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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q [Mark One] x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the Quarterly Period Ended September 30, 2004 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 x 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 x Indicate the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date:31,640,994 shares of common
stock, $.001 par value per share, were outstanding as of
November 15, 2004.




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TIMCO AVIATION SERVICES, INC. INDEX  
 PagePart
I. Financial InformationItem 1. FINANCIAL STATEMENTSCondensed Consolidated Balance Sheets at September 30, 2004
and December 31, 2003 (unaudited)
    
    
    3-4Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 2004 and
2003 (unaudited)
    
    
    5-6Condensed Consolidated Statements of Stockholders Deficit
and Comprehensive Income for the nine months ended
September 30, 2004 (unaudited)
    
    
    7Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2004 and 2003 (unaudited)
    
    
    8-9Notes to Condensed Consolidated Financial Statements
    
    
    10Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
    
    
    18Item 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
    
    
    28Ex-31Ex-32
  2




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TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited) September 30,
    
    December 31,2004
    
    2003ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    243
    
    
    $
    1,603Accounts receivable, net
    
    
    46,312
    
    
    
    36,950Inventories
    
    
    25,232
    
    
    
    25,724Net assets of discontinued operations
    
    
    
    
    
    
    459Other current assets
    
    
    5,100
    
    
    
    4,986Total current assets
    
    
    76,887
    
    
    
    69,722Fixed assets, net
    
    
    31,295
    
    
    
    55,100Other Assets:Goodwill, net
    
    
    26,124
    
    
    
    26,124Deferred financing costs, net
    
    
    3,578
    
    
    
    1,590Other
    
    
    607
    
    
    
    355Total other assets
    
    
    30,309
    
    
    
    28,069Total assets
    
    $
    138,491
    
    
    $
    152,891LIABILITIES & STOCKHOLDERS DEFICITCurrent Liabilities:Accounts payable
    
    $
    17,452
    
    
    $
    21,446Accrued expenses
    
    
    18,512
    
    
    
    16,854Customer deposits
    
    
    14,517
    
    
    
    12,586Revolving loan
    
    
    10,864
    
    
    
    14,705Current maturities of capital lease obligations
    
    
    1,197
    
    
    
    1,510Current maturities of notes payable to financial
institutions
    
    
    1,164
    
    
    
    291Accrued interest
    
    
    820
    
    
    
    992Net liabilities of discontinued operations
    
    
    184
    
    
    
    278Total current liabilities
    
    
    64,710
    
    
    
    68,662Senior subordinated notes, net:New notes due 2006
    
    
    115,800
    
    
    
    115,800Old notes due 2008
    
    
    16,247
    
    
    
    16,247Term loan with a related party
    
    
    14,412
    
    
    
    8,250Notes payable to financial institutions, net of
current portion
    
    
    13,236
    
    
    
    8,209Capital lease obligations, net of current portion
    
    
    3,963
    
    
    
    26,188Junior subordinated notes due 2007, net
    
    
    3,401
    
    
    
    3,063Deferred income
    
    
    1,347
    
    
    
    1,473Other long-term liabilities
    
    
    1,010
    
    
    
    764Total long-term liabilities
    
    
    169,416
    
    
    
    179,994
 3




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September 30,
    
    December 31,2004
    
    2003Commitments and Contingencies (see notes)Stockholders Deficit:Preferred stock, $.01 par value, 1,000,000 shares
authorized, none outstanding, 15,000 shares
designated Series A Junior Participating
    
    
    
    
    
    
    Common stock, $.001 par value, 500,000,000 shares
authorized, 31,640,994 shares issued and
outstanding
    
    
    32
    
    
    
    32Additional paid-in capital
    
    
    182,088
    
    
    
    182,088Accumulated deficit
    
    
    (277,755
    )
    
    
    (277,885
    )Total stockholders deficit
    
    
    (95,635
    )
    
    
    (95,765
    )Total liabilities and stockholders deficit
    
    $
    138,491
    
    
    $
    152,891
 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 September 30,2004
    
    2003Sales, net
    
    $
    74,152
    
    
    $
    64,309Cost of sales
    
    
    67,030
    
    
    
    58,883Gross profit
    
    
    7,122
    
    
    
    5,426Operating expenses
    
    
    5,206
    
    
    
    3,125Income from operations
    
    
    1,916
    
    
    
    2,301Interest expense
    
    
    2,093
    
    
    
    2,313Other income  net
    
    
    (345
    )
    
    
    (140
    )Income before income taxes and discontinued operations
    
    
    168
    
    
    
    128Income taxes
    
    
    
    
    
    
    Income from continuing operations before discontinued
operations
    
    
    168
    
    
    
    128Income from discontinued operations, net of income taxes
    
    
    93
    
    
    
    217Net income
    
    $
    261
    
    
    $
    345Basic income per share:Income from continuing operations
    
    $
    0.01
    
    
    $
    Income from discontinued operations
    
    
    
    
    
    
    0.01Net income
    
    $
    0.01
    
    
    $
    0.01Diluted income per share:Income from continuing operations
    
    $
    
    
    
    $
    Income from discontinued operations
    
    
    
    
    
    
    Net income
    
    $
    
    
    
    $
    Weighted average shares outstanding:Basic
    
    
    31,640,994
    
    
    
    31,640,994Diluted
    
    
    324,773,881
    
    
    
    324,777,966
 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 STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
(Unaudited) For the Nine MonthsEnded September 30,2004
    
    2003Sales, net
    
    $
    235,654
    
    
    $
    167,706Cost of sales
    
    
    215,433
    
    
    
    157,186Gross profit
    
    
    20,221
    
    
    
    10,520Operating expenses
    
    
    16,113
    
    
    
    9,797Income from operations
    
    
    4,108
    
    
    
    723Interest expense
    
    
    6,047
    
    
    
    5,388Other income  net
    
    
    (862
    )
    
    
    (1,026
    )Loss before income taxes and discontinued operations
    
    
    (1,077
    )
    
    
    (3,639
    )Income tax benefit
    
    
    
    
    
    
    (884
    )Loss from continuing operations before discontinued
operations
    
    
    (1,077
    )
    
    
    (2,755
    )Income from discontinued operations, net of income taxes
    
    
    1,207
    
    
    
    3,393Net income
    
    $
    130
    
    
    $
    638Basic and diluted (loss)income per share:Loss from continuing operations
    
    $
    (0.03
    )
    
    $
    (0.09
    )Income from discontinued operations
    
    
    0.03
    
    
    
    0.11Net income
    
    $
    
    
    
    $
    0.02Weighted average shares outstanding:Basic and diluted
    
    
    31,640,994
    
    
    
    31,640,994
 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 STATEMENT OF STOCKHOLDERS DEFICIT AND COMPREHENSIVE INCOME
(In Thousands, Except Share Data)
(Unaudited) Common Stock
    
    Additional
    
    
    
    
    

TotalStockholdersDeficit andPaid-in
    
    Accumulated
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Deficit
    
    IncomeBalance as of
December 31, 2003
    
    
    31,640,994
    
    
    $
    32
    
    
    $
    182,088
    
    
    $
    (277,885
    )
    
    $
    (95,765
    )Net income and comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130
    
    
    
    130Balance as of
September 30, 2004
    
    
    31,640,994
    
    
    $
    32
    
    
    $
    182,088
    
    
    $
    (277,755
    )
    
    $
    (95,635
    )
 The accompanying notes are an integral part of these condensed consolidated
financial statements. 7




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TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited) For the NineMonths EndedSeptember 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    130
    
    
    $
    638Adjustments to reconcile net income to cash used in
operating activities:Income from discontinued operations
    
    
    (1,207
    )
    
    
    (3,393
    )Paid-in-kind interest note obligations
    
    
    1,734
    
    
    
    716Write-off of deferred financing fees
    
    
    145
    
    
    
    Gain on Aerocell settlement, net of cash received
    
    
    
    
    
    
    (455
    )Depreciation and amortization
    
    
    3,958
    
    
    
    3,887Amortization of deferred financing costs
    
    
    856
    
    
    
    1,944Recovery of doubtful accounts
    
    
    (405
    )
    
    
    (1,044
    )Change in working capital:Accounts receivable
    
    
    (8,956
    )
    
    
    (11,068
    )Inventories
    
    
    492
    
    
    
    (4,485
    )Other assets
    
    
    (506
    )
    
    
    (1,411
    )Accounts payable
    
    
    (3,993
    )
    
    
    4,210Customer deposits
    
    
    1,931
    
    
    
    2,590Other liabilities
    
    
    498
    
    
    
    (367
    )Net cash used in operating activities
    
    
    (5,323
    )
    

    
    (8,238
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of fixed assets, net of transaction
expenses
    
    
    24,861
    
    
    
    Purchases of fixed assets
    
    
    (2,180
    )
    
    
    (1,126
    )Net cash provided by (used in) investing activities
    
    
    22,681
    
    
    
    (1,126
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings under senior debt facilities
    
    
    245,675
    
    
    
    170,902Payments under senior debt facilities
    
    
    (249,516
    )
    
    
    (166,741
    )Proceeds of term loan with related party
    
    
    6,162
    
    
    
    6,050Proceeds of notes payable with financial
institutions, net
    
    
    5,900
    
    
    
    Payments on capital leases
    
    
    (24,762
    )
    
    
    (790
    )Payments of deferred financing costs
    
    
    (2,989
    )
    
    
    (663
    )Net cash (used in) provided by financing activities
    
    
    (19,530
    )
    
    
    8,758Net cash provided by discontinued operations
    
    
    812
    
    
    
    398Net decrease in cash and cash equivalents
    
    
    (1,360
    )
    
    
    (208
    )Cash and cash equivalents, beginning of period
    
    
    1,603
    
    
    
    339Cash and cash equivalents, end of period
    
    $
    243
    
    
    $
    131
 8




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For the NineMonths EndedSeptember 30,2004
    
    2003SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Interest paid
    
    $
    3,615
    
    
    $
    4,605Income taxes refunded
    
    $
    242
    
    
    $
    174SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES:Acquisition of property through capital lease
    
    $
    2,224
    
    
    $
    Value of warrant issued to shareholder in exchange for
note payable financing
    
    $
    
    
    
    $
    1,258
 The accompanying notes are an integral part of these condensed consolidated financial statements. 9




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TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2004 (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 that,
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 distributors throughout the world. 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 U.S. generally accepted
accounting principles 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, 2003 (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 September 30, 2004, the results of
its operations for the three month and nine month periods ended September 30,
2003 and 2004 and its cash flows for the nine month periods ended September 30,
2003 and 2004. The results of operations and cash flows for the nine month
period ended September 30, 2004 are not necessarily indicative of the results
of operations or cash flows which may be reported for the year ending December
31, 2004. LIQUIDITY In April 2004, the Company refinanced all of its senior debt. On April 8,
2004, the Company closed on an agreement with the CIT Group in which the
Company obtained a $35,000 senior secured revolving line of credit (the CIT
Group Revolving Line of Credit) and a $6,400 senior secured term loan (the
CIT Group Term Loan, and collectively with the CIT Group Revolving Line of
Credit, the CIT Group Credit Facility). The CIT Group Credit Facility
matures on December 31, 2007. Effective on the same date, the Company obtained
an $8,000 senior secured term loan from Hilco Capital LP (the Hilco Term
Loan) and refinanced the $14,412 of aggregate term debt due to its principal
stockholder. In addition, on March 31, 2004, the Company sold its office and
warehouse facility located in Miramar, Florida and used the proceeds to repay
in full the Companys TROL financing obligation ($23,824 as of March 31, 2004).
For details of these events, see Notes 3, 4 and 5. For the year ended December 31, 2003, the Company incurred a loss from
continuing operations of $4,303 (adjusted for the reclassification of income
and expenditures related to the Companys Miramar facility. See Note 2 for
particulars). The Company also had a net stockholders deficit as of December
31, 2003 and continued to require additional cash flow above amounts currently
being provided from operations to meet its working capital requirements. The
Companys ability to service its debt obligations as they come due, including
maintaining compliance with the covenants and provisions of all of its debt
obligations, is dependent upon the Companys future financial and operating
performance. That performance, in turn, is subject to various factors,
including certain factors beyond the Companys control, such as changes in
conditions affecting the airline industry and changes in the overall economy.
Additionally, as a result of the state of the general economy, fluctuations in
the price of jet fuel, a significant decline but partial resurgence, from
calendar year 2000, in passenger airline travel, the currently on-going global
war on terrorism, the war in Iraq, and a competitive price reduction in airfare
prices has significantly impacted the airline industry, and thus the Companys
customer base. 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. 10




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The Company is highly leveraged and has significant obligations under its
outstanding debt and lease agreements. As a result, significant amounts of cash
flow from operations are 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 and noteholders, would be an event of default and would permit the
lenders to accelerate the maturity of these debt obligations. It would also
permit the lenders to terminate their commitments to extend additional credit
under their financing agreements. 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 make all required
debt payments and meet all financial covenants in 2004, there can be no
assurance that it will be able to do so. 2. SALE OF ASSETS AND OPERATING ENTITIES In March 2004, the Company sold its office and warehouse facility located in
Miramar, Florida for a sales price of $26,000. See Note 5 for particulars of
this sales transaction and resulting repayment of the Companys TROL financing
that was secured by the assets of this facility. The Company has recorded the
gain from its sale of the Miramar facility along with the related rental
income, depreciation expense and interest expense within income from
discontinued operations. Additionally, rental income, depreciation expense and
interest expense for the three and nine month periods ended September 30, 2003
have been reclassified to income from discontinued operations within the
accompanying condensed consolidated statements of operations. In December 2003, the Company entered into an agreement to sell an idle
facility located in Covington, Kentucky. This facility was previously part of
the Companys manufacturing operations and had no operations since fiscal 2000.
The net sales price was $454 and is included within net assets of discontinued
operations as of December 31, 2003 within the accompanying condensed
consolidated balance sheet. The resulting gain on this sale, which was
recognized with the consummation of the sale during the fourth quarter of 2003,
was $411. The cash proceeds related to this sale were fully funded in February
2004. 3. SENIOR CREDIT FACILITIES Commencing January 30, 2004, the Company entered into a series of two
amendments and limited waiver agreements pursuant to which the maturity date of
the Companys then existing senior revolving credit and term loan facilities,
which were scheduled to mature on January 31, 2004, were extended until July
31, 2004. Through these series of amendments and limited waiver agreements,
the Company temporarily extended its senior revolving credit facility and term
loan (the Amended Credit Agreement). Under the Amended Credit Agreement, the
Company had a $30,000 senior secured revolving line of credit (the Amended
Revolving Credit Facility) and a $3,500 senior secured term loan (the Amended
Term Loan and collectively with the Amended Revolving Credit Facility, the
Amended Credit Facility). Borrowings under the Amended Credit Facility were
secured by a lien on substantially all of the Companys assets and the
borrowing base consisted primarily of certain of the Companys account
receivables, inventory, and machinery and equipment. The interest rate on the
Amended Revolving Credit Facility was, at the Companys option, (a) prime plus
3% per annum, or (b) LIBOR plus 4.5% per annum. The interest rate on the
Amended Term Loan was 12% per annum. On April 8, 2004, the Company closed on a refinancing 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 Amended Revolving Credit Facility,
to repay the warrant repurchase obligation due to a previous lender (as
described in Note 7-OTHER MATTERS) and for working capital. The CIT Group Revolving Line of Credit is due December 31, 2007 and bears
interest, at the Companys option, at (a) Prime plus an advance rate ranging
from 0.00% to 0.75%, 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 the Prime option. 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, commencing on October 1, 2004, with the final quarterly
installment due on December 31, 2007. The CIT Group Term Loan bears interest
at the prevailing rate of the CIT Group Revolving Line of Credit plus one
percent. Also, the CIT Group Credit Facility contains certain financial
covenants regarding the Companys financial performance and certain other
covenants, including limitations on the incurrence of additional debt, and
provides for the termination of the CIT Group Credit Facility and repayment of
all debt in the event of a change in 11




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control, as defined. In addition, an event of default under the
Hilco Term Loan (described below) will also result in a default under the CIT
Group Credit Facility. Borrowings under the CIT Group Credit Facility are
secured by a lien on substantially all of the Companys assets. Borrowings
under the CIT Group Revolving Line of Credit are based on a borrowing base
formula that takes into account the 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 be in a position to 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 September 30, 2004, the
outstanding aggregate amount borrowed under the CIT Group Revolving Credit
Facility was $10,864, the outstanding CIT Group Term Loan was $6,400, the
amount of outstanding letters of credit under the CIT Group Revolving Credit
Facility was $10,064 and $9,352 was available for additional borrowing under
the CIT Group Revolving Credit Facility. Additionally, simultaneous with its obtaining the CIT Group Credit Facility,
the Company obtained the Hilco Term Loan, which is an $8,000 term loan, from
Hilco Capital LP. The Company used the proceeds from the Hilco Term Loan to
repay amounts outstanding under its Amended Revolving Credit Facility and
Amended Term Loan. The Hilco Term Loan matures on December 31, 2007 and bears
interest at Prime plus an advance rate ranging from 3.00% and 6.00% with the
advance rate contingent upon our meeting (from time to time) a ratio of the
Companys secured debt to EBITDA. In addition, the Hilco Term Loan bears PIK
interest ranging from 2.00% to 5.00% with the prevailing rate also being
contingent upon the ratio of the Companys level of secured debt to EBITDA. At
no time during the term of this loan, however, will the combined cash and PIK
interest rate 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) will also result in a default under the Hilco Term Loan.
Borrowings under the Hilco Term Loan are secured by a lien on substantially all
of the Companys assets. In connection with the CIT Group Credit Facility and the Hilco Term Loan, the
Company paid aggregate fees of approximately $2,858. These fees will be
amortized as deferred financing fees over the term of the new loans. In
addition, as a result of these financing activities, the Company has expensed
approximately $145 of deferred financing costs in April 2004 which relate to
the Amended Credit Facility. In addition, the Company previously had a $5,000 term loan with Bank of America
(BofA), which had been credit supported by various parties, including the
Companys principal stockholder, and which was scheduled to mature on January
31, 2004. In connection with the above-described short-term extension of the
Amended Credit Facility, the Companys principal stockholder repaid BofA and
agreed to extend the term of this loan, under the same terms previously
extended by BofA, except the maturity date was extended until July 31, 2004.
Under these terms, this $5,000 related party term loan bore interest at the
rate of LIBOR plus 2%. In April 2004, the Company refinanced all of its
previously outstanding debt (principal plus accrued and unpaid interest),
including this $5,000 term loan, with its principal shareholder. See Note 4. 4. RELATED PARTY TERM LOAN On May 14, 2003, the Company entered into an agreement with its principal
stockholder pursuant to which the principal stockholder loaned the Company
$6,050. This term loan was used for working capital requirements. This term
loan had a three-year maturity, was secured, and bore paid-in-kind interest at
the rate of 16% per annum. From inception through April 8, 2004 (the date the
Company refinanced of all of its outstanding related party debt obligations),
all interest obligations ($1,127) had been paid-in-kind. Further, the $1,300
loan obtained from the principal stockholder in connection with the acquisition
of Brice Manufacturing in October 2002 was combined with and added into this
$6,050 loan. This term loan from the Companys principal stockholder contained
cross acceleration provisions if the obligations to the Companys senior
lenders were accelerated. 12




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In connection with the funding of the $6,050 term loan, the Company issued a
warrant to its principal stockholder to acquire, for nominal consideration, 30%
of the Companys outstanding common stock (on a fully-diluted basis) as of the
day the warrant is exercised. The warrant is exercisable on or before January
31, 2007. The warrant valuation, as determined by an independent business
valuation specialist through a fair market value assessment of the Company, was
recorded at $1,258 as of May 14, 2003. The Company has recorded the value of
this warrant as deferred financing costs and 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 below, 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 (January 31, 2008). In September 2003, the Company recorded a $900 obligation reflecting the
Companys purchase from its principal stockholder of the aircraft parts
inventory located at the Goodyear facility (which inventory was acquired by the
Companys principal stockholder in the AMS bankruptcy proceedings; see Note 7 
TRANSACTIONS WITH RELATED PARTIES). In January 2004, the Companys principal stockholder repaid the Companys
previously outstanding $5,000 term loan with BofA and continued to extend this
loan to the Company under the same terms previously extended by BofA, except
the maturity date was extended until July 31, 2004. See Note 3 for
particulars. On April 8, 2004, the Company combined all of its previously outstanding debt
(principal plus accrued and unpaid interest) with its principal stockholder
into a new $14,412 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 BofA term loan
and PIK interest previously paid on these obligations. See above and Note 3
for a discussion of the outstanding debt components due to the Companys
principal stockholder that were combined in this new note. The LJH Term Loan
bears interest at 18% per annum, 6% of which is payable in cash and the balance
of which will be PIK. The LJH Term Loan is pari-passu with the New Notes (See
Note 6), 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 Hilco are accelerated. 5. TAX RETENTION OPERATING LEASE (TROL) FINANCING The Companys TROL financing arrangement was originally utilized to develop two
facilities: (i) a corporate headquarters and warehouse facility, which was
being subleased to Kellstrom Aerospace, LLC, and (ii) a facility to house the
Companys Caribe operations, which was sold in May 2001. Substantially all of
the Companys subsidiaries had guaranteed the Companys obligations under the
TROL financing arrangement. Payments were at a rate of Prime plus 3.25% to
4.00% and the Company was responsible for all property taxes, insurance and
maintenance of the property. Under the terms of the Amended TROL Financing
Agreement, entered into in July 2002, the maturity date of the TROL financing
was extended until June 30, 2005 and the base monthly rental under the TROL was
increased to the greater of: (i) the amount being received by the Company under
its sublease for the Companys Miramar facility plus, commencing July 1, 2003,
an additional monthly payment by the Company, or (ii) $210. On February 5, 2004, the Company entered into a definitive agreement to sell
its office and warehouse facility located in Miramar, Florida, and on March 31,
2004, the Company closed on the sale contemplated by this definitive agreement.
The gross sales price was $26,000. The proceeds of the sale were used to repay
in full the TROL financing obligation ($23,824). The balance, net of
transaction expenses and other Miramar property related expenses which the
Company was obligated to pay, which approximates $320, was used to repay
amounts outstanding under the Amended Term Loan (which repayment occurred in
April 2004 as part of Companys refinance of all of its senior debt
obligations. See Note 3). Additionally, as a result of this sale, the Company
recognized a gain on disposal of fixed assets of $825. This gain is included
within income from discontinued operations, net of income taxes within the
accompanying condensed consolidated statements of operations for the nine
months ended September 30, 2004. Finally, as was required under the Companys
previous senior credit facility, in February 2004, the Company entered into an
amendment and limited waiver agreement with its previous senior lenders for the
purpose of releasing the Miramar facility for sale. 13




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6. SUBORDINATED NOTES 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 Notes), which
mature on December 31, 2006. The New Notes bear interest from the date of
issuance and are payable at the Companys option either in cash or paid-in-kind
through the issuance of additional New Notes semiannually on June 30 and
December 31 of each year. See Note 10 to Notes to Consolidated Financial
Statements contained in the Companys 2003 Form 10-K for particulars of the
Companys February 2002 capital and debt restructuring and for further details
of the New Notes. The New Notes are redeemable for cash at the Companys option at the following
percentages of par plus accrued interest on the par value through the date of
redemption: 2004  73.0%, 2005  75.625% and 2006  77.5%. The New Notes also
provide that the holders will receive an aggregate of 3,003 shares of common
stock if the New Notes are redeemed in 2004, 2005 or 2006. If the New Notes have not already been redeemed or repurchased, the New Notes,
including those New Notes previously issued as paid-in-kind interest and all
accrued but unpaid interest, will automatically convert on December 31, 2006
into an aggregate of 270,276 shares of common stock. Holders of New Notes will
not receive any cash payment representing principal or accrued and unpaid
interest upon conversion; instead, holders will receive a fixed number of
shares of common stock and a cash payment to account for any fractional shares. 8 1/8% SENIOR SUBORDINATED NOTES DUE 2008 In 1998, the Company sold $165,000 of senior subordinated notes (Old Notes)
with a coupon rate of 8.125% at a price of 99.395%, which mature on February
15, 2008. On February 28, 2002, $149,000 face value of these notes were
cancelled as part of 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, 2004. Interest on the
Old Notes is payable on February 15 and August 15 of each year. See Note 5 to
the Notes to Consolidated Financial Statements contained in the Form 10-K for
details regarding the Old Notes. 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) 2004102.708%; (ii) 2005101.354%; and (iii) 2006 and
thereafter100%. Upon the occurrence of a change in control, the Company will
be required to make an offer to repurchase all or any part of each holders
senior subordinated notes at a repurchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest and liquidated damages, if
any, thereon to the repurchase date. There can be no assurance that the Company
will have the financial resources necessary to purchase the 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, new junior subordinated convertible PIK notes
(Junior Notes). 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 have been recorded as of September 20, 2002 (the effective date) at the
then current redemption value of $2,500. The discount is being accreted to the
maturity redemption value, due in January 2007, of approximately $4,400. See
Notes 5 and 7 of Notes to Consolidated Financial Statements contained in the
Form 10-K for particulars of the class action settlement and for further
details regarding the Junior Notes. The Junior Notes are redeemable for cash at the Companys option at the
following percentages of par plus accrued interest on the par value through the
date of redemption: 2004  73.0%, 2005  75.625% and 2006  77.5%. The Junior
Notes also provide that the holders will receive an aggregate of 104 shares of
common stock if the Junior Notes are redeemed in 2004, 2005 or 2006. 14




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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 9,320 shares of common stock. Holders of Junior
Notes will not receive any cash payment representing principal or accrued and
unpaid interest upon conversion; instead, holders will receive a fixed number
of shares of common stock and a cash payment to account for any fractional
shares. 7. 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. Testing and evaluation for all known sites on TIMCO-Lake
Citys property is substantially complete and the Company has commenced a
remediation program. The Company is currently monitoring the remediation, which
will extend into the future. Based on current testing, technology,
environmental law and clean-up experience to date, the Company believes that it
has established an adequate accrual for the estimated costs associated with its
current remediation strategies. Additionally, there are other areas adjacent
to TIMCO-Lake Citys facility that could also require remediation. The Company
does not believe that it is responsible for these areas; however, it may be
asserted that the Company and other parties are jointly and severally liable
and are responsible for the remediation of those properties. Based upon the
most recent cost estimates provided by environmental consultants, it is
estimated that the total remaining testing, remediation and compliance costs
for this facility will be $768. Additionally, during 2003, the Company secured
an insurance policy to comply with financial assurances required by the FDEP. Accrued expenses in the accompanying September 30, 2004 and December 31, 2003
condensed consolidated balance sheets include $768 and $810, respectively,
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. TRANSACTIONS WITH RELATED PARTIES During December 2002, an entity controlled by the Companys principal
stockholder acquired the operating assets of Aviation Management Systems, Inc.
(AMS) located in Phoenix, Arizona. Additionally, this entity assumed a lease
with the City of Phoenix for facilities previously leased by AMS at the
Goodyear Airport. In April 2003, the Company entered into an operating sublease
agreement with the principal stockholder to operate the business in the
facilities that were previously leased to AMS. The term of the sublease is for
three years with rental payments of $432 annually. Under the sublease
agreement, the Company is also responsible for insurance, taxes and charges
levied by the City of Phoenix under the main lease. In addition, as discussed
in Note 4, the Company increased its related party obligation by $900
reflecting the purchase from its principal stockholder of the aircraft parts
inventory located at the Goodyear facility (which inventory was acquired by the
Companys principal stockholder in the AMS bankruptcy proceedings). Further,
on April 4, 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. Both the inventory sale and the equipment lease are
believed to be on terms not less favorable to the Company than could be
obtained from an unaffiliated third party. During October 2002, the Company sold its real estate and fixtures located at
the Companys Aircraft Interior Design, Inc. (AID) operation in Dallas, Texas,
to the Companys principal stockholder. The gross sale price for these assets
was approximately $2,400, which was the estimated fair market value, based on a
third party appraisal, on the sale date. Simultaneous with this sale, the
Company entered into a lease agreement with the principal stockholder for
substantially all of these assets. The term of this lease is ten years. Annual
rental payments are approximately $300 per year, with the Company being
responsible for, among other things, taxes, insurance and utilities. This
lease agreement is believed to be on terms not less favorable to the Company
than could be obtained from an unaffiliated third party. 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. 15




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Deferred income within the accompanying September 30, 2004 and December 31,
2003 condensed consolidated balance sheets includes $1,347 and $1,473,
respectively, relating to this sale leaseback transaction. An entity controlled by the Companys principal stockholder purchases aircraft
for resale and lease, and the Company provides certain services for 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.
At September 30, 2004, receivables from this entity approximated $1,641 and are
included within the accompanying condensed consolidated balance sheet. 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, the Company entered into a settlement agreement with a former
customer of its Engine Center facility that had previously filed for protection
under Chapter 11 of the United States Bankruptcy Court. Pursuant to this
former customers plan of reorganization, the Company will receive a pro rata
portion of 7 million shares of common stock in the reorganized company, which
the level of common stock received will be based on the Companys unsecured
claim as compared to the total amount of all unsecured claims. While the
Companys unsecured claim has been settled, the total balance of unsecured
claims has not been finalized. As such, the Company is currently not able to
determine the amount of common stock that it will receive in the settlement.
Once all unsecured claims have been settled and the Company is able to
determine its portion of the 7 million shares of common stock that will be
received, the Company will recognize the gain for the settlement agreement in
the period in which all such contingencies have been resolved. In connection with a previously outstanding term loan, the Company granted to
one of its lenders common stock purchase warrants to purchase 13 shares of the
Companys common stock exercisable for par value at any time until December 31,
2005. The warrants entitled the holder to require the Company to repurchase
the warrants or common shares issued upon prior exercise of the warrants at
$85.00 per share ($1,079 in the aggregate). In connection with the April 8,
2004 refinancing of the Companys senior debt (see Note 3), the Company settled
its warrant repurchase obligation to its prior lender by paying $870 in cash.
As a result of this settlement, the Company recognized a gain of $209. This
gain is included within other income-net for the nine month period ended
September 30, 2004 within the accompanying condensed consolidated statement of
operations. On June 30, 2003, the Company entered into a long-term purchase agreement for
various inventory components to be used in the Companys Oscoda, Michigan
engine center. Contingent upon the achievement of guaranteed sales volume to
the Company by the third party supply vendor, the Company was committed to this
vendor to purchase an aggregate of $2,800 of inventory components over an
approximate two-year period. An initial inventory purchase of $500 took place
on June 30, 2003. The residual inventory purchase obligation of $2,300 was to
occur in $100 monthly increments. These monthly purchase commitments were
first to be reduced by inventory used in the normal course of business that is
currently on consignment from this third party supplier. Through portions of
2003 and most of 2004, the third party supply vendor did not achieve the
guaranteed sales volume levels and thus was in default of this purchase
agreement. As a result, in June 2004, the Company terminated this purchase
agreement. 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. 16




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8. 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 Three
    
    For the NineMonths Ended
    
    Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Weighted average common and common
equivalent shares outstanding:Basic
    
    
    31,640,994
    
    
    
    31,640,994
    
    
    
    31,640,994
    
    
    
    31,640,994Effect of dilutive securities
    
    
    293,132,887
    
    
    
    293,136,972
    
    
    
    
    
    
    
    Diluted
    
    
    324,773,881
    
    
    
    324,777,966
    
    
    
    31,640,994
    
    
    
    31,640,994Common stock equivalents outstanding
which are not included in the
calculation of diluted earnings
per share because their impact
is antidilutive
    
    
    15,421,031
    
    
    
    14,194,781
    
    
    
    308,533,727
    
    
    
    300,693,159
 9. STOCK COMPENSATION PLANS As permissible under SFAS No. 123, Accounting for Stock-Based Compensation,
the Company accounts for all stock-based compensation arrangements using the
intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, Accounting for 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 (loss) and earnings
(loss) per share if the Company had applied the fair value recognition of FASB
Statement No. 123 to stock-based employee compensation: For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Net income  as reported
    
    $
    261
    
    
    $
    345
    
    
    $
    130
    
    
    $
    638Additional expense
    
    
    (22
    )
    
    
    (153
    )
    
    
    (230
    )
    
    
    (542
    )Net income (loss)  pro forma
    
    
    239
    
    
    
    192
    
    
    
    (100
    )
    
    
    96Net income per share, basic  as reported
    
    
    0.01
    
    
    
    0.01
    
    
    
    
    
    
    
    0.02Net income per share, diluted  as reported
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02Net income (loss) per share, basic  pro forma
    
    
    0.01
    
    
    
    0.01
    
    
    
    
    
    
    
    Net income (loss) per share, diluted  pro forma
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure; an amendment of FASB Statement No.
123. This Statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. The Company has currently decided to continue to use
the intrinsic value method for accounting for stock-based employee
compensation, but has adopted all disclosure requirements for reporting in
interim financial statements. 17




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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, 2003 (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 at a fixed price
basis, competition in the aircraft maintenance, repair and overhaul market and
the impact on that market and on us of the war on terrorism, the Iraq war, 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 fully
integrated aviation maintenance, repair and overhaul (MR&O) services for major
commercial airlines, regional air carriers, aircraft leasing companies,
government and military units and air cargo carriers. We provide four MR&O
services: TIMCO, which, with its four active locations, is one of the largest
independent providers of heavy aircraft maintenance services in the world;
Aircraft Interior Design and Brice Manufacturing, which specialize in the
refurbishment of aircraft interior components and the manufacture and sale of
aftermarket parts and new aircraft seats; TIMCO Engineered Systems, which
provides engineering services to both our other MR&O operations and our
customers; and TIMCO Engine Center, which refurbishes JT8D engines and performs
on-wing repairs for both JT8D and CFM-56 series engines. Visit TIMCO online at
www.timco.aero. Our strategy is to be the vendor of choice to our customers, providing aircraft
maintenance solutions to meet our customers MR&O requirements. The services
that we offer allow our customers to reduce their costs by outsourcing some of
their MR&O functions. We were incorporated in Delaware in 1996 under the name Aviation Sales
Company. We changed our corporate name to TIMCO Aviation Services, Inc. in
February 2002. Our principal operating business, TIMCO, commenced operations in
1990. Our principal executive offices are at 623 Radar Road, Greensboro, North
Carolina 27410, and our telephone number is (336) 668-4410. 18




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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 timing of repair orders and payments from our customers, and
particularly our large customers,  
    
    the state of the economy generally, the state of the airline
industry generally, and the financial condition and MR&O requirements
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 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, and  
    
    the timeliness of customer aircraft arriving for scheduled
maintenance. Large portions of our cost of operations 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 and Nine Months Ended September 30, 2004 and 2003 Operating revenue for the nine months ended September 30, 2004 increased
$67,948 or 40.5% to $235,654, from $167,706 for the same period in 2003.
Operating revenue for the first nine months of 2004 included $28,520 in revenue
from our Goodyear, Arizona facility, which was subleased from our principal
stockholder in April 2003. During the first nine months of 2003, we generated
$10,396 in revenue from this facility. Without the revenue from our Goodyear
facility, revenue for the nine month period ended September 30, 2004 and 2003
would have been $207,134 and $157,310, respectively. Operating revenue for the
three months ended September 30, 2004 increased $9,843 or 15.3% to $74,152,
from $64,309 for the same period in 2003. Comparative three month revenue
without the revenue from the operations of our Goodyear facility would have
been $64,739 for 2004 and $58,745 for 2003 (we are providing this information
in order to compare the revenue derived from facilities open in both the third
quarter and first nine months of 2004 and the third quarter and first nine
months of 2003). The increase in revenue for the three and nine month periods ended September
30, 2004 over the comparable 2003 periods 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, in our
Goodyear, Arizona facility (as discussed above), 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 for its
aircraft seats. Revenue for the three and nine months ended September 30, 2004 were favorably
impacted by a significant influx of airframe heavy maintenance work to our MR&O
operations. Adverse market conditions during the first half of fiscal 2003
resulted in delays of maintenance service work by several of our significant
customers and adversely impacted our 2003 results of operations. Many of these
delayed maintenance programs, however, were inducted for service during the
second half of 2003 and have continued through the first nine months of fiscal
2004. In addition, during 2004 we have expanded our customer base and, in some
instances, increased our share of outsourced maintenance from our existing
customers. The impact on revenue for the first nine months of 2004 and for the
third quarter of 2004 was an increase in revenue for our airframe MR&O
facilities, including Goodyear, over the first nine months of 2003 and for the
third quarter of 2003 of approximately $59,506 and $8,702, respectively. This
increase in revenues from the operation of our airframe MR&O facilities,
coupled 19




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with the increased revenue for our
engine center operation and our Brice operation, resulted in a
$67,238 improvement in revenue for the first nine months of 2004 over the same
period in 2003 and a $10,133 improvement for the third quarter of 2004 over the
third quarter of 2003. While significantly improved over the nine months of 2003 and third quarter of
2003, our revenue for the nine month and three month periods ended September
30, 2004 continued to be unfavorably impacted by general economic conditions
affecting the airline industry. For most of fiscal 2004, these unfavorable
impacts include increased jet fuel prices, increased price competition and
continued downward pricing pressures from airline customers. These factors
forced us during fiscal 2003 and the first nine months of 2004 to reduce
pricing and take fixed priced work at lower rates, which adversely impacted
revenues and gross margins. Additionally, instability in the Middle East, the
currently on-going war on terrorism, and the war in Iraq have unfavorably
impacted airline passenger levels during fiscal 2004, which has equated to
further delays of maintenance service by some of our customers. Finally,
changes in customer maintenance schedules have impacted us in the past and are
likely to impact us in the future. Gross profit increased to $20,221 for the nine month period ended September 30,
2004 compared with a gross profit of $10,520 for the nine month period ended
September 30, 2003. Gross profit increased to $7,122 for the three month
period ended September 30, 2004 compared with a gross profit of $5,426 for the
three month period ended September 30, 2003. Gross profit as a percentage of
revenue increased to 8.6% and 9.6% for the nine and three month periods ended
September 30, 2004, respectively, from 6.3% and 8.4% for the comparable periods
ended in 2003. The increased gross profit for the nine month and three month
periods ended September 30, 2004 over the same periods for 2003 was spurred by
increased revenue as described above and the receipt of 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
which allowed us to better leverage our fixed costs contained in cost of sales. During most of the first nine months of 2003, because we did not have
significant nose-to-tail lines during this period, we were forced to take a
higher proportion of single-visit customers which resulted in a deterioration
of gross margin results due to lower productivity. In addition to the increase
in nose-to-tail maintenance programs during a substantial portion of 2004, an
overall increase in sales levels, particularly for our engine center operation
and Brice operation, resulted in an improved gross margin. Partially
offsetting the deterioration during 2003 that resulted due to lower
productivity, in September 2003 we settled various disputes relating to one of
our leased facilities. As part of this settlement, we were partially
alleviated from paying disputed utility charges. These charges, which were
fully accrued, resulted in a benefit of $463. This benefit is reflected as a
reduction to cost of sales for the three and nine-month periods ended September
30, 2003. Excluding the benefit recognized during the third quarter of 2003
through the settlement of various disputes for one of our leased facilities,
gross profit as a percentage of revenue would have been 6.0% and 7.7% for the
nine and three month periods ended September 30, 2003, respectively. Gross profit levels are impacted by the fact that many of the costs of
operating our facilities are relatively fixed and therefore revenues above a
certain level have a more than proportional favorable impact on gross margins.
Further, gross margins during any particular period are dependent upon the
number and type of aircraft serviced, the contract terms under which services
are performed and the efficiencies that can be obtained in the performance of
such services. Significant changes in any one of these factors could have a
material impact on the amount and percentage of gross profits. Additionally,
gross profit could be impacted in the future by considerations as to the value
of our inventory. While we believe that we have appropriately valued our
inventory at the lower of cost or market value, additional allowances may be
required in the future, depending on the market for aircraft parts and the
fleet types of the parts in our inventory compared to the types of aircraft for
which we are performing maintenance procedures. We continue to evaluate market
and industry exposures in connection with the establishment of appropriate
inventory valuation levels. Operating expenses for the nine month period ended September 30, 2004 were
$16,113 compared to $9,797 for the nine month period ended September 30, 2003.
Operating expenses for the three months ended September 30, 2004 were $5,206
compared to $3,125 for the three months ended September 30, 2003. Operating
expenses as a percentage of revenues were 6.8% and 7.0% for the nine and three
month periods ended September 30, 2004, respectively, compared to 5.8% and 4.9%
for the same respective periods in 2003. Operating expenses were favorably impacted throughout 2003. During the third
quarter of 2003, we recognized two significant offsets to operating expenses.
As a result of revised estimates from our environmental consultants, we were
able to reverse $400 of our environmental accrual. Additionally, during the
third quarter of 2003, we resolved a long standing customer dispute. The
result of this resolution was the collection of $925 accounts receivable that
were previously fully reserved. The reversal of these reserves are reflected
as reductions to operating expenses for the three and nine-month
periods ended September 30, 2003. 20




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Additionally, during the second quarter of fiscal 2003, we terminated a lease
agreement with a third party for an abandoned facility in Burnsville,
Minnesota. As a result of this lease termination, we eliminated an accrual of
$300 previously established for our operating lease commitment. Also, during
the second quarter of fiscal 2003, we eliminated an environmental reserve that
had been established for property sold in the prior year. As it was determined
that we no longer had any exposure related to possible environmental matters
for this property, we eliminated an accrual of $264 previously established for
this exposure. Also, at the end of the second quarter of fiscal 2003, we
entered into an operating agreement with a third party vendor. As a result of
this agreement and modifications made to an accounts receivable balance due
from this vendor within the operating agreement, we eliminated the need for a
reserve of $300 against this receivable balance. In addition, during the first
quarter of fiscal 2003 we were able to extend a sublease agreement with a third
party for a facility that we currently lease in Opa-Locka, Florida. As a
result of this sublease extension, we eliminated an accrual previously
established for the shortfall in the original sublease income from the amount
of the operating lease commitment. The reversal of this accrual resulted in a
$300 benefit during the 2003 first quarter. Also, as a result of a revised
estimate of workers compensation insurance claims, we reduced our accrual for
workers compensation insurance by $400 during the first quarter of 2003.
These reductions in exposures are reflected as an offset to operating expenses
of $2,889 for the nine month period ended September 30, 2003. Had all of these
offsets to operating expenses not occurred, the 2003 nine month and third
quarter operating expenses as a percentage of revenues would have been 7.6% and
6.9%, respectively. The combination of these offsets to operating expenses
during the first nine months of 2003, coupled with a significant increase in
revenues for the first nine months of 2004 compared to the first nine months of
2003, resulted in the increased three and nine month period operating expenses
reflected above. As a result of these factors, income from operations was $4,108 for the first
three quarters of 2004, compared to income from operations of $723 for the
first three quarters of 2003, and income from operations was $1,916 for the
third quarter of 2004, compared to income from operations of $2,301 for the
third quarter of 2003. Interest expense (excluding amortization of deferred financing fees) for the
nine months ended September 30, 2004 increased by $1,601 or 46.5% to $5,045,
from $3,444 for the nine months ended September 30, 2003. Interest expense
(excluding amortization of deferred financing fees) for the third quarter ended
September 30, 2004 increased by $246 or 16.0% to $1,779 from $1,533 for the
third quarter ended September 30, 2003. The increases for the nine and three
month periods ended September 30, 2004 as compared to the same periods of 2003
are primarily attributable to non-cash interest expense (since the original
$7,350 related party term loan was a PIK instrument) on our related party term
loan (which was substantially funded in July 2003), the cash interest and
non-cash interest expense on our restructured $14,412 related party term loan
(established April 8, 2004), the additional cash interest and non-cash interest
expense on our newly established $8,000 Hilco Term Loan (established April 8,
2004) and by increased borrowing levels, year-over-year, under our credit
facility. For the nine and three month periods ended September 30, 2004, our
non-cash PIK interest expense increased $1,018 and $148, respectively, as
compared to the same periods of 2003, while our cash interest expense increased
for the nine and three month periods ended September 30, 2004 by $583 and $98,
respectively, as compared to the same periods of 2003. Amortization of deferred financing costs was $1,001 and $1,944 for the nine
months ended September 30, 2004 and 2003, respectively, and was $314 and $780
for the three months ended September 30, 2004 and 2003, respectively. The
decrease for the nine and three month periods ended September 30, 2004,
compared to the nine and three month periods ended September 30, 2003 are
primarily attributable to deferred financing fees related to our July 2002
financing being fully amortized at the end of January 2004 (the original
maturity date for our Amended Credit Facility and BofA Term Loan) with minimal
additional financing fees incurred related to the extension of the Amended
Credit Facility through July 2004 (see Note 3 to Notes of Condensed
Consolidated Financial Statements for particulars of this short-term
extension). Partially offsetting this reduction is amortization of deferred
financing fees incurred in conjunction with our May 2003 amendment to our July
2002 credit facility and TROL financing arrangement, deferred financing fees
incurred in conjunction with our newly established credit facility and Hilco
Term Loan, and deferred financing fees incurred in conjunction with the warrant
that was extended to our majority stockholder in conjunction with securing a
portion of our related party term loan. In addition, during the second quarter
of 2004 we wrote-off $145 of deferred financing fees that related to the
above-described short-term extension of our amended credit facility. Other income  net was $862 and $345 for the nine and three-month periods ended
September 30, 2004, respectively, compared to $1,026 and $140 for the nine and
three-month periods ended September 30, 2003, respectively. Other income  net
for the first nine months of fiscal 2004 included a gain on the settlement
relating to our warrant repurchase obligation ($209). See Note 7 of the Notes
to the Condensed Consolidated Financial Statements. Other income  net for the
first nine months of fiscal 2003 was primarily comprised of a gain on the
settlement of outstanding purchase price adjustments and other obligations and
funds held in escrow related to the July 2002 sale of our Aerocell Structure
operations ($570). See Note 3 of the Notes to the Consolidated Financial Statements in our 2003 Form 10-K. 21




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As a result of the above factors, our loss from continuing operations before
income taxes and discontinued operations for the nine months ended September
30, 2004 was $1,077 compared to our loss from continuing operations before
income taxes and discontinued operations of $3,639 for the nine months ended
September 30, 2003. Our income from continuing operations before income taxes
and discontinued operations for the quarter ended September 30, 2004 was $168,
compared to our income from continuing operations before income taxes and
discontinued operations of $128 for the quarter ended September 30, 2003. During the first nine months of 2003, we recognized a $710 income tax benefit
as a result of the Internal Revenue Service (IRS) completing audits of our
1996, 1997, 1998 and 1999 federal income tax returns. Based on the findings in
the IRS agents report, we eliminated a $400 accrual for tax exposure matters
and established an income tax receivable for $310. Additionally, during 2003,
we recognized a tax benefit of $174 for the receipt of miscellaneous state
carryback refunds. For the reasons set forth above, our loss from continuing operations for the
nine months ended September 30, 2004 was $1,077, or $0.03 per basic share and
diluted share, compared to a loss of $2,755, or $0.09 per basic share and
diluted share, for the nine months ended September 30, 2003. Our income from
continuing operations for the three months ended September 30, 2004 was $168,
or $0.01 per basic share and $0.00 per diluted share, compared to income of
$128, or $0.00 per basic share and diluted share, for the three months ended
September 30, 2003. Income from discontinued operations for the nine and three month periods ended
September 30, 2004 was $1,207 and $93, respectively, or $0.03 and $0.00 per
basic share and diluted share, respectively, compared to income of $3,393, or
$0.11 per basic share and diluted share, for the nine months ended September
30, 2003, and $217, or $0.01 per basic share and $0.00 per diluted share, for
the three months ended September 30, 2003. Income from discontinued operations
for the first nine months of 2004 is comprised of a gain on the disposition of
our office and warehouse facility located in Miramar, Florida ($825), net
rental income and expenses associated with this office and warehouse facility
received prior to its disposition ($75), and collections on receivables
retained from the sale of our redistribution operations that had been fully
reserved and the sale of residual inventory that remains from the sale of our
redistribution operation and new parts bearings operation. Income from
discontinued operations for the first nine months of 2003 includes net rental
income and expenses associated with our Miramar facility ($205), collections on
receivables retained from the sale of our redistribution operations that had
been fully reserved and the sale of residual inventory that remains from the
sale of our redistribution operation and new parts bearings operation.
Additionally, income from discontinued operations for the first nine months of
2003 includes $2,700 resulting from the elimination and settlement of
contingency exposures and obligations relating to our redistribution operations
and new parts bearing operations, based on a current evaluation of those
exposures. 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 airlines, air freight carriers, maintenance and
repair facilities that service airlines, as well as original equipment
manufacturers. Generally, when economic factors adversely affect the airline
industry, they tend to reduce the overall demand for maintenance and repair
services, causing downward pressure on pricing and increasing the credit risks
associated with doing business with airlines. Additionally, the price of jet
fuel affects the maintenance and repair markets, since older aircraft, which
consume more fuel and which currently account for a significant portion of our
maintenance and repair services business, become less viable as the price of
fuel increases. 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 portions of fiscal 2004, and the overall instability
in the Middle East (including the war in Iraq and the currently on-going 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, and $2.5 billion for
2003. As a result of these factors, many commercial passenger airlines and air
cargo carriers reported significant reductions in their capacity and have taken
out of service upwards of 20% of their aircraft. This reduction in capacity has
lessened the aircraft maintenance required by such airlines (and thereby the
amount of maintenance being outsourced to companies like TIMCO). The impact of
these factors has resulted with the filing for bankruptcy protection under
Chapter 11 of the United States Bankruptcy Court by several carriers. The most
notable for us has been the filing for protection from creditors under Chapter
11 by United Air Lines on December 9, 2002 (United was our largest customer during the 22




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last three fiscal years). As of the date of this
Form 10-Q, United Air Lines has not emerged from protection under the
Bankruptcy Court. In addition to United Air Lines, other carriers have filed
for bankruptcy or publicly discussed the potential of seeking protection from
creditors through a voluntary bankruptcy filing. As related to us, current
exposures to carriers that are at risk of filing for protection are being
continuously evaluated and monitored, though we have in the past, and may in
the future, experience losses relating to these credit exposures.
Additionally, the Company is positioning itself for potential favorable
implications of these Chapter 11 filings and resurgence of the airlines as it
is anticipated that additional maintenance outsourcing opportunities could
result as these airlines look for cost reduction alternatives. We believe that all of the above factors could continue to have a negative
impact on our business in the foreseeable future. In response, we have taken
steps to reduce our costs. These terrorist attacks and related aftermath events
and the overall slowdown in the U.S. economy have also impacted our
competition, with several of our competitors exiting the MR&O business. Contractual Payment Obligation and Other Commercial Commitments Below is a chart setting forth our contractual payment obligations and other
commercial commitments as of September 30, 2004 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
    
    $
    10,864
    
    
    $
    10,864
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-Term
Debt
    
    
    164,260
    
    
    
    1,164
    
    
    
    121,529
    *
    
    
    41,567
    
    
    
    Capital
Leases
    
    
    5,160
    
    
    
    1,197
    
    
    
    716
    
    
    
    336
    
    
    
    2,911Operating
Leases
    
    
    22,945
    
    
    
    3,491
    
    
    
    6,103
    
    
    
    4,345
    
    
    
    9,006Total
contractual
cash
obligations
    
    $
    203,229
    
    
    $
    16,716
    
    
    $
    128,348
    
    
    $
    46,248
    
    
    $
    11,917
 OtherCommercial
    
    
    
    
    
    Less than
    
    Payments due by periodCommitments
    
    Total
    
    One Year
    
    1-3 years
    
    4-5 years
    
    After 5 yearsLetters of
Credit +
    
    
    10,064
    
    
    
    10,064
    
    
    
    
    
    
    
    
    
    
    
    Total Other
Commercial
Commitments
    
    $
    10,064
    
    
    $
    10,064
    
    
    $
    
    
    
    $
    
    
    
    $
    
 * Included within this amount is $115,800 of our New Senior Subordinated Notes
and $3,401 of our Junior Subordinated Notes. If not redeemed or repurchased by
us prior to the maturity dates of these obligations, these notes
automatically convert to 270,276 and 9,320 shares, respectively, of our
authorized but unissued common stock. + Outstanding letters of credit primarily relate to security for our obligation
to make payments on an operating lease requiring annual payments of
approximately $16,400. This amount is removed from the operating lease and
total contractual cash obligations line because it is included with the letters
of credit. 23




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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, 2003, we incurred losses from continuing
operations of $4,303 (adjusted for the reclassification of income and
expenditures related to our Miramar facility that we sold in March
2004. See Note 2 of the Notes to
Condensed Consolidated Financial Statements). We also had a net stockholders
deficit as of December 31, 2003 and September 30, 2004, and continued to
require additional cash flow above amounts currently being provided from
operations to meet our working capital requirements. Our ability to service our debt and note obligations, as they come due,
including maintaining compliance with the covenants and provisions under our
debt instruments, is and will be dependent upon our future financial and
operating performance. This performance, in turn, is subject to various
factors, including certain factors beyond our control, such as changes in
conditions affecting the airline industry and changes in the overall economy.
Additionally, our customer base has been adversely impacted in the past by
various factors, such as the state of the general economy, fluctuations in the
price of jet fuel, a significant decline but partial resurgence, from calendar
year 2000, in passenger airline travel, the war in Iraq, the outbreak of the
SARS virus in Asia, the currently on-going war on terrorism, and a competitive
price reduction in airfare prices. These and other factors may adversely
affect our customers in the future. Cash flow from operations service payments due on our debt and note
obligations, thereby reducing funds available for other purposes. Even if we
are able to meet our debt service and other obligations when due, we may not be
able to comply with the covenants and other provisions under our debt and note
obligations. A failure to comply, unless waived by the lenders and noteholders,
would be an event of default and would permit the lenders and noteholders to
accelerate the maturity of these debt and note obligations. It would also
permit them to terminate their commitments to extend credit under their
financing agreements. If we were unable to repay the debt to the lenders or
obligations to the noteholders, or otherwise obtain a waiver, the lenders and
holders could proceed against the collateral securing the financing obligations
and notes, and exercise all other rights available to them. While we expect to
be in a position to continue to meet our obligations in future periods, there
can be no assurance we will be able to do so. On April 8, 2004, we completed the refinancing of all of our outstanding senior
credit facilities. Within our refinancing, we obtained a new a $35,000 senior
secured revolving line of credit and a $6,400 senior secured term loan from a
group of financial institutions led by CIT Group. Additionally, we obtained an
$8,000 senior secured term loan from Hilco Capital, LP. The proceeds of these
new facilities were primarily used to repay amounts outstanding under our
previous revolving credit and term loan facilities. Additional borrowings
available under the revolving credit portion of this new facility are being
used for working capital. As of November 10, 2004, we had availability under
our new revolving credit facility of $8,496. Additionally, we have combined all
of the previously outstanding debt due to our principal stockholder with a
restructured $14,412 term loan. Finally, we have recently sold our office and
warehouse facility located in Miramar, Florida for a gross purchase price of
$26,000. We used a portion of the proceeds from the sale to repay the $23,624
outstanding principal balance of our TROL financing arrangement and we used the
balance of the proceeds, net of transaction expenses and other property related
costs that we were obligated to pay, to repay amounts outstanding under our
previous term loan facility. See Notes 3, 4 and 5 of Notes to Condensed
Consolidated Financial Statements for a description of all of these
transactions. 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
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. 24




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We believe that we will meet our working capital requirements during 2004 from
funds available under our revolving credit agreement and from our operations.
We may also sell our equity securities, or borrow additional funds, to the
extent required and available. While we expect that we will have
sufficient funds available to meet our working capital requirements, there can be no assurance
of this fact. Finally, at December 31, 2003 we had a net operating loss carryforward of
$49,233 that can be used to reduce future taxable income and thereby reduce
future cash requirements for income taxes, subject to certain internal revenue
code limitations and consideration of alternative minimum tax. Cash Net cash used in continuing operating activities during the nine months ended
September 30, 2004 was $5,323, compared to net cash used in continuing
operating activities of $8,238 for the same period in 2003. Cash used in
operating activities was primarily the result of earnings, adjusted for
non-cash charges, of approximately $5,211, increases in accounts receivable and
other assets of $8,956 and $506, respectively, and decreases in accounts
payable of $3,993, offset by decreases in inventories of $492 and increases in
customer deposits and other liabilities of $1,931 and $498, respectively. The
increase in accounts receivable provided additional borrowing base for our
revolving credit facility, which funded this use of cash. Cash of
$22,681 was
provided by investing activities during the first three quarters of 2004, which
included cash proceeds of $24,861 from the sale of the Companys Miramar
facility, offset by $2,180 for the purchase of fixed assets. Cash used in
financing activities during 2004 was $19,530. Net proceeds from our newly
established credit facility and term loans, and from the sale of our Miramar
facility were used for operations, to make repayments under our previously
outstanding Amended Credit Facility, to pay $2,989 of bank and refinancing fees
and to pay $24,762 of capital leases obligations, including $23,624 under our
TROL financing arrangement. Cash of $812 was provided by our discontinued
operations. Senior Credit Facilities See discussion of our senior credit facilities in Note 3 to Notes to Condensed
Consolidated Financial Statements and in our Form 10-K. Subordinated Notes See discussion of our subordinated note obligations in Note 6 to Notes to
Condensed Consolidated Financial Statements and in our Form 10-K. TROL Financing See discussion of our TROL financing in Note 5 to Notes to Condensed
Consolidated Financial Statements and in our Form 10-K. Stockholders Equity and Common Shares Outstanding At September 30, 2004, we had a negative stockholders equity of ($95,635) and
31,641 shares of our common stock were outstanding. Included as long-term debt
within our September 30, 2004 Consolidated Condensed Balance Sheet were our 8%
senior subordinated convertible PIK notes due December 31, 2006 and our junior
subordinated convertible PIK notes due January 2, 2007. These instruments were
recorded on our Consolidated Condensed Balance Sheet at $115,800 and $3,401,
respectively. While we have the right to redeem the senior and the junior
notes before their maturity, we do not have any obligation to redeem them other
than in connection with a change of control. Under the terms of our outstanding senior notes and junior notes, if these
notes are not redeemed or repurchased before their maturity, these notes,
including PIK notes previously issued with respect thereto and all accrued but
unpaid interest thereon, will automatically convert on their maturity into a
fixed number of shares of our common stock, as follows: Senior Notes
    
    
    270,276Junior Notes
    
    
    9,320279,596
 25




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Additionally, our principal stockholder holds a warrant to purchase 30% of our
common stock (on a fully diluted basis) as of the day the warrant is exercised.
The warrant is exercisable for nominal consideration on or before January 31,
2007. If our senior notes and our junior notes mature in 2006 and 2007, respectfully,
in accordance with their terms, and immediately thereafter, our principal
stockholder exercises its warrant, there will be issued and outstanding 444,624
shares of our common stock at that date. Further, on a pro-forma basis, if such
conversions and exercises had occurred at September 30, 2004, our stockholders
equity, including the nominal consideration received through the exercise of
the warrant by our principal stockholder, would have been $23,699 at that date. CONTINGENCIES We are involved in various litigation and environmental matters arising in the
ordinary course of business. These are discussed in Note 7 of Notes to
Condensed Consolidated Financial Statements and in our Form 10-K. 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 Form 10-K for a discussion of our critical accounting policies and use
of estimates. During the nine month period ended September 30,
2004, there have been no material changes to our critical accounting
policies and use of estimates. 26




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##### Table of Contents



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 as of September 30, 2004 under our CIT Group Credit Facility
and under our Hilco Term Loan bear interest at floating rates and therefore, we
are impacted by changes in prevailing interest rates. However at the same
date, our $14,412 related party term loan, our New Notes, Old Notes, and Junior
Notes all bore fixed interest rates and therefore were 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 2004 by
approximately $170 before taxes and would change the fair value of our
financial instruments by approximately $18,804. 
 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)) as
of September 30, 2004. Based on that
evaluation, this officer has concluded that as of September 30,
2004,
our disclosure controls and procedures were effective in timely
alerting him to material information relating to us
(including our consolidated subsidiaries) required to be included in
our reports filed or submitted by us under the Exchange Act.(b)
    
    There has been no significant change in our internal controls
over financial reporting during the quarter ended September 30,
2004 that has materially affected, or is reasonably likely
to affect, our internal controls over financial reporting. 27




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PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS See Note 7 to the Companys Unaudited Condensed Consolidated Financial
Statements included in this filing. 
 ITEM 2. CHANGES IN SECURITIES None 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None 
 ITEM 5. OTHER INFORMATION In October 2004, we named Leonard Singer to our Board of Directors. 
 ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K (a) Exhibits  31
    
    Certification of Principal Executive and Financial Officer under
Section 302 the Sarbanes-Oxley Act of 200232
    
    Certification of Principal Executive and Financial Officer under
Section 906 the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K During the quarter ended September 30, 2004, the Company furnished a Current
Report on Form 8-K reporting under Item 2.02 the Companys financial results
for the three month period ended June 30, 2004. 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: November 15, 2004 29




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Exhibit Index ExhibitNumber
    
    Description31
    
    Certification of Principal Executive and Financial Officer
under Section 302 the Sarbanes-Oxley Act of 200232
    
    Certification of Principal Executive and Financial Officer
under Section 906 the Sarbanes-Oxley Act of 2002
 30