##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the Quarterly Period Ended June 30, 2006
 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.
  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)
  þ o
  o o þ
 o þ
 :




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##### 



TIMCO AVIATION SERVICES, INC.
 INDEX
 PagePart I. Financial InformationItem 1.
    
    FINANCIAL STATEMENTSCondensed Consolidated Balance Sheets at June 30, 2006 and December 31, 2005 (unaudited)
    
    
    3-4Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2006 and 2005 (unaudited)
    
    
    5-6Condensed Consolidated Statements of Stockholders Equity for the six months ended June 30, 2006 (unaudited)
    
    
    7Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (unaudited)
    
    
    8-9Notes to Condensed Consolidated Financial Statements
    
    
    10Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    24Item 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    
    35Item 4.
    
    CONTROLS AND PROCEDURES
    
    
    35Part II. Other InformationItem 1.
    
    LEGAL PROCEEDINGS
    
    
    36Item 2.
    
    CHANGES IN SECURITIES AND USE OF PROCEEDS
    
    
    36Item 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    36Item 4.
    
    SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
    
    
    36Item 5.
    
    OTHER INFORMATION
    
    
    36-38Item 6.
    
    EXHIBITS AND REPORTS ON FORM 8-K
    
    
    38
 2




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    364
    
    
    $
    1,318Marketable securities
    
    
    32
    
    
    
    13,978Accounts receivable, net of allowances of $6,183 at
June 30, 2006 and $7,446 at December 31, 2005
    
    
    49,226
    
    
    
    48,643Inventories
    
    
    28,476
    
    
    
    28,681Other current assets
    
    
    6,976
    
    
    
    7,082Net assets of discontinued operations
    
    
    
    
    
    
    462Total current assets
    
    
    85,074
    
    
    
    100,164Fixed assets:Fixed assets at cost
    
    
    84,263
    
    
    
    82,676Less accumulated depreciation
    
    
    55,451
    
    
    
    52,585Fixed assets, net
    
    
    28,812
    
    
    
    30,091Other Assets:Goodwill, net
    
    
    26,124
    
    
    
    26,124Collateral deposit for debt obligation
    
    
    5,000
    
    
    
    Deferred financing costs, net
    
    
    1,661
    
    
    
    2,251Other
    
    
    1,493
    
    
    
    1,498Total other assets
    
    
    34,278
    
    
    
    29,873Total assets
    
    $
    148,164
    
    
    $
    160,128LIABILITIES & STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    18,468
    
    
    $
    21,696Accrued expenses
    
    
    17,247
    
    
    
    13,087Accrued interest
    
    
    812
    
    
    
    1,127Customer deposits
    
    
    16,685
    
    
    
    21,446Revolving loan
    
    
    5,476
    
    
    
    8,320New Senior Notes due 2006
    
    
    1,221
    
    
    
    1,221Junior subordinated notes due 2007, net
    
    
    686
    
    
    
    Current maturities of capital lease obligations
    
    
    320
    
    
    
    786Current maturities of notes payable to financial
institutions
    
    
    
    
    
    
    1,562Other
    
    
    2,713
    
    
    
    3,416Total current liabilities
    
    
    63,628
    
    
    
    72,661
 3




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS  (Continued)
 June 30,
    
    
    December 31,2006
    
    
    2005Long-term Liabilities:Term loan with related parties
    
    
    25,002
    
    
    
    Old Senior Notes due 2008
    
    
    16,247
    
    
    
    16,247Capital lease obligations, net of current portion
    
    
    3,108
    
    
    
    3,187Notes payable to financial institutions, net of
current portion
    
    
    
    
    
    
    21,197Junior subordinated notes due 2007, net
    
    
    
    
    
    
    639Total long-term liabilities
    
    
    44,357
    
    
    
    41,270Commitments and Contingencies (See notes)Stockholders Equity: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, 100,000,000 shares
authorized, 21,441,040 voting shares issued and
outstanding at June 30, 2006 and December 31, 2005
    
    
    21
    
    
    
    21Additional paid-in capital
    
    
    344,877
    
    
    
    344,864Accumulated deficit
    
    
    (304,719
    )
    
    
    (298,688
    )Total stockholders equity
    
    
    40,179
    
    
    
    46,197Total liabilities and stockholders equity
    
    $
    148,164
    
    
    $
    160,128
  4




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Three MonthsEnded June 30,2006
    
    
    2005Revenues, net
    
    $
    88,669
    
    
    $
    81,114Cost of sales
    
    
    81,890
    
    
    
    73,587Gross profit
    
    
    6,779
    
    
    
    7,527Operating expenses
    
    
    8,056
    
    
    
    5,914(Loss) income from operations
    
    
    (1,277
    )
    
    
    1,613Interest expense
    
    
    2,088
    
    
    
    2,148Gain on settlement of bankruptcy claim
    
    
    
    
    
    
    (1,773
    )Other income  net
    
    
    (31
    )
    
    
    (11
    )(Loss) income from continuing operations before income taxes
    
    
    (3,334
    )
    
    
    1,249Income tax benefit
    
    
    
    
    
    
    31(Loss) income from continuing operations
    
    
    (3,334
    )
    
    
    1,280Income from discontinued operations, net of income taxes
    
    
    92
    
    
    
    44Net (loss) income
    
    $
    (3,242
    )
    
    $
    1,324Basic (loss) income per share:(Loss) income from continuing operations
    
    $
    (0.15
    )
    
    $
    0.20Income from discontinued operations
    
    
    
    
    
    
    0.01Net (loss) income
    
    $
    (0.15
    )
    
    $
    0.21Diluted (loss) income per share:(Loss) income from continuing operations
    
    $
    (0.15
    )
    
    $
    0.11Income from discontinued operations
    
    
    
    
    
    
    Net (loss) income
    
    $
    (0.15
    )
    
    $
    0.11Weighted average shares outstanding:Basic
    
    
    21,441,040
    
    
    
    6,413,979Diluted
    
    
    21,441,040
    
    
    
    11,607,592
  5




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Six MonthsEnded June 30,2006
    
    
    2005Revenues, net
    
    $
    173,761
    
    
    $
    171,796Cost of sales
    
    
    162,802
    
    
    
    154,840Gross profit
    
    
    10,959
    
    
    
    16,956Operating expenses
    
    
    13,631
    
    
    
    12,337(Loss) income from operations
    
    
    (2,672
    )
    
    
    4,619Interest expense
    
    
    3,737
    
    
    
    4,279Gain on settlement of bankruptcy claim
    
    
    
    
    
    
    (1,773
    )Charge for early conversion of notes
    
    
    
    
    
    
    400Other income  net
    
    
    (233
    )
    
    
    (350
    )(Loss) income from continuing operations before income taxes
    
    
    (6,176
    )
    
    
    2,063Income tax benefit
    
    
    31
    
    
    
    368(Loss) income from continuing operations
    
    
    (6,145
    )
    
    
    2,431Income from discontinued operations, net of income taxes
    
    
    114
    
    
    
    99Net (loss) income
    
    $
    (6,031
    )
    
    $
    2,530Basic (loss) income per share:(Loss) income from continuing operations
    
    $
    (0.29
    )
    
    $
    0.61Income from discontinued operations
    
    
    0.01
    
    
    
    0.03Net (loss) income
    
    $
    (0.28
    )
    
    $
    0.64Diluted (loss) income per share:(Loss) income from continuing operations
    
    $
    (0.29
    )
    
    $
    0.27Income from discontinued operations
    
    
    0.01
    
    
    
    0.01Net (loss) income
    
    $
    (0.28
    )
    
    $
    0.28Weighted average shares outstanding:Basic
    
    
    21,441,040
    
    
    
    3,959,757Diluted
    
    
    21,441,040
    
    
    
    9,154,013
  6




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 Common Stock
    
    
    Additional
    
    
    
    
    
    
    TotalPaid-in
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance as of
December 31, 2005
    
    
    21,441,040
    
    
    $
    21
    
    
    $
    344,864
    
    
    $
    (298,688
    )
    
    $
    46,197Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    13Net loss and comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,031
    )
    
    
    (6,031
    )Balance as of
June 30, 2006
    
    
    21,441,040
    
    
    $
    21
    
    
    $
    344,877
    
    
    $
    (304,719
    )
    
    $
    40,179
  7




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  For the SixMonths EndedJune 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
    
    $
    (6,031
    )
    
    $
    2,530Adjustments to reconcile net (loss) income to cash
provided by operating activities:Paid-in-kind interest note obligations
    
    
    901
    
    
    
    1,121Write-off of deferred financing fees
    
    
    289
    
    
    
    Impairment charge for fixed assets
    
    
    277
    
    
    
    Non-cash stock compensation expense
    
    
    13
    
    
    
    Gain on settlement of bankruptcy claim
    
    
    
    
    
    
    (1,773
    )Non-cash inducement charge for conversion of notes
    
    
    
    
    
    
    160Depreciation and amortization
    
    
    2,582
    
    
    
    2,726Amortization of deferred financing costs
    
    
    560
    
    
    
    663(Recovery of) provision for doubtful accounts
    
    
    (616
    )
    
    
    11Sale of marketable securities, net
    
    
    13,946
    
    
    
    Change in working capital:Accounts receivable
    
    
    33
    
    
    
    1,243Inventories
    
    
    205
    
    
    
    (4,660
    )Other assets
    
    
    (4,889
    )
    
    
    (1,521
    )Accounts payable
    
    
    (3,228
    )
    
    
    412Customer deposits
    
    
    (4,761
    )
    
    
    6,096Other liabilities
    
    
    3,477
    
    
    
    (2,831
    )Cash provided by activities from continuing operations
    
    
    2,758
    
    
    
    4,177Cash provided by activities from discontinued
operations
    
    
    462
    
    
    
    Net cash provided by operating activities
    
    
    3,220
    
    
    
    4,177CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of fixed assets
    
    
    (1,580
    )
    
    
    (1,887
    )Net cash used in investing activities
    
    
    (1,580
    )
    
    
    (1,887
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings under senior debt facilities
    
    
    170,893
    
    
    
    177,936Payments under senior debt facilities
    
    
    (173,737
    )
    
    
    (186,354
    )Proceeds of term loan with related parties
    
    
    6,000
    
    
    
    Payments on term loan with financial institution
    
    
    (4,946
    )
    
    
    (581
    )Payments on capital leases
    
    
    (545
    )
    
    
    (545
    )Payments of deferred financing costs
    
    
    (259
    )
    
    
    (990
    )Proceeds of term loan with financial institutions, net
    
    
    
    
    
    
    8,155Partial exercise of LJH Warrant
    
    
    
    
    
    
    71Net cash used in financing activities
    
    
    (2,594
    )
    
    
    (2,308
    )Net decrease in cash and cash equivalents
    
    
    (954
    )
    
    
    (18
    )Cash and cash equivalents, beginning of period
    
    
    1,318
    
    
    
    293Cash and cash equivalents, end of period
    
    $
    364
    
    
    $
    275
 8




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)
 For the SixMonths EndedJune 30,2006
    
    
    2005SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Interest paid
    
    $
    (1,693
    )
    
    $
    (2,126
    )Income taxes refunded
    
    $
    31
    
    
    $
    368SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:Common stock issued in connection with
conversion of New Senior Notes
    
    $
    
    
    
    $
    54,363Common stock issued in connection with
conversion of Junior Notes
    
    $
    
    
    
    $
    2,642Available for sale investment equity change
    
    $
    
    
    
    $
    (286
    )
  9




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
     DESCRIPTION OF BUSINESS
      BASIS OF PRESENTATION
  10




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##### 









LIQUIDITY










11



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##### 



Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2005
    
    
    June 30, 2005Net income  as reported
    
    $
    1,324
    
    
    $
    2,530Additional
expense
    
    
    (19
    )
    
    
    (39
    )Net income  pro forma
    
    $
    1,305
    
    
    $
    2,491Net income per share, basic  as reported
    
    $
    0.21
    
    
    $
    0.64Net income per share, diluted  as reported
    
    
    0.11
    
    
    
    0.28Net income per share, basic  pro forma
    
    
    0.20
    
    
    
    0.63Net income per share, diluted  pro forma
    
    
    0.11
    
    
    
    0.27
  2006 Grants
    
    2005 GrantsExpected life
    
    5
    Years
    
    5
    YearsExpected volatility
    
    
    70
    %
    
    
    70
    %Risk-free interest rate
    
    
    4.83
    %
    
    
    3.99
    %Dividend yield
    
    
    
    
    
    
    Fair values
    
    $
    3.05
    
    
    $
    6.40
 12




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##### 



Weighted Average
    
    
    RemainingOptions
    
    
    Exercise Price
    
    
    Contractual LifeOptions outstanding at December 31, 2005
    
    
    56
    
    
    $
    938.44Options granted at market price
    
    
    1
    
    
    
    3.05Options forfeited
    
    
    (4
    )
    
    
    (33.73
    )Options exercised
    
    
    
    
    
    
    Options outstanding at June 30, 2006
    
    
    53
    
    
    $
    967.52
    
    
    1.84 YearsOptions exercisable at June 30, 2006
    
    
    49
    
    
    $
    833.78
    
    
    1.84 Years
    June 30,
    
    
    December 31,2006
    
    
    2005Fair Value
    
    
    Cost
    
    
    Fair Value
    
    
    CostTrading securities
    
    $
    32
    
    
    $
    32
    
    
    $
    13,978
    
    
    $
    13,927
   June 30,
    
    
    December 31,2006
    
    
    2005Finished goods
    
    $
    16,283
    
    
    $
    16,374Work in progress
    
    
    9,862
    
    
    
    10,778Raw materials
    
    
    2,331
    
    
    
    1,529$
    28,476
    
    
    $
    28,681
 13




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##### 



June 30,
    
    
    December 31,2006
    
    
    2005Original basis
    
    $
    8,802
    
    
    $
    8,543Accumulated amortization
    
    
    (7,141
    )
    
    
    (6,292
    )$
    1,661
    
    
    $
    2,251
       14




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##### 



8% SENIOR SUBORDINATED PIK NOTES DUE 2006
    15




---



##### 



8 1/8% SENIOR SUBORDINATED NOTES DUE 2008
  8% JUNIOR SUBORDINATED PIK NOTES DUE 2007
      LITIGATION AND CLAIMS
   16




---



##### 



ENVIRONMENTAL MATTERS
    OTHER MATTERS
   17




---



##### 



18




---



##### 



JANUARY 2005 TENDER OFFER
     19




---



##### 



AUGUST 2005 TENDER OFFER
        20




---



##### 



For the Three
    
    For the SixMonths Ended
    
    Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Weighted average common and common
equivalent shares outstanding:Basic
    
    
    21,441,040
    
    
    
    6,413,979
    
    
    
    21,441,040
    
    
    
    3,959,757Effect of dilutive securitiesConvertible debt
    
    
    
    
    
    
    3,642,572
    
    
    
    
    
    
    
    3,642,572Stock warrants and options
    
    
    
    
    
    
    1,551,041
    
    
    
    
    
    
    
    1,551,684Diluted
    
    
    21,441,040
    
    
    
    11,607,592
    
    
    
    21,441,040
    
    
    
    9,154,013Common stock equivalents outstanding
which are not included in the
calculation of diluted earnings
per share because their impact
is antidilutive
    
    
    499,244
    
    
    
    388,325
    
    
    
    499,350
    
    
    
    388,325
   21




---



##### 



Three months ended June 30, 2006
    
    MRO
    
    Interiors
    
    Other
    
    ConsolidatedNet sales
    
    $
    65,324
    
    
    $
    23,345
    
    
    $
    
    
    
    $
    88,669Operating income (loss)
    
    
    1,042
    
    
    
    3,010
    
    
    
    (5,329
    )
    
    
    (1,277
    )Identifiable assets
    
    
    115,308
    
    
    
    16,434
    
    
    
    16,422
    
    
    
    148,164Depreciation and amortization
    
    
    1,288
    
    
    
    39
    
    
    
    
    
    
    
    1,327Capital expenditures
    
    
    666
    
    
    
    19
    
    
    
    
    
    
    
    685Interest expense, net
    
    
    70
    
    
    
    
    
    
    
    2,018
    
    
    
    2,088
 Three months ended June 30, 2005
    
    MRO
    
    Interiors
    
    Other
    
    ConsolidatedNet sales
    
    $
    73,397
    
    
    $
    7,717
    
    
    $
    
    
    
    $
    81,114Operating income (loss)
    
    
    4,642
    
    
    
    331
    
    
    
    (3,360
    )
    
    
    1,613Identifiable assets
    
    
    107,320
    
    
    
    19,817
    
    
    
    16,115
    
    
    
    143,252Depreciation and amortization
    
    
    1,400
    
    
    
    43
    
    
    
    
    
    
    
    1,443Capital expenditures
    
    
    960
    
    
    
    223
    
    
    
    5
    
    
    
    1,188Interest expense, net
    
    
    83
    
    
    
    
    
    
    
    2,065
    
    
    
    2,148
 Six months ended June 30, 2006
    
    MRO
    
    Interiors
    
    Other
    
    ConsolidatedNet sales
    
    $
    136,894
    
    
    $
    36,867
    
    
    $
    
    
    
    $
    173,761Operating income (loss)
    
    
    1,687
    
    
    
    4,216
    
    
    
    (8,575
    )
    
    
    (2,672
    )Identifiable assets
    
    
    115,308
    
    
    
    16,434
    
    
    
    16,422
    
    
    
    148,164Depreciation and amortization
    
    
    2,503
    
    
    
    79
    
    
    
    
    
    
    
    2,582Capital expenditures
    
    
    1,554
    
    
    
    26
    
    
    
    
    
    
    
    1,580Interest expense, net
    
    
    142
    
    
    
    
    
    
    
    3,595
    
    
    
    3,737
 Six months ended June 30, 2005
    
    MRO
    
    Interiors
    
    Other
    
    ConsolidatedNet sales
    
    $
    153,032
    
    
    $
    18,764
    
    
    $
    
    
    
    $
    171,796Operating income (loss)
    
    
    10,602
    
    
    
    1,083
    
    
    
    (7,066
    )
    
    
    4,619Identifiable assets
    
    
    107,320
    
    
    
    19,817
    
    
    
    16,115
    
    
    
    143,252Depreciation and amortization
    
    
    2,645
    
    
    
    81
    
    
    
    
    
    
    
    2,726Capital expenditures
    
    
    1,605
    
    
    
    249
    
    
    
    33
    
    
    
    1,887Interest expense, net
    
    
    169
    
    
    
    
    
    
    
    4,110
    
    
    
    4,279
  Accounting for Uncertainty in Income
Taxes Accounting for Income Taxes.
   22




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##### 




    
    A Conversion, Support and Release Agreement, dated as of July 31, 2006, in which, among
other matters: (i) the Company agreed (under certain conditions) to sell to LJH and Owl
Creek an additional 2,400 shares of the Companys authorized but unissued common stock at
an exercise price of $2.50 per share through the conversion of debt owed by the Company to
LJH (the Option), and (ii) TASs stockholders agreed to support the Merger at any meeting
of the Companys stockholders called to consider and vote upon the Merger; and
    
    An Escrow Agreement, dated as of July 31, 2006, between the Company, TAS and American
Bank of Texas, under which TAS has deposited all of the funds required to pay public
stockholders the $4.00 per share cash Merger consideration. American Bank of Texas is
wholly-owned by Lacy Harber, the principal stockholder of LJH.
  23




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ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   GENERAL
 www.timco.aero.
   24




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RESULTS OF OPERATIONS
 GENERAL
   
    
    the financial health of the U.S. passenger and freight airline industry, and the impact
of the financial health of that industry on the maintenance, repair, and overhaul (MRO)
industry generally and our business specifically,
    
    the amount of MRO business being outsourced by the airline industry in general and our
airline customers in particular,
    
    factors that affect the financial health and well-being of our airline customers, such
as the September 11, 2001 terrorist attacks, the global war on terrorism, and fluctuations
in the price of jet fuel,
    
    the effect of competition on our business, including the effects of competition on the
pricing of the services and goods that we provide,
    
    our ability to achieve gross profit margins at which we can be profitable, including
margins on services that we perform on a fixed price basis and our ability to accurately
project our costs in a dynamic environment,
    
    our ability to generate sufficient working capital from our operations and from our
available credit facilities to meet our operating requirements, capital expenditure
requirements and service our indebtedness,
    
    our maintaining good relations with our customers and vendors,
    
    our ability to fully utilize our hangar space dedicated to maintenance and repair services,
    
    our ability to manage our business efficiently and achieve both positive income and cash flow from our operations,
    
    our ability to attract and retain the services of our executive officers and key employees,
    
    our ability to attract and retain a sufficient number of mechanics to perform the
maintenance, overhaul and repair services requested by our customers,
    
    our ability to integrate future acquisitions, and
    
    future changes in government regulations.
  OPERATING SEGMENTS
  25




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THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
      26




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27




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28




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29




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##### 



LIQUIDITY AND CAPITAL RESOURCES
 DEVELOPMENTS CONCERNING THE AVIATION INDUSTRY AND OUR OPERATIONS
    30




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##### 



CONTRACTUAL PAYMENT OBLIGATION AND OTHER COMMERCIAL COMMITMENTS
  Contractual
    
    
    
    
    
    Less than
    
    
    Payments due by periodObligations
    
    Total
    
    
    One Year
    
    
    1-3 years
    
    
    4-5 years
    
    
    After 5 yearsRevolving Credit
Facility
    
    $
    5,476
    
    
    $
    5,476
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-Term Debt
    
    
    43,156
    
    
    
    1,907
    (a)
    
    
    41,249
    
    
    
    
    
    
    
    Capital Leases
    
    
    3,428
    
    
    
    320
    
    
    
    365
    
    
    
    431
    
    
    
    2,312Operating (b) Leases
    
    
    19,112
    
    
    
    4,327
    
    
    
    6,466
    
    
    
    2,924
    
    
    
    5,395Estimated
Interest
Obligation (c)
    
    
    4,875
    
    
    
    3,520
    
    
    
    1,355
    
    
    
    
    
    
    
    Total
contractual
cash
obligations
    
    $
    76,047
    
    
    $
    15,550
    
    
    $
    49,435
    
    
    $
    3,355
    
    
    $
    7,707
 OtherCommercial
    
    
    
    
    
    Less than
    
    
    Payments due by periodCommitments
    
    Total
    
    
    One Year
    
    
    1-3 years
    
    
    4-5 years
    
    
    After 5 yearsLetters of
Credit (b)
    
    
    8,804
    
    
    
    8,804
    
    
    
    
    
    
    
    
    
    
    
    Total Other
Commercial
Commitments
    
    $
    8,804
    
    
    $
    8,804
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (a)
    
    This amount reflects $1,221 of our New Senior Notes due 2006 and $686 of our
Junior Notes due January 2007. If not redeemed or repurchased by us prior to the
maturity dates of these obligations, these notes automatically convert to 71 shares and
39 shares, respectively, of our authorized but unissued common stock. See Note 9 of
Notes to Condensed Consolidated Financial Statements for discussion regarding our New
Senior Notes and Junior Notes.(b)
    
    Outstanding letters of credit primarily relate to security for our obligations
to make payments on an operating lease requiring future aggregate principal payments of
approximately $7,800. This amount is removed from the operating lease and total
contractual cash obligations line because it is included within the letters of credit.(c)
    
    The estimated interest obligations were calculated using the actual balance of the revolving
credit facility at June 30, 2006 and the expected outstanding balances on the short-term and
long-term debt obligations, in accordance with payment obligations as detailed in the schedule
above. For each debt obligation, we used the individual interest rate that was applicable as of
June 30, 2006, which ranged from 6.88% to 8.25%.  31




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LIQUIDITY
      32




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##### 



-
    
    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.
   SOURCE AND USE OF CASH
  SENIOR CREDIT FACILITIES
  SUBORDINATED NOTES
  RIGHTS OFFERING
  33




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CONTINGENCIES
  CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
   34




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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
   ITEM 4: CONTROLS AND PROCEDURES
 (a)
    
    
    Our Chief Financial Officer and Chief Executive Officer evaluated our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the Exchange Act)). Based on that evaluation, these officers
have concluded that as of June 30, 2006 our disclosure controls and procedures were effective in
timely alerting them to material information relating to our Company (including our consolidated
subsidiaries) required to be included in our reports filed or submitted by us under the Exchange
Act.As of June 30, 2006, we have carried out an evaluation, under the supervision and with the
participation of our management, including our principal executive officer and 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 and principal financial
officer concluded that our Companys disclosure controls and procedures are effective.(b)
    
    
    There have been no changes in our internal controls or in other factors that could have a
material affect, or are reasonably likely to have a material affect to the internal controls
subsequent to the date of their evaluation in connection with the preparation of this quarterly
report on Form 10-Q.Effective April 27, 2006, Fritz Baumgartner is no longer serving as our Vice President, Corporate
Controller and Chief Accounting Officer. Just subsequent to this date, we appointed Jason Yaudes
as our Corporate Controller and Chief Accounting Officer. The full transition and performance of
our internal controls as related to our Chief Accounting Officer has been completed with no impact
to the effectiveness of the design and operation of our disclosure controls and procedures.
 35




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##### 



PART II. OTHER INFORMATION
  ITEM 1. LEGAL PROCEEDINGS
  ITEM 1A. RISK FACTORS
  ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
  ITEM 5. OTHER INFORMATION
 Changes in Executive Officers of the Company
    Employment Agreements with John R. Cawthron and Gene House
    36




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##### 



Retirement of Roy T. Rimmer, Jr.
  Sale of Assets of the Goodyear, Arizona Facility
    
    
    $1,138 was paid in cash at closing; and
    
    $262 was paid by cancellation of Sellers outstanding indebtedness to Aeroturbine
relating to an engine purchased by the Company from Aeroturbine in March 2006.
    Agreement and Plan of Merger between the Company and TAS Holding, Inc.
    37




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
    
    A Conversion, Support and Release Agreement, dated as of July 31, 2006, in which, among
other matters: (i) the Company agreed (under certain conditions) to sell to LJH and Owl
Creek an additional 2,400 shares of the Companys authorized but unissued common stock at
an exercise price of $2.50 per share through the conversion of debt owed by the Company to
LJH (the Option), and (ii) TASs stockholders agreed to support the Merger at any meeting
of the Companys stockholders called to consider and vote upon the Merger; and
    
    An Escrow Agreement, dated as of July 31, 2006, between the Company, TAS and American
Bank of Texas, under which TAS has deposited all of the funds required to pay public
stockholders the $4.00 per share cash Merger consideration. American Bank of Texas is
wholly-owned by Lacy Harber, the principal stockholder of LJH.
  ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K
  10.1
    
    Employment Agreement between the Company and John R. Cawthron10.2
    
    Employment Agreement between the Company and Gene House10.3
    
    Asset Sale Agreement between the Company and Aeroturbine related to the Goodyear
facility10.4
    
    Agreement and Plan of Merger between the Company and TAS (1)10.5
    
    Conversion, Support and Release Agreement between the Company, TAS, LJH and the
affiliates
of Owl Creek (1)10.6
    
    Escrow Agreement between the Company, TAS and American Bank of Texas (1)31.1
    
    Certification of CEO and CFO under Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of CEO and CFO under Section 906 the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Filed as exhibits to the Form 8-K filed by the Company under
Item 1.01 on August 3, 2006.   38




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##### 



SIGNATURES
  TIMCO Aviation Services, Inc.
 By:
    /s/ James H. TateChief Financial Officer(Principal Financial Officer)  39




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##### 



ExhibitNumber
    
    Description10.1
    
    Employment Agreement between the Company and John R. Cawthron10.2
    
    Employment Agreement between the Company and Gene House10.3
    
    Asset Sale Agreement between the Company and Aero Turbine related to the Goodyear
facility10.4
    
    Agreement and Plan of Merger between the Company and TAS (1)10.5
    
    Conversion, Support and Release Agreement between the Company, TAS, LJH and affiliates
of Owl Creek (1)10.6
    
    Escrow Agreement between the Company, TAS and American Bank of Texas (1)31.1
    
    Certification of CEO and CFO under Section 302 the Sarbanes-Oxley Act of 200232.1
    
    Certification of CEO and CFO under Section 906 the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Filed as exhibits to the Form 8-K filed by the Company under Item 1.01 on August 3,
2006. 40