SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003
Commission File No. 1-11775

TIMCO AVIATION SERVICES, INC.

(Exact name of registrant as specified in its charter)

(336) 668-4410
(Registrant’s telephone number)

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 [ X ] NO [   ]

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 30, 2003, 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 $0.38 per share) of the common stock held by non-affiliates was approximately $4.9 million. At April 12, 2004, there were 31,640,994 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement for its 2004 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, 2003) 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

FORWARD LOOKING STATEMENTS

     (All dollar amounts and share amounts contained in this Annual Report on Form 10-K are in thousands, except per share data)

This Annual Report on Form 10-K contains forward looking statements. You can identify these statements by the fact that they use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. These include forward looking statements on, among other matters:

•		our business strategy and our future plans for our business,
•		anticipated trends and our competitive position in the industry in which we operate, and
•		our anticipated performance in future periods.

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, including, among others:

•		the financial health of the U.S. passenger and freight airline industry, and the impact of the financial health of that industry on the maintenance, repair, and overhaul (“MR&O”) industry generally and our business specifically,
•		the amount of MR&O business being outsourced by the airline industry in general and our airline customers in particular,
•		factors that effect the financial health and well-being of our airline customers, such as the September 11, 2001 terrorist attacks and the SARS outbreak,
•		the effect of competition on our business, including the effects of competition on the pricing of the services and goods that we provide,
•		our ability to achieve gross profit margins at which we can be profitable, including margins on services that we perform on a fixed price basis,
•		our ability to generate sufficient working capital from our operations and from our available credit facilities to meet our operating requirements and service our indebtedness,
•		our maintaining good relations with our customers and vendors,
•		utilization rates for our MR&O facilities,
•		our ability to manage our business efficiently and achieve both positive income and cash flow from our operations,
•		our ability to attract and retain qualified personnel in our business,
•		our ability to integrate future acquisitions, and
•		future changes in government regulations.

Should one or more of the assumptions underlying our forward looking statements prove incorrect, or should future events occur that change the landscape of our industry and our customers, the forward looking statements contained in this report or the future financial results described in this report may not ultimately come true. We are not obligated, nor do we undertake the obligation, to revise these forward looking statements to reflect future events or circumstances.

References to “TIMCO”, “we”, “us” and “our” refer to TIMCO Aviation Services, Inc. and, unless the context otherwise requires, its subsidiaries.

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ITEM 1. BUSINESS

General

TIMCO Aviation Services, Inc. is among the world’s largest providers of fully integrated aviation maintenance, repair and overhaul (MR&O) services for major commercial airlines, regional air carriers, aircraft leasing companies, government and military units and air cargo carriers. We provide four MR&O services: TIMCO, which, with its four active locations, is one of the largest independent providers of heavy aircraft maintenance services in the world; Aircraft Interior Design and Brice Manufacturing, which specialize in the refurbishment of aircraft interior components and the manufacture and sale of aftermarket parts and new aircraft seats; TIMCO Engineered Systems, which provides engineering services to both our MR&O operations and our customers; and TIMCO Engine Center, which refurbishes JT8D engines and performs on-wing repairs for both JT8D and CFM-56 series engines. Visit TIMCO online at www.timco.aero.

Our strategy is to be the vendor of choice to our customers, providing aircraft maintenance solutions to meet our customers’ MR&O requirements. The services that we offer allow our customers to reduce their costs by outsourcing some of their MR&O functions.

We were incorporated in Delaware in 1996 under the name “Aviation Sales Company.” We changed our corporate name to “TIMCO Aviation Services, Inc.” in February 2002. Our principal operating business, TIMCO, commenced operations in 1992. Our principal executive offices are at 623 Radar Road, Greensboro, North Carolina 27410, and our telephone number is (336) 668-4410.

Industry Overview

An industry study published in January 2003 estimated the total MR&O market at $34.6 billion, as follows:

•		Heavy maintenance and modifications comprise 30% ($10.4 billion) of the MR&O market,
•		Engine maintenance accounts for 29% ($10 billion ) of the MR&O market,
•		Line maintenance accounts for 23% ($8.0 billion) of the MR&O market, and
•		Component repair makes up 18% ($6.2 billion) of the MR&O market.

		The MR&O market consists of captive in-house operations of airlines and freight carriers, semi-captive operations that are affiliated with an airline, independent providers of MR&O services such as TIMCO and facilities operated by original equipment manufacturers. Based on industry sources, we believe that approximately 50% of MR&O services required by airlines and freight carriers are currently outsourced to independent providers like TIMCO, compared to approximately 33% ten-years ago. We also believe that more MR&O services will be outsourced in the future, as carriers aggressively pursue outsourcing as a means to reduce their costs. Some airlines, such as United Air Lines, have recently closed maintenance facilities and substantially increased the MR&O requirements that they outsource, and several low fare airlines such as Jet Blue, Air Tran and Southwest outsource nearly all of their aircraft heavy maintenance checks. We also believe that other large carriers who have not outsourced their maintenance in the past are considering doing so in the future.
		Passenger airlines and freight carriers incur substantial direct and indirect operating costs, which are resistant to significant reduction because of labor agreements, aircraft fleet efficiency, and route structures. At the same time, they have encountered increasing pricing pressure during the last decade from new and established discount airlines, known as low cost carriers (LCC’s) which have inherently lower cost structures, and from a reduction in passengers because of, among other things, economic conditions and the global war on terrorism. For many airlines, these factors have resulted in lower revenue per seat mile, without a commensurate offsetting reduction in expenses. While certain airline expenditures are beyond the direct control of airline operators, such as the price of fuel, airport security charges, and taxes, we believe that outsourcing MR&O functions can reduce airline operating costs. We believe that maintenance generally represents between 10% and 15% of an airline’s costs, and that these costs are currently receiving significant attention from passenger airlines and freight carriers because they can be moderated through actions such as outsourcing.
		Outsourcing of maintenance and repair functions by airlines allows a service provider such as TIMCO to achieve economies of scale unavailable to airlines individually. We believe that the trend towards outsourcing by airlines of a growing 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 by focusing their operations on their core competency of providing airline services to their customers.

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Industry sources also report that while events such as the September 11th terrorist attacks, the wars in Iraq and Afghanistan and the SARS outbreak, as well as generally slow economic growth, have caused a decline in the MR&O market between 2000 and 2003, the market appears to be recovering and is expected to return to its historic growth rate (1.5 x GDP) in 2004 and beyond. We believe that the following factors will affect the recovery of the MR&O market:

•		worldwide economic growth,
•		fleet growth (net of aircraft retirements), which is expected to range in the near term (2002-2007) between 4.8% and 7.1% and in the intermediate-term (2007-2012) between 2.7% and 3.7%,
•		speed of passenger and cargo traffic recovery,
•		financial pressure on airlines to improve asset utilization,
•		the impact of conversions of passenger aircraft to freighters which extends the useful life of particular aircraft,
•		newer aviation technologies, which are more reliable but more costly and complex to maintain,
•		increased regulation and concerns about safety,
•		industry consolidation, which should reduce competition in the long term,
•		the globalization of the MR&O market,
•		expiration of aircraft maintenance warranties and the induction for maintenance servicing programs by newer generation aircraft, and
•		fuel prices.

Operations

Airframe Maintenance Services

We perform maintenance, repair and modification services on aircraft at TIMCO’s repair stations in Greensboro, North Carolina, Lake City, Florida, Macon, Georgia and Goodyear, Arizona. We also have a maintenance facility in Winston-Salem, North Carolina, which we have closed until we develop customers for this facility. The services performed at each of our airframe maintenance facilities are as follows:

Facilities

•		TIMCO – Greensboro (GSO) – GSO is our largest airframe maintenance and modification facility. GSO primarily supports multi-line major customers including United Air Lines (B737, B757, B767 and B777), Delta Air Lines (B777 modifications plus engineering and maintenance services), UPS (DC-8 and A300-600), FedEx (DC-10 and B727) and ABX Air (DC-8). GSO has grown and adapted to the changing aviation environment by maintaining its market share of existing older generation aircraft product lines and by developing new capabilities to support the needs of today’s newer generation aircraft.
		We have 600,000 square feet of space in GSO in four hangars, three of which are wide body hangars and one of which is a multi-bay hangar. We also have a structures center in GSO, in which we repair flight controls and other components in conjunction with repairs being handled by our heavy maintenance operations, and a composite center, where we repair and overhaul advanced composite and bonded aluminum honeycomb assemblies.
•		TIMCO-Lake City (LCQ) – LCQ has historically competed as a low cost facility. We currently perform maintenance for various customers in LCQ, including United Air Lines (B737), America West (B737 and B757), AeroCal (DC-9) and Mesaba (Saab 340 and Avro RJ85). LCQ has the capacity and experience to support commercial and government contracts, and we hope to ultimately make LCQ our primary center for military MR&O services. In that regard, during 2002, we were awarded SAE AS 9100 Certification at LCQ and we became part of a FAST team (both prerequisites of government contract work).
		The LCQ facility consists of six maintenance hangars, as well as a dedicated two-bay strip and paint hangar which is capable of supporting both narrow body and select wide body aircraft. The LCQ facility has over 600,000 square feet of covered hangar space and over 1.3 million square feet of ramp space. Our facility is located at the Lake City airport. We control and maintain the taxiways, parking areas and engine run up areas located at this airport. We also maintain an FAA approved control tower at this airport.

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•		TIMCO – Macon (MCN) – TIMCO-MCN has over 140,000 square feet of space in two hangers and we currently operate three service lines at this facility. TIMCO-MCN has been customized specifically for the America West A319/A320 and B737 heavy airframe maintenance operations. TIMCO-MCN has been the dedicated facility for America West since 2000 and has often been cited as a model for future MR&O/airline “partnerships”.
•		TIMCO-Goodyear (GYR) – TIMCO-GYR is located near the city of Phoenix, AZ and is TIMCO’s newest facility. This facility provides heavy airframe maintenance support for airlines such as Alaska Airlines, Allegiant Air, World Airways and leasing customers such as GE Capital, US Bank, CIT and Finova Capital. The desert location and arid climate makes TIMCO-GYR an excellent storage location for aircraft, and TIMCO-GYR has been recognized as a leading provider of maintenance support for short and medium term aircraft storage needs. Many of these storage aircraft are later inducted into heavy maintenance at GYR, just prior to re-entering commercial service.
		Our GYR operation has over 318,000 square feet of space in two hangars. We also have 1.5 million square feet of ramp and runway access storage providing space to park up to 200 aircraft.
•		TIMCO-Winston Salem – This one-hangar facility, which was formerly the home base for Piedmont Airlines and a major repair and line station for U.S. Airways, is currently closed. We hope to utilize this facility in the future in another airline partnership, similar to our operation in Macon.

		Types of heavy-airframe maintenance services provided
		The services we offer principally consist of “C” and “D” level maintenance checks, interior crew rest reconfigurations and the conversion of passenger aircraft 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 greater emphasis on the integrity of the aircraft’s structure. In the “D” level check, the aircraft is disassembled so that 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.
		Aircraft modification services
		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 performed by TIMOC include reconfiguring passenger interiors and installing passenger amenities such as telephones, in flight entertainment systems and crew rest areas. We also modify B777 to include sleeping quarters for crews on international flights and convert passenger aircraft to freighter configuration.

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		Engineering services
		Our engineering services group, which operates as TIMCO Engineered Systems, provides integrated aircraft engineering and supply-chain management, 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 designed, obtained FAA certification for, and installed over 500 ballistic cockpit doors that are in compliance with FAA requirements resulting from the September 11, 2001 terrorist attacks.
		Interiors and Seat Manufacturing Services
		We have two operations, Brice Manufacturing and Aircraft Interior Design, which specialize in the refurbishment of aircraft interior components and the manufacture and sale of aftermarket parts and new aircraft seats.
		BRICE Manufacturing Company (Brice), is based in Pacoima, California, was acquired by TIMCO in October 2002. In addition to its ownership of 5,000 PMA parts, Brice has developed a global customer base for new cabin seats ranging from basic coach to business class and first class seats. Customers include Lufthansa, Air New Zealand, LuxAir, GE Capital, AeroMexico, Allegiant and Qantas. Brice is also an approved vendor for both Boeing and Airbus for new aircraft deliveries and Brice’s product offerings include the supply of palletized seats for installation on C-17 and C-130 military aircraft.
		Aircraft Interior Design, Inc. (AID), based in Dallas, Texas, is a major provider of seat overhauls and refurbishment for Southwest Airlines. In addition to Southwest, AID has significant contracts with Spirit Airlines for cabin seat overhauls, flight attendant seats and modification/overhaul of their first class seats. AID also provides crew seat overhauls for ATI, DHL/ASTAR and Express.Net. In 2004, additional focus will be made by AID on “soft goods” campaigns which include cut and sew seat covers, carpet kits and class divider refurbishment. AID has also provided galley and lavatory component refurbishment programs to Delta Air Lines in support of Delta’s Dallas-Fort Worth B757 heavy maintenance operation.
		Engine Repair and Overhaul Services
		TIMCO Engine Center (TEC), located in Oscoda, MI, has complete repair and overhaul capability for the JT8D and JT8D-200 series engines. On-wing services have been expanded to include the JT8D and JT8D-200 engines as well as the CFM-56 engine. The CFM-56 engine services are provided jointly with Snecma Engine Services. Snecma is a 50% partner of the CFM-56 engine. The CFM-56 on-wing services will expand to TIMCO’s airframe locations in the near future. TEC had significant revenue growth in 2002, much attributed to adding JT8D-200 overhaul capabilities. Spirit Airlines is a major customer of TEC for engine overhaul and engine on-wing services.
		Line Maintenance Services
		Commencing in 2003, we began to provide interior line maintenance support for United Air Lines. We are currently providing these services to United Air Lines in three cities. We hope in the future to expand the line maintenance services that we provide for United Air Lines into other cities and to offer line maintenance services to other airlines. While this is a new business for us and is only a small part of our revenue at this time, we believe that line maintenance, which we believe is a $3.2 billion market in North America, offers substantial growth opportunities for us.
		Customer base
		Our customer base consists of airlines, air cargo carriers, leasing companies, and government and military units. Our top ten customers accounted for 75.9% and 81.6% of our 2003 and 2002 income, respectively, and our largest customer, United Air Lines, which is currently in a Chapter 11 proceeding, accounted for 26.0% and 23.9% of our 2003 and 2002 revenues, respectively.
		Management information systems
		We operate our business using three decentralized, network-based systems. Each system is fully integrated in regard to the respective business unit. One system is utilized in the operation of our heavy airframe maintenance and modification business. The other two systems are 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 2004.

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		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 85% 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.
		The FAA regulates the manufacture, repair and operation of all aircraft and aircraft equipment operated in the United States. FAA 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 be 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, 2003, we employed approximately 3,400 persons. None of our employees are covered by collective bargaining agreements. We believe that our relations with our employees are good.

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		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:
		We incurred losses in 2003 and our liquidity remains tight.
		For the year ended December 31, 2003, we incurred losses from continuing operations of $3,967. We also had a net stockholders’ deficit as of December 31, 2003, and continued to require additional cash flow above amounts currently being provided from operations to meet our working capital requirements. Additionally, as a result of operating activities, we were not in compliance at certain times during 2001, 2002, and during the quarter ended March 31, 2003 with debt covenant requirements under our revolving credit and term loan facilities and our tax retention operating lease (TROL) financing arrangement. We, however, 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 debt instruments, is and will continue to be dependent upon our future financial and operating performance. This performance, in turn, is subject to various factors, including certain factors beyond our control, such as changes in conditions affecting the airline industry and changes in the overall economy. Additionally, our customer base has been adversely impacted in the past by various factors, such as the state of the general economy, fluctuations in the price of jet fuel, a significant decline, from calendar year 2000, in passenger airline travel, the currently on-going war on terrorism, the war in Iraq, the outbreak of the SARS virus in Asia and a competitive price reduction in airfare prices. These and other factors may adversely affect our customers in the future.
		Cash flow from operations service payments of our debt and note obligations, thereby reducing funds available for other purposes. Even if we are able to meet our debt service and other obligations when due, we may not be able to comply with the covenants and other provisions under our debt and note obligations. A failure to comply, unless waived by the lenders and noteholders, would be an event of default and would permit our lenders and noteholders to accelerate the maturity of these debt and note obligations. It would also permit them to terminate their commitments to extend credit under the financing agreements. If we were unable to repay the debt to the lenders or obligations to the noteholders, or otherwise obtain a waiver, the lenders and holders could proceed against the collateral securing the financing obligations and notes, and exercise all other rights available to them. While we expect to be in a position to continue to meet our obligations in future periods, there can be no assurance we will be able to do so.
		Risks associated with the aviation services industry.
		The condition of the airline industry has a substantial effect 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.
		As discussed above, the September 11, 2001 terrorist attacks against the United States of America and the resulting increase in airline insurance costs, additional government mandated passenger taxes and fees, and increased airport security costs, have had a severe impact on the aviation industry. These factors, in conjunction with an overall slowdown in the U.S. economy, a reduction in passenger levels from fiscal 2001 through fiscal 2003, and the overall instability in the Middle East (including the currently on-going war on terrorism and the war in Iraq) have resulted in operating losses for U.S. airline carriers in excess of $10.3 billion for 2001, $8.6 billion for 2002, and an estimated $2.5 billion for 2003. In addition to these adverse factors, fiscal 2003 has been further impacted by the outbreak of the SARS virus in Asia. As a result of these factors, many commercial passenger airlines and air cargo carriers reported significant reductions in their capacity and have taken out of service upwards of 20% of their aircraft. This reduction in capacity has lessened the aircraft maintenance required by such airlines (and thereby the amount of maintenance being outsourced to companies like TIMCO). The impact of these factors has resulted with the filing for bankruptcy protection under Chapter 11 of the United States Bankruptcy Court by several carriers. The most notable for us has been the filing for protection from creditors under Chapter 11 by United Air Lines on December 9, 2002 (United was our largest customer during the last three fiscal years). As of the date of this report, United Air Lines has not emerged from protection under the Bankruptcy Court. In addition to United Air Lines, other carriers have publicly discussed the potential of seeking protection from creditors through a voluntary bankruptcy filing. As related to us, current exposures to carriers that are at risk of filing for protection are being continuously evaluated and monitored, though we have in the past, and may in the future, experience losses relating to these credit exposures. Additionally, the Company is positioning itself for potential favorable implications of these Chapter 11 filings and resurgence of the airlines as it is anticipated that additional maintenance outsourcing opportunities could result as these airlines look for cost reduction alternatives.

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		We believe that all of the above factors could continue to have a negative impact on our business in the foreseeable future. In response, we have taken steps to reduce our costs. These terrorist attacks and related aftermath events and the overall slowdown in the U.S. economy have also impacted our competition, with several of our competitors exiting the MR&O business.
		The loss or a significant downturn in the operations of one or two of our major customers could materially affect our business.
		Our ten largest customers accounted for approximately 76% and 82% of our total revenues for 2003 and 2002, respectively. Of these ten customers, two represented approximately 26% and 17% of our total revenues, respectively, for the year ended December 31, 2003. The largest of these customers, United Air Lines, is currently in reorganization under Chapter 11 of the United States Bankruptcy Code. No other customer represented more than 10% of our consolidated revenues for 2003. While the relative significance of customers varies from period to period, the loss of, or significant curtailments in purchases 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.
		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 $3,967, $24,426 (excluding the gain from our debt extinguishment), and $131,849, respectively, during the 2003, 2002, and 2001 fiscal years. If we 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.
		We are highly leveraged.
		We are highly leveraged. This could have important consequences to us, including:

•		our vulnerability to adverse general economic and industry conditions;
•		our ability to obtain additional financing for future working capital expenditures, general corporate or other purposes, particularly where our current lenders have a lien on all of our assets; and
•		the requirement that we obtain the consent from our lenders if we wish to borrow additional amounts.

We depend on financing transactions.

We are primarily dependent on cash flow from operations and borrowings to meet our working capital requirements.

•		During 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 term debt and to fund our working capital requirements.
•		During 2002, we relied 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.
•		During 2003, we continued to rely on borrowings under our senior revolving credit facility and proceeds from our related party term loan 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. We cannot assure you that additional financing will be available to us in the future, if required, for these purposes.

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Our lenders impose significant restrictions on us.

Our senior credit facilities and the indenture relating to our 8% senior subordinated convertible paid-in-kind (PIK) interest notes due 2006 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.

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 few years. 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.

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 most 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 85% 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 their current levels.

Control is vested in our principal stockholder.

Lacy Harber, our principal stockholder, owns approximately 59% (as of December 31, 2003) 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.

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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.

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 270,276 and 9,320 shares, respectively, of our common stock. Further, we are obligated to issue 30% of our outstanding common stock, on a fully-diluted basis (13,560 shares if the warrant were to be exercised today and 139,979 shares if the warrant were to be exercised after the New Notes and the Junior Notes mature), for nominal consideration upon the exercise of the warrant issued in May 2003 to our principal stockholder (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 2003 Stock Incentive Plan, we may grant restricted stock or stock options or warrants to purchase up to 5,800 shares of our common stock to our officers, directors and employees. See Notes 5, 6, 11 and 15 of Notes to Consolidated Financial Statements for particulars regarding these matters.

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 remains below $1.00 per share (as it has since the fourth quarter of 2002), our common stock will 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 31,641 shares of our common stock currently outstanding, approximately 59% are currently 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.

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.

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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.

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 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 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 15 to our Consolidated Financial Statements. The following table identifies, as of December 31, 2003, our principal properties:

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ITEM 3. LEGAL PROCEEDINGS.

Lawsuits and investigations

In 2002, we settled, without admitting liability or wrongdoing, a securities class action lawsuit arising from allegations regarding our reported financial results during periods prior to 2000. Additionally, the U.S. Securities and Exchange Commission initiated an inquiry, in the first quarter of 2000, into our accounting for certain transactions occurring prior to 2000. We are cooperating with the SEC in its inquiry. In 2002, we also settled a lawsuit relating to the closing of our Oscoda, Michigan airframe heavy maintenance facility. See Note 7 of Notes to Consolidated Financial Statements for the particulars of these settlements.

We are also involved in various other 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 Issues

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 the most recent cost estimates provided by environmental consultants, we believe that the total remaining testing, remediation and compliance costs for this facility will be approximately $810. During fiscal 2003, we secured an insurance policy that, in the future, will partially mitigate our environmental exposures for this facility and that will also provide the financial assurance required by the FDEP.

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, 2003 and 2002 consolidated balance sheets include $810 and $1,474, 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. In the opinion of management, the ultimate resolution of these environmental exposures will not have a material adverse effect upon the financial condition or result of operations of the Company.

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

On January 13, 2004, we held our 2003 Annual Stockholders meeting. Stockholders representing 28,994 shares of our outstanding common stock were present in person or by proxy at the meeting, constituting 91.6% of our outstanding common stock. At the meeting, all of our directors were reelected, our 2003 Stock Incentive Plan was approved, and the decision of our audit committee to retain KPMG LLP to audit our 2003 financial statements was ratified. The votes taken at the meeting were as follows:

     The vote with respect to our directors was as follows:

The vote for and against the approval of the Company’s 2003 Stock Incentive Plan was as follows:

The vote to ratify the appointment of our independent auditors for the 2003 fiscal year was as follows:

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PART II

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

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, 2003, we believe that there were approximately 4,300 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 quarters to date of 2004, as reported by the OTC Bulletin Board 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.

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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, new parts distribution operation and our manufacturing operations, all of which were sold in 2000.