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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

For the fiscal year ended December 31, 2002

TIMCO AVIATION SERVICES, INC.

(Exact name of registrant as specified in its charter)

(336) 668-4410

Securities registered pursuant to Section 12(b) of the Exchange Act:

Securities registered pursuant to section 12(g) of the Exchange Act:

Common Stock, par value $.001 per share

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [  ]   NO [ X ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act, Rule 12b-2). Yes [   ] No [X]

As of June 28, 2002, the aggregate market value (based on the closing sales price of the common stock as reported on the OTC Bulletin Board maintained by the NASD on such date, which was $1.45 per share) of the common stock held by non-affiliates was approximately $17.5 million. At May 12, 2003, there were 31,640,994 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement for its 2003 Annual Meeting of Stockholders (which Proxy Statement will be filed on or before 120 days after the end of the Registrant’s fiscal year ended December 31, 2002) are incorporated by reference into Part III hereof. Certain exhibits listed in Part IV of this Annual Report on Form 10-K are incorporated by reference from prior filings made by the Registrant under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended.

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PART I

ITEM 1. BUSINESS.

UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO “TIMCO,” “WE,” “OUR” AND “US” IN THIS ANNUAL REPORT ON FORM 10-K INCLUDES TIMCO AVIATION SERVICES, INC. AND ITS SUBSIDIARIES. THIS ANNUAL REPORT ON FORM 10-K CONTAINS OR MAY CONTAIN FORWARD-LOOKING STATEMENTS, SUCH AS STATEMENTS REGARDING OUR 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 ANNUAL REPORT ON FORM 10-K, OUR ABILITY TO CONTINUE TO GENERATE SUFFICIENT WORKING CAPITAL TO MEET OUR OPERATING REQUIREMENTS AND SERVICE OUR INDEBTEDNESS, OUR MAINTAINING GOOD WORKING RELATIONSHIPS WITH OUR VENDORS AND CUSTOMERS, COMPETITIVE PRICING FOR OUR PRODUCTS AND SERVICES, OUR ABILITY TO ACHIEVE GROSS PROFIT MARGINS AT WHICH WE CAN BE PROFITABLE, INCLUDING MARGINS ON SERVICES WE PERFORM ON A FIXED PRICE BASIS, COMPETITION IN THE AIRCRAFT MAINTENANCE, REPAIR AND OVERHAUL MARKET AND THE IMPACT ON THAT MARKET AND THE COMPANY OF THE TERRORIST ATTACKS ON SEPTEMBER 11, 2001, 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 CHANGES IN GOVERNMENT REGULATIONS. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM RESULTS EXPRESSED OR IMPLIED IN ANY FORWARD-LOOKING STATEMENTS MADE BY US IN THIS ANNUAL REPORT ON FORM 10-K. WE DO NOT UNDERTAKE ANY OBLIGATION TO REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT FUTURE EVENTS OR CIRCUMSTANCES.

General

We are among the leading providers of aviation maintenance, repair and overhaul (“MR&O”) services. Based on industry statistics and industry publications, we are one of the largest independent providers of heavy maintenance services for aircraft in North America and among the largest providers of these services in the world. We sell and provide aircraft maintenance, repair and overhaul services to commercial passenger airlines and air cargo carriers.

We offer MR&O services to our customers through our seven repair stations licensed by the Federal Aviation Authority (FAA). These services include maintenance, repair and modification services for aircraft, and repair and overhaul services on a wide range of aircraft components, flight control surfaces, aircraft interiors and Pratt & Whitney JT8D engines. In addition, we also provide modification services for the conversion of passenger aircraft to freighter configuration, as well as, aircraft engineering services.

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 executive offices are at 623 Radar Road, Greensboro, North Carolina 27410, and our telephone number is (336) 668-4410.

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Overview of TIMCO Aviation Services, Inc. in Fiscal 2002

For the year ended December 31, 2002, we incurred losses from continuing operations of $24.4 million and continue to require additional cash flow above amounts currently being provided from operations to meet our working capital requirements. Additionally, as a result of current year operating activities, we were not in compliance, at December 31, 2002, with debt covenant requirements under our Amended Credit Facility and our Tax Retention Operating Lease (TROL). Subsequent to year-end, we have obtained a waiver of non-compliance with all financial covenants and have thereby cured these covenant violations. We have also entered into agreements that reset financial covenant requirements for the Amended Credit Agreement and TROL financing arrangements for future periods. Debt classification, acceleration provisions, and potential suspension of financing obligations with repayment of all debt in the event of a material adverse change in the business that are provided for under these financing agreements will remain contingent upon the continued compliance or waiver of violations of these covenant requirements and other events of default. The airline industry, and thus our customer base, has been significantly impacted by a number of factors including: the general state of the economy, the rising price of jet fuel, a significant decline in passenger airline travel since calendar year 2000, the on-going war in Iraq and competitive airfare price reductions exceeding 15%. 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 our competitors exiting the maintenance, repair, and overhaul business.

As a result of our substantial debt, illiquidity, and our continued losses from operations, our auditors have placed a going concern modification in their report on our consolidated financial statements for the year ended December 31, 2002. Even in light of the extenuating situation that we face and overall economy and airline industry circumstances, during the year ended December 31, 2002 we dealt with several significant matters, including (i) the restructuring of our senior and subordinated indebtedness and our capital, (ii) the settlement of our outstanding class action litigation and the resolution of a number of significant legacy items, and (iii) the focusing of our operations on our maintenance, repair, and overhaul business.

Capital and Equity Restructuring

In February 2002, we completed a significant restructuring of our capital and equity. This restructuring consisted of four parts. The first part was a reverse split (on a one-share-for-ten-shares basis) of our outstanding common stock, reducing our outstanding common shares from 15 million shares to 1.5 million shares (5% of the restructured entity) and an increase in our authorized shares from 30.0 million to 500.0 million shares. The second part was an offer to the holders of our $165.0 million, 8 1/8% senior subordinated notes due 2008 (the “Old Notes”) to exchange their old notes for up to $10 million in cash, $100.0 million of our new 8% senior subordinated convertible paid-in-kind (“PIK”) notes due 2006 (the “New Notes”), 4.5 million shares of our post-reverse split common stock (15% of the restructured entity) and five-year warrants to purchase an additional 3.0 million shares of our post-reverse split common stock at an exercise price of $5.16 per share (the “Note Exchange”). The third part was a rights offering to our existing stockholders to raise funds to pay the cash portion of the Note Exchange offer and the expenses of the restructuring, and to provide us with working capital for our ongoing business operations. In the rights offering, we offered 24.0 million shares of our post-reverse split common stock (80% of the restructured entity) to raise $20.0 million. In connection with the rights offering, Lacy J. Harber, our principal stockholder, agreed to purchase any unsold allotments. The last part consisted of the issuance to the pre-restructuring holders of our common stock of five-year warrants to purchase an additional 3.0 million shares of our post-reverse split common stock at an exercise price of $5.16 per share.

On February 28, 2002, we completed all four parts of our restructuring. In the Note Exchange, we exchanged $148.8 million of our Old Notes (approximately 90% of the Old Notes) for $5.1 million in cash, and all of the New Notes, shares and warrants described above. We used the net proceeds of the rights offering, approximating $10.0 million after payment of the cash proceeds of the Note Exchange and expenses of the restructuring, to reduce trade payables and to provide working capital for our ongoing business operations. See Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II and Note 13 to the accompanying consolidated financial statements for further details of our capital and equity restructuring.

Refinancing of Senior Revolving Credit Facility and Senior Term Debt

In July 2002, we refinanced our senior credit facilities with a syndicate of four lenders led by Citicorp USA Inc. and UPS Capital Corporation. Under the Amended Credit Agreement, the Company obtained a $30.0 million senior secured revolving line of credit and a $7.0 million senior secured term loan. We utilized the proceeds from the new credit facility to repay outstanding borrowings under our previously outstanding revolving credit facility and our previously outstanding $12.0 million senior secured term loan. Further, from proceeds received from the completed sale of our Aerocell Structures operations on July 31, 2002, $3.5 million of the new $7.0 million senior secured term loan has been paid.

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In July 2002, we also restructured our outstanding $10.0 million senior secured term loan with Bank of America. $5.0 million of this loan is now due on January 31, 2004. $2.5 million of the original $10.0 million term loan was repaid through proceeds of the completed sale of our Aerocell Structures operations. The remaining $2.5 million of the original $10.0 million term loan has also been satisfied through a transfer of property and from the proceeds of the Aerocell Structures sale. This transaction was completed with a related party.

See Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II and Note 5 to the accompanying consolidated financial statements for further details of these transactions.

Settlement of Class Action Litigation

Several lawsuits had been filed against us and certain of our former officers and directors, and our former auditors, in the United States District Court for the Southern District of Florida, which were consolidated into a single lawsuit. Among other matters, the consolidated complaint alleged that our reported financial results in 1997, 1998, and 1999 were materially misleading and violated generally accepted accounting principles. In May 2002, we entered into an agreement to settle these claims and on September 20, 2002 this settlement agreement became final. Under the agreement, we have paid $11.5 million in cash, all of which has been paid by our directors’ and officers’ liability insurance carrier, and we have issued certain securities in full settlement of the claims. As a result of this settlement becoming final, all claims against us and the other defendants have been dismissed without any admission of liability or wrongdoing. See Item 3 (Legal Proceedings) of Part I and Note 9 to the accompanying consolidated financial statements for further details regarding this settlement.

Settlement with Kellstrom Industries, Inc.

In July 2002, we closed on the transactions contemplated by a Post-Closing Resolution Agreement, dated as of June 10, 2002, between us and Kellstrom Industries, Inc. The settlement resolved and settled globally outstanding disputes between us and Kellstrom relating to matters arising out of our December 2000 sale of substantially all of the assets of our redistribution operation to Kellstrom. The closing of the settlement resulted in a net cash payment to us of approximately $0.4 million. See Risk Factors Relating to Our Business within Part I and Note 3 to the accompanying consolidated financial statements for further details regarding this settlement.

Sale of Aerocell Structures Operations

In July 2002, we completed the sale of substantially all of the assets and business of our Aerocell Structures operations. The net sale price was $9.6 million (subject to post-closing adjustments), of which $9.1 million was received in cash at the closing and the balance of which has been placed into escrow. We used the proceeds from the sale to repay $3.5 million of the new $7.0 million term loan and $3.5 million to repay the $2.5 million BofA loan and a $1.0 million related party loan. The remainder, net of expenses, was used for working capital. See Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II and Note 3 to the accompanying consolidated financial statements for further details regarding this transaction.

Federal Income Tax Refund

In April 2002, we applied for and received $11.1 million of federal income tax refunds as a result of carrying back net operating losses to offset taxable income from prior years. This income tax refund is the result of favorable tax legislation passed by the U.S. Congress, that temporarily extended the number of years that net operation losses could be carried back to offset taxable income. This refund has been used to pay vendors and for working capital. See Note 11 to the accompanying consolidated financial statements for further details regarding this transaction.

Recent Financing

On May 14, 2003, we entered into an agreement with our principal stockholder pursuant to which he agreed to loan us $6.0 million ($2.0 million at closing and $2.0 million 30 and 60 days thereafter), which will be used for working capital in our operations. The new note has a three-year maturity, is secured debt and bears a 16% PIK interest coupon. In connection with the new loan, we issued a warrant to our majority stockholder (the “Harber Warrant”) to acquire, for nominal consideration, 30% of our outstanding common stock

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(on a fully-diluted basis) as of the day the warrant is exercised. The warrant is exercisable on or before January 31, 2007.

See discussion of these transactions within Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II and Note 18 to the accompanying consolidated financial statements.

Current Liquidity

Even in light of the fiscal 2002 transactions and settlements discussed above and our recent financing, we continue to require additional cash flows above amounts currently being provided from operations to meet the working capital requirements of our operations. While we believe that the proceeds of the new financing, as well as funds available to us under our revolving credit facility and from operations, will be sufficient to allow us to operate our business over the next 12 months, we cannot assure you of that fact. We also cannot assure you that required additional financing will be available to us in the future if needed to continue the operation of our business.

Industry Overview

We believe that the total worldwide market for maintenance, repair and overhaul services will increase over the next 20 years in line with the projected increase in passenger and cargo traffic. Boeing forecasts, in its World Demand for Commercial Airplanes, that passenger air traffic will average a growth rate of 4.9% per year through the year 2021. In the same report, Boeing estimates that cargo traffic will increase 6.4% per year through the year 2021. We believe that currently airlines perform approximately 75% of the North American MR&O services, outsourcing the balance to independent providers like TIMCO. As these airlines evaluate their internal cost structure and look for ways to lower their internal measurement of cost per seat mile, we believe that more of these carriers will look to independent providers, like TIMCO, for providing their maintenance, repair and overhaul services.

We believe that the following trends are currently affecting our industry:

Growth in the market for aircraft maintenance and repair services

The Boeing Report (World Demand for Commercial Airplanes) projects that:

. the worldwide fleet of commercial aircrafts will more than double by 2021;

. the worldwide freighter airplane fleet will increase approximately 73% by 2021; and

. the aircraft fleet will continue to age.

We believe that a combination of these factors will in the long term increase the demand for maintenance and repair services.

Increased outsourcing of maintenance and repair requirements

Airlines incur substantial expenditures directly in connection with fuel, insurance, labor and aircraft ownership, as well as, indirectly through airport security charges and passenger mandated taxes and fees. At the same time, airlines have come under increasing pressure during the last decade to reduce the costs associated with providing air transportation services. The result of these factors has equated to a lower revenue per seat mile for many airline carriers. While several of the expenditures required to operate an airline are beyond the direct control of airline operators, such as the price of fuel, airport security charges, taxes and labor costs, we believe that outsourcing maintenance and repair functions are areas in which airlines can reduce their operating costs. Outsourcing of maintenance and repair functions by airlines allows an integrated service provider such as TIMCO to achieve economies of scale unavailable to individual airlines and to handle these functions less expensively and more efficiently on our customers’ behalf. We believe that the trend towards outsourcing by airlines of a larger and larger portion of their MR&O requirements to large independent service providers such as TIMCO will continue in the future as these carriers look to reduce their cost per seat mile for providing air transportation services and to focus their in-house operations on their core competency of providing airline services to their customers.

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Diversified services and competitive strengths

We believe that the breadth of our services, including a range of aircraft maintenance and repair services, allows us to be a vendor of choice to our customers in a highly fragmented industry. In addition to our heavy airframe maintenance and modification services, by providing engineering services, and repair and overhaul services on aircraft components and interiors, we believe that we maintain a competitive advantage in the MR&O market through our ability to ensure that each of the individual parts that need repair or overhaul are completed on a timely basis and to our quality standards. Our customers include commercial passenger airlines, air cargo carriers, aircraft leasing companies and maintenance and repair facilities.

Emphasis on Quality

All of our MR&O facilities are licensed by the FAA. We emphasize quality and on-time delivery to our customers. We are focused on meeting and exceeding FAA requirements. Since safety is a key issue to our customers, our ability to meet and exceed FAA requirements on a consistent basis is critical.

Impact of September 11th Terrorist Attacks and Related Matters, the State of the Airline Industry, and the General Economy

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 slow down in the U.S. economy, a greater then 9% reduction in passenger levels, and the overall instability in the Middle East (including the currently on-going war in Iraq) have resulted in operating losses for U.S. airline carriers in excess of $7.7 billion for 2001 and are estimated at $9.5 billion for 2002. As a result of these terrorist attacks and their related aftermath, including the currently on-going war in Iraq, 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 caused the airline industry to incur significant losses in 2001 and 2002 and lessened the aircraft maintenance required by such airlines (and thereby the amount of maintenance being outsourced to companies like TIMCO). The impact of the September 11th attacks, the currently on-going war in Iraq, and the overall state of the economy, has resulted in continuing losses during 2002 for most airlines and with the filing for bankruptcy protection under Chapter 11 of the United States Bankruptcy Court by several carriers. The most notable have been the filings for protection from creditors under Chapter 11 by U.S. Airways on August 11, 2002 and United Airlines on December 9, 2002 (United accounted for 31.8% and 23.9%, respectively, of our 2001 and 2002 revenues). In addition to U.S. Airways and United Airlines, other carriers, including American Airlines, have publicly discussed the potential of seeking protection from creditors through a voluntary bankruptcy filing. As related to us, current exposures to carriers that are at risk of filing for protection are being continuously evaluated and monitored, though we have in the past, and may in the future, experience losses relating to these credit exposures. Additionally, the Company is positioning itself for potential favorable implications of these protection filings and rebirths of the airlines as it is anticipated that additional maintenance outsourcing opportunities could result as these airlines look for cost reduction alternatives to internal labor sources.

We believe that all of the above factors will continue to have a negative impact on our business in the foreseeable future. In response, during 2001 and 2002 we took steps, including head count reductions, 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.

Operations

Our core business is the providing of maintenance, repair and overhaul services for aircraft and aircraft components.

Since our customers consist of domestic and international passenger and freight airlines, aircraft leasing companies, and maintenance and repair facilities that service airlines, economic factors affecting the airline industry tend to impact our business. When economic factors adversely affect the airline industry, they tend to reduce the overall demand for aircraft maintenance and repair services, causing downward pressure on pricing and increasing the credit risks associated with doing business within the industry. Additionally, the price of fuel affects the aircraft maintenance and repair markets, since older aircraft, which consume more fuel and which account for most of our aircraft maintenance and repair business, become less viable as the price of fuel increases. We cannot assure you that economic and other factors which have affected the airline industry in the past and may affect the airline industry in the future will not adversely impact our business, financial condition or results of operations.

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During 2002, the market for maintenance and repair services was impacted by rising fuel costs, increased capacity of competitors, changes in fleet mix by some airlines, and other factors. These factors caused certain airlines and other carriers to reduce the volume of services required, thereby, reducing the services to be outsourced to third party providers such as TIMCO. This has resulted in excess capacity among many maintenance and repair service providers, which has caused pricing pressures to maintain market share. We have sought to maintain our relative market share by continuing to focus on quality service, turn time and by offering our array of services including increased opportunities in aircraft modification and engineering services and by, where necessary, offering price concessions and fixed prices for certain services.

Aircraft heavy maintenance

We perform maintenance, repair and modification services on aircraft at TIMCO’s repair stations in Greensboro, North Carolina, Lake City, Florida, and Macon, Georgia. We also have a repair station in Winston-Salem, North Carolina, which we have closed until we develop customers for this facility. Further, we have recently subleased a maintenance facility in Goodyear, Arizona from a related party. We have recently been licensed for this facility and have recently commenced performing services at this facility.

The services we offer principally consist of “C” and “D” level maintenance checks and the modification of passenger aircrafts to freighter configurations. “C” and “D” checks each involve a different degree of inspection, and the services performed at each level vary depending upon the individual aircraft operator’s FAA-approved maintenance program. “C” and “D” level checks are comprehensive checks and usually take a minimum of several weeks to complete, depending upon the scope of the work to be performed.

The “C” level check is an intermediate level service inspection that typically includes testing and servicing of the aircraft’s operational systems, external and internal cleaning and refurbishing, and servicing of the interior. Trained mechanics visually inspect the external and internal structure of the aircraft, repair defects and remove corrosion found, all in a manner as required by the manufacturer’s maintenance and structural repair manuals. The “D” level check includes all of the work accomplished in the “C” level check, but places a more detailed emphasis on the integrity of the structure. In the “D” level check, the aircraft is disassembled to the point where the entire structure can be inspected and evaluated. Once the inspection, evaluation and repairs have been completed, the aircraft is reassembled and its systems reinstalled to the detailed tolerances demanded in each system’s specifications. Depending upon the type of aircraft and the FAA-certified maintenance program being followed, intervals between “C” level checks can range from 12 to 18 months and 1,000 to 5,000 flight hours, and intervals between “D” level checks can range from four to eight years and 10,000 to 25,000 flight hours. Structural inspections performed during “C” level and “D” level checks provide personnel with detailed information about the condition of the aircraft and the need to perform additional work or repairs not provided for in the original work scope. Project coordinators and customer support personnel work closely with the aircraft’s customer service representative in evaluating the scope of any additional work required and in the preparation of a detailed cost estimate for the labor and materials required to complete the job.

Each aircraft certified by the FAA is constructed under a “Type Certificate.” Anything which is done subsequently to modify the aircraft from its original type design requires the review and approval of the FAA. These modifications are authorized by the issuance of a Supplemental Type Certificate (STC) or an engineering order issued by the airline’s engineering department. Typical modification services include reconfiguring of passenger interiors, installing passenger amenities such as telephones and installing crew rest areas.

We also convert passenger aircraft to freighter configuration. When we convert a passenger plane to freighter configuration we:

completely strip the interior;

strengthen the load-bearing capacity of the flooring;

install the bulkhead or cargo net;

cut into the fuselage for the installation of a cargo door;

reinforce the surrounding door structures;

replace windows with metal plugs;

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fabricate and install the cargo doors; and

install fire detection and suppression systems.

We also need to line the aircraft interior to protect the fuselage structure from pallet damage and modify the air conditioning system. Conversion contracts also typically require “C” or “D” level maintenance checks as these conversion aircraft have usually been out of service for some time and maintenance is required for the aircraft to comply with current FAA standards. Additional modification services performed may include cockpit reconfiguration to upgrade the avionic systems to current technology and the integration of traffic control and avoidance systems, windshear detection systems and navigational aids.

Component repair and overhaul services

We provide repair and overhaul services at our three FAA-licensed repair stations. Brice Manufacturing Company (Brice) manufactures and markets an extensive range of aircraft seats, seat refurbishments and related products and services. Brice also maintains over 4,000 parts manufacturing authorizations (PMA’s) which encompass all seat types. Aircraft Interior Design refurbishes aircraft interior components, including passenger and crew seats. TIMCO Engine Center refurbishes JT8D engines.

Engineering services

Our engineering services group provides integrated aircraft engineering, including aircraft certification, design and approval of modifications to aircraft systems and structures, for customers of our heavy aircraft maintenance operations, and for airlines, leasing companies and aerospace original equipment manufacturers. Our engineering services group was the first to market cockpit door bars and has obtained certification from the FAA for a new ballistic cockpit doors that is in compliance with FAA requirements that resulted from the September 11, 2001 terrorist attacks.

Joint venture to convert 727 aircraft

We own a 50% interest in a joint venture which has an STC for conversion of Boeing 727 aircraft which is fully compliant with FAA regulations and requirements for aftermarket aircraft cargo conversions. We manufacture the kits required to complete conversions of the aircraft based upon the STC, and we operate one of the aircraft maintenance facilities which has been licensed by the joint venture to install the kits on passenger aircraft being converted to cargo configuration. For the year ended December 31, 2002, there were no sales activities for this joint venture.

Management information systems

We operate our business using two decentralized, network based systems. Each system is fully integrated in regards to the respective business unit. One system is utilized in the operation of our heavy airframe maintenance and modification business. The other system is used at each of our component MR&O businesses. We are currently assessing our systems and expect that in future periods we will need to upgrade one or more of our systems. However, we do not currently intend to make significant systems-related capital expenditures during 2003.

Competition

The airline industry and the markets for our products and services are extremely competitive, and we face competition from a number of sources. Our competitors include airline and aircraft service companies, and other companies providing maintenance, repair and overhaul services. Some of our competitors have substantially greater financial and other resources than us. We cannot assure you that competitive pressures will not materially adversely affect our business, financial condition or results of operations. In the airframe heavy maintenance, which currently constitutes approximately 80% of our business, our major competitors are B.F. Goodrich and ST Mobile Aerospace Engineering, Inc.

Government regulation

The aviation industry is highly regulated by the FAA in the United States and by similar agencies in other countries. We must be certified by the FAA, and in some cases authorized by the original equipment manufacturers, in order to repair aircraft components and to perform maintenance and repair services on aircraft.

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The FAA regulates the manufacture, repair and operation of all aircraft and aircraft equipment operated in the United States. Its regulations are designed to ensure that all aircraft and aircraft equipment are continuously maintained in proper condition to ensure safe operation of the aircraft. Similar rules apply in other countries. All aircraft must be maintained under a continuous condition monitoring program and must periodically undergo thorough inspection and maintenance. The inspection, maintenance and repair procedures for the various types of aircraft and aircraft equipment are prescribed by regulatory authorities and can be performed only by certified repair facilities utilizing certified technicians. Certification and conformance is required prior to installation of a part on an aircraft. We closely monitor the FAA and industry trade groups in an attempt to understand how possible future regulations might impact us.

We cannot assure you that new and more stringent government regulations will not be adopted in the future or that any such new regulations, if enacted, will not materially adversely affect our business, financial condition or results of operations.

Further, our operations are also subject to a variety of worker and community safety laws. In the United States, the Occupational Safety and Health Act mandates general requirements for safe workplaces for all employees. Specific safety standards have been promulgated for workplaces engaged in the treatment, disposal or storage of hazardous waste. We believe that our operations are in material compliance with health and safety requirements under the Occupational Safety and Health Act.

Product liability

Our business exposes us to possible claims for personal injury or death which may result from the failure of an aircraft or an aircraft part repaired or maintained by us or from our negligence in the repair or maintenance of an aircraft or an aircraft part. While we maintain what we believe to have adequate liability insurance to protect us from claims of this type, based on our review of the insurance coverages maintained by similar companies in our industry, we cannot assure you that claims will not arise in the future or that our insurance coverage will be adequate. Additionally, there can be no assurance that insurance coverages can be maintained in the future at an acceptable cost. Any liability of this type not covered by insurance could materially adversely affect our business, financial condition or results of operations.

Employees

As of December 31, 2002, we employed approximately 2,000 persons. None of our employees are covered by collective bargaining agreements. We believe that our relations with our employees are good.

Risk Factors Relating to Our Business

In addition to the other information contained in or incorporated by reference into this Form 10-K, you should carefully consider the following risk factors, as well as the other information contained in this report:

General Business Risk Factors

For the year ended December 31, 2002, we incurred losses from continuing operations of $24.4 million and continue to require additional cash flow above amounts currently being provided from operations to meet our working capital requirements. Additionally, as a result of current year operating activities, we were not in compliance, at December 31, 2002, with debt covenant requirements under our Amended Credit Facility and our TROL. Subsequent to year-end, we have obtained a waiver of non-compliance with all financial covenants and have thereby cured these covenant violations.

Our ability to service our debt and note obligations, as they come due, including maintaining compliance with the covenants and provisions under our Amended Credit Facility, our TROL Financing agreement, our $5.0 million BofA Term Loan, and our New Notes, Old Notes, and Junior Notes, as well as our debt due to our principal stockholder resulting from his recent loan to us, is 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. Our high leverage position could have a material impact on our liquidity and this leverage positioning makes us vulnerable to economic downturns.

Cash flow from operations service payments of our debt and note obligations, thereby reducing funds available to us 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 our financing agreements. The Amended Credit Facility and the TROL financing agreement also provide for the termination of the financing agreements and repayment of all obligations in the event of a material adverse change in our business or a change in control, as defined. These actions would have an immediate material adverse effect on our liquidity. If we were unable to repay our 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.

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Risks associated with the aviation services industry

The condition of the airline industry has a substantial affect on our business, since our customers consist of airlines, maintenance and repair facilities that service airlines, as well as original equipment manufacturers. Generally, when economic factors adversely affect the airline industry, they tend to reduce the overall demand for maintenance and repair services, causing downward pressure on pricing and increasing the credit risks associated with doing business with airlines. Additionally, the price of jet fuel affects the maintenance and repair markets, since older aircraft, which consume more fuel and which currently account for a significant portion of our maintenance and repair services business, become less viable as the price of fuel increases.

On September 11, 2001, four commercial aircraft were hijacked and destroyed in terrorist attacks on the World Trade Center in New York City and the Pentagon in Washington, D.C. These terrorist attacks and resulting increased insurance costs, additional passenger taxes and fees, and increased airport security costs have had a negative impact on the airline industry in general, and thereby indirectly on us. Additionally, a recent increase in the price of jet fuel, the currently on-going war in Iraq, the reduction in passenger levels from 2000 (approximately 663 million) to 2002 (estimated at approximately 601 million), and the greater than 15% competitive reduction in airfare prices have also negatively impacted the airline industry, with the result for some carriers being the filing for protection under Chapter 11 of the United States Bankruptcy Code. The combination of these factors has also adversely impacted us through downward pricing pressures, the reduction in aircraft maintenance needs due to declines in airline travel, and the increased credit exposure to certain airline customers. We cannot assure you that economic and other factors which are currently affecting and may continue to affect the airline industry will not continue to adversely impact our business, financial condition or results of operations in the future.

The loss of one or two of our major customers could materially hurt our business because we depend on only a small number of customers

Our four largest customers accounted for approximately 65% of our total revenues for the year ended December 31, 2002 and approximately 58% of our total revenues for the year ended December 31, 2001. These four customers, individually, represented approximately 24%, 18%, 12%, and 11%, of our total revenues, for the year ended December 31, 2002. The largest of these customers, United Airlines, is currently in reorganization under Chapter 11 of the United States Bankruptcy Code. These same four customers, individually, represented approximately 32%, 10%, 9%, and 7% of our revenues, respectively, for the year ended December 31, 2001. No other customers represented more than 10% of our consolidated revenues for these two fiscal years. While the relative significance of customers varies from period to period, the loss of, or significant curtailments of purchase of our services by, one or more of our significant customers at any time has in the past and may in the future adversely affect our revenue and cash flow.

Our business is subject to heavy government regulation

The aviation industry is highly regulated by the Federal Aviation Administration in the United States and by similar agencies in other countries. We must be certified by the FAA in order to repair aircraft and aircraft components.

We cannot assure you that new and more stringent government regulations will not be adopted in the future or that any such new regulations, if enacted, would not materially adversely affect our business, financial condition or results of operations.

Our business is highly competitive

The airline industry and the markets for our products and services are extremely competitive, and we face competition from a number of sources. Our competitors include aircraft manufacturers, aircraft part manufacturers, airline and aircraft service companies and other companies providing maintenance, repair and overhaul services. Certain of our competitors are currently experiencing financial difficulties similar to or worse than our own and several of our competitors have ceased operations or substantially curtailed their operations during the last fiscal year. Many of these competitors have responded to their financial difficulties by reducing prices on their services to increase or retain market share. Any material deterioration in our financial condition is likely to affect our ability to compete with price-cutting by our competitors. Some of our competitors have substantially greater financial and other resources than we do. We cannot assure you that competitive pressures will not materially adversely affect our business, financial condition or results of operations.

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Our business is susceptible to liability claims

Our business exposes us to possible claims for personal injury or death which may result if we were negligent in repairing an airplane. We cannot assure you that claims will not arise in the future or that our insurance coverage will be adequate to protect us in all circumstances. Additionally, we cannot assure you that we will be able to maintain adequate insurance coverages in the future at an acceptable cost. Any liability claim not covered by adequate insurance could materially adversely affect our business, financial condition or results of operations.

We depend on our executive officers and our employees

Our continued success depends significantly upon the services of our executive officers and upon our ability to attract and retain qualified personnel in all of our operations. While we have employment agreements with each of our executive officers and certain of our key employees, most of our employees are employed on an at-will basis. The loss of one or more of our executive officers and of a significant number of our other employees without capable replacements could materially adversely affect our business, financial condition or results of operations.

Our airframe heavy maintenance business (which constitutes more than 80% of our current business) requires qualified mechanics and other personnel to provide services requested by our customers, and our ability to meet customer requirements depends on our ability to attract and retain the mechanics and other qualified personnel necessary to provide services at the physical locations of our operations. In that regard, we utilize outside contractors to provide personnel when we cannot otherwise hire required personnel. While we have been able to obtain sufficient mechanics and other required personnel to date, there can be no assurance we will be able to obtain all personnel required in the future. This may constrain our ability to grow our operations from its current levels.

Control of our company is vested with our principal stockholder

Lacy Harber, our principal stockholder, owns approximately 58% (as of December 31, 2002) of our outstanding common stock. Mr. Harber is able to control the vote on all matters submitted to the vote of our stockholders and therefore, able to direct our management and policies, including, but not limited to, the election of our entire board of directors.

In addition, under such circumstances, we will not, without Mr. Harber’s approval, be able to consummate transactions involving an actual or potential change in our control, including transactions in which the holders of our common stock might otherwise receive a premium for their shares over then current market prices.

Sales of business units during 2000, 2001 and 2002

During 2000, 2001, and 2002 we engaged in a restructuring of our business and operations intended to focus our business on our maintenance, repair and overhaul operations and to reduce and restructure our senior debt.

In July 2002, we completed the sale of substantially all of the assets and business of our Aerocell Structures operations. The net sales price was $9.6 million (subject to post-closing adjustments described below), of which $9.1 million was received in cash at the closing and the balance of which has been placed into escrow and will be disbursed in the manner set forth below. We used the proceeds from the sale to repay $3.5 million of the new $7.0 million term loan and $3.5 million to repay the $2.5 million BofA Term Loan due August 14, 2002 and a $1.0 million related party loan. The remainder, net of expenses, was used for working capital. For the year ended December 31, 2002, the Company has recorded a $0.3 million gain as a result of this sale.

The agreement under which the Aerocell assets were sold provided that the value of the Aerocell assets at the closing date would be at least $11.7 million. The agreement provides procedures relating to the determination of the closing date value of the Aerocell assets and requires a post-closing payment to the purchaser (on a dollar-for-dollar basis) if it is ultimately determined that the closing date value of the Aerocell assets was lower than the targeted amount. We are currently in the process of reconciling the closing date value of the Aerocell assets with the purchaser.

The Agreement also provided that the funds in escrow will be held to support certain indemnification rights provided in the Agreement, and, provided that if no claims for indemnity have been asserted, $250,000 of the funds being held in escrow will be released six months after the Closing Date and the balance of the funds being held in escrow will be released one year after the Closing Date.

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As a result of unresolved purchase price issues, the escrow balance that was due at the end of January 2003 has not yet been released. Upon resolution of these items, any residual balance, after an offset of any agreed to or required purchase price adjustments, will be released. The Agreement also provides that we will receive certain rebates in the future for work which we help procure for the Purchaser. However, before any such amounts are payable under this rebate, the Purchaser will receive a credit to the extent that certain specified inventory of Aerocell is not sold within one year following the Closing Date. There is also additional inventory of Aerocell as to which we will have to pay up to $0.2 million in cash one year from the closing if that inventory has not been sold or consumed by that date.

In May 2001, we completed the sale of the assets of our Caribe Aviation, Inc. component repair subsidiary for $22.5 million, of which we received $21.75 million in cash at the closing, and the balance of which was received in 2002. We used $15.5 million of the proceeds from the sale to repay senior debt and the remainder for working capital. In addition, the purchaser acquired the real estate and facility on which the Caribe operation was located for an aggregate purchase price of $8.5 million. The proceeds from the sale of the real estate and facility were used to reduce the outstanding TROL financing.

In December 2000, we completed the sale of our Dixie Aerospace new parts distribution operation to Wencor West, Inc. for $17.7 million, including debt assumed by Wencor West. We used the net cash proceeds of the sale, which approximated $13.5 million, to repay senior debt. In addition, we retained certain accounts receivable and inventory of Dixie’s new parts distribution operation which are being liquidated pursuant to collection and consignment agreements executed with the purchaser.

In December 2000, we completed the sale of substantially all of the assets and business of our redistribution operation in a series of transactions which were intended to constitute a single transaction (the “Transaction”). The Transaction was entered into with Kellstrom Industries, Inc. (“Kellstrom”) and KAV Inventory, LLC (“KAV”). KAV is a 50/50 limited liability company organized by Kellstrom and us. The aggregate purchase price received by us in the Transaction was $156.4 million, approximately $127.0 million of which was paid in cash ($122.0 million after payment of transaction expenses). The cash net proceeds of the Transaction were used by us to repay senior debt.

The first component of the Transaction consisted of KAV’s acquisition of substantially all of the aircraft and engine spare parts inventory and the engine inventory of our redistribution operation, as well as certain rotable parts inventories from two of our MR&O operations. The purchase price paid for this inventory was 89% of the closing date adjusted book value of such inventory ($148.6 million), subject to post-closing adjustment as set forth in the agreement relating to the inventory sale. As part of the Transaction, KAV consigned the inventory to Kellstrom. All post-closing adjustments have been resolved within the global settlement described below.

The cash portion of the purchase price paid for the inventory ($105.5 million) was obtained by KAV from a financial institution, with the balance paid in the form of three subordinated promissory notes. The KAV institutional financing was secured by a lien on all of the assets of KAV. The first two subordinated notes, each in the principal amount of $13.7 million, were five-year senior subordinated notes bearing interest at the rate of 14% per annum (see below for a description of Kellstrom’s purchase of one of these notes). The first two notes were subordinated in all respects to the KAV institutional financing. The third subordinated note was a five-year junior subordinated note in the principal amount of $15.7 million bearing interest at the rate of 14% per annum. The junior subordinated note was subordinated in all respects to both the KAV institutional financing and to repayment of the two senior subordinated notes. These amounts were to be paid with funds available after repayment of the KAV institutional financing and after repayment of the two $13.7 million senior subordinated notes.

In connection with the Transaction, we agreed with Kellstrom to equally share the operational expenses of KAV beyond amounts permitted under the loan agreement relating to KAV’s institutional financing. Additionally, we posted an $8.5 million letter of credit and Kellstrom posted a $6.5 million letter of credit with Bank of America to secure (in part) KAV’s institutional financing. The letters of credit were only to be drawn upon a default by KAV of its loan obligations and if drawn, such amounts were to be treated as loans to KAV and repaid prior to repayment of the two $13.7 million senior subordinated notes.

Additionally, we and Kellstrom were to be repaid the approximately $2.3 million which we each advanced to KAV for use in paying bank fees and expenses relating to obtaining their institutional financing. We and Kellstrom were to be repaid these amounts prior to repayment of the two $13.7 million senior subordinated notes. See Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for a description of the current status of the KAV notes and the Company’s $8.5 million letter of credit.

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The second component of the Transaction consisted of a sale to Kellstrom of certain non-inventory assets of our redistribution operation and the assumption by Kellstrom of a portion of the redistribution operation’s accounts payable. Kellstrom also acquired one of the $13.7 million senior subordinated notes described above. The net purchase price for these assets (including the $13.7 million senior subordinated note), after adjustment for assumed debt, was $21.5 million, all of which was paid in cash. The purchase price of the non-inventory assets purchased by Kellstrom was subject to post-closing adjustment as set forth in the agreement relating to the asset sale. All post-closing adjustments have been resolved within the global settlement described below.

Additionally, as part of the Transaction:

(1)  Kellstrom leased certain furniture, fixtures and equipment (the “FF&E”) used in the redistribution operation and the redistribution operation’s warehouse facility in Pearland, Texas for a one-year term (the Pearland lease and related option (described below) were cancelled in early 2002);

(2)  Kellstrom leased the redistribution operation’s 545,000 square foot headquarters and warehouse facility located in Miramar, Florida (the “Miramar Lease”). Pursuant to a sublease agreement (which was modified upon the closing of the settlement contemplated by the Post Closing Resolution Agreement described below), Kellstrom would pay us the lesser of $384,000 or the actual lease payment due under our lease for this facility for each year during the initial five year lease term. We also granted Kellstrom the right to renew the sublease for five consecutive five year periods, at a market rental rate;

(3)  Kellstrom had an option to acquire the FF&E and/or the Pearland, Texas property during the term of the above-described leases, and for a period of 60 days thereafter, for a purchase price equal to the net book value of such assets (approximately $9.4 million in the aggregate). We had an option (which was modified as described below) after one year to require Kellstrom to purchase the FF&E and/or the Pearland, Texas property for the same purchase prices; provided, however, that if we exercised either or both of our options, Kellstrom could defer its purchases of and continue to lease the FF&E and/or the Pearland, Texas property for up to an additional six months under certain circumstances;

(4)  We entered into a cooperation agreement (which was terminated upon the closing of the settlement contemplated by the Post Closing Resolution Agreement described below) under which we agreed to provide repair services for the KAV parts inventory as well as repair services to Kellstrom with respect to Kellstrom’s parts inventory, and Kellstrom agreed to supply parts to our MR&O operations, on an ongoing basis;

(5)  We entered into a non-competition agreement (which was modified in the settlement described below) with Kellstrom whereby we are restricted for a period of up to five years from engaging in the redistribution business; and

(6)  We granted Kellstrom a limited license to use the name “Aviation Sales” (if combined with the Kellstrom name) in connection with Kellstrom’s redistribution business.

In July 2002, we closed on a global settlement of outstanding disputes between ourselves and Kellstrom (the “Settlement”) pursuant to the terms of a Post-Closing Resolution Agreement, dated as of June 10, 2002 (the “PCRA”).

As part of the Settlement:

a.		Kellstrom purchased certain furniture, fixtures and equipment (“FF&E”), approximately $7.7 million, net, from one of our subsidiaries, Aviation Sales Distribution Services Company (“ASDC”), which equipment is being used by Kellstrom in the operation of its business;
b.		Kellstrom “put” back to us certain uncollected, fully reserved accounts receivable, which had been sold by ASDC to Kellstrom as part of the sale of the assets of the redistribution operation, in accordance with the terms of the Asset Purchase Agreement, dated December 1, 2000, among us, Kellstrom, and ASDC (the “APA”);
c.		We and Kellstrom resolved outstanding purchase price adjustment disputes under the APA;
d.		We and Kellstrom settled and setoff amounts (approximately $1.2 million) due and owing in the ordinary course between us and Kellstrom, including certain rental amounts owed by Kellstrom under the Miramar Lease (defined below);

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e.		Kellstrom’s sub-lease (the “Miramar Lease”) of our 525,000 square foot Miramar, Florida warehouse and office facility (the “Miramar Facility”) was amended (the “Amended Kellstrom Lease”) to provide for a term of twenty (20) years with an annual minimum rental of $2.75 million for the first five years, $3.0 million for years six through ten and at fair market value thereafter (all subject to CPI increases). Further, the Amended Kellstrom Lease provides Kellstrom with a one-time right to terminate the Amended Kellstrom Lease upon the completion of the 7th lease year after the closing of the Settlement;
f.		The Non-Competition Agreement between us and Kellstrom was amended to, among other things, allow our Aerocell Structures flight surfaces MR&O operation to exchange flight surfaces with its customers and to allow us, during the six months following the completion of the settlement, to sell up to $4.0 million of aircraft parts in the open market; and
g.		The Cooperation Agreement between us and Kellstrom, which obligated us to purchase aircraft parts from Kellstrom, was terminated.

The closing of the Settlement occurred in connection with the sale of Kellstrom’s business to an entity, Kellstrom Aerospace, LLC, organized by Inverness Management LLC. As part of that sale, the Amended Kellstrom Lease was assigned to Kellstrom Aerospace LLC. Such sale, and the terms of the Settlement, were approved by the Bankruptcy Court in Kellstrom’s Chapter 11 bankruptcy proceeding.

In addition, simultaneous with the Settlement, we resolved certain purchase price adjustment issues with KAV under the Inventory Purchase Agreement, dated December 1, 2000, among us, ASDC and KAV. Further, the consignment agreement between KAV and Kellstrom (which has been assigned to Kellstrom Aerospace, LLC) and the loan arrangement between KAV and Bank of America were simultaneously amended.

Finally, simultaneous with the Settlement, the four parties (one of which is an entity controlled by our principal stockholder) that had provided credit support to Kellstrom in December 2000 at the time of the sale of our redistribution operations to Kellstrom, entered into an agreement with Kellstrom’s senior lenders to share proceeds from a sale of an office and warehouse facility owned by Kellstrom and regarding certain other matters. Additionally, as part of the same agreement, we entered into a release agreement with Kellstrom’s senior lenders with respect to certain matters.

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ITEM 2. PROPERTIES.

Our executive offices are located in Greensboro, North Carolina at the headquarters of our TIMCO airframe maintenance operations. Our ownership interests and leasehold interests in all of our facilities are pledged to our senior lenders as collateral for amounts borrowed. See Notes 5 and 7 to Consolidated Financial Statements. The following table identifies, as of December 31, 2002, our principal properties:

	(1)		Currently subleased to Kellstrom Aerospace, LLC.
	(2)		Our corporate headquarters is located at this facility.
	(3)		Airframe maintenance facility has been closed and we have returned control of the facility to the airport authority; Engine repair facility is currently operating.
	(4)		This facility is subleased to us until June 2006 by our principal stockholder.
	(5)		This facility has been closed until we develop customers for this facility.
	(6)		This facility is leased from a former director and executive officer and sub-leased to an unaffiliated third party.
	(7)		This facility is closed.

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ITEM 3. LEGAL PROCEEDINGS.

Lawsuits and investigations

Several lawsuits had been filed against us and certain of our former officers and directors, and our former auditors, in the United States District Court for the Southern District of Florida, which had been consolidated into a single lawsuit. The consolidated complaint, as amended in March 2000, September 2000 and September 2001, alleged violations of Sections 11 and 15 of the Securities Act of 1933 (“Securities Act”) and Sections 10(b) and 20(a) of, and Rule 10b-5 under, the Securities Exchange Act of 1934 (“Exchange Act”). Among other matters, the consolidated complaint alleged that our reported financial results in 1997, 1998 and 1999 were materially misleading and violated generally accepted accounting principles. The amended consolidated complaint sought damages and certification of two classes, one consisting of purchasers of our common stock in our June 1999 public offering and one consisting of purchasers of our common stock during the period between April 30, 1997 and April 14, 2000.

In May 2002, we entered into an agreement to settle these claims. Under the settlement agreement, the fairness of which was approved by the District Court on August 21, 2002, the Company paid $11.5 million in cash, all of which was paid by our directors’ and officers’ liability insurance carrier. We also issued (i) 1.25 million shares of our authorized but unissued common stock, (ii) $4.0 million of our new 8% Junior Subordinated Convertible PIK Notes due 2007 (with terms similar to, but structurally subordinated to, our New Notes (see Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Note 6 within the accompanying consolidated financial statements), and (iii) five-year warrants to purchase 4.15 million shares of our common stock at an exercise price of $5.16 per share, which are exercisable upon grant. The settlement became effective on September 20, 2002. As a result of this settlement becoming final, all claims against us and the other defendants have been dismissed without any admission of liability or wrongdoing.

During the first quarter of 2000, the U.S. Securities and Exchange Commission initiated an inquiry into our accounting for certain transactions occurring prior to 2000. We are cooperating with the SEC in its inquiry.

In November 2001, we were sued by several former employees of our Oscoda, Michigan heavy airframe maintenance operation, on behalf of themselves and purportedly on behalf of a class of similarly situated employees, for alleged violations by us of the Worker Adjustment and Retraining Notification Act in connection with our spring 2001 temporary closure of that operation. The suit, which was filed in the U.S. District Court for the Eastern District of Michigan, sought back pay (including salary and accrued vacations) and other benefits for each of the affected employees for a sixty day period after such employees were terminated. In November 2002, without admitting liability, we entered into a settlement agreement, which was approved by the U.S. District Court and is pending a vote of acceptance by the former employees, relating to this suit. As part of the settlement, we have agreed to pay these former employees $1.15 million. While we expect the settlement to be accepted by the class of former employees, there can be no assurance of this fact. If the settlement is not approved, we intend to vigorously contest this matter.

We are also involved in various lawsuits and other contingencies arising out of operations in the normal course of business.

In the opinion of management, the ultimate resolution of these claims and lawsuits will not have a material adverse effect upon our business, financial position or results of operations.

Environmental matters

We are taking remedial action pursuant to Environmental Protection Agency and Florida Department of Environmental Protection (“FDEP”) regulations at TIMCO-Lake City. Ongoing testing is being performed and new information is being gathered to continually assess the impact upon us and the magnitude of required remediation efforts. Based upon cost estimates provided by environmental consultants as of December 31, 2002, it was estimated that the total remaining testing, remediation and compliance costs for this facility would be approximately $1.4 million. To comply with the financial assurances required by the FDEP, we had issued a $1.4 million standby letter of credit in favor of the FDEP. Subsequent to year-end, in March 2003, engineers of the FDEP presented updated information regarding our exposure at TIMCO-Lake City. The result of this updated information has concluded that our environmental exposure approximates $1.2 million. As a result of this updated evaluation, we have lowered the related environmental accrued liability for this exposure by $0.2 million. Additionally, the FDEP has allowed us to lower the standby letter of credit in favor of the FDEP to approximately $0.3 million. While this reduction may only be temporary, we are evaluating alternative means, outside of standby letter of credits, for meeting the financial assurance requirements established by the FDEP.

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In addition, testing and evaluation for all known sites on TIMCO-Lake City’s property is substantially complete and we have commenced a remediation program. We are currently monitoring the remediation, which will extend into the future. Based on current testing, technology, environmental law and clean-up experience to date, we believe that we have established an accrual for the estimated costs associated with our current remediation strategies.

Additionally, there are other areas adjacent to TIMCO-Lake City’s facility that could also require remediation. We do not believe that we are responsible for these areas; however, it may be asserted that TIMCO and other parties are jointly and severally liable and are responsible for the remediation of these properties.

Accrued expenses in the accompanying December 31, 2001 and 2002 consolidated balance sheets include $2.0 million and $1.5 million, respectively, relating to obligations to remediate the environmental matters described above. Future information and developments will require us to continually reassess the expected impact of the environmental matters discussed above. Actual costs to be incurred in future periods may vary from the estimates, given the inherent uncertainties in evaluating environmental exposures. These uncertainties include the extent of required remediation based on future testing and evaluation and the varying costs and effectiveness of remediation methods.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of our stockholders during the fourth quarter of 2002.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Shares of common stock issued in our completed restructuring of common equity

In connection with our restructuring, effective February 28, 2002 we changed our capitalization by increasing the number of our authorized shares of common stock from 30 million shares to 500 million shares and by reducing the number of our issued and outstanding shares of common stock by converting every ten shares of our issued and outstanding common stock into one share.

Prior to the restructuring, we had 15,015,317 shares of common stock outstanding. In connection with the restructuring, these outstanding shares became 1,501,532 post-reverse split shares of our common stock. We also issued the following shares of our common stock in the restructuring:

		— 4,504,595 shares of our post-reverse split common stock were issued to the holders of our Old Notes in the Note Exchange;
		— 24,024,507 shares of our post-reverse split common stock were issued in the rights offering.

At the completion of the restructuring, we had 30,030,634 post-reverse split shares of common stock outstanding and Lacy J. Harber, our principal stockholder, owned approximately 61% of the outstanding shares.

Further, in connection with the restructuring we issued 6,006,126 five-year warrants to purchase shares of our post-reverse split common stock at an exercise price of $5.16 per share, which are exercisable upon grant. Half of these warrants were issued to the holders of our pre-restructuring common stock. The balance of the warrants were issued to the holders of our Old Notes in the Note Exchange. Warrants issued to the holders of our Old Notes will trade together with the New Notes until December 31, 2003.

Pursuant to the terms of the New Notes which were issued in the Note Exchange, we are obligated to issue additional shares of our post-reverse split common stock when the New Notes are either redeemed or mature.

If the New Notes are redeemed (at our option) prior to their maturity, we will issue the following shares of our post-reverse split common stock in connection with such redemption:

		If the New Notes are redeemed in 2002 or 2003, we will issue 4,504,595 shares of post-reverse split common stock as part of the redemption consideration,
		If the New Notes are redeemed in 2004, 2005 or 2006 (prior to maturity), we will issue 3,003,063 shares of post- reverse split common stock as part of the redemption consideration; and
		If the New Notes have not been redeemed prior to their maturity at the close of business on December 31, 2006, the New Notes will automatically convert into 270,275,706 shares of our post-reverse split common stock.
		Securities issued in connection with our class action settlement

In connection with our class action settlement, we issued 1.25 million shares of our authorized but unissued common stock. Additionally, we issued $4.0 million of our new 8% Junior Subordinated Convertible PIK Notes due 2007 (with terms similar to, but structurally subordinated to, our New Notes). Finally, as a component of this settlement, we issued five-year warrants to purchase 4.15 million shares of our common stock at an exercise price of $5.16 per share, which are exercisable upon grant.

Pursuant to the terms of the Junior Notes, we are obligated to issue additional shares of our common stock when the Junior Notes are either redeemed or mature. If the Junior Notes are redeemed (at our option) prior to their maturity, we will issue the following shares of our common stock in connection with the redemption:

If the Junior Notes are redeemed in 2002 or 2003, we will issue 144,331 shares of common stock as part of the redemption consideration; and

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		If the Junior Notes are redeemed in 2004, 2005, or 2006, we will issue 103,554 shares of common stock as part of the redemption consideration.
		If the Junior Notes have not been redeemed prior to their maturity at the close of business on January 2, 2007, the Junior Notes will automatically convert into 9,319,852 shares of our common stock.
		Recent Financing

In May 2003, in connection with our principal stockholder’s loan to us, we issued a warrant to our principal stockholder (the “Harber Warrant”) to acquire, for nominal consideration, 30% of our outstanding common stock (on a fully-diluted basis) on the date the warrant is exercised. The warrant is exercisable on or before January 31, 2007. See Note 18 to the accompanying consolidated financial statements.

Trading Market for our Common Stock

The following information relates to the trading of our common stock, par value $.001 per share. At December 31, 2002, we believe that there were approximately 7,000 beneficial holders of our common stock. The high and low last sales prices of our common stock (adjusted for the one-share-for-ten-shares reverse split which occurred on February 28, 2002) for each quarter during our two most recent fiscal years as well as for the first and second quarter to date of 2003, as reported by the New York Stock Exchange through December 5, 2001 and as reported by the OTC Bulletin Board from December 6, 2001 to date, are set forth below:

No Cash Dividends

We have never declared any cash dividends on our common stock, and we do not expect to pay cash dividends in the future. Future profits, if any, will be retained by us for use in the operation of our business. There are also restrictions in our credit agreements limiting our ability to pay cash dividends. See Note 5 of Notes to consolidated financial statements and Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — LIQUIDITY AND CAPITAL RESOURCES.

Stockholders’ Rights Plan

On November 2, 1999 we adopted a Stockholders’ Rights Plan and declared a dividend distribution of one preferred share purchase right on each outstanding share of our common stock. Each preferred share purchase right would entitle stockholders to buy one one-thousandth of a share of our newly created Series A Junior Participating Preferred Stock at an initial exercise price of $90.00. In general, the preferred share purchase rights were to become exercisable if a person or group acquired 15% or more of our common stock or announced a tender offer for 15% or more of our common stock, (no limit as to ownership by Mr. Harber). Our Board of Directors was entitled to redeem the preferred share purchase rights at one cent per preferred share purchase right at any time before any such person acquired 15% or more of our

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outstanding common stock. In February 2002, in connection with the closing of the Note Exchange and rights offering, we terminated the Stockholders’ Rights Plan.

Risks associated with our equity securities

Our existing stockholders will experience substantial dilution upon the redemption or maturity of the New Notes or Junior Notes and upon the exercise of the Harber Warrant

We are obligated to issue additional shares of our common stock if we redeem our New Notes or Junior Notes. Additionally, if the New Notes or Junior Notes have not been redeemed prior to maturity, they will automatically convert into 270,275,706 and 9,319,852, respectively, of shares of our common stock. Further, we are obligated to issue 30% of our outstanding common stock, on a fully-diluted basis, (9,492,298 shares if the warrant were to be exercised today and 93,370,966 shares if the warrant were to be exercised after the New Notes and the Junior Notes mature), upon the exercise of the Harber Warrant. Holders of our common stock, as a result of the conversion of the New Notes and the Junior Notes, and/or the exercise of the Harber Warrant, will face immediate and substantial dilution in their percentage ownership of the total outstanding shares of our common stock and a reduction in their voting power. Conversion of these factors would likely have a material adverse effect on the prevailing market price of our common stock. Finally, under our 2001 Stock Option Plan, we may grant options or warrants to purchase up to 2,400,000 shares of our common stock to our officers, directors and employees.

Impact of our being a Bulletin Board stock

Our common stock is quoted on the OTC Bulletin Board which may negatively affect the price and liquidity of our common stock. Due to the fact that we were no longer in compliance with the NYSE continued listing criteria, which required, among other things, that we have a market capitalization of not less than $50 million and total shareholders’ equity of not less than $50 million and due to the fact that the average closing price of our pre-reverse split common stock had fallen below $1.00 for more than 30 consecutive trading days, the NYSE suspended the trading of our common stock on the NYSE effective immediately prior to the opening of the market on Thursday, December 6, 2001. Commencing December 6, 2001, our common stock became quoted on the OTC Bulletin Board maintained by the NASD. We cannot assure you that the market for our common stock will be as liquid as it had historically been on the NYSE. As a result, the market price for our common stock may become more volatile than it has been historically.

If our common stock is deemed a “penny stock,” its liquidity will be adversely affected

The price of our common stock fell below $1.00 per share in September 2001. If the market price for our common stock falls and remains below $1.00 per share (as it has for some months), our common stock may be deemed to be a penny stock. So long as our common stock is considered a penny stock, it will be subject to rules that impose additional sales practices on broker-dealers who sell our securities. For example, broker-dealers must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. Also, a disclosure schedule must be prepared before any transaction involving a penny stock, and disclosure is required about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Monthly statements are also required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Because of these additional obligations, some brokers may not effect transactions in penny stocks. This could have an adverse effect on the liquidity of our common stock.

Our common stock is thinly traded. Our stock price may fluctuate more than the stock market as a whole

As a result of the thin trading market for our stock, its market price may fluctuate significantly more than the stock market as a whole or the stock prices of similar companies. Of the 31,640,994 shares of our common stock currently outstanding, approximately 58% are beneficially owned by Lacy Harber, our principal stockholder. Without a larger float, our common stock will be less liquid than the stock of companies with broader public ownership, and, as a result, the trading prices for our common stock may be more volatile. Among other things, trading of a relatively small volume of our common stock may have a greater impact on the trading price for our stock than would be the case if our public float were larger. In addition, sales of a substantial amount of common stock in the public market, or the perception that these sales may occur, could adversely affect the market price of our common stock. Possible or actual sale of any of these shares, particularly by Mr. Harber, may decrease the market price of our common stock.

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The market price of our common stock could be depressed by future sales

Future sales of our common stock, or the perception that these sales could occur, could adversely affect the market price of our common stock. We cannot assure you as to when, and how many of, the shares of our common stock will be sold and the effect these sales may have on the market price of our common stock. In addition, we may issue additional shares of common stock in connection with possible future acquisitions or other transactions. Although these securities may be subject to regulatory or contractual resale restrictions, as these restrictions lapse or if these shares are registered for sale to the public, they may be sold to the public. In the event we issue a substantial number of shares of our common stock, which subsequently become available for unrestricted resale, there could be a material adverse effect on the prevailing market price of our common stock.

Adjustments to common stock purchase warrant exercise prices and exercise dates

We may, in our sole discretion, and in accordance with the terms of the warrant agreements with the warrant agents, reduce the exercise price of the common stock purchase warrants issued in the restructuring and the class action settlement and/or extend the time within which the warrants may be exercised, depending on such things as the current market conditions, the price of the common stock and the need for additional capital. Further, in the event that we issue certain securities or make certain distributions to the holders of our common stock, the exercise price of the warrants may be reduced. Any such price reductions (assuming exercise of the warrants) will provide less money for us, higher incremental expense and possibly adversely affect the market price of our securities. The warrants issued in the Note Exchange will not trade separately from the New Notes until December 31, 2003.

Impact of warrant exercise on market

In the event of the exercise of a substantial number of warrants within a reasonably short period of time after the right to exercise commences, the resulting increase in the amount of our common stock in the trading market could substantially affect the market price of our common stock.

We are subject to significant anti-takeover provisions

Our certificate of incorporation and bylaws contain provisions that may have the effect of discouraging transactions involving an actual or threatened change of control. In addition, our board of directors has the authority to issue up to 1,000,000 shares of preferred stock in one or more series and to fix the preferences, rights and limitations of any of these series without stockholder approval. Our ability to issue preferred stock could discourage unsolicited acquisition proposals, or make it difficult for a third party to gain control of us, which could adversely affect the market price of our common stock.

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ITEM 6. SELECTED FINANCIAL DATA

The following table represents our selected consolidated financial information. The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and notes thereto and Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS which contains a description of the factors that materially affect the comparability from period to period of the information presented herein. Operating results from continuing operations reflect the results of operations from our MR&O and leasing operations, including the pre-acquisition operations for all periods presented of Whitehall Corporation (acquired in July 1998), Caribe Aviation (acquired in March 1998 and sold in May 2001), and Aerocell Structures (acquired in September 1997 and sold in July 2002). Discontinued operations includes the results of operations of our redistribution operations and our manufacturing operations, both of which were sold in 2000.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Capital and Equity Restructuring

In August 2001, we entered into an agreement with the holders of 73.02%, or $120.5 million aggregate principal amount, of our 8 1/8% senior subordinated notes due 2008 (the “Old Notes”) to restructure those notes. Under the agreement, the holders of more than a majority of the outstanding Old Notes agreed to exchange the Old Notes in an exchange offer and consent solicitation and to waive the default arising as a result of the failure to pay the interest payment due August 15, 2001. Also, our senior lenders approved the terms of the restructuring and agreed to forbear until March 31, 2002, subject to certain conditions, on the default in the senior loan agreements resulting from the failure to make the note interest payment. We commenced the Note Exchange on or about January 14, 2002 and the Note Exchange expired on February 22, 2002. At a special meeting of our stockholders held on February 19, 2002, our stockholders approved the terms of the restructuring.

On February 28, 2002, we completed an extensive restructuring of our capital and equity. The restructuring consisted of four parts. The first part was a reverse split (on a one-share-for-ten-shares basis) of our outstanding common stock, reducing our outstanding common shares from 15.0 million shares to 1.5 million shares (5% of the restructured entity) and an increase in our authorized shares from 30.0 million shares to 500.0 million shares. The second part was an offer to the holders of our $165.0 million of 8 1/8% senior subordinated notes due 2008 (the “Old Notes”) to exchange their Old Notes for up to $10.0 million in cash, $100.0 million of new 8% senior subordinated convertible pay-in kind notes due 2006 (the “New Notes”), 4.5 million shares of our common stock (15% of the restructured entity) and five-year warrants to purchase an additional 3.0 million shares of common stock at an exercise price of $5.16 per share, which are exercisable upon grant, (collectively, the “Note Exchange”). A condition to the closing of the Note Exchange offer was that the holders of 80% or more of the outstanding Old Notes tender their Old Notes in the Note Exchange. The third part was a rights offering to our existing stockholders to raise funds to pay the cash portion of the Note Exchange offer and the expenses of the restructuring, and to provide us with working capital for ongoing business operations. In the rights offering, we offered 24.0 million shares of our common stock (80% of the restructured entity) to raise $20.0 million. In connection with the rights offering, Lacy J. Harber, our principal stockholder, agreed to purchase unsold allotments. The last part consisted of the issuance to the pre-restructuring holders of our common stock of five-year warrants to purchase an additional 3.0 million shares of common stock at an exercise price of $5.16 per share, which are exercisable upon grant.

In the rights offering, we sold 12.0 million shares of common stock to our existing stockholders (including Mr. Harber), and Mr. Harber purchased the balance of the shares (12.0 million shares) pursuant to his obligation to purchase unsold allotments. In the Note Exchange, we exchanged $149.0 million face value of Old Notes (approximately 90% of the Old Notes) for $5.1 million in cash, and all of the New Notes, shares and warrants described above. We used the net proceeds of the rights offering, approximating $10.0 million after payment of the cash proceeds of the Note Exchange, accrued interest on the bonds not tendered, and expenses of the restructuring, to reduce trade payables and to provide working capital for our ongoing business operations.

The restructuring has been recorded in accordance with SFAS No. 15, “Accounting by Debtors and Creditors for Troubled Debt Restructurings.” As a result, we recognized an extraordinary gain of $27.3 million, net of $0 tax expense, in the first quarter of 2002. Additionally, we will not record interest expense on the New Notes, as the New Notes are already carried on our consolidated financial statements at their maximum potential cash redemption value (including interest) through their maturity. This maximum potential cash redemption value equates to the present value, through 2006, of the $100.0 million notes plus the value of stock to be issued upon redemption of these notes in 2006.

The New Notes are redeemable for cash at our option at the following percentages of par plus accrued interest on the par value through the date of redemption: 2002 — 70.0%, 2003 — 72.5%, 2004 — 73.0%, 2005 — 75.625% and 2006 — 77.5%. Pursuant to the terms of the New Notes, which were issued in the Note Exchange, we are also obligated to issue additional shares of common stock when the New Notes are either redeemed or mature. If the New Notes are redeemed in 2002 or 2003, the Company will issue 4.5 million shares of common stock as part of the redemption consideration. If the New Notes are redeemed in 2004, 2005 or 2006 (prior to maturity), the Company will issue 3.0 million shares of common stock as part of the redemption consideration. If the New Notes have not been redeemed prior to their maturity at the close of business on December 31, 2006, the New Notes will automatically convert into 270.3 million shares of our common stock.

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As a result of the exchange offer and consent solicitation, $16.2 million in aggregate principal amount of the Old Notes remain outstanding. As part of the Note Exchange, substantially all of the covenant protections contained in the indenture for the Old Notes were removed.

Recent Financing

On May 14, 2003, we entered into an agreement with our principal stockholder pursuant to which he agreed to loan us $6.0 million, which will be used for working capital in our operations. The new note has a three-year maturity, is secured debt and bears a 16% PIK interest coupon. In connection with the new loan, we issued a warrant to our majority stockholder to acquire, for a nominal consideration, 30% of our outstanding common stock (on a fully-diluted basis) as of the date the warrant is exercised.

Risk factors relating to our financial condition and results of operations

     We have substantial debt that we may be unable to service

As further discussed within the “Senior Credit Facilities” section of this Item 7, in July 2002 we refinanced all of our senior debt obligations. The result of this refinance was the establishment of a new $30.0 million revolving credit facility and a new $7.0 million senior term loan. Subsequent to the establishment of this Amended Credit Facility, we paid down, through proceeds received from the sale of our Aerocell Structure operations, $3.5 million of our new senior term loan. Additionally, in July 2002, we restructured our senior term loan with BofA. The resulting BofA term loan, subsequent to a pay-down through proceeds of the sale of our Aerocell Structure operations and the transfer of real estate to a related party that satisfied a portion of the outstanding term loan, is an outstanding obligation of $5.0 million due January 31, 2004. Finally, in July 2002, we restructured our TROL financing arrangement. Under the amended TROL Financing Agreement, the maturity date of the TROL financing has been extended until June 30, 2005.

As of December 31, 2002 we had outstanding indebtedness of $175.5 million, of which $35.5 million was senior indebtedness, which included amounts due under the TROL Financing, which is now characterized as a capital lease, $5.0 million BofA Term Loan, $3.5 million Amended Term Loan and $2.2 million under our Amended Revolving Credit Facility. In addition, we had $11.5 million of letters of credit outstanding under our Amended Revolving Credit Facility with $1.6 million available for borrowing under our Amended Revolving Credit Facility. As of May 12, 2003, we have outstanding $8.5 million of term loans with financial institutions, $24.6 million under the TROL Financing Agreement, $10.1 million of outstanding letters of credit, $16.2 million of our Old Notes, $100.0 million of our New Notes (recorded on our financial statements at $115.8 million), and $2.8 million of our Junior Notes. Additionally, as of May 12, 2003 we had $1.7 million available for borrowing under our Amended Revolving Credit Facility. 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;
	•		we are required to obtain consent from our lenders under our senior credit facilities and the parties under our TROL financing arrangement in order to obtain new debt financing; and
	•		the dedication of a 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.

Our senior credit facilities and TROL financing arrangement contain certain financial covenants regarding our financial performance and certain other covenants, including limitations on the amount of annual capital expenditures and the incurrence of additional debt. We did not meet certain financial covenants at December 31, 2002, and thus were in violation of the Amended Credit Agreement and TROL financing arrangement. Subsequent to year-end, however, we obtained waivers of non-compliance with all financial covenants and have thereby cured the covenant violations. We also entered into agreements that reset financial covenant requirements for the Amended Credit Agreement and TROL financing arrangement. Going forward, debt classification will remain contingent upon the continued compliance or waiver of violations of these covenant requirements.

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Additionally, we did not have sufficient available liquid resources to pay the August 2001 and the February 2002 interest payments due on the Old Notes. As a result of our failure to make the August 2001 and the February 2002 interest payments, we were in breach of the terms of the indenture and the breach was subsequently waived by holders of the Old Notes who exchanged such notes for New Notes in the Note Exchange. We have now cured the default arising by reason of our non-payment of interest by paying the remaining holders of the Old Notes their delinquent interest. We do not currently have sufficient available liquid resources to repay the principal balance of the Old Notes at maturity or to refinance the New Notes and the Junior Notes prior to their maturity, and there can be no assurance that funding will be available for such purposes in the future.

     We depend on financing transactions and going concern modification

During 1999, we relied primarily upon significant borrowings under our senior revolving credit facility, and sales of our securities, including our previously issued Old Notes, to satisfy our funding requirements relating to our acquisitions of several businesses and to finance the working capital required to operate our business. During 2000 and 2001, we relied primarily on proceeds from sales of our various business operations and on borrowings under our senior revolving credit facility to reduce our senior debt and to fund our working capital requirements. During 2002, we continued to rely on proceeds from sales of business operations, borrowings under our senior revolving credit facility, our Note Exchange and Rights Offering, and our income tax refund to reduce our senior debt and to fund our working capital requirements. We continue to require cash flows above amounts currently being provided from operations to meet the working capital requirements of our operations, and we recently obtained additional financing from our principal stockholder for this purpose. However, we cannot assure you that additional financing will be available to us in the future, if required, for these purposes.

Because of our substantial debt, illiquidity and our continued losses from operations, our auditors have placed a going concern modification in their report on our consolidated financial statements for the year ended December 31, 2002.

     Our lenders impose significant restrictions on us

Our senior credit facilities and the New Notes impose significant operating and financial restrictions on us. These restrictions may significantly limit our ability to incur additional indebtedness, pay dividends, repay indebtedness prior to its stated maturity, sell assets or engage in mergers or acquisitions. In addition, our failure to comply with these restrictions could result in an event of default which, if not cured or waived, could materially adversely affect our business, financial condition or results of operations.

     We have incurred losses in the past and we may incur losses in the future. If we incur losses in the future, our ability
     to obtain sufficient working capital for our operations and our ability to service our indebtedness may be impaired.

We incurred losses from continuing operations of $115.9 million, $131.8 million and $24.4 million, respectively, during the 2000, 2001 and 2002 fiscal years. If we continue to incur losses in the future, we will likely limit our ability to obtain sufficient working capital for our operations and our ability to execute our business strategy. In addition, our ability to service our indebtedness may be harmed because we may not generate sufficient cash flow from operations to pay principal or interest when due.

A large portion of our operating expenses are relatively fixed and cancellations, reductions or delays in orders by a customer or group of customers has in the past and could in the future have a material adverse effect on our business, financial condition or results of operations.

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Results of Operations

Operating revenues consist primarily of service revenues and sales of materials consumed while providing services, net of allowances for 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:

	•		decisions made regarding sales of our assets to reduce our debt,
	•		timing of repair orders and payments from large customers,
	•		the state of the economy generally, the state of the airline industry generally, and the financial condition of our airline customers specifically,
	•		competition from other third-party MR&O service providers,
	•		the number of airline customers seeking repair services at any time,
	•		the impact of fixed pricing on gross margins and our ability to accurately project our costs in a dynamic environment,
	•		our ability to fully utilize our hangar space dedicated to maintenance and repair services,
	•		the volume and timing for 727 cargo conversions and the impact during future periods on airline use of both the 727 fleet type and JT8D engines (both of which are older models) as a result of increased fuel costs and other factors,
	•		our ability to attract and retain a sufficient number of mechanics to perform the maintenance, overhaul and repair services requested by our customers, and
	•		the timeliness of customer aircraft arriving for scheduled maintenance.

Large portions of our operating expenses are relatively fixed. Since we typically do not obtain long-term commitments from our customers, we must anticipate the future volume of orders based upon the historic patterns of our customers and upon discussions with our customers as to their future requirements. Cancellations, reductions or delays in orders by a customer or group of customers have in the past and could in the future have a material adverse effect on our business, financial condition and results of operations.

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     Year Ended December 31, 2001 Compared to Year Ended December 31, 2002

The following tables set forth certain information relating to our operations for the periods indicated:

Operating revenue for the year ended December 31, 2002 decreased $82.2 million or 31.1% to $182.0 million, from $264.1 million for the year ended December 31, 2001. Operating revenue for the year ended December 31, 2001 included $34.7 million from facilities and operations that were closed or sold during 2001. Additionally, revenues from the operations of Aerocell Structures of $3.9 million in fiscal 2002 (business sold August 1, 2002) and $16.6 million in fiscal 2001 are included within operating revenues. Excluding the revenue from these former facilities and operations, comparative fiscal 2002 and 2001 revenues would have been $178.1 million and $212.8 million, respectively. Finally, 2002 revenues from our Brice Manufacturing operation, which was acquired in October 2002, was $1.9 million.

The decrease in revenue is primarily attributable to decreased revenue from our heavy airframe maintenance operations. This decrease was generally caused by a reduction in market opportunities due to adverse market conditions, which have caused many of our customers to delay maintenance on their aircraft or park older aircraft maintained by us due to rising fuel prices, reduced passenger levels, and general economic conditions. Our revenue was also adversely impacted during 2002 by increased price competition and downward pricing pressures from airline customers, and, during 2001, by increased competition in the airframe heavy maintenance business. These factors forced us during fiscal 2001 and 2002 to reduce pricing and take fixed priced work at lower rates, which adversely impacted revenues and gross margins. Further, during this period, several of our customers, including our largest customer for 2001 and 2002, experienced severe adverse financial problems of their own, and in some cases substantially delayed their on-going maintenance due to their situation, which further adversely impacted our operating results for the period. In addition, revenue decreased due to the sale of our Aerocell flight surface maintenance operation at the end of July 2002, the sale of our Caribe MR&O operation in the second quarter of 2001, the consolidation of our Winston Salem, North Carolina heavy airframe maintenance facility into our Greensboro, North Carolina operations and the closure of our Oscoda airframe heavy maintenance MR&O operation. Finally, 2001 revenues included revenues from sales of leased assets from our leasing portfolio. All such leases have now expired and all lease packages have been sold.

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Gross profit decreased to $2.3 million for the year ended December 31, 2002, compared with a gross profit of $4.5 million for the year ended December 31, 2001. This deterioration is due primarily to inventory valuation charges recorded during the second and fourth quarter of 2002 (see discussion below). These charges completely offset operating efficiencies, resulting in a higher revenue realization per labor hour, and cost reductions achieved through consolidation of operations. Additionally, company-wide salary and benefit reductions implemented in 2001 have favorably impacted our gross margin in 2002. Gross profit results for the second half of 2002, as compared to the first half of 2002, have been unfavorably impacted by the completion of significant, long-duration maintenance work for specific aircraft types, the receipt of new one-off aircraft types, and delayed customer maintenance. While the receipt of one-off aircraft types present significant opportunities to TIMCO, the short-term impact is a lower revenue realization per labor hour. Our fiscal 2001 and fiscal 2002 cost of sales were also impacted by the reduction in revenue described above relative to our primarily fixed cost structure and the impact of price competition and fixed pricing on all of our heavy airframe maintenance operations. Gross profit as a percentage of revenues decreased to 1.2% for the year ended December 31, 2002, from 1.7% for the year ended December 31, 2001.

Gross profit levels 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 profits have in the past and could in the future be impacted in the future by considerations as to the value of our inventory. While we believe that we have valued our inventory at the lower of cost or market, for the reasons set forth below, during 2002 we substantially increased our valuation allowance against our current inventory. As a result of market conditions in the aircraft parts market, during the second quarter ended June 30, 2002, we recognized inventory write-downs of $1.6 million. In addition, as a result of the general economy, the current state of the airline industry, the economic condition of a number of our significant airline customers (including our largest customer, which is currently in a Chapter 11 bankruptcy proceeding) and the current on-going war in the Middle East, as well as exposures generated through actions of our customer base as related to aircraft fleet type and our inventory as related to these aircraft fleets, during the fourth quarter ended December 31, 2002, we elected to recognize inventory write-downs of an additional $6.7 million. We will continue to evaluate all market and industry exposures in connection with our adjustments to inventory valuations and cannot assure you that additional inventory write-downs will not be required in future periods.

Operating expenses decreased $48.2 million or 75.0% to $16.1 million for the year ended December 31, 2002, compared with $64.3 million for the year ended December 31, 2001. Operating expenses as a percentage of revenues were 8.9% for the year ended December 31, 2002, compared to 24.3% for the year ended December 31, 2001. Included in operating expenses for the year ended December 31, 2001 are an aggregate of $25.0 million in non-cash adjustments to the carrying value of certain of our long-lived assets, including the write-off of goodwill and certain fixed assets associated with the closure of the Oscoda, Michigan heavy airframe maintenance facility and an impairment relating to the Oscoda, Michigan engine overhaul operation, Winston-Salem heavy airframe facility, and an allowance for a receivable from an airframe customer that was experiencing significant financial difficulties. These costs were partially offset by a reduction in operating expenses resulting from the closure of two heavy airframe maintenance facilities during 2001 and the savings associated with the consolidation of the operations of Aircraft Interior Design. The remaining reduction in operating expenses from prior year is mainly due to the lower sales volumes noted above, the closing of our Miramar headquarters and moving those offices to our Greensboro location, the sale of Caribe and Aerocell, the salary and benefit reductions noted above, and a year-over-year headcount reduction (including Aerocell) of approximately 300 employees. These reduction have been partially offset by operating expenses of $0.3 million for Brice Manufacturing, which was acquired in October 2002, $1.15 million settlement charges with former Oscoda, Michigan employees (see Item 3. LEGAL PROCEEDINGS), and the recording in 2002 of accounts receivable valuation allowances of approximately $1.3 million for customers with identified credit exposures, including our largest customer.

As a result of these factors, our loss from operations was $13.8 million for the year ended December 31, 2002, compared to a loss from operations of $59.8 million for the year ended December 31, 2001.

Interest expense (excluding amortization of deferred financing fees) for the twelve months ended December 31, 2002 decreased by $11.2 million or 56.3% to $8.7 million, from $19.9 million for the twelve months ended December 31, 2001. The decrease is primarily attributable to completion of the Note Exchange and Rights Offering which eliminated interest expense on $149.0 million of notes since the end of February 2002 (see Note 13 of the Notes to the Consolidated Financial Statements for an explanation as to why interest is not recorded on the New Notes), lower outstanding debt balances as a result of selling Aerocell and Caribe, completion of the restructuring and slightly lower interest rates from period to period. These reductions have been partially offset by the accretion of our Junior Notes, which will mature

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in January 2007, to their redemption value. This accretion, which approximated $113 for 2002 and is a non-cash item (since the note is a PIK instrument), is included as a component of interest expense.

Amortization of deferred financing costs, which is included within interest expense, was $5.5 million for the year ended December 31, 2002, compared to $5.9 million for fiscal 2001.

We recorded a charge of $8.0 million during the first quarter of 2002 related to an agreement to settle our outstanding class action securities litigation. For the period ended June 30, 2002, since the settlement had not yet become final, the securities to be issued in this settlement were revalued, resulting in a gain which we recorded of $1.875 million. For the quarter ended September 30, 2002, based on the settlement becoming final September 20, 2002, we again revalued the securities to be issued in this settlement and recorded a gain of $1.715. As a result of this settlement becoming final, this gain establishes the final valuation of the securities to be issued, and, accordingly, we have recorded charges of $4.4 million for the 2002 fiscal year relating to the settlement. See Note 9 within the accompanying consolidated financial statements.

During 2001, we recorded a charge of $37.9 million to write-off the notes receivable due from KAV. There was no comparable charge in 2002. See Item 1. BUSINESS for a description of our 2002 global settlement of outstanding matters with Kellstrom.

Other income – net was $4.2 million for the year ended December 31, 2002. Other income – net for fiscal 2002 is mainly comprised of rent of the Company’s Miramar facility located in Miami, Florida (approximately $2.3 million), a portion of the gain on the global settlement with Kellstrom (approximately $0.7 million), and the gain on sale of the Aerocell operations (approximately $0.3 million). Other expense – net was $45.6 million for the year ended December 31, 2001. Other expense – net for fiscal 2001 included a gain on the sale of the Caribe operations and income on a lease deposit totaling $7.9 million offset by equity method losses of affiliates of $6.6 million, a charge to fully reserve the notes receivable due from KAV in the amount of $37.9 million (as discussed above), and a charge of $9.0 million relating to our purchase obligation on the property securing our TROL financing in which the obligation price exceeded the fair market value of the property. Included within the loss from affiliates is a charge of $6.3 million to fully reserve our investment in a limited liability corporation that was established to convert certain Boeing 727 aircraft from passenger configuration to cargo configuration.

As a result of the above factors, our loss from continuing operations before income taxes, discontinued operations and extraordinary gain for the twelve months ended December 31, 2002 was $28.2 million, compared to $131.2 million for the twelve months ended December 31, 2001.

We recorded a $3.8 million tax benefit during the first quarter of 2002 as a result of the passage of legislation which permits businesses to carry net operating losses back to offset taxable income from the previous five years (compared to two years under prior law). Prior to the passage of this legislation, we had established valuation allowances for these deferred tax assets as it was determined to be more likely than not that we would not generate taxable income in the foreseeable future and that we would not have the opportunity to benefit from these net operating losses.

As of December 31, 2002, we had net operating loss carryforwards of $33.0 million. These net operating loss carryforwards include a limitation on net operating losses that can be carried forward subsequent to our capital and equity restructuring (completed in February 2002) and net operating losses generated during the current year. As of December 31, 2002, we have established a valuation allowance for the full balance of these net operating loss carryforwards as it has been currently assessed that it is more likely then not that we will not be able to realize these net operating loss carryforwards in future periods. See Note 11 within the accompanying consolidated financial statements.

For the reasons set forth above, our loss from continuing operations for the year ended December 31, 2002 was $24.4 million, or $0.94 per basic share and diluted share, compared to a loss of $131.8 million, or $87.81 per basic share and diluted share, for the year ended December 31, 2001. Weighted average common and common equivalent shares outstanding (diluted) were 26.0 million for the year ended December 31, 2002, and 1.5 million for the year ended December 31, 2001.

Income from discontinued operations for the twelve month period ended December 31, 2002 was $4.2 million or $0.16 per basic share and diluted share, compared to a loss of $9.4 million, or $6.25 per basic share and diluted share for the twelve month period ended December 31, 2001. Income from discontinued operations for the year ended December 31, 2002 is primarily comprised of collections on receivables retained from the sale of our redistribution operations that had been written-off in 2001 (approximately $1.1 million), lease of equipment to Kellstrom for a portion of the year ($0.5 million), and a portion of the gain on the Kellstrom settlement (approximately $0.9 million).

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The 2001 fiscal year included $7.7 million of charges to assets whose realization was adversely impacted by the operations of KAV and the financial condition of Kellstrom.

During the first quarter of 2002, the Company recognized a $27.3 million, or $1.05 per basic and diluted share, extraordinary gain relating to the Note Exchange. See discussion above and Note 13 within the accompanying consolidated financial statements.

     Year Ended December 31, 2000 Compared to Year Ended December 31, 2001

The following tables set forth certain information relating to our operations for the periods indicated:

Operating revenues for the year ended December 31, 2001 decreased $73.9 million or 21.9% to $264.1 million, from $338.1 million for the year ended December 31, 2000. The decrease in revenues is primarily attributable to decreased revenues from our heavy airframe maintenance operations. This decrease was generally caused by a reduction in market opportunities due to adverse market conditions, which caused many of our customers to delay maintenance on their aircraft or park older aircraft maintained by us due to rising fuel prices and general economic conditions. Our revenue has also been adversely impacted during 2001 by increased competition that spread outsourced available heavy airframe maintenance among a larger group of providers. These factors forced us during fiscal 2000 and 2001 to reduce pricing and take fixed priced work at lower rates, which severely impacted revenues and gross margins. Further, during this period, several of our customers experienced severe adverse financial problems of their own, which further adversely impacted our operating results. In addition, revenues decreased due to the closure of our Oscoda, Michigan heavy airframe maintenance facility and the consolidation of our Winston Salem, North Carolina heavy aircraft maintenance facility into our Greensboro, North Carolina operations, impacts of reduced pricing and a change in the timing of revenue recognition in relation to the design and construction of specialized parts effective December 31, 2000. Also, revenues from our Caribe Aviation operation declined $13.6 million from period to period, due to the sale of that business in May 2001.

Gross profit was $4.5 million in fiscal 2001, compared to a gross loss of $15.3 million for the year ended December 31, 2000. Gross profit for the year ended December 31, 2000 was negatively impacted by a charge of $11.5 million relating to the disposition of three A-300 aircraft that were sold during August and September 2000 and the reduction of the carrying value of certain equipment on lease. We also incurred losses during the beginning of the first quarter of 2001 associated with the start-up of operations at one of our heavy airframe maintenance facilities for a new program that began at the end of 2000. Additionally, due to adverse economic conditions as described above, we recognized inventory valuation write-downs of $2.7 million, which is included in cost of sales for the year ended December 31, 2001. Our 2001 cost of sales was also impacted by the reduction in revenue described above relative to our primarily fixed cost structure and the impact of price competition and fixed pricing on certain of our heavy airframe maintenance operations. As a result of reduced revenues and market

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opportunities, as described above, during 2001 we closed and consolidated certain facilities and reduced headcount at each of our operations, resulting in an aggregate reduction of approximately 28% of our workforce. In addition, in April 2001 we implemented salary and benefit reductions that affected virtually all employees. Gross profit (loss) as a percentage of operating revenues was 1.7% for the year ended December 31, 2001, compared to (4.5%) for the year ended December 31, 2000.

Operating expenses decreased $10.3 million or 13.8% to $64.3 million for the year ended December 31, 2001, compared with $74.6 million for the year ended December 31, 2000. Operating expenses as a percentage of operating revenues were 24.3% for the year ended December 31, 2001, compared to 22.1% for the year ended December 31, 2000. Operating expenses in 2000 were affected by a $3.6 million increase in professional fees relating primarily to the completion of our 1999 audit and the refinancing and amendments to our credit facility, and a charge of $4.4 million relating to valuation allowances recorded for certain accounts receivable of a major customer that filed for bankruptcy protection in 2000. Operating expenses for 2000 were also negatively impacted by the costs associated with the move to new facilities during the third quarter of 2000 of two of our MR&O operations. Included in operating expenses for the year ended December 31, 2001 are an aggregate of $25.0 million in non-cash adjustments to the carrying value of certain of our long-lived assets, including the write-off of goodwill and certain fixed assets associated with the closure of the Oscoda, Michigan heavy airframe maintenance facility and an impairment relating to the Oscoda, Michigan engine overhaul operation, Winston-Salem heavy airframe maintenance facility and the Company component overhaul facilities. These costs were partially offset by a reduction in operating expenses resulting from the closure of two heavy airframe maintenance facilities during 2001 and the savings associated with the consolidation of the operations of Aircraft Interior Design.

Interest expense for the year ended December 31, 2001 increased by $5.4 million or 26.7% to $25.8 million, from $20.3 million for the year ended December 31, 2000. This increase was primarily attributable to increased amortization of bank fees due to the significant bank fees paid during 2000 and 2001 and the accelerated amortization of such fees in connection with the sale of Caribe during the second quarter of 2001.

Other expense, net increased $44.8 million, from $0.9 million for the year ended December 31, 2000 to $45.6 million for the year ended December 31, 2001. Other expense, net for the year ended December 31, 2000 includes our recording a loss of $0.9 million in connection with the disposition of the AvAero joint venture. Included in other expense for the year ended December 31, 2001 is the gain on the sale of Caribe and the recognition of income on a lease deposit taken during the second quarter of 2001 totaling $7.9 million in the aggregate, offset by a charge to write-off the notes receivable due from KAV in the amount of $37.9 million, loss from affiliate of $6.6 million, and a charge of $9.0 million relating to our purchase obligation on the property securing our TROL financing in which the obligation price exceeded the fair market value of the property. The loss from affiliate of $6.6 million included a charge of $6.4 million to write-off our investment in a limited liability corporation that designs, manufactures and installs FAA approved Boeing 727 conversion kits.

As a result of the above factors, our loss from continuing operations for the year ended December 31, 2001 was $131.8 million, or $87.81 per basic share and diluted share, compared to a loss of $115.9 million, or $77.17 per basic share and diluted share, for the year ended December 31, 2000. Weighted average common and common equivalent shares (on a post-reverse split basis) outstanding (diluted) were 1.5 million during both the years ended December 31, 2001 and 2000.

Our loss from discontinued operations for the year ended December 31, 2001 was $9.4 million, or $6.25 per basic share and diluted share, compared to a loss of $95.8 million, or $63.77 per basic share and diluted share, for the year ended December 31, 2000. The loss for 2000 included a loss from the operation of our discontinued operations of $23.4 million. All such operations were sold during 2000. The loss from discontinued operations for the year ended December 31, 2001 is primarily comprised of the write-down of certain assets of the operations to their estimated net realizable values and the provision of accruals for certain exposures (including $7.7 million of valuation allowances relating to assets whose realization is impacted by KAV and Kellstrom) offset by certain recoveries.

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Liquidity and capital resources

Liquidity

Below is a table setting forth our contractual payment obligations and other commercial commitments as of December 31, 2002 which have been aggregated in order to facilitate an understanding of our liquidity (in thousands):

We are also committed under employment agreements with all of our executive officers and several of our key employees.

We believe that we will meet our working capital requirements during 2003 from funds available under our revolving credit agreement, from the funds recently loaned to us by our principal stockholder, and from our operations. We may also sell individual assets or our equity securities, or borrow additional funds, to the extent required and available. While we expect that required financing will be available to meet our working capital requirements, there can be no assurance of this fact. Our auditors have placed a going concern modification in their report on our 2002 financial statements as a result of our current substantial debt, illiquidity and continued losses from operations.

Cash

Net cash provided by continuing operating activities during the fiscal year ended December 31, 2002 was $6.6 million, compared to net cash provided by continuing operating activities during 2001 of $17.6 million. Cash provided by operating activities for the 2002 fiscal year was primarily the result of operations, adjusted for non-cash charges, of approximately ($3.6) million and decreases in accounts receivable, inventories and other assets of $7.8 million, $9.2 million and $9.4 million, respectively, partially offset by reductions in trade payables of $11.0 million, accrued liabilities of $6.0 million and customer deposits of $2.1 million.

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Cash provided by investing activities during the fiscal year ended December 31, 2002 and 2001 was $6.5 million and $22.0 million, respectively. The cash provided by investing activities for 2002 was primarily related to the sale of Aerocell Structures and proceeds from the sale leaseback of the AID facility, partially offset by purchases of fixed assets and the acquisition of Brice Manufacturing. Cash used in financing activities for the year ended December 31, 2002 and 2001 was $16.0 million and $39.6 million, respectively. Cash used in financing activities for 2002 was primarily comprised of net proceeds from the rights offering of $19.8 million used to fund the Note Exchange, including $5.1 million for the retirement of Old Notes and $5.0 million for expenses of the Note Exchange. The remaining proceeds, along with cash from operations, our income tax refund and the proceeds from the sale of Aerocell Structures, were used to pay down $9.9 million of the revolving credit balance, $13.5 million of our senior term loans, $3.1 million to pay bank and refinancing fees and $0.5 million of capital leases. These activities were partially offset by borrowings from our principal stockholder of $1.3 million. Cash of $3.3 million and $0.1 million were provided by our discontinued operations for the years ended December 31, 2002 and 2001, respectively.

Senior Credit Facilities

Prior to July 2002, we had a revolving loan and letter of credit facility (the “Credit Facility”) of $37.5 million with a group of financial institutions. On June 28, 2002, in anticipation of amending the Credit Facility, we voluntarily reduced its revolving loan and letter of credit facility from $37.5 million to $30.0 million. On July 12, 2002, we entered into an agreement amending and restating our senior credit facilities with a syndicate of four lenders led by Citicorp USA Inc. and UPS Capital Corporation pursuant to the terms of a Fifth Amended and Restated Credit Agreement (the “Amended Credit Agreement”). Under the Amended Credit Agreement, we have obtained a $30.0 million senior secured revolving line of credit (the “Amended Revolving Credit Facility”) and a $7.0 million senior secured term loan (the “Amended Term Loan” and collectively with the Amended Revolving Credit Facility, the “Amended Credit Facility”).

We utilized the proceeds from the Amended Credit Facility to repay outstanding borrowings under our previously outstanding revolving credit facility and our previously outstanding $12.0 million senior secured term loan. See Note 5 within the accompanying consolidated financial statements. As of May 12, 2003, the outstanding aggregate amount under the Amended Revolving Credit Facility was $11.4 million, our outstanding Amended Term Loan was $3.5 million, the amount of letters of credit under the Amended Revolving Credit Facility was $10.1 million, and availability under the Amended Revolving Credit Facility was $1.7 million.

The interest rate on the Amended Revolving Credit Facility is, at the Company’s option, (a) prime plus 3% per annum, or (b) LIBOR plus 4.5% per annum. The Company has currently elected the prime option. The interest rate on the Amended Term Loan is 12% per annum. The Amended Revolving Credit Facility is due on January 31, 2004. The Amended Term Loan was due in quarterly installments of $500,000, commencing September 30, 2002, with the principal balance due in full on January 31, 2004. However, $3.5 million of the Amended Term Loan was repaid from the proceeds of the Aerocell Structures sale and has been applied first against current quarterly installments (current maturities) and second against long-term maturities. As a result, no principal installments are currently due and the principal of the Amended Term Loan is due in full on January 31, 2004.

The Amended Credit Agreement contains certain financial covenants regarding our financial performance and certain other covenants, including limitations on the amount of annual capital expenditures and the incurrence of additional debt, and provides for the termination of the Amended Credit Facility and repayment of all debt in the event of a material adverse change in the business or a change in control. Generally, the Amended Credit Agreement requires mandatory repayments and reduction of the commitments thereunder from proceeds of a sale of assets or an issuance of equity or debt securities. Mandatory repayments are also required as a result of insufficient collateral to meet the borrowing base requirements thereunder or in the event the outstanding obligations under the Amended Credit Facility exceed the commitments thereunder. As of December 31, 2002, the Company did not meet certain financial covenants and thus, was in violation of the Amended Credit Facility. Subsequent to year-end, however, the Company has obtained a waiver of non-compliance with all financial covenants and has thereby cured the covenant violations. The Company has also entered into agreements that reset financial covenant requirements for the Amended Credit Facility. Finally, substantially all of our assets are pledged as collateral for the amounts borrowed under the Amended Credit Facility.

On July 12, 2002, we also restructured our outstanding $10.0 million senior secured term loan with Bank of America. $5.0 million of this loan (the “$5.0 million BofA Term Loan”) is now due on January 31, 2004. The $5.0 million BofA Loan bears interest at the rate of LIBOR plus 2% and is credit supported by two individuals, one of whom is our principal stockholder. The $5.0 million BofA loan is secured by a lien on substantially all of our assets.

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After the refinancing, $2.5 million of the original BofA loan continued to be due on August 14, 2002, and such loan was repaid from the proceeds of the Aerocell Structures sale in July 2002. The remaining $2.5 million of the original BofA loan (the “Quevedo Loan”) was restructured as follows: (i) at the closing of the refinancing, Mr. Quevedo, who is one of our former directors and executive officers, paid Bank of America $2.5 million, reducing our obligation under this term loan from $10.0 million to $7.5 million (which amount was then restructured as set forth above); (ii) we transferred to Mr. Quevedo a 100,000 square foot warehouse facility in Pearland, Texas, which had been previously utilized by our redistribution operation, in satisfaction of $1.5 million of the Quevedo Loan (which is at least as favorable a price, based on a third party appraisal, for this property as could have been obtained from an unaffiliated third party); and (iii) we agreed to pay Mr. Quevedo the remaining $1.0 million balance of this loan, with interest at the rate of 12% per annum, on the earlier of the sale of Aerocell Structures or January 31, 2004. As a result of the completed sale of Aerocell Structures on July 31, 2002, we repaid the outstanding $1.0 million balance of this loan.

On May 14, 2003, we entered into an agreement with our principal stockholder pursuant to which he agreed to loan us an additional $6.0 million ($2.0 million at closing and $2.0 million 30 days and 60 days thereafter), which is to be used for working capital in our operations. The new note has a three-year maturity, is secured debt and bears a 16% PIK interest coupon. In connection with the new loan, we issued a warrant to our majority stockholder to acquire, for nominal consideration, 30% of our 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. Further, the $1.3 million loan that we received from our principal stockholder in connection with the October 2002 Brice Manufacturing acquisition has been combined with this loan, and the keepwell agreement, which our principal stockholder had issued to our senior lenders in connection with the Brice Manufacturing acquisition and required monthly funding of any EBITDA losses of Brice, has been eliminated.

Senior Subordinated Notes

     New Notes

On February 28, 2002, in connection with our Note Exchange, we issued $100.0 million face value in aggregate principal amount of our New Notes, which mature on December 31, 2006. The New Notes bear interest at the rate of 8.0% per annum from the date of issuance, and are payable at our option either in cash or paid- in-kind through the issuance of additional New Notes, semiannually on June 30 and December 31 of each year. We expect to elect to pay interest in-kind. If we do not pay interest in cash as of an interest payment date, we will automatically be deemed to have paid such interest in-kind and additional New Notes in the amount of such interest payment will automatically be deemed to be outstanding from such date forward.

The New Notes are general unsecured obligations, subordinated in right of payment to all existing and future senior debt, including indebtedness outstanding under the Amended Credit Facility, any future credit facility that may replace the Amended Credit Facility and the $5.0 million BofA Term Loan. The New Notes are effectively subordinated to all secured obligations to the extent of the assets securing such obligations, including the Amended Credit Facility, the $5.0 million BofA Term Loan, and the new loan from our principal stockholder.

The New Notes are fully and unconditionally guaranteed, on a senior subordinated basis, by substantially all of our existing subsidiaries and each subsidiary that we organize in the future, unless such subsidiary is designated as an unrestricted subsidiary (the “Subsidiary Guarantors”). Subsidiary guarantees are joint and several, full and unconditional, general unsecured obligations of the Subsidiary Guarantors. Additionally, there are no significant restrictions that would preclude the parent company from obtaining funds, either through loan or dividend, from each Subsidiary Guarantor. Subsidiary guarantees are subordinated in right of payment to all existing and future senior debt of Subsidiary Guarantors, including the Amended Credit Facility and the $5.0 million BofA Term Loan, and are also effectively subordinated to all secured obligations of Subsidiary Guarantors to the extent of the assets securing such obligations, including the Amended Credit Facility, the $5.0 million BofA Term Loan, and the new loan from our principal stockholder.

The indenture for the New Notes (i) permits us to incur indebtedness equal to the greater of $95 million or an unlimited amount to the extent that we satisfy a fixed charge coverage ratio of 2.25 to 1.00, (ii) requires us, upon a change of control or certain asset sales, to repurchase the New Notes at a price equal to the redemption price which we would be obligated to pay if we redeemed the New Notes on the date of the change of control or asset sale; and (iii) does not contain a provision requiring acceleration of any premium due upon acceleration

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of the New Notes upon an event of default by reason of any willful action (or inaction) taken (or not taken) by us with the intention of avoiding the prohibition on the redemption of New Notes.

The New Notes are redeemable for cash at our option at the following percentages of par plus accrued interest on the par value through the date of redemption: 2002 — 70.0%, 2003 — 72.5%, 2004 — 73.0%, 2005 — 75.625% and 2006 — 77.5%. The New Notes also provide that the holders will receive an aggregate of 4.5 million shares of common stock if the New Notes are redeemed in 2002 or 2003 and an aggregate of 3.0 million 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 270.3 million shares of our common stock. Holders of New Notes will not receive any cash payment representing principal or accrued and unpaid interest upon conversion; instead, holders will receive a fixed number of shares of common stock and a cash payment to account for any fractional shares.

     Old Notes

In 1998, we sold $165.0 million of the Old Notes due in 2008 with a coupon rate of 8.125% at a price of 99.395%. As a result of the Note Exchange, $16.2 million in aggregate principal amount of the Old Notes remain outstanding. Interest on the Old Notes is payable on February 15 and August 15 of each year. The Old Notes are general unsecured obligations, subordinated in right of payment to all existing and future senior debt, including indebtedness outstanding under the Amended Credit Facility, the $5.0 million BofA Term Loan, and the new loan from our principal stockholder, and under senior credit facilities which may replace these facilities in the future, and to the New Notes. In addition, the Old Notes are effectively subordinated to all secured obligations to the extent of the assets securing such obligations, including the Amended Credit Facility, the $5.0 million BofA Term Loan, the new loan from our principal stockholder, and to the New Notes. As a result of the Note Exchange, substantially all of the covenant protection contained in the indenture relating to the Old Notes was extinguished.

The Old Notes are fully and unconditionally guaranteed, on a senior subordinated basis, by substantially all of our existing subsidiaries and each subsidiary that we organize in the future, unless such subsidiary is designated as an unrestricted subsidiary (the “Subsidiary Guarantors”). Subsidiary guarantees are joint and several, full and unconditional, general unsecured obligations of the Subsidiary Guarantors. Additionally, there are no significant restrictions that would preclude the parent company from obtaining funds, either through loan or dividend, from each Subsidiary Guarantor. Subsidiary guarantees are subordinated in right of payment to all existing and future senior debt of Subsidiary Guarantors, including the Amended Credit Facility, the $5.0 million BofA Term Loan, and the new loan from our principal stockholder, and are also effectively subordinated to all secured obligations of Subsidiary Guarantors to the extent of the assets securing such obligations, including the Amended Credit Facility, the $5.0 million BofA Term Loan, and the new loan from our principal stockholder.

Junior Subordinated Notes

As discussed in Notes 6 and 9 within the accompanying consolidated financial statements, the settlement of our outstanding class action litigation became effective on September 20, 2002. As part of this settlement agreement, we have issued $4.0 million face value in aggregate principal amount of the Company’s new junior subordinated convertible PIK notes (“Junior Notes”). These notes bear interest at 8% and mature on January 2, 2007. The Junior Notes bear interest from September 20, 2002 and are payable at the Company’s option either in cash or paid-in-kind through the issuance of additional notes semiannually on June 30 and December 31 of each year. If we do not pay interest in cash as of an interest payment date, we will automatically be deemed to have paid such interest in-kind and additional Junior Notes in the amount of such interest payment will automatically be deemed to be outstanding from such date forward. Additionally, the Junior Notes have been recorded as of September 20, 2002 (the effective date) at the then current redemption value of approximately $2.5 million. The discount is being accreted to the maturity redemption value, due in January 2007, of approximately $4.4 million. The Junior Notes are general unsecured obligations and are subordinated in right of payment to all current and future senior debt, including the Amended Credit Facility, the $5.0 million BofA Term Loan, the new loan from our principal stockholder, and the Old and New Subordinated Notes.

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The Junior Notes are redeemable for cash at the Company’s option at the following percentages of par plus accrued interest on the par value through the date of redemption: 2002 — 70.0%, 2003 — 72.5%, 2004 — 73.0%, 2005 — 75.625% and 2006 — 77.5%.

The Junior Notes also provide that the holders will receive an aggregate of 144,300 shares of common stock if the Junior Notes are redeemed in 2002 or 2003 and an aggregate of 103,550 shares of common stock if the Junior Notes are redeemed in 2004, 2005 or 2006.

If the Junior Notes have not already been redeemed or repurchased, the Junior Notes, including those Junior Notes previously issued as paid-in-kind interest and all accrued but unpaid interest, will automatically convert on January 2, 2007 into an aggregate of 9.3 million shares of common stock. Holders of Junior Notes will not receive any cash payment representing principal or accrued and unpaid interest upon conversion; instead, holders will receive a fixed number of shares of common stock and a cash payment to account for any fractional shares.

TROL Financing

We have a TROL financing arrangement that was utilized to develop two facilities: (i) a corporate headquarters and warehouse facility, which has been subleased to Kellstrom, and (ii) a facility to house our Caribe operation that was sold in May 2001. The lease contains financial covenants regarding our financial performance and certain other affirmative and negative covenants, with which we will be obligated to comply during the term of the lease.

On July 12, 2002, we entered into an agreement amending our TROL financing arrangement (the “Amended TROL Financing Agreement”). Under the terms of the Amended TROL Financing Agreement, the maturity date of the TROL financing was extended until June 30, 2005 and the base rent under the TROL was increased to the greater of: (i) the amount being received under our sublease for the facility, plus, commencing July 1, 2003, an additional monthly payment by us, or (ii) $210,000. The TROL financing continues to be secured by the real property and improvements comprising the facilities.

Substantially all of our subsidiaries have guaranteed our obligations under the lease. Additionally, we have an option to acquire the new facility at the end of the lease for an option price as determined in the lease. Lease payments are currently at a rate of Prime plus 3.25% to 4.0% and we are responsible for all property taxes, insurance and maintenance of the property. The TROL financing is secured by a lien on the real property and improvements comprising the facilities and on the fixtures therein.

The TROL financing contains certain financial covenants regarding the Company’s financial performance and certain other covenants, which overall mirror the covenant requirements under the Amended Credit agreement, and provides for the termination of the TROL financing agreement and repayment of all debt in the event of a material adverse change in the Company’s business. At December 31, 2002, the Company did not meet certain financial covenants and thus, was in violation of the TROL financing agreement. Additionally, as a result of a cross default provision between the TROL and our Amended Credit Facility, for which we were in violation with financial covenants at December 31, 2002, we were also in violation of the TROL financing agreement. Subsequent to year-end, however, the Company has obtained a waiver of non-compliance with all financial covenants and has thereby cured the covenant violations. The Company has also entered into an agreement that resets financial covenant requirements for the TROL financing arrangement and the Amended Credit Facility.

Critical Accounting Policies

Financial Reporting Release No. 60 encourages all companies to include a discussion of critical accounting policies or methods used in the preparation of the financial statements. Our consolidated financial statements include a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements.

     Revenue Recognition

Revenues from MR&O services are recognized and unbilled receivables are recorded based upon the percentage of completion method. Unbilled receivables are billed on the basis of contract terms (generally upon completion of an aircraft) and deliveries. Revenues related to engine overhaul services are recognized upon shipment of the overhauled engine. We regularly review our progress on percentage-of-completion contracts and review the estimated costs of fulfilling its obligations. If we do not accurately estimate the scope of the work to be performed or do not manage these contracts properly within the planned periods of time or satisfy it obligations under the contracts, then future revenue and margins may be significantly and negatively affected, or losses on existing contracts may need to be recognized. Any resulting reductions in revenues, margins or contract losses could be material to our results of operations.

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     Use of Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates these estimates, including those related to estimated losses on disposal of discontinued operations, the provision to reduce inventory to the lower of cost or fair value, the estimated profit or loss to be recognized as aircraft maintenance, design and construction services are performed, the allowances for doubtful accounts and notes receivable, the realizability of its investment in affiliates, the recovery of long lived assets and goodwill, medical benefit accruals, the estimated fair values of facilities under capital leases and allowances for litigation and environmental costs. Management bases their estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

     Inventory Valuation

Inventories, which consist primarily of new, overhauled, serviceable and repairable aircraft parts, are stated at the lower of cost or market on primarily a specific identification basis and aircraft parts usage analysis. Though we believe that we have adequately provided for any such declines in inventory value, any unanticipated change in technology or customer aircraft fleet for which our inventory relates could significantly affect the value of our inventory and thereby adversely affect gross margins and results of operations. Customer demand, general economic conditions and industry market factors may also impact the value of our inventory. In instances where bulk purchases of inventory items are made, cost is determined based upon an allocation by management of the bulk purchase price to the individual components. Expenditures required for the recertification of parts are capitalized as inventory and are expensed as the parts associated with the recertification are sold.

     Accounts Receivable – Allowance for Doubtful Accounts

Substantially all of our accounts receivable are due primarily from airline and cargo carriers. During 2001 and 2002, there has been significant change in the aviation industry, including the filing for bankruptcy protection under Chapter 11 of the United States Bankruptcy Court by certain carriers. This in turn has affected service providers within the aviation industry and has resulted in us experiencing higher credit losses. We continuously perform credit evaluations of our customers, considering numerous inputs including the customers’ financial position, past payment history, cash flows, historical loss experience and economic conditions. While management believes that adequate allowances for doubtful accounts have been provided in the consolidated financial statements, it is possible that we could experience additional unexpected credit losses.

     Goodwill Valuation

As of January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 represents a substantial change in how goodwill is accounted for. SFAS No. 142 requires that goodwill no longer be amortized, but that goodwill be tested for impairment by comparing the reporting unit’s carrying value to its fair value as of January 1, 2002 and as of an annual assessment date.

In accordance with SFAS No. 142, we have elected July 31st as our annual impairment assessment date. We have completed our initial impairment assessment as of January 1, 2002 and our annual impairment as of July 31, 2002, and have concluded that no impairment charge is required at this time. Any resulting impairment charges in the future, based on the evaluation requirements under SFAS No. 142, could be material to the Company’s results of operations.

     Long-Lived Assets

Management reviews long-lived assets, which consists of property, plant and equipment, for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recovered. Recoverability of long-lived assets to be held and used is evaluated by a comparison of the carrying amount of the asset to future net undiscounted cash flows expected to be generated by the asset

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group. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the excess of the carrying amount over the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying value or fair value less cost to sell when we have committed to a disposal plan.

As discussed below (Recently Issued Accounting Standards), in August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. We have adopted SFAS No. 144 as of January 1, 2002 with no material impact on our consolidated financial statements.

Recently Issued Accounting Standards

In June 2001, FASB issued SFAS No. 142, “Goodwill and Intangible Assets.” SFAS No. 142 eliminates the requirement to amortize goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with defined lives and addresses the impairment testing and recognition for goodwill and intangible assets. SFAS No. 142 applies to goodwill and intangible assets arising from transactions completed before and after the Statement’s effective date of January 1, 2002 and requires that goodwill no longer be amortized, but tested for impairment at least annually. At December 31, 2002, we had net goodwill of $26,124, which is subject to the new impairment tests prescribed under the statement. We adopted SFAS No. 142 on January 1, 2002. In accordance with SFAS No. 142, we have elected July 31, 2002 as our annual impairment assessment date. We completed our initial impairment assessment as of January 1, 2002 and our annual impairment assessment as of July 31, 2002, and concluded that no impairment charge is required at this time. Absent a significant change in our operating environment, our assessment of goodwill impairment will next be re-evaluated as of July 31, 2003 (the annual assessment date).

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and the accounting and reporting provisions of Accounting Principles Board Opinion (APB) No. 30, “Reporting the Results Of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS No. 144 also amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS No. 144 establishes a single accounting model for assets to be disposed of by sale whether previously held and used or newly acquired. SFAS No. 144 retains the provisions of APB No. 30 for presentation of discontinued operations in the income statement, but broadens the presentation to include a component of an entity. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We adopted SFAS No. 144 effective January 1, 2002 with no material impact on our consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” Under Statement 4, all gains and losses from extinguishment of debt were required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. This Statement eliminates Statement 4 and as a result, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in APB No. 30. Additionally, this Statement amends SFAS No. 13, “Accounting for Leases”, such that lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in a similar manner as a sale-leaseback. This Statement became effective for us on January 1, 2003. As a result of adoption, we will reclassify the $27,279 gain on debt extinguishment to be included with continuing operations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” A liability for a cost associated with an exit or disposal activity shall be recognized and measured initially at its fair value in the period in which the liability is incurred, except for certain qualifying employee termination benefits. This Statement became effective for exit or disposal activities initiated by us after December 31, 2002.

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In October 2002, the FASB Emerging Issues Task Force (EITF) issued Summary No. 2, Supplement No. 4 of EITF Issue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”. The focus of this issue, as related to us, is the accounting for service arrangements in which separate units of accounting is required, and how the consideration should be allocated among these separate, identifiable units. As we maintain certain customer service contracts that include multiple aircraft, we have reviewed this issue as it relates to our revenue recognition policy. As of December 31, 2002, no material impact or change to our revenue recognition policy has been identified based upon the release of this EITF.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statement No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. We are currently evaluating the impact of this interpretation on our consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure; an amendment of FASB Statement No. 123”. This Statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements regarding the method of accounting used for stock-based employee compensation and the effect of the method used on reported results. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements. We have currently decided to continue to use the intrinsic value method for accounting for stock-based employee compensation.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.

We are exposed to market risk for changes in interest rates. We have no exposure to foreign currency exchange rates or to commodity price risk. We do not hold or issue any financial instruments for trading or other speculative purposes.

Our obligations under our Amended Revolving Credit Facility and our $5.0 million BofA senior term loan bear interest at floating rates and therefore, we are impacted by changes in prevailing interest rates. However, our $3.5 million Amended Term Loan, our new loan from our principal stockholder, and our New Notes, Old Notes, and Junior Notes all bear fixed interest rates and therefore are not subject to the risk of interest rate fluctuations. A 10% change in market interest rates that affect our financial instruments would impact earnings during 2002 by approximately $45,000 before taxes and would change the fair value of our financial instruments by approximately $11.2 million.

The table below provides information about our market sensitive financial instruments and constitutes a “forward-looking statement.” Our major market risk exposure is changing interest rates in the United States and fluctuations in the London Interbank Offered Rate. Our policy is to manage interest rates through use of a combination of fixed and floating rate debt. The table below assumes the December 31, 2002 interest rates remain constant (dollars in thousands).