##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q [Mark One] þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Quarterly Period Ended March 31, 2005 OR o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from to Commission 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)
    
    65-0665658
(IRS Employer
Identification No.)623 Radar Road
Greensboro, North Carolina
(Address of principal executive offices)
    
    27410
(Zip Code)
 Registrants telephone number, including area code: (336) 668-4410 (x8010) Indicate by checkmark whether the registrant: (1) has 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 period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ Indicate the number of shares outstanding of each of the issuers classes of common equity, as of
the latest practicable date:256,557,694 shares of common stock, $.001 par value per share, were
outstanding as of May 9, 2005.




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##### 



TIMCO AVIATION SERVICES, INC. INDEX PagePart I. Financial InformationItem 1.
    
    FINANCIAL STATEMENTSCondensed Consolidated Balance Sheets at March 31, 2005 and December 31,
2004 (unaudited)
    
    3 - 4Condensed Consolidated Statements of Operations for the three months ended
March 31, 2005 and 2004 (unaudited)
    
    
    5Condensed Consolidated Statements of Stockholders Deficit and
Comprehensive Income for the three months ended March 31, 2005 (unaudited)
    
    
    6Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2005 and 2004 (unaudited)
    
    7 - 8Notes to Condensed Consolidated Financial Statements
    
    
    9Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
    
    
    20Item 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    
    27Item 4.
    
    CONTROLS AND PROCEDURES
    
    
    27Part II. Other
InformationItem 1.
    
    LEGAL PROCEEDINGS
    
    
    28Item 2.
    
    CHANGES IN SECURITIES AND USE OF PROCEEDS
    
    
    28Item 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    28Item 4.
    
    SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
    
    
    28Item 5.
    
    OTHER INFORMATION
    
    
    28Item 6.
    
    EXHIBITS AND REPORTS ON FORM 8-K
    
    
    28
 2




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited) March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    273
    
    
    $
    293Accounts receivable, net
    
    
    47,746
    
    
    
    49,721Inventories
    
    
    23,350
    
    
    
    22,244Other current assets
    
    
    5,314
    
    
    
    4,553Total current assets
    
    
    76,683
    
    
    
    76,811Fixed assets, net
    
    
    29,977
    
    
    
    30,537Other Assets:Goodwill, net
    
    
    26,124
    
    
    
    26,124Deferred financing costs, net
    
    
    2,963
    
    
    
    3,263Other
    
    
    633
    
    
    
    633Total other assets
    
    
    29,720
    
    
    
    30,020Total assets
    
    $
    136,380
    
    
    $
    137,368LIABILITIES & STOCKHOLDERS DEFICITCurrent Liabilities:Accounts payable
    
    $
    21,074
    
    
    $
    18,000Accrued expenses
    
    
    21,305
    
    
    
    19,667Customer deposits
    
    
    8,867
    
    
    
    9,254Revolving loan
    
    
    5,662
    
    
    
    11,692Current maturities of capital lease obligations
    
    
    1,469
    
    
    
    1,327Current maturities of notes payable to financial
institutions
    
    
    1,164
    
    
    
    1,164Accrued interest
    
    
    1,006
    
    
    
    1,812Total current liabilities
    
    
    60,547
    
    
    
    62,916Senior subordinated notes, net:New notes due 2006
    
    
    61,437
    
    
    
    115,800Old notes due 2008
    
    
    16,247
    
    
    
    16,247Term loan with a related party
    
    
    15,862
    
    
    
    14,412Notes payable to financial institutions, net of
current portion
    
    
    12,654
    
    
    
    12,945Capital lease obligations, net of current portion
    
    
    3,309
    
    
    
    3,593Deferred income
    
    
    1,262
    
    
    
    1,305Junior subordinated notes due 2007, net
    
    
    940
    
    
    
    3,514Other long-term liabilities
    
    
    532
    
    
    
    1,488Total long-term liabilities
    
    
    112,243
    
    
    
    169,304Commitments and Contingencies (see notes)
 3




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##### 



March 31,
    
    
    December 31,2005
    
    
    2004Stockholders 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, 256,557,694 and 31,640,994 shares
issued and outstanding at March 31, 2005 and
December 31, 2004, respectively
    
    
    257
    
    
    
    32Additional paid-in capital
    
    
    239,099
    
    
    
    182,088Accumulated deficit
    
    
    (275,766
    )
    
    
    (276,972
    )Total stockholders deficit
    
    
    (36,410
    )
    
    
    (94,852
    )Total liabilities and stockholders deficit
    
    $
    136,380
    
    
    $
    137,368
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
(Unaudited) For the Three MonthsEnded March 31,2005
    
    
    2004Sales, net
    
    $
    90,682
    
    
    $
    83,532Cost of sales
    
    
    81,264
    
    
    
    77,239Gross profit
    
    
    9,418
    
    
    
    6,293Operating expenses
    
    
    6,454
    
    
    
    5,502Income from operations
    
    
    2,964
    
    
    
    791Interest expense
    
    
    2,131
    
    
    
    1,809Charges for early conversion of notes
    
    
    400
    
    
    
    Other income
- net
    
    
    (381
    )
    
    
    (165
    )Income (loss) before income taxes and discontinued
operations
    
    
    814
    
    
    
    (853
    )Income tax benefit
    
    
    337
    
    
    
    Income (loss) from continuing operations before discontinued
operations
    
    
    1,151
    
    
    
    (853
    )Income from discontinued operations, net of income taxes
    
    
    55
    
    
    
    971Net income
    
    $
    1,206
    
    
    $
    118Basic income per share:Income (loss) from continuing operations
    
    $
    0.02
    
    
    $
    (0.03
    )Income from discontinued operations
    
    
    
    
    
    
    0.03Net income
    
    $
    0.02
    
    
    $
    Diluted income per share:Income (loss) from continuing operations
    
    $
    
    
    
    $
    (0.03
    )Income from discontinued operations
    
    
    
    
    
    
    0.03Net income
    
    $
    
    
    
    $
    Weighted average shares outstanding:Basic
    
    
    59,130,813
    
    
    
    31,640,994Diluted
    
    
    266,926,765
    
    
    
    31,640,994
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT AND COMPREHENSIVE INCOME
(In Thousands, Except Share Data)
(Unaudited) TotalStockholdersAdditional
    
    
    
    
    
    
    Deficit andCommon Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    IncomeBalance as of
December 31, 2004
    
    
    31,640,994
    
    
    $
    32
    
    
    $
    182,088
    
    
    $
    (276,972
    )
    
    $
    (94,852
    )Conversion of New Senior Notes
    
    
    126,883,592
    
    
    
    127
    
    
    
    54,236
    
    
    
    
    
    
    
    54,363Conversion of Junior Notes
    
    
    7,007,260
    
    
    
    7
    
    
    
    2,635
    
    
    
    
    
    
    
    2,642Inducement for early conversion
of Notes
    
    
    20,083,628
    
    
    
    20
    
    
    
    140
    
    
    
    
    
    
    
    160Partial exercise of the LJH
Warrant
    
    
    70,942,220
    
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    71Net income and comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,206
    
    
    
    1,206Balance as of
March 31, 2005
    
    
    256,557,694
    
    
    $
    257
    
    
    $
    239,099
    
    
    $
    (275,766
    )
    
    $
    (36,410
    )
 The accompanying notes are an integral part of these condensed consolidated financial
statements. 6




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited) For the ThreeMonths EndedMarch 31,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,206
    
    
    $
    118Adjustments to reconcile net income to cash provided by
(used in) operating activities:Income from discontinued operations
    
    
    (55
    )
    
    
    (971
    )Inducement charge for conversion of notes
    
    
    160
    
    
    
    Paid-in-kind interest note obligations
    
    
    563
    
    
    
    476Depreciation and amortization
    
    
    1,259
    
    
    
    1,282Amortization of deferred financing costs
    
    
    300
    
    
    
    264Provision for doubtful accounts
    
    
    142
    
    
    
    476Change in working capital:Accounts receivable
    
    
    1,833
    
    
    
    (17,163
    )Inventories
    
    
    (1,106
    )
    
    
    507Other assets
    
    
    (761
    )
    
    
    957Accounts payable
    
    
    3,074
    
    
    
    4,522Customer deposits
    
    
    (387
    )
    
    
    2,717Other liabilities
    
    
    788
    
    
    
    2,251Net cash provided by (used in) operating activities
    
    
    7,016
    
    
    
    (4,564
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of fixed assets
    
    
    (699
    )
    
    
    (342
    )Proceeds from sale of fixed assets, net of transaction
expenses
    
    
    
    
    
    
    24,861Net cash (used in) provided by investing activities
    
    
    (699
    )
    
    
    24,519CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings under senior debt facilities
    
    
    86,833
    
    
    
    75,838Payments under senior debt facilities
    
    
    (92,863
    )
    
    
    (73,195
    )Payments on term loan with financial institution
    
    
    (291
    )
    
    
    Payments on capital leases
    
    
    (142
    )
    
    
    (23,648
    )Partial exercise of LJH Warrant
    
    
    71
    
    
    
    Payments of deferred financing costs
    
    
    
    
    
    
    (966
    )Net cash used in financing activities
    
    
    (6,392
    )
    
    
    (21,971
    )Net cash provided by discontinued operations
    
    
    55
    
    
    
    626Net decrease in cash and cash equivalents
    
    
    (20
    )
    
    
    (1,390
    )Cash and cash equivalents, beginning of period
    
    
    293
    
    
    
    1,603Cash and cash equivalents, end of period
    
    $
    273
    
    
    $
    213SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Interest paid
    
    $
    (1,944
    )
    
    $
    (1,775
    )Income taxes refunded
    
    $
    337
    
    
    $
    
 7




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##### 



TIMCO AVIATION SERVICES,
INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)
(In Thousands)
(Unaudited) For the ThreeMonths EndedMarch 31,2005
    
    
    2004SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:Common stock issued in connection with
conversion of New Senior Notes
    
    $
    54,363
    
    
    $
    Common stock issued in connection with
conversion of Junior Notes
    
    $
    2,642
    
    
    $
    
 The accompanying notes are an integral part of these condensed consolidated financial statements. 8




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2005 (Unaudited) (Amounts and Shares in Thousands, Except Per Share Data) 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION and LIQUIDITY 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 January 2005, the Company extended a tender offer to the holders of its 8% Senior Subordinated
Convertible PIK Notes due 2006 (New Senior Notes) and to the holders of its 8% Junior
Subordinated Convertible PIK Notes due 2007 (Junior Notes) to receive a 15% premium for agreeing
to an early conversion of their Notes into shares of the Companys authorized but unissued common
stock. The indentures relating to the New Senior Notes and Junior Notes provide that unless the
New Senior Notes and the Junior Notes are redeemed prior to their maturity, the New Senior Notes,
including all previously issued PIK interest and all accrued but unpaid interest, will
automatically convert at their maturity into 270,276 shares of common stock and the Junior Notes,
including all previously issued PIK interest and all accrued but unpaid interest, will
automatically convert at their maturity into 9,320 shares of common stock. On March 8, 2005, the Companys tender offer to the holders of its New Senior Notes and Junior
Notes expired. As of the expiration of the tender offer, the Company had received tenders and
related consents from holders of 47.0% in aggregate principal amount of the New Senior Notes and
tenders and related consents from holders of 75.2% in aggregate principal amount of the Junior
Notes. At the closing of the offer, the Company issued 224,916 in aggregate shares of its
authorized but unissued common stock to the holders of the New Senior Notes who tendered in the
offering, to the holders of the Junior Notes who tendered in the offer, and to LJH Ltd. (an entity
controlled by the Companys principal stockholder) in connection with its partial exercise of the
LJH Warrant (defined below). After the closing of the offer, the Company has 256,558 shares
outstanding and LJH, Ltd. owns approximately 57% of the outstanding common stock. See Note 5 for
further information. As of March 31, 2005, $61,437 of New Senior Notes and $940 of Junior Notes remain outstanding. All
such Notes will convert at their maturity into an aggregate of 145,705 shares of the Companys
authorized but unissued common stock. Further, upon the conversion of the remaining New Senior
Notes and Junior Notes into shares of common stock at their maturity, LJH Ltd. will have the right
to exercise the amended LJH Warrant to receive an additional 62,445 shares of common stock. At
such time, the Company would have 464,707 shares of common stock outstanding and LJH Ltd. would own
approximately 45% of the outstanding common stock. BASIS OF PRESENTATION The accompanying unaudited interim condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on
Form 10-Q. Pursuant to such rules and regulations, certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted. The accompanying unaudited
interim condensed consolidated financial statements should be read in conjunction with the
Companys consolidated financial statements and the notes thereto included in the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2004, File No. 001-11775 (the Form
10-K). In the opinion of management, the accompanying unaudited interim condensed consolidated financial
statements of the Company contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position of the Company as of March 31, 2005, the results
of its operations and its cash flows for the three month periods ended March 31, 2004 and 2005.
The results of operations and cash flows for the three month period ended March 31, 2005 are not
necessarily indicative of the results of operations or cash flows which may be reported for the
year ending December 31, 2005. 9




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##### 



LIQUIDITY On April 12, 2005, the Company closed a financing arrangement with Monroe Capital Advisors LLC in
which the Company obtained a $7,000 senior secured term loan and a $3,000 delayed draw term loan
designated for capital expenditures. Additionally, Monroe Capital acquired the $8,000 senior
secured term loan previously made to the Company by Hilco Capital LP. The original $8,000 term
loan due to Hilco Capital (and acquired by Monroe Capital as part of this financing) and the new
$7,000 term loan (collectively the Term Loans) mature on December 31, 2007. Borrowings for
capital expenditures made under the $3,000 delayed draw term loan (the Monroe Capital Line of
Credit and together with the Term Loans the Monroe Capital Loans) are payable in monthly
installments (as set forth in the financing agreement with Monroe Capital) with the balance due on
December 31, 2007. For further details of this financing agreement, see Note 9. For the year ended December 31, 2004, the Company incurred a loss from continuing operations of
$667. The Company also had a net stockholders deficit as of December 31, 2004 and for 2004
required additional cash flow above amounts provided from operations to meet its working capital
requirements. During the first quarter ended March 31, 2005, while not necessarily indicative of
the results of operations or cash flows which may be reported for the year ended December 31, 2005,
the Company reported income from continuing operations of $1,151 and cash flow from operations of
$7,016. 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, the currently on-going global war on terrorism, 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, a significant amount of cash flow from operations is needed 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, 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. Additionally, 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 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 be able to make all required debt payments and meet
all financial covenants in 2005, there can be no assurance that it will be able to do so. 2. SALE OF ASSETS AND OPERATING ENTITIES In March 2004, the Company sold an office and warehouse facility located in Miramar, Florida that
had previously been used in its parts redistribution operation for a sales price of $26,000. The
proceeds of the sale were used to repay the $23,824 balance of the Companys TROL financing
obligation and to pay transaction expenses and other expenses associated with the property. The
remainder of the proceeds was used to repay amounts outstanding under a previously outstanding
senior credit facility in April 2004. As a result of this transaction, the Company recognized a
gain on disposal of fixed assets of $825. This gain, along with the related rental income,
depreciation expense and interest expense, is included within income from discontinued operations,
net of income taxes within the accompanying condensed consolidated statement of operations for the
three month period ended March 31, 2004. See the Companys Annual Report of Form 10-K for the year
ended December 31, 2004 for particulars of the Companys TROL financing obligation and refinancing
of all of the Companys senior debt obligations. 10




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##### 



3. SENIOR CREDIT FACILITIES On April 8, 2004, the Company closed on a refinancing of all of its senior debt as contemplated by
a financing agreement dated April 5, 2004 between the Company and the CIT Group. Under this
financing agreement, the Company obtained the CIT Group Revolving Line of Credit, which is a
$35,000 senior secured revolving line of credit, and the CIT Group Term Loan, which is a $6,400
senior secured term loan. The Company used the proceeds from the CIT Group Credit Facility to repay
in full amounts outstanding under its previously outstanding senior credit facility, to repay a
warrant repurchase obligation due to a previous lender and for working capital. See the Companys
Annual Report of Form 10-K for the year ended December 31, 2004 for particulars of the Companys
refinancing of all of its previously outstanding senior debt and the warrant repurchase obligation
due to a previous lender. 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%, or (b) LIBOR plus
an advance rate ranging from 2.50% to 4.00%, with the advance rates contingent on the Companys
leverage ratio. The Company has currently elected both Prime and LIBOR options for portions of the
outstanding revolving line of credit. Also, in accordance with the requirements of EITF 95-22, the
Company has presented this revolving line of credit as a short-term obligation. The CIT Group Term
Loan is due in quarterly installments of $291, which commenced 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, and
provides for the termination of the CIT Group Credit Facility and repayment of all debt in the
event of a change in control, as defined. In addition, an event of default under the Hilco Term
Loan (described below) and the recently established Monroe Capital Loans (see Note 9) 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 level of the Companys receivables and inventory. Further, the amounts that the Company can
borrow under the CIT Group Revolving Line of Credit are 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 limited based on the ratio of the Companys debt
to EBITDA. Finally, the agreement relating to the CIT Group Revolving Line of Credit requires that
at the time of each additional borrowing, the Company must make various representations and
warranties to its lenders regarding its business (including several reaffirming that there have
been no changes in the status of specific aspects of the Companys business that could reasonably
be expected to have a material adverse effect upon the business operation, assets, financial
condition or collateral of the Company and its subsidiaries taken as a whole), and be in compliance
with various affirmative and negative covenants, all as more particularly set forth in the
agreement. As of March 31, 2005, the outstanding aggregate amount borrowed under the CIT Group
Revolving Line of Credit was $5,662, the outstanding CIT Group Term Loan was $5,818, the amount of
outstanding letters of credit under the CIT Group Revolving Line of Credit was $12,064, and $11,755
was available for additional borrowing under the CIT Group Revolving Line of Credit. Simultaneous with the inception of the CIT Group Credit Facility, the Company obtained the Hilco
Term Loan, which was an $8,000 term loan, from Hilco Capital LP (which loan has now been assigned
to Monroe Capital; see Note 9). The Company used the proceeds from the Hilco Term Loan to repay
amounts outstanding under its previously outstanding senior credit facility. 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 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 this loan, however, is the combined cash
and PIK interest rate to 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, and provides
for the termination of the Hilco Term Loan and repayment of all debt in the event of a change in
control, as defined. In addition, an event of default under the CIT Group Credit Facility
(described above) would 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. On April 12,
2005, the Company entered into a financing arrangement in which Monroe Capital acquired all rights
and obligations related to this term loan from Hilco Capital. In that agreement, the terms of the
Hilco Term Loan were modified. See Note 9 for particulars of this transaction, the amended loan
terms and the additional funding obtained from Monroe Capital. 11




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##### 



4. TERM LOAN TO A RELATED PARTY On April 8, 2004, the Company entered into an agreement with its principal stockholder pursuant to
which it combined all of its previously outstanding debt (principal plus accrued and unpaid
interest) with its principal stockholder into a related party term loan due on January 31, 2008
(the LJH Term Loan). The LJH Term Loan combines the $1,300 loan relating to the Brice
acquisition, the $6,050 related party term loan made in May 2003, the $900 obligation related to
the AMS inventory purchase, the $5,000 loan which replaced the Companys previous term loan with
BofA and PIK interest previously paid on these obligations. See the Companys Annual Report of
Form 10-K for the year ended December 31, 2004 for particulars regarding these combined debt
obligations. The LJH Term Loan bears interest at 18% per annum, 6% of which is payable in cash and
the balance of which is payable-in-kind. Additionally, the PIK interest balance compounds into principal
debt semi-annually in January and August. The LJH Term Loan is pari-passu with the New Senior
Notes, but is secured by a lien on substantially all of the Companys assets. The LJH Term Loan
also contains cross acceleration provisions if the Companys
obligations to the CIT Group and Monroe Capital are accelerated. As partial consideration for the funding of a $6,050 term loan with the Company principal
stockholder in 2003, of which this amount has become part of the related party term loan discussed
above, the Company issued a warrant (the LJH 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 in 2003. The Company recorded the
value of this warrant as deferred financing costs and was amortizing this amount to expense over a
three-year period (the original period of this loan). As a result of the related party term loan
refinancing described above, effective April 8, 2004 the Company reset the amortization period for
the unamortized deferred financing balance and will amortize this amount over the term of the newly
established related party term loan. In January 2005, the Company extended an offer for early conversion of its New Senior Notes and
Junior Notes. As part of this offer, the Companys principal stockholder agreed to certain amended
terms with respect to the LJH Warrant. Upon the completion of the Companys tender offer, its
principal stockholder partially exercised the LJH Warrant. As a result of this partial exercise,
the Companys principal stockholder received 70,942 shares of the Companys authorized but unissued
common stock. Additionally, the LJH Warrant was amended such that upon the maturity of the
remaining untendered New Senior Notes and Junior Notes, which is to occur on December 31, 2006 and
January 2, 2007, respectively, and the automatic conversion of these notes into common stock, the
Companys principal stockholder will have the right to exercise the amended warrant to receive an
additional 62,445 shares of common stock. See Note 5 for specifics of this tender offer. 5. SUBORDINATED NOTES OFFERING AND CONSENT SOLICITATION In January 2005, the Company extended an offering and consent solicitation relating to the New
Senior Notes and the Junior Notes. Under the contractual terms of the New Senior Notes and the
Junior Notes (collectively, the Notes), the Notes will automatically convert at their maturity
into a fixed number of shares of the Companys authorized but unissued common stock unless, prior
to their maturity, the Notes are redeemed in accordance with their terms for cash and additional
shares of common stock. In the offer, the Company offered holders of the Notes the right to receive a 15% premium payable
in shares of its common stock if the holders agreed to an early conversion of their Notes into
common stock during the conversion period, which expired as of March 8, 2005. The Company also
solicited consents from the holders of its New Senior Notes and Junior Notes to remove all material
covenants contained in the indentures, including the covenant restricting the amount of senior debt
that the Company may incur and the covenant requiring the Company to redeem the Notes upon a change
of control. If the holders tendered their Notes, they were automatically consenting to the
proposed amendments to the indentures. To become effective for each class of Notes, the amendments
required the consent of a majority of the holders of the Notes (excluding from this computation the
Notes held by the Companys principal stockholder). The Company received tenders and related consents from holders of 47.0% in aggregate principal
amount of the New Senior Notes and tenders and related consents from holders of 75.2% in aggregate
principal amount of the Junior Notes. Based on the level of premium shares that have been issued
(see below), for the first quarter ended March 31, 2005, the Company recorded an inducement charge
of $160 and incurred related transaction expenses of $240. 12




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##### 



At the closing of the offer, the Company issued 145,916 shares of its authorized but unissued
common stock to the holders of the New Senior Notes who tendered in the offer (including 19,032
premium shares), 8,058 shares of its authorized but unissued common stock to the holders of the
Junior Notes who tendered in the offer (including 1,051 premium shares), and 70,942 shares to LJH
Ltd. (an entity controlled by the Companys principal stockholder) in connection with its partial
exercise of the LJH Warrant. See Note 4 for information about the LJH Warrant. After the closing
of the offer, the Company has 256,558 shares outstanding and the Companys principal stockholder
holds approximately 57% of the outstanding common stock. In accordance with the terms of the offer, all Notes that were properly tendered were accepted for
early conversion. The Company received consents representing a majority in aggregate principal
amount of the outstanding Junior Notes in the consent solicitation, and accordingly, the proposed
amendments to the indentures governing the Junior Notes have become effective. Since the Company
did not receive consents representing a majority in aggregate principal amount of the outstanding
New Senior Notes in the consent solicitation, the indentures governing the New Senior Notes were
not amended. As of March 31, 2005, $61,437 of New Senior Notes and $940 of Junior Notes remain outstanding. All
such Notes will convert at their maturity into an aggregate of 145,705 shares of the Companys
authorized but unissued common stock. Further, upon the conversion of the remaining New Senior
Notes and Junior Notes into shares of common stock at their maturity, LJH Ltd. will have the right
to exercise the amended LJH Warrant to receive an additional 62,445 shares of common stock. At
such time, the Company would have 464,707 shares of common stock outstanding and LJH Ltd. would own
approximately 45% of the outstanding common stock. The Company believes that the remaining New Senior Notes and Junior Notes will convert into common
stock at their maturity, since the Company does not expect to be in a position to redeem the
remaining New Senior Notes and Junior Notes in accordance with their terms. Further, management
does not believe that a change of control, as defined in the indenture relating to the New Senior
Notes, will occur at any time prior to the maturity of the Notes. As
such and although generally accepted accounting principles require
the remaining Notes to be treated as a debt instrument, the Company
believes that the remaining Notes should be considered a common stock
equivalent. 13




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##### 



The following table sets forth (1) the Companys actual capitalization as of March 31, 2005
and (2) the Companys pro forma capitalization as of March 31, 2005 as if the remaining untendered
Notes had automatically converted into common stock at their maturity and the remaining portion of
the LJH Warrant had been exercised in full at that date: AdjustmentsUponActual
    
    
    Maturity
    
    
    Pro FormaUnaudited
    
    
    Unaudited
    
    
    UnauditedRevolving loan
    
    $
    5,662
    
    
    $
    
    
    
    $
    5,662Notes payable to financial institutions
    
    
    13,818
    
    
    
    
    
    
    
    13,818Capital lease obligation
    
    
    4,778
    
    
    
    
    
    
    
    4,778Related party term loan
    
    
    15,862
    
    
    
    
    
    
    
    15,862Old senior subordinated notes due 2008
    
    
    16,247
    
    
    
    
    
    
    
    16,247New senior subordinated convertible PIK notes due 2006
    
    
    61,437
    
    
    
    (61,437
    )(A)
    
    
    Junior subordinated convertible PIK notes due 2007
    
    
    940
    
    
    
    (940
    )(A)
    
    
    Total debt
    
    $
    118,744
    
    
    $
    (62,377
    )
    
    $
    56,367Stockholders equity (deficit):Preferred stock, $0.01 par value,
1,000,000 shares authorized, none outstanding, 15,000 shares
designated series A junior participating
    
    $
    
    
    
    $
    
    
    
    $
    Common Stock, $0.001 par value, 500,000,000 shares authorized,
256,557,694 shares issued and outstanding on March 31, 2005,
464,707,273 shares issued and outstanding on March 31, 2005 on a
proforma basis
    
    
    257
    
    
    
    208
    (B)
    
    
    465Additional paid in capital
    
    
    239,099
    
    
    
    62,231
    (B)
    
    
    301,330Accumulated deficit
    
    
    (275,766
    )
    
    
    
    
    
    
    (275,766
    )Total stockholders (deficit) equity
    
    $
    (36,410
    )
    
    $
    62,439
    
    
    $
    26,029Total capitalization
    
    $
    82,334
    
    
    $
    62
    
    
    $
    82,396
   (A)
    
    Represents the conversion of the outstanding New Senior Notes and Junior
Notes into shares of common stock at their maturity.(B)
    
    Reflects: (i) the issuance of 145,705 shares to the holders of the
untendered New Senior Notes and Junior Notes upon the maturity of such Notes;
and (ii) the issuance of 62,445 shares to the Companys principal stockholder
upon the complete exercise of the LJH Warrant. Upon the maturity of the New
Senior Notes and Junior Notes, and upon the complete exercise of the remaining
portion of the LJH Warrant in early 2007, the Company will have 464,707 shares
of common stock outstanding. 14




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##### 



8% SENIOR SUBORDINATED PIK NOTES DUE 2006 On February 28, 2002, in connection with its capital and debt restructuring, the Company issued
$100,000 face value, in aggregate, principal amount of 8.0% senior subordinated convertible
paid-in-kind (PIK) notes (New Senior Notes), which mature on December 31, 2006. On March 8,
2005, in conjunction with the Companys offering and consent solicitation (see above), the Company
received tenders and related consents from holders of 47.0% in aggregate principal amount of the
New Senior Notes. After consummation of the offer, $61,437 of New Senior Notes remain outstanding.
The New Senior 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 Senior Notes
semiannually on June 30 and December 31 of each
year.
The New Senior 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: 2005 - 75.625% and
2006 - 77.5%. The New Senior Notes also provide that the holders will receive an aggregate of
1,593 shares of common stock if the New Senior Notes are redeemed in 2005 or 2006. If the New Senior Notes have not already been redeemed or repurchased, the New Senior Notes,
including those New Senior 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 143,392
shares of common stock. Holders of New Senior 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 a note exchange in exchange for cash and
securities, and substantially all of the covenants contained in the indenture relating to the
remaining Old Notes were extinguished. As a result of the exchange offer and consent solicitation,
$16,247 in aggregate principal amount, net of unamortized discount, of Old Notes remain outstanding
at March 31, 2005. Interest on the Old Notes is payable on February 15 and August 15 of each year. The Old 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) 2005  101.354%; and (ii) 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 remaining Old Notes upon a
change in control or that such repurchase will then be permitted under the Companys senior credit
facilities. 8% JUNIOR SUBORDINATED PIK NOTES DUE 2007 In September 2002, as part of a class action settlement, the Company issued $4,000 face value, in
aggregate, junior subordinated convertible PIK notes (Junior Notes). On March 8, 2005, in
conjunction with the Companys offering and consent solicitation (see above), the Company received
tenders and related consents from holders of 75.2% in aggregate principal amount of the Junior
Notes. After consummation of the offer, $872 of Junior Notes remain outstanding. The
Junior Notes bear interest at 8% and mature on January 2, 2007. Interest on the Junior Notes is
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. Additionally, the Junior Notes were
recorded as of September 20, 2002 (the effective date) at the then current redemption value of
$2,500. As a result of the Companys tender offer, the current redemption value approximates $940.
The discount on these Junior Notes is being accreted to the redemption value that would be due if
the Junior Notes were redeemed immediately prior to maturity in January 2007, of approximately
$1,150. 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: 2005  75.625% and 2006
 77.5%. The Junior Notes also provide that the holders will receive an aggregate of 26 shares of
common stock if the Junior Notes are redeemed in 2005 or 2006. 15




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##### 



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 2,313 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. 6. COMMITMENTS AND CONTINGENCIES 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. 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
adequate accrual for the estimated costs associated with its current remediation strategies.
Additionally, during 2003 the Company secured an insurance policy to comply with the financial
assurances required by the FDEP. During the 2004 fiscal year and the first quarter of fiscal 2005,
the Company has proceeded with its remediation plan with no significant change in the estimated
compliance costs and has maintained its insurance policy to comply with the financial assurances
required by the FDEP. 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. Accrued expenses in the accompanying March 31, 2005 and December 31, 2004 condensed consolidated
balance sheets include $800 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. LEASE COMMITMENTS WITH RELATED PARTIES In 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. In 2003, the Company entered into an operating sublease agreement with its principal
stockholder to operate the business in these facilities. 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. Further, in 2004, the
Company entered into an equipment lease with its principal stockholder with respect to certain
equipment and tooling used at the Goodyear facility (which equipment and tooling had been acquired
by the Companys principal stockholder in the AMS bankruptcy proceedings). The lease, which is
recorded as a capital lease, is for a two-year term and requires monthly payments of $74. During 2002, the Company sold certain real estate and fixtures located 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 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 March 31,
2005 and December 31, 2004 condensed consolidated balance sheets includes $1,262 and $1,305,
respectively, relating to this sale leaseback transaction. These leases are believed to be on terms not less favorable to the Company than could be obtained
from an unaffiliated third party. 16




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##### 



LITIGATION AND CLAIMS The Company is involved in various lawsuits and contingencies arising out of its 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 the financial condition or results of
operations of the Company. OTHER MATTERS In August 2004, a settlement agreement for unsecured claims was reached with the entity from which
the Company had acquired its Oscoda, Michigan engine and airframe maintenance facilities in 1999.
Pursuant to that entitys plan of reorganization under Chapter 11 of the United States Bankruptcy
Code, the Company would receive a pro rata portion of 7,000 shares of common stock in the
reorganized company based on the Companys unsecured claim as compared to the total of all
unsecured claims. In April 2005, the common stock was distributed. See Note 9. 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 the first quarter of 2005, the billings related to
the services that were provided to such entity were approximately $660. At March 31, 2005, the
Company had a net receivable from this entity of $1,831, of which $500 has been received subsequent
to the end of the first quarter. The Company has employment agreements with its executive officers and certain of its 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 severance benefits in the event of a change of control. See Note 9 for particulars of an operating lease commitment that the Company entered into
subsequent to March 31, 2005. 7. WEIGHTED AVERAGE SHARES Basic income per share is computed using the weighted-average number of shares outstanding during
the period. Diluted income per share uses the weighted-average number of shares outstanding during
the period plus the dilutive effect of stock options calculated using the treasury stock method.
Weighted average shares used in the computation of basic and diluted income per share is as
follows: For the ThreeMonths EndedMarch 31,2005
    
    
    2004Weighted average common and common
equivalent shares outstanding:Basic
    
    
    59,130,813
    
    
    
    31,640,994Effect of dilutive securities
    
    
    207,795,952
    
    
    
    Diluted
    
    
    266,926,765
    
    
    
    31,640,994Common stock equivalents outstanding
which are not included in the
calculation of diluted earnings
per share because their impact
is antidilutive
    
    
    15,526,757
    
    
    
    308,483,246
 17




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##### 



8. STOCK COMPENSATION PLANS As permissible under SFAS No. 123, Accounting for Stock-Based Compensation, the Company currently
accounts for all stock-based compensation arrangements using the intrinsic value method prescribed
by Accounting Principles Board Opinion No. 25, 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: Quarter Ended March 31,2005
    
    
    2004Net income  as reported
    
    $
    1,206
    
    
    $
    118Additional expense
    
    
    (19
    )
    
    
    (177
    )Net (loss) income  pro forma
    
    
    1,187
    
    
    
    (59
    )Net income per share, basic  as reported
    
    
    0.02
    
    
    
    0.00Net income per share, diluted  as reported
    
    
    0.00
    
    
    
    0.00Net income (loss) per share, basic  pro forma
    
    
    0.02
    
    
    
    (0.00
    )Net income (loss) per share, diluted  pro forma
    
    
    0.00
    
    
    
    (0.00
    )
 In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment, which is a
revision of FASB Statement 123, Accounting for Stock-Based Compensation. SFAS No. 123 (Revised
2004) will require the Company to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which an employee is required to
provide service in exchange for the award. This Statement, as amended in April 2005, will be
adopted by the Company during the first quarter of 2006 (ending March 31, 2006). 9. SUBSEQUENT EVENTS FINANCING ARRANGEMENT WITH MONROE CAPITAL On April 12, 2005, the Company closed on a financing arrangement with Monroe Capital Advisors LLC
in which the Company obtained a $7,000 senior secured term loan and a $3,000 delayed draw term loan
designated for capital expenditures. Additionally, Monroe Capital acquired the $8,000 senior
secured term loan previously made to the Company by Hilco Capital LP. The original $8,000 term
loan due to Hilco Capital (and acquired by Monroe Capital as part of this financing) and the new
$7,000 term loan (collectively the Term Loans) mature on December 31, 2007. The Term Loans bear
cash interest at the annual rate of LIBOR (which for purposes of the Term Loans shall never be
lower than 2.25%) plus 6.00% and PIK interest at the rate of 2.00% per annum. Borrowings for
capital expenditures made under the $3,000 delayed draw term loan (the Monroe Capital Line of
Credit and together with the Term Loans the Monroe Capital Loans) are payable in monthly
installments (as set forth in the financing agreement) with the balance due on December 31, 2007.
The Monroe Capital Line of Credit bears cash interest at the per annum rate of LIBOR (which for
purposes of the Monroe Capital Line of Credit shall never be lower than 2.25% nor greater than
5.00%) plus 6.00% and PIK interest at the rate of 1.00% per annum. The financing agreement related to the Monroe Capital Loans contain certain financial covenants
regarding the Companys financial performance and certain other covenants, including limitations on
the incurrence of additional debt, and provide for the termination of the Monroe Capital Loans and
the repayment of all debt in the event of a change in control, as defined in the agreement relating
to the Monroe Capital Loans. In addition, an event of default under the Companys CIT Group Credit
Facility (described in Note 3) will also result in a default under the Monroe Capital Loans.
Borrowings under the Monroe Capital Loans are secured by: (i) a first lien on the assets that the
Company acquires or refinances with the Monroe Capital Line of Credit, and (ii) a second lien on
substantially all of the Companys other assets. 18




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##### 



OPERATING LEASE COMMITMENT On April 15, 2005 the Company entered into an operating lease agreement with Maxus Leasing Group
for tooling and other equipment to be used for the repair and overhaul of CFM engines. The initial
term of the lease is 48 months with a cancellation option, contingent upon the payment of a
cancellation fee, after the first 12 months. Rental payments approximate $1,320 per year, with the
Company also responsible for insurance, taxes, and other upfront expenditures. RECEIPT AND RECOGNITION OF SETTLEMENT As discussed in Note 6, in August 2004, a settlement agreement for unsecured claims was reached
with the entity (Kitty-Hawk, Inc.) from which the Company acquired its Oscoda, Michigan engine
and airframe maintenance facilities in 1999. In April 2005, pursuant to this entitys plan of
reorganization under Chapter 11 of the United States Bankruptcy Code, the Company received 1,364
shares of new common stock in the reorganized company in settlement of its claim against that
entitys bankruptcy estate. Based on the stock price of the reorganized company on April 21, 2005,
which approximated $1.30 per share, the Company will record, in accordance with SFAS No. 5,
Accounting for Contingencies, a gain of $1,773 in the second quarter of 2005. 19




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##### 



ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unless the context otherwise requires, references to TIMCO, we, our, and us, in this
Quarterly Report on Form 10-Q (Form 10-Q) includes TIMCO Aviation Services, Inc. and its
subsidiaries. This Form 10-Q contains, or may contain, forward-looking statements, such as
statements regarding our prospects, strategy and anticipated trends in the industry in which we
operate. 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, competitive factors, shifts in market demand, and other risks and uncertainties,
including, in addition to those described below and elsewhere in this Form 10-Q and in our Annual
Report on Form 10-K for the year ended December 31, 2004 (the Form 10-K), our ability to continue
to generate sufficient working capital to meet our operating requirements and service our
indebtedness, our maintaining good working relationships with our vendors and customers,
competitive pricing for our products and services, our ability to achieve gross profit margins at
which we can be profitable, including margins on services we perform on a fixed price basis,
competition in the aircraft maintenance, repair and overhaul market and the impact on that market
and on us of the ongoing global war on terrorism, the state of the domestic passenger airline
industry and the financial condition of our airline customers, our ability to attract and retain
qualified personnel in our businesses, utilization rates for our MR&O facilities, our ability to
effectively integrate future acquisitions, our ability to effectively manage our business, economic
factors which affect the airline industry, generally including the amount of aircraft maintenance
outsourced by various airlines, and future changes in government regulations. Should one or more
of these risks or uncertainties materialize, or should the assumptions underlying our
forward-looking statements prove incorrect, actual results may differ significantly from results
expressed or implied in any forward-looking statements made by us in this Form 10-Q. We do not
undertake any obligation to revise these forward-looking statements to reflect future events or
circumstances. The following discussion and analysis should be read in conjunction with the information set forth
under Managements Discussion and Analysis of Financial Condition and Results of Operations in
the Form 10-K. GENERAL TIMCO Aviation Services, Inc. is among the worlds largest providers of 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 MR&O services
through several subsidiaries: Triad International Maintenance Corporation (known in the industry as
TIMCO), which, with its four active locations, is one of the largest independent providers of
aircraft heavy maintenance services in the world and also provides aircraft storage and line
maintenance services; Brice Manufacturing and Aircraft Interior Design, which specialize in the
sale of new aircraft seats and aftermarket parts and in the refurbishment of aircraft interior
components; TIMCO Engineered Systems, which provides engineering services both to 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 goal 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. At present, approximately 80% of our business is airframe heavy maintenance, and we are one of the
largest providers of these services in the world. We have begun expansion into line maintenance
and hope to significantly expand that business, believing it to be a service that airlines will
seriously consider outsourcing in the future. We also are planning to expand our engine operation
by establishing a repair shop to overhaul and maintain CFM engines. There can be no assurance we
can successfully expand in these areas. 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 1990. Our principal executive offices are at 623 Radar
Road, Greensboro, North Carolina 27410, and our telephone number is (336) 668-4410. 20




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RESULTS OF OPERATIONS General 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 factors described in Forward Looking
Statements above and the following factors:  
    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 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. Three Months Ended March 31, 2005 and 2004 Operating revenue for the three month period ended March 31, 2005 increased $7,150 or 8.6% to
$90,682, from $83,532 for the same period in 2004. The increase in revenues for the quarter ended
March 31, 2005 compared to the revenues for the quarter ended March 31, 2004 can primarily be
attributed to additional revenue in our airframe heavy maintenance operations (described below), in
our engine center operation due to an expanded customer base and the addition of JT8D-200 overhaul
capabilities, and in our Brice seat manufacturing and overhaul operation, which has benefited from
the cross sales of our other service offerings and from an expanded customer base, including its
first major U.S. carrier for its aircraft seats. During 2005, particularly within our airframe MR&O facilities, we have continued to expand our
customer base and, in some instances, we have increased our share of outsourced maintenance from
our existing customers. The impact on revenue for the 2005 first quarter was an increase in
revenue for our airframe MR&O facilities over the 2004 first quarter of approximately $11,000 or
17.7%. This increase in revenues from the operation of our airframe MR&O facilities, coupled with
the increased revenue for our engine center operation ($2,800 quarter-over-quarter increase), for
our line maintenance operation ($1,000 quarter-over-quarter increase), and our Brice operation
($870 quarter-over-quarter increase), accounted for the significant increase in revenue for the
2005 first quarter over the 2004 first quarter. These quarter-over-quarter revenue increases were
partially offset by lower revenue for our engineering services as substantial customer programs
were completed during the first quarter of 2004. While significantly improved over 2004, our revenue and gross profit for 2005 continued to be
unfavorably impacted by general economic conditions affecting the airline industry, including
increased jet fuel prices, and by increased competition in the MR&O markets in which we operate.
These factors forced us to reduce our pricing and take fixed priced work at lower rates, which
adversely impacted revenues and gross margins. Additionally, instability in the Middle East and
the global war on terrorism have unfavorably impacted airline passenger levels during 2004 and
2005, which has equated to further delays of maintenance service by some of our customers.
Finally, delays and changes in customer maintenance schedules have impacted us in the past and are
likely to impact us in the future. 21




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Gross profit increased to $9,418 for the quarter ended March 31, 2005 compared with a gross profit
of $6,293 for the quarter ended March 31, 2004; a 50.0% improvement. Gross profit as a percentage
of revenue increased to 10.4% for the first quarter
of 2005, compared to 7.5% for same period of 2004. The increased gross profit for the three month
period ended March 31, 2005 over the same period for 2004 was spurred by long-term repetitive
customer maintenance programs (referred to in the industry as nose-to-tail lines), where greater
efficiencies can be achieved, and by higher revenues, particularly within our airframe MR&O
operations and our engine center operation, which allowed us to better leverage the fixed portion
of our cost of sales. Also, partially deteriorating the gross profit results for the first quarter
of 2004 were ramp-up/learning curve issues relating to services for a major new customer within our
Greensboro airframe facility. Gross profit levels are affected by sales volume in that many of the costs of operating our
facilities are relatively fixed and therefore revenues above a certain level have a more than
proportional 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 in any particular period and from period to period. Additionally,
gross profit could be impacted in the future by considerations as to the value of our inventory.
We continue to evaluate market and industry exposures in connection with the establishment of
appropriate inventory valuation levels. While we believe that we have appropriately valued our
inventory at the lower of cost or market, additional allowances may be required in the future,
depending on the market for aircraft parts during any particular period and the applicability of
the parts in our inventory compared to the types of aircraft for which we are performing
maintenance procedures. Operating
expenses for the three month period ended March 31, 2005 were
$6,454 compared to $5,502
for the three month period ended March 31, 2004. Operating expenses as a percentage of revenues
were 7.1% and 6.6% for the 2005 and 2004 first quarters, respectively. As
a result of these factors, income from operations was $2,964 for the quarter ended March 31,
2005, compared to income from operations of $791 for the quarter ended March 31, 2004. Interest expense (excluding amortization of deferred financing fees) for the three month period
ended March 31, 2005 increased by $287 to $1,832, from $1,545 for the three month period ended
March 31, 2004. The increase over 2004 is primarily attributable to interest expense on our
restructured related party term loan (established April 8, 2004) and the additional interest
expense on our $8,000 Hilco Term Loan (established April 8, 2004). For the quarter ended March 31,
2005, our non-cash PIK interest expense increased $87 while our cash interest expense increased
$200 over 2004. Amortization of deferred financing costs for the first quarter of 2005 was $300, compared to $264
for the first quarter of 2004. The slight increase over 2004 is primarily attributable to higher
deferred financing fees incurred in conjunction with our CIT Group Credit Facility and Hilco Term
Loan (both completed in April 2004) as compared to our previously outstanding senior credit
facilities with an original maturity date of January 31, 2004 and minimal additional financing fees
incurred related to the short-term extension of our previously outstanding senior credit facilities
though July 2004. During the first quarter ended March 31, 2005, we completed an offering and consent solicitation
relating to our New Senior Notes and our Junior Notes. As a result of this tender offer, we
recognized an inducement charge of $160 relating to the value of the premium shares issued as a
part of the offering. Additionally, we incurred transaction fees related to the offering of $240.
See Note 5 of Notes to Condensed Consolidated Financial Statements for specifics regarding this
tender offer. Other income  net was $381 and $165 for the three months of 2005 and 2004, respectively. Other
income  net for the first quarter of 2005 included a $250 gain from the receipt of life insurance
proceeds on a former key employee. As a result of the above factors, our income from continuing operations before income taxes and
discontinued operations for the quarter ended March 31, 2005 was
$814 compared to our loss from
continuing operations before income taxes and discontinued operations of $853 for the quarter ended
March 31, 2004. During
the first quarter of 2005, we recognized a $337 income tax benefit as a result of income tax
refunds for the overpayment of state taxes for our Oscoda, Michigan operations. For the reasons set forth above, our income from continuing operations for the three month period
ended March 31, 2005 was $1,151, or $0.02 per basic share and $0.00 per diluted share, compared to
a loss of $853, or $0.03 per basic share and diluted share, for the three month period ended March
31, 2004. 22




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Income from discontinued operations for the quarter ended March 31, 2005 was $55, or $0.00 per
basic share and diluted share, compared to income of $971, or $0.03 per basic share and diluted
share, for the quarter ended March 31, 2004. Income from
discontinued operations for 2004 includes an $825 gain on the disposition of our office and
warehouse facility located in Miramar, Florida and net rental income and expenses associated with
this office and warehouse facility received prior to its disposition. Results for both the three
month periods ended March 31, 2005 and 2004 include collections on receivables retained from the
sale of our redistribution operations that had been fully reserved and the sale of residual
inventory that remains after the sale of our redistribution operation and new parts bearings
operation. Since our collections on assets from discontinued operations are winding down, we do
not expect that our income from discontinued operations will be significant in future periods. MARKET OUTLOOK Based on our first quarter performance, and the factors discussed herein and in our Form 10-K in
Market Outlook for 2005, we continue to believe that our fiscal 2005 revenue will be between
$345,000 and $350,000 and that our fiscal 2005 net income will be between $2,000 and $2,500. LIQUIDITY AND CAPITAL RESOURCES Developments Concerning the Aviation Industry and Our Operations The condition of the airline industry has a substantial effect on our business, since our customers
consist of passenger airlines and freight carriers, aircraft leasing companies, maintenance and
repair facilities that service airlines, and 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. 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 ongoing global war on terrorism) have resulted in operating losses for U.S. airline
carriers in excess of $10.3 billion for 2001, $8.6 billion for 2002, $3.6 billion for 2003, and an
estimated $5.0 billion for 2004. In addition to these adverse factors, fiscal 2003 was further
impacted by the outbreak of the SARS virus in Asia and fiscal 2004 and the first quarter of 2005
were impacted by significantly increased fuel costs due to the high price of oil. 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). These factors have also
caused several carriers to file for bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code. 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 has been 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 those that have already filed, 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 solutions. We believe that all of the above factors could continue to have a negative impact on our business
in the foreseeable future. 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. 23




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Contractual Payment Obligation and Other Commercial Commitments Below is a table setting forth our contractual payment obligations and other commercial commitments
as of March 31, 2005, but adjusted for the term loan portion of the new financing arrangement with
Monroe Capital Advisors LLC (see Liquidity below) and adjusted for the operating lease commitment
to Maxus Leasing Group entered into on April 15, 2005 (see Contingencies below), which have been
aggregated in order to facilitate a basic understanding of our liquidity (in thousands): Contractual
    
    
    
    
    
    Less than
    
    
    
    
    
    
    Payments due by periodObligations
    
    Total
    
    
    One Year
    
    
    1-3 years
    
    
    4 - 5 years
    
    
    After 5 yearsRevolving Credit Facility
    
    $
    5,662
    
    
    $
    5,662
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-Term Debt
    
    
    115,304
    
    
    
    1,164
    
    
    
    114,140
    *
    
    
    
    
    
    
    Capital Leases
    
    
    4,778
    
    
    
    1,469
    
    
    
    285
    
    
    
    336
    
    
    
    2,688Operating
Leases
    
    
    26,751
    
    
    
    4,328
    
    
    
    8,696
    
    
    
    5,347
    
    
    
    8,380Total
contractual
cash
obligations
    
    $
    152,495
    
    
    $
    12,623
    
    
    $
    123,121
    
    
    $
    5,683
    
    
    $
    11,068
 OtherCommercial
    
    
    
    
    
    Less than
    
    
    
    
    
    
    Payments due by periodCommitments
    
    Total
    
    
    One Year
    
    
    1-3 years
    
    
    4 - 5 years
    
    
    After 5 yearsLetters of
Credit +
    
    
    12,064
    
    
    
    12,064
    
    
    
    
    
    
    
    
    
    
    
    Total Other
Commercial
Commitments
    
    $
    12,064
    
    
    $
    12,064
    
    
    $
    
    
    
    $
    
    
    
    $
    
    +  Outstanding letters of credit primarily relate to security for our obligation to make payments on
an operating lease requiring aggregate payments of approximately $15,600. This amount is removed
from the operating lease and total contractual cash obligations line because it is included within
the letters of credit. We are also committed under employment agreements with all of our executive officers and several of
our key employees. Liquidity For the year ended December 31, 2004, we incurred losses from continuing operations of $667. We
also had a net stockholders deficit as of December 31, 2004 and March 31, 2005. Further, during
2004 we required additional cash flow above amounts currently being provided from operations to
meet our working capital requirements. During the first quarter ended March 31, 2005, while not
necessarily indicative of the results of operations and cash flows which may be reported for the
year ended December 31, 2005, we reported income from continuing operations of $1,151 and cash flow
from operations of $7,016. 24




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Our ability to service our debt and note obligations as they come due, including maintaining
compliance with the covenants and provisions under our current and future 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, the ongoing global war on
terrorism, the outbreak of the SARS virus in Asia and competitive price reductions in airfare
prices. These and other factors may adversely affect our customers in the future. Cash flow from operations is used to service 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. Additionally, our senior credit facilities limit our ability
to continue to borrow additional funds in the event of a material adverse change in our business,
as defined. 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. On April 12, 2005, we closed on a financing arrangement with Monroe Capital Advisors LLC in which
we obtained a $7,000 senior secured term loan and a $3,000 delayed draw term loan designated for
capital expenditures. Additionally, Monroe Capital acquired the $8,000 senior secured term loan
previously made to us by Hilco Capital LP. The original $8,000 term loan due to Hilco Capital (and
acquired by Monroe Capital as part of this financing) and the new $7,000 term loan (collectively
the Term Loans) mature on December 31, 2007. Borrowings for capital expenditures made under the
$3,000 delayed draw term loan (the Monroe Capital Line of Credit and together with the Term Loans
the Monroe Capital Loans) are payable in monthly installments (as set forth in the financing
agreement) with the balance due on December 31, 2007. For further details regarding this amended
and restated financing agreement, see Note 9 of Notes to Condensed Consolidated Financial
Statements. At May 4, 2005, the outstanding aggregate borrowed on the CIT Group Revolving Line of Credit was
$4,597, the outstanding CIT Term Loan was $5,527, outstanding letters of credit under the CIT Group
Revolving Line of Credit was $12,064 and $15,364 was available for additional borrowing under the
CIT Group Revolving Line of Credit. Additionally, the degree to which we are leveraged 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;-
    the requirement that we obtain the consent from our lenders if we wish to borrow additional
amounts; and-
    the dedication of a significant portion of our cash flow from operations to the payment of
principal and interest on indebtedness, thereby reducing the funds available for operations. In addition, subject to the limitations set forth in the indenture for the New Senior Notes, we and
our subsidiaries may incur substantial amounts of additional indebtedness. Finally, our senior
credit facilities are secured by a lien on substantially all of our assets. We believe that we will meet our working capital requirements during 2005 from funds available
under our revolving credit agreement, our new term loans from Monroe
Capital and our
operations. We may also sell 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 expectation. 25




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Source and Use of Cash Net cash provided by our continuing operating activities during the first quarter of 2005 was
$7,016, compared to net cash used in continuing operating activities during the first quarter of
2004 of $4,564. Cash earnings, adjusted for non-cash charges, from continuing operations in the
first quarter of 2005 of $3,575, decreases in accounts receivable of $1,833, and increases in
accounts payable and other liabilities of $3,074 and $788, respectively, were used primarily to
fund increases in inventory and other assets of $1,106 and $761, respectively, for the purchase of
fixed assets of $699, and to reduce our senior debt and capital lease obligations by $6,463 in
the aggregate. Cash of $55 was provided by our discontinued operations. Senior Credit Facilities See discussion of our senior credit facilities in Notes 3 and 9 to Notes to Condensed Consolidated
Financial Statements and in our 2004 Form 10-K. Subordinated Notes See discussion of our subordinated note obligations in Note 5 to Notes to Condensed Consolidated
Financial Statements and in our 2004 Form 10-K. CONTINGENCIES On April 15, 2005, we entered into an operating lease agreement with Maxus Leasing Group for
tooling and other equipment to be used for the repair and overhaul of CFM engines. The initial
term of the lease is 48 months with a cancellation option, contingent upon the payment of a
cancellation fee, after the first 12 months. See Note 9 within Notes to Condensed Consolidated
Financial Statements. We are involved in various litigation and environmental matters arising in the ordinary course of
business. These are discussed in Note 6 of Notes to Condensed Consolidated Financial Statements.
We maintain insurance coverage against certain potential claims in amounts that we believe to be
adequate. Although the final outcome of these legal and environmental matters cannot be
determined, based on the facts presently known, it is managements opinion that the final
resolution of these matters will not have a material adverse effect on our financial position or
future results of operations. CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES Financial Reporting Release No. 60 requires all companies to include a discussion of critical
accounting policies or methods used in the preparation of its 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. See our Annual Report on Form 10-K for the year ended December 31, 2004 for a discussion of our
critical accounting policies and use of estimates. During the three month period ended March 31,
2005, there have been no material changes to our critical accounting policies and use of estimates. 26




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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 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 CIT Group Revolving Credit Facility and our $8,000 Hilco Term Loan (and
the Monroe Capital Term Loans which replaced this $8,000 term loan) bear interest at floating rates
and therefore, we are impacted by changes in prevailing interest rates. However, our $15,862 term
loan from our principal stockholder, and our New Senior Notes, Old Senior 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 2005 by approximately $153 before taxes and would change the fair value of
our financial instruments by approximately $8,164. ITEM 4: CONTROLS AND PROCEDURES  (a)
    Our Chief Executive Officer (who is also our acting Chief Financial
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, this officer has concluded that as of March 31, 2005 our
disclosure controls and procedures were effective in timely alerting
him 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 March 31, 2005, we have carried out an evaluation, under the
supervision and with the participation of our management, including
our principal executive officer (who is also our acting principal
financial officer), of the effectiveness of the design and operation
of our disclosure controls and procedures. Based on such evaluation,
our principal executive officer concluded that the Companys
disclosure controls and procedures are effective.(b)
    There have been no significant changes in our 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 quarterly report on Form 10-Q. 27




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PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 6 to the Companys Unaudited Condensed Consolidated Financial Statements included in this
filing. ITEM 2. CHANGES IN SECURITIES See Note 5 to the Companys Unaudited Condensed Consolidated Financial Statements included in this
filing. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K (a) Exhibits 10.1
    
    Master Lease Agreement dated as of
April 15, 2005, between Maxus Leasing Group, Inc. and TIMCO
Engine Center, Inc., and Schedules 001, 002 and 003 thereto31.1
    
    Certification of CEO and CFO under Section 302 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of CEO and CFO under Section 906 the Sarbanes-Oxley Act of 2002
 (b) Reports on Form 8-K During the quarter ended March 31, 2005, the Company filed a Current Report on Form 8-K reporting
under Item 3.02 the completion of the Companys tender offer and consent solicitation to the
holders of its 8% senior subordinated convertible PIK notes and its 8% junior subordinated
convertible PIK notes. Also, the Company filed a Current Report on Form 8-K reporting under Item
2.02 the issuance of a press release announcing the Companys financial results for the year ended
December 31, 2004. Subsequent to March 31, 2005, the Company filed a Current Report on Form 8-K reporting the loans
obtained from Monroe Capital Advisors, LLC. 28




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized. TIMCO Aviation Services, Inc. By:
    
    /s/ Roy T. Rimmer, Jr.Chief Executive Officer(Principal Executive and Financial Officer)
 Dated: May 10, 2005 29




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Exhibit Index ExhibitNumber
    
    Description10.1
    
    Master Lease Agreement dated as of
April 15, 2005, between Maxus Leasing Group, Inc. and TIMCO
Engine Center, Inc., and Schedules 001, 002 and 003 thereto31.1
    
    Certification of CEO and CFO under Section 302 the Sarbanes-Oxley Act of 200232.2
    
    Certification of CEO and CFO under Section 906 the Sarbanes-Oxley Act of 2002
 30