##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the Quarterly Period Ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the transition period from            to
 Commission File No. 1-11775
 TIMCO AVIATION SERVICES, INC.
  Delaware
    
    65-0665658(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)623 Radar Road
    
    27410Greensboro, North Carolina
    
    (Zip Code)(Address of principal executive offices)
  þ o
  o o þ
 o þ
 :




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##### 



TIMCO AVIATION SERVICES, INC.
 INDEX
 Part I. Financial Information
 PageItem 1.
    
    FINANCIAL STATEMENTSCondensed Consolidated Balance Sheets at September 30, 2006 (unaudited)
and December 31, 2005
    
    2-3Condensed Consolidated Statements of Operations for the three months and
nine months ended September 30, 2006 and 2005(unaudited)
    
    
    4-5Condensed Consolidated Statements of Stockholders Equity for the nine
months ended September 30, 2006 (unaudited)
    
    
    6Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2006 and 2005 (unaudited)
    
    
    7-8Notes to Condensed Consolidated Financial Statements
    
    
    9Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
    
    
    23Item 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    
    34Item 4.
    
    CONTROLS AND PROCEDURES
    
    
    34Part II. Other InformationItem 1.
    
    LEGAL PROCEEDINGS
    
    
    35Item 1A.
    
    RISK FACTORS
    
    
    35Item 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    35Item 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    35Item 4.
    
    SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
    
    
    35Item 5.
    
    OTHER INFORMATION
    
    
    35Item 6.
    
    EXHIBITS AND REPORTS ON FORM 8-K
    
    
    35
 1




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,2006
    
    
    December 31,(Unaudited)
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    378
    
    
    $
    1,318Marketable securities
    
    
    32
    
    
    
    13,978Accounts receivable, net of allowances of $5,348 at
September 30, 2006 and $7,446 at December 31, 2005
    
    
    39,942
    
    
    
    48,643Inventories
    
    
    32,978
    
    
    
    28,681Other current assets
    
    
    8,453
    
    
    
    7,082Net assets of discontinued operations
    
    
    
    
    
    
    462Total current assets
    
    
    81,783
    
    
    
    100,164Fixed assets:Fixed assets at cost
    
    
    81,062
    
    
    
    82,676Less accumulated depreciation
    
    
    54,011
    
    
    
    52,585Fixed assets, net
    
    
    27,051
    
    
    
    30,091Other Assets:Goodwill, net
    
    
    26,124
    
    
    
    26,124Collateral deposit for debt obligation
    
    
    5,000
    
    
    
    Deferred financing costs, net
    
    
    1,415
    
    
    
    2,251Other
    
    
    1,172
    
    
    
    1,498Total other assets
    
    
    33,711
    
    
    
    29,873Total assets
    
    $
    142,545
    
    
    $
    160,128LIABILITIES & STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    14,778
    
    
    $
    21,696Accrued expenses
    
    
    14,088
    
    
    
    13,087Accrued interest
    
    
    1,328
    
    
    
    1,127Customer deposits
    
    
    27,175
    
    
    
    21,446Revolving loan
    
    
    254
    
    
    
    8,320New Senior Notes due 2006
    
    
    1,221
    
    
    
    1,221Junior subordinated notes due 2007, net
    
    
    711
    
    
    
    Current maturities of capital lease obligations
    
    
    413
    
    
    
    786Current maturities of notes payable to financial
institutions
    
    
    
    
    
    
    1,562Other
    
    
    2,183
    
    
    
    3,416Total current liabilities
    
    
    62,151
    
    
    
    72,661
 2




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS  (Continued)
 September 30,2006
    
    
    December 31,(Unaudited)
    
    
    2005Long-term Liabilities:Term loan with related parties
    
    
    25,459
    
    
    
    Old Senior Notes due 2008
    
    
    16,247
    
    
    
    16,247Capital lease obligations, net of current portion
    
    
    3,067
    
    
    
    3,187Notes payable to financial institutions, net of
current portion
    
    
    
    
    
    
    21,197Junior subordinated notes due 2007, net
    
    
    
    
    
    
    639Total long-term liabilities
    
    
    44,773
    
    
    
    41,270Commitments and Contingencies (See notes)Stockholders Equity:Preferred stock, $.01 par value, 1,000,000 shares
authorized, none outstanding, 15,000 shares
designated Series A Junior Participating
    
    
    
    
    
    
    Common stock, $.001 par value, 100,000,000 shares
authorized, 21,441,040 voting shares issued and
outstanding at September 30, 2006 and
December 31, 2005
    
    
    21
    
    
    
    21Additional paid-in capital
    
    
    344,880
    
    
    
    344,864Accumulated deficit
    
    
    (309,280
    )
    
    
    (298,688
    )Total stockholders equity
    
    
    35,621
    
    
    
    46,197Total liabilities and stockholders equity
    
    $
    142,545
    
    
    $
    160,128
  3




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Three MonthsEnded September 30,2006
    
    
    2005Revenues, net
    
    $
    62,692
    
    
    $
    78,192Cost of sales
    
    
    58,018
    
    
    
    77,594Gross profit
    
    
    4,674
    
    
    
    598Operating expenses
    
    
    7,389
    
    
    
    5,973Gain on sale of fixed assets
    
    
    (220
    )
    
    
    (1,178
    )Loss from operations
    
    
    (2,495
    )
    
    
    (4,197
    )Interest expense
    
    
    2,155
    
    
    
    2,579Other income  net
    
    
    (58
    )
    
    
    (388
    )Loss from continuing operations before income taxes
    
    
    (4,592
    )
    
    
    (6,388
    )Income tax benefit
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (4,592
    )
    
    
    (6,388
    )Income from discontinued operations, net of income taxes
    
    
    31
    
    
    
    42Net loss
    
    $
    (4,561
    )
    
    $
    (6,346
    )Basic and diluted loss per share:Loss from continuing operations
    
    $
    (0.21
    )
    
    $
    (1.00
    )Income from discontinued operations
    
    
    
    
    
    
    0.01Net loss
    
    $
    (0.21
    )
    
    $
    (0.99
    )Weighted average shares outstanding:Basic and diluted
    
    
    21,441,040
    
    
    
    6,413,979
  4




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Nine MonthsEnded September 30,2006
    
    
    2005Revenues, net
    
    $
    236,452
    
    
    $
    249,989Cost of sales
    
    
    220,821
    
    
    
    232,435Gross profit
    
    
    15,631
    
    
    
    17,554Operating expenses
    
    
    21,019
    
    
    
    18,310Gain on sale of fixed assets
    
    
    (220
    )
    
    
    (1,178
    )(Loss) income from operations
    
    
    (5,168
    )
    
    
    422Interest expense
    
    
    5,891
    
    
    
    6,860Gain on settlement of bankruptcy claim
    
    
    
    
    
    
    (1,773
    )Charge for early conversion of notes
    
    
    
    
    
    
    400Other income  net
    
    
    (290
    )
    
    
    (740
    )Loss from continuing operations before income taxes
    
    
    (10,769
    )
    
    
    (4,325
    )Income tax benefit
    
    
    31
    
    
    
    368Loss from continuing operations
    
    
    (10,738
    )
    
    
    (3,957
    )Income from discontinued operations, net of income taxes
    
    
    146
    
    
    
    140Net loss
    
    $
    (10,592
    )
    
    $
    (3,817
    )Basic and diluted loss per share:Loss from continuing operations
    
    $
    (0.49
    )
    
    $
    (0.83
    )Income from discontinued operations
    
    
    0.01
    
    
    
    0.03Net loss
    
    $
    (0.48
    )
    
    $
    (0.80
    )Weighted average shares outstanding:Basic and diluted
    
    
    21,441,040
    
    
    
    4,786,824
  5




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 
 Common Stock
    
    
    Additional
    
    
    
    
    
    
    TotalPaid-in
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance as of
December 31, 2005
    
    
    21,441,040
    
    
    $
    21
    
    
    $
    344,864
    
    
    $
    (298,688
    )
    
    $
    46,197Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    16Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,592
    )
    
    
    (10,592
    )Balance as of
September 30, 2006
    
    
    21,441,040
    
    
    $
    21
    
    
    $
    344,880
    
    
    $
    (309,280
    )
    
    $
    35,621
  6




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the NineMonths EndedSeptember 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (10,592
    )
    
    $
    (3,817
    )Adjustments to reconcile net loss to cash provided by
operating activities:Write-off of deferred financing fees
    
    
    289
    
    
    
    Paid-in-kind interest on note obligations
    
    
    1,382
    
    
    
    2,452Compensation Expense for stock options
    
    
    16
    
    
    
    Non-cash gain on settlement of bankruptcy claim
    
    
    
    
    
    
    (1,773
    )Impairment charged for fixed assets
    
    
    277
    
    
    
    Non-cash inducement charge for conversion of notes
    
    
    
    
    
    
    160Gain on disposition of fixed assets
    
    
    (220
    )
    
    
    Depreciation and amortization
    
    
    3,577
    
    
    
    4,031Amortization of deferred financing costs
    
    
    837
    
    
    
    1,059Sale of marketable securities, net
    
    
    13,946
    
    
    
    Recovery of doubtful accounts
    
    
    (616
    )
    
    
    (5
    )Change in working capital:Accounts receivable
    
    
    9,317
    
    
    
    1,011Inventories
    
    
    (4,297
    )
    
    
    (9,112
    )Other assets
    
    
    (5,369
    )
    
    
    (4,211
    )Accounts payable
    
    
    (6,918
    )
    
    
    4,410Customer deposits
    
    
    5,729
    
    
    
    10,613Other liabilities
    
    
    305
    
    
    
    (4,331
    )Cash provided by activities from continuing operations
    
    
    7,663
    
    
    
    487Cash provided by activities from discontinued operations
    
    
    462
    
    
    
    Net cash provided by operating activities
    
    
    8,125
    
    
    
    487CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of fixed assets
    
    
    724
    
    
    
    Purchases of fixed assets
    
    
    (1,994
    )
    
    
    (3,435
    )Net cash used in investing activities
    
    
    (1,270
    )
    
    
    (3,435
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings under senior debt facilities
    
    
    247,880
    
    
    
    265,605Payments under senior debt facilities
    
    
    (255,946
    )
    
    
    (269,777
    )Payments on term loan with financial institution
    
    
    (4,946
    )
    
    
    (872
    )Borrowings under related party loan
    
    
    6,000
    
    
    
    Payments on capital leases
    
    
    (493
    )
    
    
    (680
    )Payments of deferred financing costs
    
    
    (290
    )
    
    
    (1,095
    )Proceeds of term loan with financial institutions, net
    
    
    
    
    
    
    9,656Partial exercise of LJH Warrant
    
    
    
    
    
    
    71Net cash (used in)provided by financing activities
    
    
    (7,795
    )
    
    
    2,908Net (decrease)increase in cash and cash equivalents
    
    
    (940
    )
    
    
    100Cash and cash equivalents, beginning of period
    
    
    1,318
    
    
    
    293Cash and cash equivalents, end of period
    
    $
    378
    
    
    $
    393
 7




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)
 For the NineMonths EndedSeptember 30,2006
    
    
    2005SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Interest paid
    
    $
    (2,439
    )
    
    $
    (3,180
    )Income taxes refunded
    
    $
    31
    
    
    $
    368SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:Proceeds held in escrow from sale of fixed assets
    
    $
    755
    
    
    $
    SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:Common stock issued in connection with
conversion of New Senior Notes
    
    $
    
    
    
    $
    54,363Common stock issued in connection with
conversion of Junior Notes
    
    $
    
    
    
    $
    2,642Available for sale investment equity change
    
    $
    
    
    
    $
    (341
    )
  8




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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
     DESCRIPTION OF BUSINESS
      9




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##### 



BASIS OF PRESENTATION
   LIQUIDITY
     10




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##### 



11




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##### 



Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2005
    
    
    September 30, 2005Net loss   as reported
    
    $
    (6,346
    )
    
    $
    (3,817
    )Additional expense
    
    
    (19
    )
    
    
    (58
    )Net loss  pro forma
    
    $
    (6,365
    )
    
    $
    (3,875
    )Net loss per share, basic and diluted  as reported
    
    
    (0.99
    )
    
    
    (0.80
    )Net loss per share, basic and diluted  pro forma
    
    
    (0.99
    )
    
    
    (0.81
    )
  2006 Grants
    
    2005 GrantsExpected life
    
    5 Years
    
    
    5 YearsExpected volatility
    
    
    70
    %
    
    
    70
    %Risk-free interest rate
    
    
    4.75
    %
    
    
    3.99
    %Dividend yield
    
    
    
    
    
    
    Fair values
    
    $
    3.31
    
    
    $
    7.07
   Weighted Average
    
    
    RemainingOptions
    
    
    Exercise Price
    
    
    Contractual LifeOptions outstanding at December 31,
2005
    
    
    56
    
    
    $
    938.44Options granted at market price
    
    
    3
    
    
    
    3.31Options forfeited
    
    
    (4
    )
    
    
    (33.73
    )Options exercised
    
    
    
    
    
    
    Options outstanding at
September 30, 2006
    
    
    55
    
    
    $
    943.53
    
    
    1.65 YearsOptions exercisable at September
30, 2006
    
    
    49
    
    
    $
    818.15
    
    
    1.65 Years
 12




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##### 



September 30,
    
    
    December 31,2006
    
    
    2005Fair Value
    
    
    Cost
    
    
    Fair Value
    
    
    CostTrading securities
    
    $
    32
    
    
    $
    32
    
    
    $
    13,978
    
    
    $
    13,927
   September 30,
    
    
    December 31,2006
    
    
    2005Finished goods
    
    $
    16,832
    
    
    $
    16,374Work in progress
    
    
    13,798
    
    
    
    10,778Raw materials
    
    
    2,348
    
    
    
    1,529$
    32,978
    
    
    $
    28,681
   September 30,
    
    
    December 31,2006
    
    
    2005Original basis
    
    $
    8,834
    
    
    $
    8,543Accumulated amortization
    
    
    (7,419
    )
    
    
    (6,292
    )$
    1,415
    
    
    $
    2,251
    13




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##### 



14




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##### 



8% SENIOR SUBORDINATED PIK NOTES DUE 2006
    8 1/8% SENIOR SUBORDINATED NOTES DUE 2008
  8% JUNIOR SUBORDINATED PIK NOTES DUE 2007
   15




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##### 



LITIGATION AND CLAIMS
   ENVIRONMENTAL MATTERS
    OTHER MATTERS
  16




---



##### 



17




---



##### 



JANUARY 2005 TENDER OFFER
   18




---



##### 



AUGUST 2005 TENDER OFFER
      19




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##### 




    
    A Conversion, Support and Release Agreement, dated as of July 31, 2006, in which, among
other matters: (i) the Company agreed (under certain conditions) to sell to LJH and Owl
Creek an additional 2,400 shares of the Companys authorized but unissued common stock at
an exercise price of $2.50 per share through the conversion of debt owed by the Company to
LJH (the Option), and (ii) TASs stockholders agreed to support the Merger at any meeting
of the Companys stockholders called to consider and vote upon the Merger; and
    
    An Escrow Agreement, dated as of July 31, 2006, between the Company, TAS and American
Bank of Texas, under which TAS has deposited all of the funds required to pay public
stockholders the $4.00 per share cash Merger consideration. American Bank of Texas is
wholly-owned by Lacy Harber, the principal stockholder of LJH.
  20




---



##### 



For the Three
    
    
    For the NineMonths Ended
    
    
    Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Weighted average common and common
equivalent shares outstanding:Basic
    
    
    21,441,040
    
    
    
    6,413,979
    
    
    
    21,441,040
    
    
    
    4,786,824Effect of dilutive securities
Convertible debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock warrants and options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    21,441,040
    
    
    
    6,413,979
    
    
    
    21,441,040
    
    
    
    4,786,824Common stock equivalents outstanding
which are not included in the
calculation of diluted earnings
per share because their impact
is antidilutive
    
    
    500,296
    
    
    
    5,584,311
    
    
    
    500,290
    
    
    
    5,583,018
   21




---



##### 



Three months ended September 30, 2006
    
    MRO
    
    Interiors
    
    Other
    
    ConsolidatedNet sales
    
    $
    54,367
    
    
    $
    8,325
    
    
    $
    
    
    
    $
    62,692Operating income (loss)
    
    
    2,436
    
    
    
    367
    
    
    
    (5,298
    )
    
    
    (2,495
    )Identifiable assets
    
    
    99,890
    
    
    
    25,509
    
    
    
    17,146
    
    
    
    142,545Depreciation and amortization
    
    
    960
    
    
    
    36
    
    
    
    
    
    
    
    996Capital expenditures
    
    
    462
    
    
    
    
    
    
    
    
    
    
    
    462Goodwill
    
    
    26,124
    
    
    
    
    
    
    
    
    
    
    
    26,124Interest expense, net
    
    
    70
    
    
    
    
    
    
    
    2,085
    
    
    
    2,155
 Three months ended September 30, 2005
    
    MRO
    
    Interiors
    
    Other
    
    ConsolidatedNet sales
    
    $
    70,886
    
    
    $
    7,306
    
    
    $
    
    
    
    $
    78,192Operating income (loss)
    
    
    (1,547
    )
    
    
    (720
    )
    
    
    (1,931
    )
    
    
    (4,197
    )Identifiable assets
    
    
    111,241
    
    
    
    20,541
    
    
    
    18,733
    
    
    
    150,515Depreciation and amortization
    
    
    1,220
    
    
    
    78
    
    
    
    
    
    
    
    1,298Capital expenditures
    
    
    1,536
    
    
    
    53
    
    
    
    35
    
    
    
    1,624Goodwill
    
    
    26,124
    
    
    
    
    
    
    
    
    
    
    
    26,124Interest expense, net
    
    
    80
    
    
    
    
    
    
    
    2,499
    
    
    
    2,579
 Nine months ended September 30, 2006
    
    MRO
    
    Interiors
    
    Other
    
    ConsolidatedNet sales
    
    $
    191,260
    
    
    $
    45,192
    
    
    $
    
    
    
    $
    236,452Operating income (loss)
    
    
    4,122
    
    
    
    4,583
    
    
    
    (13,873
    )
    
    
    (5,168
    )Identifiable assets
    
    
    99,890
    
    
    
    25,509
    
    
    
    17,146
    
    
    
    142,545Depreciation and amortization
    
    
    3,740
    
    
    
    114
    
    
    
    
    
    
    
    3,854Capital expenditures
    
    
    2,197
    
    
    
    26
    
    
    
    
    
    
    
    2,223Goodwill
    
    
    26,124
    
    
    
    
    
    
    
    
    
    
    
    26,124Interest expense, net
    
    
    212
    
    
    
    
    
    
    
    5,680
    
    
    
    5,892
 Nine months ended September 30, 2005
    
    MRO
    
    Interiors
    
    Other
    
    ConsolidatedNet sales
    
    $
    223,918
    
    
    $
    26,070
    
    
    $
    
    
    
    $
    249,989Operating income (loss)
    
    
    9,055
    
    
    
    363
    
    
    
    (8,996
    )
    
    
    422Identifiable assets
    
    
    111,241
    
    
    
    20,541
    
    
    
    18,733
    
    
    
    150,515Depreciation and amortization
    
    
    3,816
    
    
    
    215
    
    
    
    
    
    
    
    4,031Capital expenditures
    
    
    3,065
    
    
    
    302
    
    
    
    68
    
    
    
    3,435Goodwill
    
    
    26,124
    
    
    
    
    
    
    
    
    
    
    
    26,124Interest expense, net
    
    
    249
    
    
    
    
    
    
    
    6,611
    
    
    
    6,860
    Accounting for Uncertainty in Income
Taxes Accounting for Income Taxes.
 22




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ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   GENERAL
 www.timco.aero.
   23




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RESULTS OF OPERATIONS
 GENERAL
   
    
    the financial health of the U.S. passenger and freight airline industry, and the impact
of the financial health of that industry on the maintenance, repair, and overhaul (MRO)
industry generally and our business specifically,
    
    the amount of MRO business being outsourced by the airline industry in general and our
airline customers in particular,
    
    factors that affect the financial health and well-being of our airline customers, such
as the September 11, 2001 terrorist attacks, the global war on terrorism, and fluctuations
in the price of jet fuel,
    
    the effect of competition on our business, including the effects of competition on the
pricing of the services and goods that we provide,
    
    our ability to achieve gross profit margins at which we can be profitable, including
margins on services that we perform on a fixed price basis and our ability to accurately
project our costs in a dynamic environment,
    
    our ability to generate sufficient working capital from our operations and from our
available credit facilities to meet our operating requirements, capital expenditure
requirements and service our indebtedness,
    
    our maintaining good relations with our customers and vendors,
    
    our ability to fully utilize our hangar space dedicated to maintenance and repair services,
    
    our ability to manage our business efficiently and achieve both positive income and cash flow from our operations,
    
    our ability to attract and retain the services of our executive officers and key employees,
    
    our ability to attract and retain a sufficient number of mechanics to perform the
maintenance, overhaul and repair services requested by our customers,
    
    our ability to integrate future acquisitions, and
    
    future changes in government regulations.
  OPERATING SEGMENTS
  24




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THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
      25




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26




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27




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28




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LIQUIDITY AND CAPITAL RESOURCES
 DEVELOPMENTS CONCERNING THE AVIATION INDUSTRY AND OUR OPERATIONS
    29




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CONTRACTUAL PAYMENT OBLIGATION AND OTHER COMMERCIAL COMMITMENTS
  Contractual
    
    
    
    
    
    Less than
    
    
    Payments due by periodObligations
    
    Total
    
    
    One Year
    
    
    1-3 years
    
    
    4-5 years
    
    
    After 5 yearsRevolving
Credit
Facility
    
    $
    254
    
    
    $
    254
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-Term
Debt
    
    
    43,638
    
    
    
    1,932
    (a)
    
    
    41,706
    
    
    
    
    
    
    
    Capital
Leases
    
    
    3,480
    
    
    
    372
    
    
    
    365
    
    
    
    431
    
    
    
    2,312Operating (b)
Leases
    
    
    18,511
    
    
    
    4,532
    
    
    
    5,851
    
    
    
    2,924
    
    
    
    5,204Estimated
Interest
Obligation (c)
    
    
    3,773
    
    
    
    3,157
    
    
    
    616
    
    
    
    
    
    
    
    Total
contractual
cash
obligations
    
    $
    69,656
    
    
    $
    10,247
    
    
    $
    48,538
    
    
    $
    3,355
    
    
    $
    7,516
 Other
    
    
    
    
    
    Less than
    
    
    Payments due by periodCommercial
    
    Total
    
    
    One Year
    
    
    1-3 years
    
    
    4-5 years
    
    
    After 5 yearsCommitmentsLetters of
Credit (b)
    
    
    8,804
    
    
    
    8,804
    
    
    
    
    
    
    
    
    
    
    
    Total Other
Commercial
Commitments
    
    $
    8,804
    
    
    $
    8,804
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (a)
    
    This amount reflects $1,221 of our New Senior Notes due 2006 and $686 of our
Junior Notes due January 2007. If not redeemed or repurchased by us prior to the maturity
dates of these obligations, these notes automatically convert to 71 shares and 39 shares,
respectively, of our authorized but unissued common stock. See Note 10 of Notes to
Condensed Consolidated Financial Statements for discussion regarding our New Senior Notes
and Junior Notes.(b)
    
    Outstanding letters of credit primarily relate to security for our obligations to make
payments on an operating lease requiring future aggregate principal payments of
approximately $7,800. This amount is removed from the operating lease and total
contractual cash obligations line because it is included within the letters of credit.(c)
    
    The estimated interest obligations were calculated using the actual balance of the
revolving credit facility at September 30, 2006 and the expected outstanding balances on
the short-term and long-term debt obligations, in accordance with payment obligations as
detailed in the schedule above. For each debt obligation, we used the individual interest
rate that was applicable as of September 30, 2006, which ranged from 7.08% to 8.25%.  30




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LIQUIDITY
      31




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
    
    our vulnerability to adverse general economic and industry conditions;
    
    our ability to obtain additional financing for future working capital expenditures, general
corporate or other purposes,particularly where our current lenders have a lien on all of our assets;
    
    the requirement that we obtain the consent from our lenders if we wish to borrow additional
amounts; and
    
    the dedication of a significant portion of our cash flow from operations to the payment of
principal and interest on
indebtedness, thereby reducing the funds available for operations.
   SOURCE AND USE OF CASH
  SENIOR CREDIT FACILITIES
  SUBORDINATED NOTES
  RIGHTS OFFERING
  32




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CONTINGENCIES
  CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
   33




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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
   ITEM 4: CONTROLS AND PROCEDURES
 (a)
    
    Our Chief Financial Officer and Chief Executive Officer evaluated our
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act)). Based on that evaluation, these
officers have concluded that as of September 30, 2006 our disclosure
controls and procedures were effective in timely alerting them to
material information relating to our Company (including our
consolidated subsidiaries) required to be included in our reports
filed or submitted by us under the Exchange Act.As of September 30, 2006, we have carried out an evaluation, under the
supervision and with the participation of our management, including
our principal executive officer and principal financial officer, of
the effectiveness of the design and operation of our disclosure
controls and procedures. Based on such evaluation, our principal
executive officer and principal financial officer concluded that our
Companys disclosure controls and procedures are effective.(b)
    
    There have been no changes in our internal controls or in other
factors that could have a material affect, or are reasonably likely to
have a material affect to the internal controls subsequent to the date
of their evaluation in connection with the preparation of this
quarterly report on Form 10-Q.Effective September 21, 2006, Jason Yaudes is no longer serving as our
Corporate Controller and Chief Accounting Officer. The Company is
currently evaluating its options with respect to the personnel
required on a going-forward basis in its finance department as a
result of the contemplated merger transaction discussed in Note 15 to
Notes to Condensed Consolidated Financial Statements.
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PART II. OTHER INFORMATION
  ITEM 1. LEGAL PROCEEDINGS
  ITEM 1A. RISK FACTORS
  ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
  ITEM 5. OTHER INFORMATION
  ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K
  31.1
    
    Certification of CEO and CFO under Section 302 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of CEO and CFO under Section 906 the Sarbanes-Oxley Act of 2002
 35




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SIGNATURES
  TIMCO Aviation Services, Inc.By:
    /s/ James H. TateChief Financial Officer(Principal Financial Officer) 
 36




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ExhibitNumber
    
    Description31.1
    
    Certification of CEO and CFO under Section 302 the Sarbanes-Oxley Act of 200232.2
    
    Certification of CEO and CFO under Section 906 the Sarbanes-Oxley Act of 2002
 37