additionally, the Company has an option to acquire the facility at
the end of the lease for an option price as determined in the lease. Lease
payments are currently at a rate of Prime plus 3.25% to 4.00% and the Company
is responsible for all property taxes, insurance and maintenance of the
property. The TROL financing contains certain financial covenants regarding the Companys
financial performance and certain other covenants, which overall substantially
mirror the covenant requirements under the Amended Credit Agreement, and
provides for the termination of the TROL financing agreement and repayment of
all debt in the event of a material adverse change in the Companys business.
At certain times during fiscal 2002 and during the first quarter of 2003, the
Company was not in compliance with certain of the covenants contained in the
TROL financing agreement. Additionally, as a result of a cross default
provision (that has been subsequently modified to a cross acceleration
provision within the May 14, 2003 amendment to these agreements) between the
TROL financing agreement and the Amended Credit Agreement, for which the
Company was also in violation of covenant requirements during fiscal 2002 and
the first quarter of 2003, the Company was also in default of the TROL
financing agreement. The lessor under the TROL financing agreement and senior
lenders of the Amended Credit Facility, however, waived, and in certain
instances amended, all such events of non-compliance and as of December 31,
2002 and March 31, 2003, the Company was in compliance with all covenant
requirements, as amended. Additionally, as of December 31, 2003 the Company
was in compliance with all financial covenant requirements under this
agreement, as amended. The original TROL financing was a $43,000 loan facility provided by a financial
institution. As discussed in Note 1, in conjunction with the sale of the Caribe
operation, the purchaser of that business also acquired the real estate and
facility used by the Caribe business for $8,500. These proceeds were used to
repay a portion of the TROL financing. Additionally the Company had posted, as
security for the benefit of the TROL lender, a $9,000 letter of credit, and in
November 2001 the TROL lender drew down in full the $9,000 letter of credit. As
a result of the lender drawing down on this letter of credit and other
modifications made to the required lease payments, the Company determined that
the lease qualified as a capital lease and the Company recorded a capitalized
lease asset and a related capital lease liability in the amount of $34,200 for
the quarter ended September 30, 2001. The capital lease liability was then
reduced by the application of the proceeds of the $9,000 letter of credit. At
that time, management estimated that the recorded value of the capitalized
asset exceeded its fair market value by approximately $9,000 and recorded an
impairment charge (included in operating expense) for that amount. The lease agreement has been amended on several occasions. Under the terms of
an April 2001 amendment, two stockholders of the Company, one of whom is the
Companys principal stockholder, provided a guarantee in an amount up to
$1,000. In exchange for providing their guarantee, the stockholders each
received warrants to purchase 5 shares of the Companys common stock at an
exercise price of $17.50 per share, the value of which ($102) was charged to
results of operations during 2001. Such guarantee was released in conjunction
with the sale of Caribe and repayment of proceeds relating to the sale of the
real estate and facility as discussed above. The Company and substantially all of its subsidiaries have guaranteed the
repayment of the remaining $23,824 principal balance of the TROL financing. The
TROL financing is secured by a lien on the real property and improvements
comprising the facilities and on the fixtures therein. On February 5, 2004,
the Company entered into a definitive agreement to sell its office and
warehouse facility located in Miramar, Florida, F-22




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##### 



which assets secure the $23,824 remaining
principal balance on this TROL financing arrangement. This sale closed on
March 31, 2004 and the TROL financing was repaid in full. See Note 15 for
particulars. SENIOR CREDIT FACILITIES In April 2004, the Company refinanced all of its existing senior credit
facilities. See Note 15 for particulars. On July 12, 2002, the Company entered into an agreement amending and restating
its senior credit facilities with a syndicate of four lenders led by Citicorp
USA Inc. and UPS Capital Corporation pursuant to the terms of a Fifth Amended
and Restated Credit Agreement (the Amended Credit Agreement). Under the
Amended Credit Agreement, the Company obtained a $30,000 senior secured
revolving line of credit (the Amended Revolving Credit Facility) and a $7,000
senior secured term loan (the Amended Term Loan and collectively with the
Amended Revolving Credit Facility, the Amended Credit Facility). Borrowings
under the Amended Credit Facility were secured by a lien on substantially all
of the Companys assets and the borrowing base consists primarily of certain of
the Companys account receivables, inventory, and machinery and equipment. The interest rate on the Amended Revolving Credit Facility was, at the
Companys option, (a) prime plus 3% per annum, or (b) LIBOR plus 4.5% per
annum. The interest rate on the Amended Term Loan was 12% per annum. The
Amended Revolving Credit Facility and the Amended Term Loan were due in full on
January 31, 2004, but effective January 31, 2004, the maturity date of these
loans was extended to July 31, 2004. See Note 15 for a discussion of the
Companys refinancing activities subsequent to December 31, 2003. The Amended
Term Loan is due in quarterly installments of $500, commencing September 30,
2002, with the principal balance due in full on January 31, 2004 (extended to
July 31, 2004). $3,500 of the Amended Term Loan was repaid from the proceeds of
the Aerocell sale and has been applied first against current quarterly
installments (current maturities) and second against long-term maturities. The Amended Credit Agreement contained certain financial covenants regarding
the Companys financial performance and certain other covenants, including
limitations on the amount of annual capital expenditures and the incurrence of
additional debt, and provided for the termination of the Amended Credit
Facility and repayment of all debt in the event of a material adverse change in
the business or a change in control, as defined. A default and acceleration of
repayment under the Amended Credit Facility could potentially result in
repayment acceleration under other agreements to which we are a party,
including the TROL financing agreement. Generally, the Amended Credit
Agreement required mandatory repayments and reduction of the commitments
thereunder from proceeds of a sale of assets or an issuance of equity or debt
securities. Mandatory repayments were also required as a result of insufficient
collateral to meet the borrowing base requirements thereunder or in the event
the outstanding obligations under the Amended Credit Facility exceed the
commitments thereunder. At certain times during fiscal 2002 and during the
first quarter of 2003, the Company was not in compliance with certain covenants
contained in the Amended Credit Agreement. The senior lenders, however,
waived, and in some instances, amended all such events of non-compliance and as
of December 31, 2002 and March 31, 2003, the Company was in compliance with all
covenant requirements, as amended. Additionally, as of December 31, 2003, the
Company was in compliance with all financial covenant requirements under this
agreement, as amended. As of December 31, 2003, the outstanding aggregate
amounts borrowed under the Amended Revolving Credit Facility was $14,705, the
outstanding Amended Term Loan was $3,500, the amount of outstanding letters of
credit under the Amended Revolving Credit Facility was $9,155, and availability
under the Amended Revolving Credit Facility was $3,933. On July 12, 2002, the Company also restructured its outstanding $10,000 senior
secured term loan with Bank of America. $5,000 of this loan (the $5,000 BofA
Term Loan) was due on January 31, 2004, but was refinanced by the Company
principal stockholder and was extended to mature on July 31, 2004. This loan
was further refinanced in April 2004 (see Note 15). The $5,000 BofA Term Loan
bore interest at the rate of LIBOR plus 2% and was credit supported by two
individuals, one of whom is the Companys principal stockholder. Further,
$2,500 of the original $10,000 BofA Term Loan, due August 14, 2002, was repaid
from proceeds of the Aerocell sale. The $2,500 balance of the original BofA
loan was repaid as described below. The $5,000 BofA loan was secured by a lien
on substantially all of the Companys assets. At the July 2002 closing of the term debt refinancing, one of the parties, who
had provided credit support for this loan and who is a former executive officer
and director of the Company, paid Bank of America $2,500, reducing the
Companys obligation under its term loan arrangements with Bank of America from
$10,000 to $7,500 (which amount was then restructured as set forth above). The
Company transferred to this party a 100,000 square foot warehouse facility in
Pearland, Texas, which had previously been utilized by the Companys
redistribution operation, in satisfaction of $1,500 of the loan (which is at
least as favorable a price, based on a third party appraisal, for this property
as could have been obtained from an unaffiliated third party). In addition, the
Company agreed to pay the remaining $1,000 balance of this loan, with interest
at the rate of 12% per annum, on the earlier of the Companys sale of Aerocell
or January 31, 2004. As a result of the completed sale of Aerocell on July 31,
2002, the Company repaid the outstanding $1,000 of this loan. F-23




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For providing credit support for the $5,000 BofA Term Loan, the Company issued
five-year warrants (exercisable upon grant) to purchase 750 shares of its
unissued common stock at an exercise price of $1.05 per share to each of two
individuals (warrants to purchase 1,500 shares of common stock in the
aggregate), one of whom is the Companys principal stockholder. Additionally,
the Company paid approximately $50 in cash to both of these individuals. The
Company has recorded the value of these warrants (approximately $700) and cash
payment as deferred financing costs and is amortizing this amount to expense
over the term of the $5,000 BofA Term Loan. In connection with the original BofA Term Loan, the Company issued warrants to
purchase 25 shares of its unissued common stock at an exercise price of $40.00
per share to each of four individuals, one of whom is the Companys principal
stockholder, one of whom is a former director and principal stockholder, and
one of whom is a former executive officer and director of the Company. Each of
these individuals provided credit support to the financial institution that
advanced the loan proceeds. The Company recorded the value of these warrants
($2,536) as deferred financing costs and amortized this amount to expense over
the term of the loan (through August 2002). In May 2001, the Company obtained a
short-term increase in the term loan and thereafter repaid the additional
borrowing from the proceeds of the Caribe sale. The Companys principal
stockholder provided credit support for the increased amount of the term loan
and, in return, received a cash fee of $67 and warrants to purchase 33 shares
of the Companys common stock at an exercise price of $14.00 per share. The
value of these warrants ($254) and the cash fee were charged to results of
operations during the year ended December 31, 2001. The credit support provided
by each of the related parties was in the form of a full and unconditional
guaranty to the financial institution, up to a percentage amount, of any
amounts required to be repaid to the financial institution. NOTE PAYABLE TO RELATED PARTY On May 14 2003, the Company entered into an agreement with its principal
stockholder pursuant to which the principal stockholder loaned the Company
$6,050. This term loan has been used for working capital requirements. This
related party term note has a three-year maturity, is secured debt and bears a
16%, quarterly compounding PIK interest coupon. From inception through
December 31, 2003, all interest obligations of approximately $764 have been
paid-in-kind and are included within other long-term liabilities within the
accompanying consolidated balance sheet for the year ended December 31, 2003.
Further, the $1,300 loan received from the principal stockholder in connection
with the acquisition of Brice Manufacturing in October 2002 has been added to
this $6,050 loan, and further, the Keepwell agreement, which the Companys
principal stockholder issued to the Companys senior lenders in connection with
the Brice Manufacturing acquisition and that required monthly funding of any
EBITDA losses, was eliminated. Additionally, in September 2003, the Company
agreed to increase the note relating to this loan by $900 reflecting the
purchase from its principal stockholder of the aircraft parts inventory located
at the Goodyear facility (which inventory was acquired by the Companys
principal stockholder in the AMS bankruptcy proceedings; see Note 6). Finally,
this term loan from the Companys principal stockholder contains cross
acceleration provisions if the obligations to the Companys senior lenders are
accelerated. In connection with the funding of the $6,050 term loan, the Company issued a
warrant to its principal stockholder to acquire, for nominal consideration, 30%
of the Companys outstanding common stock (on a fully-diluted basis) as of the
day the warrant is exercised. The warrant is exercisable on or before January
31, 2007. The warrant valuation, as determined by an independent business
valuation specialist through a fair market value assessment of the Company, was
recorded at $1,258 as of May 14, 2003. The Company has recorded the value of
this warrant as deferred financing costs and is amortizing this amount to
expense over the three year term of the related party loan. This related party term loan was refinanced in April 2004. See Note 15 is for
particulars. NOTE 6RELATED PARTY TRANSACTIONS An entity controlled by the Companys principal stockholder purchases aircraft
for resale and lease, and the Company provides aircraft maintenance service
work to that entity. Services provided to that entity are charged at not less
then the rates that would be charged for such services to an unaffiliated third
party. During 2003, the billings related to the services that were provided to
such entity were approximately $588. The Company did not provide these
services during 2002 or 2001. In addition, during 2003 the Company utilized an
aircraft owned by its principal stockholder. All usage fees were no greater
then would be charged by an unaffiliated third party. Expenses associated with
this usage were $33 in 2003. The Company did not use this aircraft during 2001
or 2002. During December 2002, an entity controlled by the Companys principal
stockholder acquired the operating assets of Aviation Management Systems, Inc.
(AMS) located in Phoenix, Arizona. Additionally, this entity assumed a lease
with the City of Phoenix for facilities previously leased by AMS at the
Goodyear Airport. During 2003, the Company entered into an operating sublease
agreement with the principal stockholder to operate the business in the
facilities that were previously leased to AMS. The term of the sublease is for
three years with rental payments of $432 annually. Under the sublease
agreement, the Company is also responsible for insurance, taxes and charges
levied by the City of Phoenix under the new lease. In addition, as discussed
above, the Company has agreed to increase its related party term loan by $900
reflecting the purchase from its principal stockholder of the aircraft parts
inventory located at the Goodyear facility (which inventory F-24




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was acquired by the
Companys principal stockholder in the AMS bankruptcy proceedings). Further,
subsequent to December 31, 2003, the Company entered into a lease with its
principal stockholder with respect to certain equipment and tooling used at the
Goodyear facility. The lease, which will be recorded as a capital lease, is for
a three-year term and requires monthly payments of $74. During October 2002, the Company sold its real estate and fixtures located at
the Companys Aircraft Interior Design, Inc. (AID) operation in Dallas, Texas,
to the Companys principal stockholder. The gross sale price for these assets
was approximately $2,400, which was the estimated fair market value, based on a
third party appraisal, on the sale date. Simultaneous with this sale, the
Company entered into a lease agreement with the principal stockholder for
substantially all of these assets. The term of this lease is ten years. Annual
rental payments are approximately $300 per year, with the Company being
responsible for, among other things, taxes, insurance and utilities. The sale
and resulting leaseback qualify for sale leaseback accounting pursuant to SFAS
No. 98, Accounting for Leases. The Company has deferred the gain on sale of
approximately $1,700 and is amortizing this gain to income over the term of the
lease agreement as an offset to rent expense. Deferred income within the
accompanying December 31, 2003 and 2002 consolidated balance sheets includes
$1,473 and $1,641, respectively, relating to this sale leaseback transaction.
Additionally, for the portion of the real estate that was not included within
the subsequent lease agreement, the Company recorded a gain of approximately
$100 for the year ended December 31, 2002. The Company leased its former corporate headquarters and warehouse in Miami,
Florida (the Miami Property) from an entity controlled by a former director
and former principal stockholder of the Company. The lease on the Miami
Property called for annual payments in the amount of $893 expiring on December
2, 2014. In connection with the purchase of the Miami Property by the related
party, the Company made an unsecured $2,466 loan to the related party, which
bore interest at 8% per annum. The loan was being repaid in monthly
installments with any remaining outstanding principal and interest due on
December 2, 2004. In January 2001, the loan was sold to the current principal
stockholder of the Company for 90% of the then outstanding principal balance of
$2,006. In conjunction with the transaction, the Company granted to the current
principal stockholder warrants to purchase 3 shares of common stock at an
exercise price of $36.30 per share. The value of the warrants of $46 was
charged to operating results and credited to additional paid-in capital. In
March 2001, the Miami Property was sold and the Company was relieved of its
remaining obligations under the lease agreement. During 2003, 2002, and 2001, the Company leased certain real property from
entities controlled by one of its former directors and executive officers.
These facilities were previously utilized as the headquarters of two of the
Companys MR&O operations. The Company has subsequently moved out of these
facilities and at December 31, 2003 is liable on only one of the facility lease
agreements. The Company has in turn subleased this facility to a third party.
Prior to fiscal 2003, this sublease arrangement was for only a portion of the
Companys lease term. During 2003, however, this sublease arrangement was
extended through the full original lease term. As a result of this sublease
extension, the Company eliminated a $300 accrual previously established for the
shortfall in the operating lease commitment and the amount of the original
sublease income. The reversal of this accrual is reflected as a reduction to
operating expenses for the year ended December 31, 2003. Additionally, during
2001 and 2002, the Company utilized aircraft owned by an entity controlled by
this former director and executive officer. Payments for all of these items
were approximately $350, $300, and $400 in 2003, 2002, and 2001, respectively. During 2003 and 2002, the Company utilized an aircraft owned by its Chief
Executive Officer. All usage fees were no greater than would be charged by
unaffiliated third parties and TIMCOs fees for services on the aircraft were
at its normal hourly rates. Expense associated with this use were $51 in 2003
and $272, net of services provided on the aircraft totaling $39, in 2002. This
aircraft was sold by the Companys Chief Executive Officer during 2003. See Note 5 for terms and conditions of the Companys $8,250 related party term
loan, which includes the $1,300 Brice acquisition loan, from its principal
stockholder. Also see Note 5 for a description of debt guarantees by certain
directors and principal stockholders in connection with the original $10,000
term loan and the $5,000 Amended Term Loan to the Company and for a description
of credit support provided by certain stockholders in connection with an
amendment to the TROL financing lease. NOTE 7COMMITMENTS AND CONTINGENCIES LITIGATION AND CLAIMS In 2000, several suits were filed against the Company, certain of its former
officers and directors, and its former auditors, in the United States District
Court for the Southern District of Florida. These suits, which were
consolidated into a single lawsuit, alleged violations of Sections 11 and 15 of
the Securities Act of 1933 (Securities Act) and Sections 10(b) and 20(a) of,
and Rule 10b-5 under, the Securities Exchange Act of 1934 (Exchange Act).
Among other matters, the consolidated complaint, as amended, alleged that the
Companys reported financial results in 1997, 1998 and 1999 were materially
misleading and violated generally accepted accounting principles. The amended
consolidated complaint sought damages and certification of two classes, one
consisting of purchasers of the Companys common stock in the Companys June
1999 public offering and one consisting of purchasers of the Companys common
stock during the period between April 30, 1997 and F-25




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April 14, 2000. During the
first quarter of 2000, the U.S. Securities and Exchange Commission initiated an
inquiry into the Companys accounting for certain transactions occurring prior
to 2000. The Company has cooperated with the SEC in its inquiry. In May 2002, the Company entered into an agreement to settle the class action
suit without any admission by the defendants of liability or wrongdoing. Under
the settlement agreement, the fairness of which was approved by the District
Court in August 2002, the Company has paid $11,500 in cash, all of which has
been paid by the Companys directors and officers liability insurance
carrier, and has issued certain securities, as described, in full settlement of
the claims. The securities issued are: (i) 1,250 shares of the Companys
authorized but unissued common stock, (ii) $4,000 of the Companys new 8%
Junior Subordinated Convertible PIK Notes due 2007 (with terms similar to, but
structurally subordinated to, the New Notes, and structurally subordinated to
the Old Notes), and (iii) five-year warrants to purchase 4,150 shares of the
Companys common stock at an exercise price of $5.16 per share, which are
exercisable upon grant. The settlement became effective on September 20, 2002. All securities issued as part of the settlement have been presented within the
accompanying consolidated financial statements as issued and outstanding as of
September 20, 2002. For the year ended December 31, 2002, the Company recorded
an aggregate charge of $4,410 related to the value of the securities issued in
this settlement. In November 2001, the Company had been sued by several former employees of its
Oscoda, Michigan heavy airframe maintenance operation, on behalf of themselves
and purportedly on behalf of a class of similarly situated employees, for
alleged violations of the Worker Adjustment and Retraining Notification Act in
connection with its spring 2001 temporary closure of that operation. The suit,
which was filed in the U.S. District Court for the Eastern District of
Michigan, sought back pay (including salary and accrued vacations) and other
benefits for each of the affected employees for a sixty day period after such
employees were terminated. In November 2002, the Company entered into a
settlement agreement relating to this suit, for which the fairness of this
settlement was approved by the U.S. District Court and by the former employees.
As part of the settlement, the Company agreed to pay these former employees
$1,150. As of December 31, 2003, this settlement has been fully funded, and as
such, without any admission of liability or wrongdoing, all outstanding claims
against the Company have been dismissed. As of December 31, 2003 and 2002, $0
and $1,150, respectively, are included within accrued expenses within the
accompanying consolidated balance sheets relating to this lawsuit. The Company is also involved in various other lawsuits and contingencies
arising out of its operations in the normal course of business. In the opinion
of management, the ultimate resolution of these other claims and lawsuits will
not have a material adverse effect upon the financial condition or results of
operations of the Company. SETTLEMENT WITH KELLSTROM In July 2002, the Company closed on the transactions contemplated by the
Post-Closing Resolution Agreement, dated as of June 10, 2002 (the PCRA)
between the Company and Kellstrom Industries, Inc. (Kellstrom). The
settlement resolved and settled globally the outstanding disputes between the
Company and Kellstrom (the Settlement) relating to matters arising out of the
Companys December 2000 sale of substantially all of the assets of its
redistribution operation to Kellstrom. See Note 3 for a full description of the
terms of the Settlement. ENVIRONMENTAL MATTERS The Company is taking remedial action pursuant to Environmental Protection
Agency and Florida Department of Environmental Protection (FDEP) regulations
at TIMCO-Lake City. Ongoing testing is being performed and new information is
being gathered to continually assess the impact and magnitude of the required
remediation efforts on the Company. Based upon the most recent cost estimates
provided by environmental consultants, it is estimated that the total remaining
testing, remediation and compliance costs for this facility will be
approximately $810. As a result of these most recent cost estimates, the
Company reduced its overall environmental exposure to $810 and has recorded a
$400 benefit by reducing a portion of this environmental accrual. This
reduction is reflected as a offset to operating expenses for the year ended
December 31, 2003. Additionally, the Company has secured an insurance policy
to comply with the financial assurances required by the FDEP. Testing and evaluation for all known sites on TIMCO-Lake Citys property is
substantially complete and the Company has commenced a remediation program. The
Company is currently monitoring the remediation, which will extend into the
future. Based on current testing, technology, environmental law and clean-up
experience to date, the Company believes that it has established an accrual for
the estimated costs associated with its current remediation strategies.
Additionally, there are other areas adjacent to TIMCO-Lake Citys facility that
could also require remediation. The Company does not believe that it is
responsible for these areas; however, it may be asserted that the Company and
other parties are jointly and severally liable and are responsible for the
remediation of those properties. F-26




---



##### 



In addition to recording a $400 benefit as a result of revised environmental
estimates by the Companys environmental consultants for its Lake City facility
(as discussed above), during 2003 the Company also eliminated a $300
environmental accrual that had been established for property sold in a prior
year, as it was determined in 2003 that the Company no longer had any
environmental exposures for this property. Accrued expenses in the
accompanying December 31, 2003 and 2002 consolidated balance sheets includes
$810 and $1,474 related to obligations to remediate the environmental matters
described above. Future information and developments will require the Company
to continually reassess the expected impact of the environmental matters
discussed above. Actual costs to be incurred in future periods may vary from
the estimates, given the inherent uncertainties in evaluating environmental
exposures. These uncertainties include the extent of required remediation based
on testing and evaluation not yet completed and the varying costs and
effectiveness of remediation methods. In the opinion of management, the
ultimate resolution of these environmental exposures will not have a material
adverse effect upon the financial condition or results of operations of the
Company. OTHER MATTERS In connection with a previously outstanding term loan, the Company granted one
of its lenders common stock purchase warrants to purchase 13 shares of the
Companys common stock exercisable for par value at any time until December 31,
2005. The warrants entitle the holder to require the Company to repurchase the
warrants or common shares issued upon prior exercise of the warrants at $85.00
per share. As of December 31, 2003, the lender has not required the Company to
repurchase any warrants. The Company recorded the value of these warrants as
additional deferred financing costs and accrued expenses and amortized the
deferred financing cost to interest expense over the original term of the loan
(August 2002). If the repurchase right relating to these warrants were to be
exercised in full, the Company would be obligated to pay its lender an
aggregate of $1,097. This aggregate obligation is included within accrued
expenses in the accompanying December 31, 2003 and 2002 consolidated balance
sheets. In April 2004, in connection with the refinancing of its senior debt,
the Company settled its repurchase obligation. See Note 15. On June 30, 2003, the Company entered into a long-term purchase agreement for
various inventory components to be used in the Companys Oscoda, Michigan
engine center. Contingent upon the achievement of guaranteed sales volume to
the Company by the third party supply vendor, the Company has committed to this
vendor to purchase an aggregate of $2,800 of inventory components over an
approximate two-year period. An initial inventory purchase of $500 took place
on June 30, 2003. The residual inventory purchase obligation of $2,300 will
occur in $100 monthly increments. These monthly purchase commitments will
first be reduced by inventory used in the normal course of business that is
currently on consignment from this third party supplier. Additionally, as a
result of this agreement and modifications made to an accounts receivable due
from this vendor within the operating agreement, the Company eliminated the
need for a reserve of $300 against this receivable balance. During fiscal
2003, the third party supply vendor did not achieve the guaranteed sales volume
levels and thus was in default of this purchase agreement. The Company is
currently considering its options with respect to this default. During 2003, the Company terminated a lease agreement with a third party for an
abandoned facility in Burnsville, Minnesota. As a result of this lease
termination, the Company eliminated a $300 accrual previously established for
its operating lease commitment. The Company has employment agreements with most of its executive officers and
certain key employees. The employment agreements provide that such officers and
key employees may earn bonuses, based upon a sliding percentage scale of their
base salaries, provided the Company achieves certain financial operating
results, as defined. Further, certain of these employment agreements provide
for certain severance benefits in the event of a change of control. The Company leases certain buildings and office equipment under operating lease
agreements. For the years ended December 31, 2003, 2002 and 2001, rent expense
under all leases amounted to $4,692, $4,721, and $6,398, respectively. Minimum rental commitments under all leases with remaining non-cancellable
lease terms of one year or more as of December 31, 2003 are as follows: Years Ending December 31,
    
    Operating Leases
    
    Capital Leases2004
    
    $
    4,636
    
    
    $
    3,2292005
    
    
    4,540
    
    
    
    23,8072006
    
    
    4,245
    
    
    
    4322007
    
    
    3,800
    
    
    
    4322008
    
    
    3,341
    
    
    
    432Thereafter
    
    
    22,242
    
    
    
    4,498Interest
    
    
    
    
    
    
    (5,132
    )$
    42,804
    
    
    $
    27,698
 F-27




---



##### 



Included within the above operating lease commitments are obligations to
related parties of $286 for fiscal years 2004 through 2006, $300 for fiscal
years 2007 and 2008, and $1,126 thereafter. Included within the above amounts
for capital lease obligations are obligations included within the Companys
TROL financing arrangement. This obligation, which approximated $23,824 as of
December 31, 2003, has been paid in full subsequent to year-end and is further
discussed within Note 5. Additionally, while not reflected as reductions to
the rental commitments above, the Company has sublease income (as related to
the non-cancellable lease term) related to the property financed by the TROL
financing arrangement of $2,750 for each year 2004 through 2006, $2,875 for
2007, $3,000 for 2008, and $1,500 thereafter. With the sale of the assets
securing the TROL financing arrangement subsequent to December 31, 2003, this
sublease income has been terminated. See Note 15. NOTE 8INCOME TAXES Income tax (benefit) expense relating to continuing operations for the years
ended December 31, 2003, 2002 and 2001 consists of the following: 2003
    
    2002
    
    2001CurrentFederal
    
    $
    (1,339
    )
    
    $
    (3,800
    )
    
    $
    621State
    
    
    353
    
    
    
    
    
    
    
    (986
    )
    
    
    (3,800
    )
    
    
    621DeferredFederal
    
    
    
    
    
    
    
    
    
    
    State
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income tax (benefit) expense related to continuing operations
    
    $
    (986
    )
    
    $
    (3,800
    )
    
    $
    621
 The entire balance of the income tax (benefit) expense reflected above for
fiscal years 2003, 2002, and 2001 relates to continuing operations. There was
no income tax (benefit) or expense for the Companys discontinued operations
for fiscal years 2003, 2002, or 2001. The tax effects of temporary differences that give rise to significant portions
of net deferred tax assets as of December 31, 2003 and 2002 are as follows: December 31,2003
    
    2002Deferred tax assets, net:Allowance for doubtful accounts
    
    $
    10,851
    
    
    $
    13,881Accruals
    
    
    1,131
    
    
    
    4,129Write down of investment
    
    
    4,748
    
    
    
    4,748Inventories
    
    
    6,946
    
    
    
    8,201Property and equipment
    
    
    6,797
    
    
    
    4,428Net operating loss/credit carry forwards
    
    
    19,523
    
    
    
    13,207Other
    
    
    (451
    )
    
    
    (929
    )49,545
    
    
    
    47,665Less valuation allowance
    
    
    (49,545
    )
    
    
    (47,665
    )Net deferred tax assets
    
    $
    -0-
    
    
    $
    -0-
 As of December 31, 2003, the Company had federal net operating loss
carryforwards of $49,233, $1,806 relating to pre-restructuring activities and
$47,427 relating to post-restructuring activities. After the carryback of net
operating losses to prior years and the completion of the note exchange and
rights offering (see Note 10), the amount of pre-restructuring net operating
loss carryforwards available for use by the Company after February 28, 2002 was
limited to $1,806, which may be utilized at a rate of approximately $90 per
year, plus net operating losses generated from March 1, 2002 through December
31, 2002 and those net operating losses generated in fiscal year 2003. Net
operating losses not currently utilized may be carried forward for 20 years.
As of December 31, 2003, the Company has established a full valuation allowance
to offset net deferred tax assets due to the uncertainty as to whether these
net deferred tax assets will be utilized. F-28




---



##### 



The reconciliation of the federal statutory rate and the Companys effective
tax rate on continuing operations is as follows for the years ended December
31, 2003, 2002 and 2001: 2003
    
    2002
    
    2001Federal income tax (benefit) at the statutory rate
    
    
    (35.0
    )%
    
    
    (35.0
    )%
    
    
    (35.0
    )%Increase in tax rate resulting from:Losses not currently utilized
    
    
    35.0
    
    
    
    35.0
    
    
    
    35.0Completion of IRS examinations
    
    
    (23.8
    )
    
    
    
    
    
    
    State income taxes, net of federal tax benefit
    
    
    7.8
    
    
    
    
    
    
    
    Temporary change in tax legislation
    
    
    
    
    
    
    (401.3
    )
    
    
    Other
    
    
    (3.9
    )
    
    
    
    
    
    
    0.4Effective income tax rate
    
    
    (19.9
    )%
    
    
    (401.3
    )%
    
    
    0.4
    %
 During 2003, the Internal Revenue Service (IRS) completed examinations of the
Companys 1996, 1997, 1998 and 1999 federal income tax returns. The completion
of these examinations resulted in the elimination of a $1,000 accrual for tax
exposure matters and the establishment of a $177 income tax receivable. The
impact of these adjustments was a combined benefit of $1,177. The Company also
provided for state income tax exposures of $388. In addition, the Company
recognized an income tax benefit of $197 for the receipt of miscellaneous
federal and state carryback refunds. The aggregate net benefit of these events
($986) is included within the income tax benefit within the accompanying
consolidated statement of operations for the year ended December 31, 2003. Additionally, the Company applied for and received $11,061 of federal income
tax refunds during the year ended December 31, 2002, as a result of carrying
back net operating losses to offset taxable income from prior years. Of this
amount, $3,800 has been recognized as an income tax benefit during 2002 and has
resulted from favorable tax legislation passed by the U.S. Congress that
temporarily extended the number of years that net operating losses could be
carried back to offset taxable income. Prior to the passage of this
legislation, these net operating losses were fully reserved, as it was
determined to be more likely than not that the Company would not generate
taxable income in the near future and the Company would not have the
opportunity to benefit from these net operating losses. NOTE 9WEIGHTED AVERAGE SHARES The Company utilizes provisions under Statement of Financial Accounting
Standards No. 128 (SFAS 128), Earnings Per Share for computing and
presenting basic and diluted earnings per share. Basic earnings per share is
computed by dividing net income by the weighted average common shares
outstanding during the year. Diluted earnings per share is based on the
combined weighted average number of common shares and common share equivalents
outstanding which include, where appropriate, the assumed exercise of options
and warrants. In computing diluted earnings per share, the Company has utilized
the treasury stock method.
The computation of weighted average common and common equivalent shares used in
the calculation of basic and diluted earnings per share is as follows: Years Ended December 31,2003
    
    2002
    
    2001Weight average shares outstanding used in calculating basic
earnings per share
    
    
    31,641
    
    
    
    26,015
    
    
    
    1,502Effect of dilutive options and warrants
    
    
    
    
    
    
    229,471
    
    
    
    Weighted average common and common equivalent shares
    
    
    31,641
    
    
    
    255,486
    
    
    
    1,502Options and warrants outstanding which are not included in the
calculation of diluted earnings per share because their impact
is antidilutive
    
    
    302,394
    
    
    
    10,574
    
    
    
    437
 NOTE 10NOTE EXCHANGE AND RIGHTS OFFERING In February 2002, the Company completed a significant restructuring of its
capital and equity. The restructuring consisted of four parts. The first part
was a reverse split (on a one-share-for-ten-shares basis) of the Companys
outstanding common stock, reducing its outstanding common shares from 15,000
shares to 1,500 shares (5% of the restructured entity) and an increase in the
Companys authorized shares from 30,000 shares to 500,000 shares. The second
part was an offer to the holders of the Companys Old Notes to exchange their
Old Notes for up to $10,000 in cash, $100,000 of the New Notes, 4,500 shares of
the Companys common stock (15% of the restructured entity) and five-year
warrants to purchase an additional 3,000 shares of common stock at an exercise
price of $5.16 per share, which are exercisable upon grant, (collectively, the
Note Exchange). A condition to the closing of the Note Exchange offer was
that the holders of 80% or more of the outstanding Old Notes tender their Old
Notes in the Note Exchange. The third part was a rights offering to the
existing stockholders to raise funds to pay the cash portion of the Note
Exchange offer and the expenses of the restructuring, and to provide the
Company with working capital for ongoing business operations. In the rights
offering, the Company offered 24,000 shares of common stock (80% of
the restructured F-29




---



##### 



entity)
to raise $20,000. In connection with the rights offering, Lacy J. Harber, the
Companys principal stockholder, agreed to purchase unsold allotments. The last
part consisted of the issuance to the pre-restructuring holders of the
Companys common stock of five-year warrants to purchase an additional 3,000
shares of common stock at an exercise price of $5.16 per share, which are
exercisable upon grant. In the rights offering, the Company sold 12,000 shares of common stock to the
existing stockholders (including Mr. Harber), and Mr. Harber purchased the
balance of the shares (12,000 shares) pursuant to his obligation to purchase
unsold allotments. In the Note Exchange, the Company exchanged approximately
$149,000 face value of Old Notes (approximately 90% of the Old Notes) for
$5,100 in cash, and all of the New Notes, shares and warrants described above.
The Company used the net proceeds of the rights offering, approximating $10,000
after payment of the cash proceeds of the Note Exchange, accrued interest on
the Old Notes not tendered, and expenses of the restructuring, to reduce trade
payables and to provide working capital for the Companys ongoing business
operations. The restructuring has been recorded in accordance with SFAS No. 15,
Accounting by Debtors and Creditors for Troubled Debt Restructurings. As a
result of the restructuring, the Company recognized a gain of $27,279, in the
first quarter of 2002. Additionally, due to the application of SFAS No. 15, the
Company will no longer record interest expense on the New Notes, as the New
Notes are carried at their maximum potential cash redemption value (including
interest) through their maturity. This maximum potential cash redemption value
equates to the present value, through 2006, of the $100,000 notes plus the
value of stock to be issued upon redemption of these notes in 2006. For a
description of the terms of the New Notes, see Note 5. Additionally, $16,247 in aggregate principal amount, net of unamortized
discount, of the Old Notes remain outstanding. As part of the Note Exchange,
substantially all of the covenant protections contained in the indenture for
the Old Notes was removed. The Company paid cash and issued 360 shares of common stock as consideration
for services provided by a third party in connection with the restructuring. NOTE 11STOCK OPTION PLANS Effective on November 13, 2003, the Company adopted the 2003 Stock Incentive
Plan pursuant to which officers, directors, key employees and independent
contractors or consultants can receive options to purchase up to 5,800 shares
of the Companys common stock. No further options will be granted under the
Companys 2001 Stock Option Plan, 1996 Stock Option Plan or the Companys 1996
Director Stock Option Plan. Any shares of common stock reserved for issuance
upon the exercise of options that were not issued under such plans were
cancelled. The terms of any option issued under the 2001 Stock Option Plan, the
1996 Stock Option Plan and the 1996 Director stock option plan, however, will
continue to be governed by such plans and by the option agreements currently in
effect for such options. Pursuant to the 2003 Stock Incentive Plan, an aggregate of 5,800 shares of the
Companys common stock are reserved for issuance upon exercise of options
granted. Pursuant to the 2001 Stock Option Plan, an aggregate of 2,400 shares
of the Companys common stock was reserved for issuance upon exercise of
options granted. Pursuant to the 1996 Director Stock Option Plan, options to
acquire a maximum of the greater of 15 shares or 2% of the number of shares of
Common Stock then outstanding could have been granted to directors of the
Company. Pursuant to the 1996 Stock Option Plan, options to acquire a maximum
of the greater of 225 shares of Common Stock or 15% of the number of shares of
Common Stock then outstanding could have been granted to executive officers,
employees (including employees who are directors), independent contractors and
consultants of the Company. Pursuant to the 2003 Stock Incentive Plan, the 2001
Stock Option Plan, the 1996 Director Stock Option Plan, and the 1996 Stock
Option Plan (collectively the Plans), the price at which the Companys common
stock may be purchased upon the exercise of options granted under the Plans
will be required to be at least equal to the per share fair value of the Common
Stock on the date the particular options are granted. Options granted under the
Plans may have maximum terms of not more than ten years. Generally, options
granted under the Plans may be exercised at any time up to three months after
the person to whom such options were granted is no longer employed or retained
by the Company or serving on the Companys Board of Directors. Pursuant to the Plans, unless otherwise determined by the Compensation
Committee of the Companys Board of Directors, one-third of the options granted
under the Plans are exercisable upon grant, one-third are exercisable on the
first anniversary of such grant and the final one-third are exercisable on the
second anniversary of such grant. However, options granted under the Plans
shall become immediately exercisable if the holder of such options is
terminated by the Company or is no longer a director of the Company, as the
case may be, subsequent to certain events which are deemed to be a change in
control of the Company. On February 28, 2002, in conjunction with the completion of the Companys
capital restructuring (see Note 10), the Company granted certain executive
officers the option to purchase 1,700 shares of common stock at $0.83 per
share, with one-third of the options vesting upon grant, one-third of the
options granted vesting on February 28, 2003, and one-third of the options
granted vesting on February 28, 2004. Also, on March 20, 2002, after completion
of the Companys capital restructuring, the Company granted certain members of
management the option to purchase 488 shares of common stock at $1.02 per
share, with one-third of the options vesting upon grant, one-third of the
options granted vesting on March 20, 2003, and one-third of the options granted
vesting on March 20, 2004. Both the grant to the Companys
executive F-30




---



##### 



officers and to members of the
Companys management were made under the 2001 Stock Option Plan. In addition to the options granted under the 2001 Stock Option Plan, on March
20, 2002, the Company granted an executive officer the option to purchase 800
shares of common stock at $1.02 per share, with one-third of the options
vesting upon grant, one-third of the options granted vesting on March 20, 2003,
and one-third of the options granted vesting on March 20, 2004. These options
were initially granted outside of any plan. Effective with the adoption of the
2003 Stock Incentive Plan on November 13, 2003, however, the grant of these 800
options have become subject to the terms of the 2003 Stock Incentive Plan for
all purposes. The following summarizes outstanding stock options: WeightedAverageTotal
    
    Exercise PriceOutstanding at December 31, 2000
    
    
    212
    
    
    
    226.30Granted
    
    
    61
    
    
    
    41.50Cancelled
    
    
    
    
    
    
    Outstanding at December 31, 2001
    
    
    273
    
    
    
    184.74Granted
    
    
    3,163
    
    
    
    .92Cancelled
    
    
    
    
    
    
    Outstanding at December 31, 2002
    
    
    3,436
    
    
    
    15.54Granted
    
    
    125
    
    
    
    0.47Cancelled
    
    
    
    
    
    
    Outstanding at December 31, 2003
    
    
    3,561
    
    
    
    15.02Options exercisableAt December 31, 2003
    

    
    2,423
    
    
    
    21.86Available to grant under Plans at December 31, 2003
    
    
    4,913
 The following table summarizes information about outstanding and exercisable
stock options at December 31, 2003: Outstanding Weighted Average
    
    Exercisable Weighted AverageRange of Exercise
    
    
    
    
    
    Remaining ContractualPrices
    
    Shares
    
    Life (in years)
    
    Shares
    
    Exercise Price$
    0.33
    
    
    
    
    $
    10.00
    
    
    
    3,288
    
    
    
    3.3
    
    
    
    2,150
    
    
    
    0.9110.01
    
    
    
    
    
    100.00
    
    
    
    122
    
    
    
    7.0
    
    
    
    122
    
    
    
    41.27100.01
    
    
    
    
    
    200.00
    
    
    
    37
    
    
    
    4.7
    
    
    
    37
    
    
    
    169.93200.01
    
    
    
    
    
    300.00
    
    
    
    35
    
    
    
    4.4
    
    
    
    35
    
    
    
    255.90300.01
    

   
    
    
    
    420.00
    
    
    
    79
    
    
    
    4.8
    
    
    
    79
    
    
    
    389.78$
    0.33
    
    
    
    
    $
    420.00
    
    
    
    3,561
    
    
    
    3.4
    
    
    
    2,423
    
    
    $
    21.86
 The Company accounts for the fair value of its option grants in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees whereby no compensation cost related to stock options is deducted in
determining net income (loss). Had compensation cost for the Companys stock
option plans been determined pursuant to Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), the
Companys net income (loss) and earnings (loss) per share would have decreased
(increased) accordingly. F-31




---



##### 



Using the Black-Scholes option pricing model, the Companys pro forma net
income (loss), pro forma earnings (loss) per share and pro forma weighted
average fair value of options granted, with related assumptions, are as
follows: Years Ended December 31,2003
    
    2002
    
    2001Pro forma net (loss) income
    
    $
    (964
    )
    
    $
    4,631
    
    
    $
    (143,405
    )Pro forma basic (loss) earnings per share
    
    
    (0.03
    )
    
    
    0.18
    
    
    
    (95.51
    )Pro forma diluted (loss) earnings per share
    
    
    (0.03
    )
    
    
    0.02
    
    
    
    (95.51
    )Risk free interest rates
    
    
    3
    %
    
    
    4
    %
    
    
    5
    %Expected lives
    
    
    4-10 years
    
    
    
    4-10 years
    
    
    
    7-10 yearsExpected volatility
    
    
    70
    %
    
    
    70
    %
    
    

    79
    %Weighted average grant date fair value
    
    $
    0.28
    
    
    $
    0.57
    
    
    $
    34.82Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 In addition to the stock options discussed above, the Company has an aggregate
of 25,380 of stock warrants outstanding at December 31, 2003. This amount
includes the balance that would be issued as of December 31, 2003, through the
exercise of the warrant issued to our principal stockholder. See Note 5. NOTE 12401(K) SAVINGS PLAN Effective January 1, 1995, the Company established a qualified defined
contribution plan (the Plan) for eligible employees. The Plan provides that
employees may contribute up to the maximum percent of pretax earnings as
allowed by the U.S. tax code and the Company may elect, at its discretion, to
make contributions to the Plan in any year. During 2003, 2002, and 2001, the
Company did not make any contributions to the Plan. The Company does not
provide retired employees with health or life insurance benefits. NOTE 13-IMPACT OF ADOPTING SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, the Company has adopted SFAS No. 142. The impact of
adopting this Statement and the discontinuance of recording goodwill
amortization expense is as follows: 2003
    
    2002
    
    2001(In thousands, Except Share Data)Reported net (loss) income
    
    $
    (261
    )
    
    $
    7,022
    
    
    $
    (141,235
    )Add back: goodwill amortization
    
    
    
    
    
    
    
    
    
    
    1,900Adjusted net (loss) income
    
    
    (261
    )
    
    
    7,022
    
    
    
    (139,335
    )Basic (loss) earnings per share:Reported net (loss) income
    
    $
    (0.01
    )
    
    $
    0.27
    
    
    $
    (94.06
    )Goodwill amortization
    
    $
    
    
    
    $
    
    
    
    $
    1.27Adjusted net (loss) income
    
    $
    (0.01
    )
    
    $
    0.27
    
    
    $
    (92.79
    )Diluted (loss) earnings per share:Reported net (loss) income
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    (94.06
    )Goodwill amortization
    
    $
    
    
    
    $
    
    
    
    $
    1.27Adjusted net (loss) income
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    (92.79
    )
 F-32




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##### 



NOTE 14QUARTERLY FINANCIAL DATA (UNAUDITED) Results for the quarterly periods in the years ended December 31, 2003, 2002
and 2001 are as follows: First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter(In thousands, except earnings (loss) per share)2003Operating revenues
    
    $
    51,284
    
    
    $
    52,112
    
    
    $
    64,309
    
    
    $
    74,809Gross profit
    
    
    3,519
    
    
    
    1,575
    
    
    
    5,426
    
    
    
    5,663Income (loss) from continuing operations
    
    
    68
    
    
    
    (2,865
    )
    
    
    246
    
    
    
    (1,416
    )Income from discontinued operations
    
    
    251
    
    
    
    2,838
    
    
    
    99
    
    
    
    518Net income (loss)
    
    
    319
    
    
    
    (27
    )
    
    
    345
    
    
    
    (898
    )Diluted income (loss) per share from continuing
operations
    
    
    0.00
    
    
    
    (0.09
    )
    
    
    0.00
    
    
    
    (0.04
    )Diluted income per share from discontinued operations
    
    
    0.00
    
    
    
    0.09
    
    
    
    0.00
    
    
    
    0.02Diluted net income (loss) per share
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    (0.03
    )
 First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter(In thousands, except earnings (loss) per share)2002Operating revenues
    
    $
    57,534
    
    
    $
    48,300
    
    
    $
    33,852
    
    
    $
    42,287Gross profit (loss)
    
    
    6,246
    
    
    
    5,106
    
    
    
    (1,419
    )
    
    
    (7,665
    )Income (loss) from continuing operations
    
    
    20,619
    
    
    
    (456
    )
    
    
    (1,198
    )
    
    
    (16,112
    )Income from discontinued operations
    
    
    232
    
    
    
    691
    
    
    
    2,545
    
    
    
    701Net income (loss)
    
    
    20,851
    
    
    
    235
    
    
    
    1,347
    
    
    
    (15,411
    )Diluted income (loss) per share from continuing
operations
    
    
    0.20
    
    
    
    (0.01
    )
    
    
    (0.04
    )
    
    
    (0.51
    )Diluted income per share from discontinued operations
    
    
    
    
    
    
    0.02
    
    
    
    0.08
    
    
    
    0.02Diluted net income (loss) per share
    
    
    0.20
    
    
    
    0.01
    
    
    
    0.04
    
    
    
    (0.49
    )
 NOTE 15SUBSEQUENT EVENTS Commencing January 30, 2004, the Company entered into a series of two amendments
and limited waiver agreements pursuant to which the maturity date of all of the
Companys existing senior revolving credit and term loan facilities were
extended until July 31, 2004. As discussed in Note 5, the Companys existing
senior revolving credit and term loan facilities had been scheduled to expire
on January 31, 2004. In addition, the Company had a $5,000 term loan with
BofA, which had always been credit supported by various parties, including the
Companys principal stockholder, and which was scheduled to mature on January
31, 2004. In connection with the above-described short-term extension of the
revolving credit and term loan facilities, the Companys principal stockholder
repaid BofA and agreed to extend the term of this loan until July 31, 2004. On April 8, 2004, the Company
closed on a refinancing of its senior debt as contemplated by a
financing agreement dated April 5, 2004. Under the agreement with the
CIT Group, the Company obtained a $35,000 senior secured revolving line of credit
(the CIT Group Revolving Line of Credit) and a $6,400 senior secured term
loan (the CIT Group Term Loan, and collectively with the CIT Group Revolving
Line of Credit, the CIT Group Credit Facility). The Company used the
proceeds from the CIT Group Credit Facility to repay in full amounts
outstanding under its Amended Revolving Credit Facility, to repay the warrant
repurchase obligation due to a previous lender (as described below and in Note
7) and for working capital. The CIT Group Revolving Line of Credit is due December 31, 2007 and bears
interest, at the Companys option, at (a) Prime plus an advance rate ranging
from 0.00% to 0.75% with the advance rate contingent on the Companys leverage
ratio, or (b) LIBOR plus an advance rate ranging from 2.50% to 4.00% with the
advance rate contingent on the Companys leverage ratio. The CIT Group Term
Loan is due in quarterly installments of $291, commencing on October 1, 2004,
with the final quarterly installment due on December 31, 2007. The CIT Group
Term Loan bears interest at the prevailing rate of the CIT Group Revolving Line
of Credit plus one percent. Also, the CIT Group Credit Facility contains
certain financial covenants regarding the Companys financial performance and
certain other covenants, including limitations on the incurrence of additional
debt. In addition, an event of default under the Hilco Term
Loan (described below) will also result in a default under the CIT Group Credit
Facility. Borrowings under the CIT Group Credit Facility are secured by a lien
on substantially all of the Companys assets. Borrowings under the
CIT Group Revolving Line of Credit are
based on a borrowing base formula that takes into account the value of
the Companys receivables and inventory from time to time. Further, the amount
the Company can borrow under the CIT Group Revolving Line of Credit is
affected by various availability reserves that are established by the
lenders under the financing agreement and the Companys borrowings under the
CIT Group Revolving Line of Credit are capped based on the ratio of
the Companys debt to EBITDA and by the maximum amount of the CIT Group
Revolving Line of Credit. At April 8, 2004, the Companys availability
under the CIT Group Revolving Line of Credit was $10,371. F-33




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##### 



Additionally, simultaneous
with its obtaining the CIT Group Credit Facility, the Company
borrowed $8,000 from Hilco Capital LP (the Hilco
Term Loan). The Company used the proceeds from the Hilco Term Loan to repay
amounts outstanding under its Amended Revolving Credit Facility and Amended
Term Loan. The Hilco Term Loan matures on December 31, 2007 and bears interest
at Prime plus an advance rate ranging from 3.00% and 6.00% with the advance
rate contingent upon our meeting (from time to time) a ratio of the
Companys secured debt to EBITDA. In addition, the Hilco Term Loan bears PIK interest ranging from
2.00% to 5.00% with the prevailing rate also being contingent upon the ratio of
the Companys level of secured debt to EBITDA. At no time during the
term of the Hilco Term Loan, however, will the combined cash and PIK
interest rates be less then 9.00% nor greater then 18.00% per annum. Also, the Hilco Term Loan
contains certain financial covenants regarding the Companys financial
performance and certain other covenants, including limitations on the
incurrence of additional debt. In addition, an event of default under the CIT
Group Credit Facility (described above) will also result in a default under the
Hilco Term Loan. Borrowings under the Hilco Term Loan are secured by a lien on
substantially all of the Companys assets. In connection with the CIT Group Credit Facility and the Hilco Term Loan, the
Company paid aggregate fees of approximately $2,500. These will be amortized, starting
in the second quarter of 2004, over the term of the new loans. In connection with the refinancing, the Company settled its warrant repurchase
obligation to its prior lender by paying $870 in cash. Finally, on April 8, 2004,
the Company refinanced (effective March 31, 2004) all of its previously
outstanding debt (principal plus accrued and unpaid interest) with its principal stockholder with a new $14,412 term loan
due on January 31, 2008 (the LJH Term Loan). The LJH Term Loan combines the
$5,000 loan which replaced the BofA term loan, the $6,050 related party term
loan made in May 2003, the $1,300 loan relating to the Brice acquisition, the
$900 obligation related to the AMS inventory purchase, and PIK interest
previously paid on these obligations. See Notes 5 and 6 for particulars. The
LJH Term Loan bears interest at 18% per annum, 6% of which is payable in cash
and the balance of which will be PIK. The LJH Term Loan is pari-passu with the
New Notes, but is secured. The LJH
Term Loan also contains cross acceleration provisions if the obligations to the
CIT Group and Hilco are accelerated. On March 31, 2004, the Company closed on the sale of its office and warehouse
facility located in Miramar, Florida. The gross sales price was $26,000. The
proceeds of the sale were used to repay in full the TROL financing obligation.
The balance, net of transaction expenses, which approximates $500,
was used to repay amounts outstanding under the Amended Term Loan. Additionally, as a result of this sale, the Company
will record a gain on disposal of fixed assets, for the first quarter ended
March 31, 2004, of approximately $800. Finally, as was required under the
Companys previous senior credit facility, in February 2004, the Company
entered into an amendment and limited waiver agreement with its previous senior
lenders for the purpose of releasing the Miramar facility for sale. F-34




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##### 



SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Three Years Ended December 31, 2003
(In thousands) Additions (Deductions)Balance at
    
    Charged (Credited) to
    
    
    
    
    
    
    
    
    
    Balance atBeginning
    
    Cost and
    
    
    
    
    
    
    
    
    
    End ofDescription
    
    of Year
    
    Expenses
    
    Other
    
    Deductions
    
    YearAllowances for doubtful accounts
receivable:Year ended December 31,2001
    
    $
    7,454
    
    
    
    9,502
    
    
    
    252
    (C)
    
    
    5,369
    (A)
    
    $
    11,3352002
    
    
    11,335
    
    
    
    846
    
    
    
    
    
    
    
    2,477
    (A)
    
    
    9,7042003
    
    
    9,704
    
    
    
    838
    (D)
    
    
    
    
    
    
    3,254
    (A)
    
    
    5,612Accruals relating to discontinued operations:2001
    
    
    28,048
    
    
    
    9,386
    
    
    
    
    
    
    
    4,927
    (B)
    
    
    32,5072002
    
    
    32,507
    
    
    
    
    
    
    
    
    
    
    
    23,041
    (B)
    
    
    9,4662003
    
    
    9,466
    
    
    
    
    
    
    
    
    
    
    
    4,451
    (B)
    
    
    5,015
  (A)
    
    Represents accounts receivable written-off.(B)
    
    Utilization of accruals upon disposition of business.(C)
    
    Represents allowance for doubtful accounts of Caribe Aviation which was sold in May 2001.(D)
    
    Represents collection on accounts previously fully reserved. F-35