TIMCO Aviation Services, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For the Quarterly Period Ended September 30, 2005
OR
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o |
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
For
the transition period from
to
Commission
File No. 1-11775
TIMCO AVIATION SERVICES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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65-0665658
(IRS Employer
Identification No.) |
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623 Radar Road
Greensboro, North Carolina
(Address of principal executive offices)
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27410
(Zip Code) |
Registrants telephone number, including area code: (336) 668-4410 (x8010)
Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes
o No þ
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common equity, as of
the latest practicable date: 256,559,172 shares of common stock, $.001 par value per share, were
outstanding as of November 10, 2005.
TIMCO AVIATION SERVICES, INC.
INDEX
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Page |
Part I. Financial Information
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Item 1.
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FINANCIAL STATEMENTS |
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Condensed Consolidated Balance Sheets at September 30, 2005 and December
31, 2004 (unaudited)
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3-4 |
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Condensed Consolidated Statements of Operations for the three months and
nine months ended September 30, 2005 and 2004 (unaudited)
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5-6 |
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Condensed Consolidated Statements of Stockholders Deficit for the nine
months ended September 30, 2005 (unaudited)
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7 |
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Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2005 and 2004 (unaudited)
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8-9 |
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Notes to Condensed Consolidated Financial Statements
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10 |
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Item 2.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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24 |
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Item 3.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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37 |
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Item 4.
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CONTROLS AND PROCEDURES
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37 |
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Part II. Other Information
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Item 1.
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LEGAL PROCEEDINGS
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38 |
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Item 2.
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CHANGES IN SECURITIES AND USE OF
PROCEEDS
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38 |
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Item 3.
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DEFAULTS UPON SENIOR SECURITIES
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38 |
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Item 4.
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SUBMISSION OF MATTERS TO VOTE OF
SECURITY HOLDERS
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38 |
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Item 5.
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OTHER INFORMATION
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38 |
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Item 6.
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EXHIBITS AND REPORTS ON FORM 8-K
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38 |
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2
TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
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September 30, |
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December 31, |
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2005 |
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2004 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
393 |
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$ |
293 |
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Marketable securities |
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1,432 |
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Accounts receivable, net of allowances of $5,360 at
September 30, 2005 and $5,190 at December 31, 2004 |
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48,715 |
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49,721 |
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Inventories |
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31,216 |
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22,244 |
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Other current assets |
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8,223 |
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4,553 |
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Total current assets |
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89,979 |
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76,811 |
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Fixed assets: |
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Fixed assets at cost |
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82,639 |
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79,293 |
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Less accumulated depreciation |
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52,698 |
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48,756 |
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Fixed assets, net |
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29,941 |
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30,537 |
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Goodwill, net |
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26,124 |
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26,124 |
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Deferred financing costs, net |
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3,299 |
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3,263 |
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Other |
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1,172 |
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633 |
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Total assets |
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$ |
150,515 |
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$ |
137,368 |
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LIABILITIES & STOCKHOLDERS DEFICIT |
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Current Liabilities: |
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Accounts payable |
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$ |
22,410 |
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$ |
18,000 |
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Customer deposits |
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19,867 |
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9,254 |
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Accrued expenses |
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17,251 |
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19,667 |
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Revolving loan |
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7,520 |
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11,692 |
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Current maturities of notes payable to financial
institutions |
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1,416 |
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1,164 |
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Current maturities of capital lease obligations |
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1,012 |
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1,327 |
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Accrued interest |
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851 |
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1,812 |
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Total current liabilities |
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70,327 |
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62,916 |
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Senior subordinated convertible notes, net: |
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New notes due 2006 |
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61,437 |
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115,800 |
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Old notes due 2008 |
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16,247 |
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16,247 |
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Notes payable to financial institutions, net of
current portion |
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21,602 |
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12,945 |
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Term loan with a related party |
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18,321 |
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14,412 |
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Capital lease obligations, net of current portion |
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3,228 |
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3,593 |
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Junior subordinated convertible notes due 2007, net |
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947 |
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3,514 |
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Deferred income |
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1,305 |
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Other long-term liabilities |
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180 |
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1,488 |
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Total long-term liabilities |
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121,962 |
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169,304 |
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3
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September 30, |
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December 31, |
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2005 |
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2004 |
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Commitments and Contingencies (see notes) |
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Stockholders Deficit: |
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Preferred stock, $.01 par value, 1,000,000 shares
authorized, none outstanding, 15,000 shares
designated Series A Junior Participating |
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Common stock, $.001 par value, 500,000,000 shares
authorized, 256,559,172 and 31,640,615 shares
issued and outstanding at September 30, 2005 and
December 31, 2004, respectively |
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257 |
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32 |
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Additional paid-in capital |
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239,099 |
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182,088 |
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Accumulated other comprehensive loss, net of tax |
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(341 |
) |
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Accumulated deficit |
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(280,789 |
) |
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(276,972 |
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Total stockholders deficit |
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(41,774 |
) |
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(94,852 |
) |
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Total liabilities and stockholders deficit |
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$ |
150,515 |
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$ |
137,368 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
(Unaudited)
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For the Three Months |
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Ended September 30, |
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2005 |
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2004 |
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Revenues, net |
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$ |
78,192 |
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$ |
74,152 |
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Cost of sales |
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77,594 |
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67,030 |
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Gross profit |
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598 |
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7,122 |
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Operating expenses |
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5,973 |
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5,164 |
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Gain on sale of fixed assets |
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(1,178 |
) |
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(Loss) income from operations |
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(4,197 |
) |
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1,958 |
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Interest expense |
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2,579 |
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2,093 |
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Other income net |
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(388 |
) |
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(303 |
) |
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(Loss) income before income taxes and discontinued
operations |
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(6,388 |
) |
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168 |
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Income tax benefit (provision) |
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(Loss) income from continuing operations before discontinued
operations |
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(6,388 |
) |
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168 |
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Income from discontinued operations, net of income taxes |
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42 |
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93 |
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Net (loss) income |
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$ |
(6,346 |
) |
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$ |
261 |
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Basic (loss) income per share: |
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(Loss) income from continuing operations |
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$ |
(0.02 |
) |
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$ |
0.01 |
|
Income from discontinued operations |
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Net (loss) income |
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$ |
(0.02 |
) |
|
$ |
0.01 |
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Diluted (loss) income per share: |
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(Loss) income from continuing operations |
|
$ |
(0.02 |
) |
|
$ |
|
|
Income from discontinued operations |
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Net (loss) income |
|
$ |
(0.02 |
) |
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$ |
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Weighted average shares outstanding: |
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Basic |
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256,559,172 |
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31,640,615 |
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Diluted |
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256,559,172 |
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324,773,881 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
(Unaudited)
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For the Nine Months |
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Ended September 30, |
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2005 |
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2004 |
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Revenues, net |
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$ |
249,989 |
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$ |
235,654 |
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Cost of sales |
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|
232,435 |
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215,433 |
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Gross profit |
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17,554 |
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20,221 |
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Operating expenses |
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18,310 |
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|
15,987 |
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Gain on sale of fixed assets |
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(1,178 |
) |
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Income from operations |
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422 |
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4,234 |
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Interest expense |
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6,860 |
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6,047 |
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Gain on settlement of bankruptcy claim |
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(1,773 |
) |
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Charge for early conversion of notes |
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400 |
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Other income net |
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(740 |
) |
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(736 |
) |
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Loss before income taxes and discontinued operations |
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(4,325 |
) |
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(1,077 |
) |
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Income tax benefit |
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|
368 |
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|
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|
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|
|
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Loss from continuing operations before discontinued
operations |
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(3,957 |
) |
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(1,077 |
) |
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Income from discontinued operations, net of income taxes |
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|
140 |
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|
1,207 |
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Net (loss) income |
|
$ |
(3,817 |
) |
|
$ |
130 |
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Basic and diluted (loss) income per share: |
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Loss from continuing operations |
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
Income from discontinued operations |
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|
0.03 |
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|
|
|
|
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|
Net (loss) income |
|
$ |
(0.02 |
) |
|
$ |
|
|
|
|
|
|
|
|
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|
|
|
|
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Weighted average shares outstanding: |
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|
|
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Basic and diluted |
|
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191,472,959 |
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31,640,615 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
6
TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT
(In Thousands, Except Share Data)
(Unaudited)
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Common Stock |
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Accumulated |
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Additional |
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Other |
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Total |
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|
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Paid-in |
|
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Comprehensive |
|
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Accumulated |
|
|
Stockholders |
|
|
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Shares |
|
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Amount |
|
|
Capital |
|
|
Loss |
|
|
Deficit |
|
|
Deficit |
|
Balance as of
December 31, 2004 |
|
|
31,640,615 |
|
|
$ |
32 |
|
|
$ |
182,088 |
|
|
$ |
|
|
|
$ |
(276,972 |
) |
|
$ |
(94,852 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of New Senior
Notes |
|
|
126,883,592 |
|
|
|
127 |
|
|
|
54,236 |
|
|
|
|
|
|
|
|
|
|
|
54,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Junior
Notes |
|
|
7,009,078 |
|
|
|
7 |
|
|
|
2,635 |
|
|
|
|
|
|
|
|
|
|
|
2,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inducement for early
conversion of Notes |
|
|
20,083,667 |
|
|
|
20 |
|
|
|
140 |
|
|
|
|
|
|
|
|
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partial exercise of the
LJH Warrant |
|
|
70,942,220 |
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on
investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(341 |
) |
|
|
|
|
|
|
(341 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,817 |
) |
|
|
(3,817 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
September 30, 2005 |
|
|
256,559,172 |
|
|
$ |
257 |
|
|
$ |
239,099 |
|
|
$ |
(341 |
) |
|
$ |
(280,789 |
) |
|
$ |
(41,774 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial
statements.
7
TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine |
|
|
|
Months Ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(3,817 |
) |
|
$ |
130 |
|
Adjustments to reconcile net (loss) income to cash
provided by(used in) operating activities: |
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
(140 |
) |
|
|
(1,207 |
) |
Non-cash gain on settlement of bankruptcy claim |
|
|
(1,773 |
) |
|
|
|
|
Paid-in-kind interest note obligations |
|
|
2,452 |
|
|
|
1,734 |
|
Non-cash inducement charge for conversion of notes |
|
|
160 |
|
|
|
|
|
Write-off of deferred financing fees |
|
|
|
|
|
|
145 |
|
Depreciation and amortization |
|
|
4,031 |
|
|
|
3,958 |
|
Amortization of deferred financing costs |
|
|
1,059 |
|
|
|
856 |
|
Recovery of doubtful accounts |
|
|
(5 |
) |
|
|
(405 |
) |
Change in working capital: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
1,011 |
|
|
|
(8,956 |
) |
Inventories |
|
|
(8,972 |
) |
|
|
492 |
|
Other assets |
|
|
(4,211 |
) |
|
|
(506 |
) |
Accounts payable |
|
|
4,410 |
|
|
|
(3,993 |
) |
Customer deposits |
|
|
10,613 |
|
|
|
1,931 |
|
Other liabilities |
|
|
(4,331 |
) |
|
|
498 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
487 |
|
|
|
(5,323 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchases of fixed assets |
|
|
(3,435 |
) |
|
|
(2,180 |
) |
Proceeds from sale of fixed assets, net of transaction
expenses |
|
|
|
|
|
|
24,861 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(3,435 |
) |
|
|
22,681 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Borrowings under senior debt facilities |
|
|
265,605 |
|
|
|
245,675 |
|
Payments under senior debt facilities |
|
|
(269,777 |
) |
|
|
(249,516 |
) |
Proceeds of term loan with financial institutions, net |
|
|
9,656 |
|
|
|
5,900 |
|
Payments of deferred financing costs |
|
|
(1,095 |
) |
|
|
(2,989 |
) |
Payments on term loan with financial institution |
|
|
(872 |
) |
|
|
|
|
Payments on capital leases |
|
|
(680 |
) |
|
|
(24,762 |
) |
Partial exercise of LJH Warrant |
|
|
71 |
|
|
|
|
|
Proceeds of term
loan with related party |
|
|
|
|
|
|
6,162 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
2,908 |
|
|
|
(19,530 |
) |
|
|
|
|
|
|
|
Net cash provided by discontinued operations |
|
|
140 |
|
|
|
812 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
100 |
|
|
|
(1,360 |
) |
Cash and cash equivalents, beginning of period |
|
|
293 |
|
|
|
1,603 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
393 |
|
|
$ |
243 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
(3,180 |
) |
|
$ |
(3,615 |
) |
|
|
|
|
|
|
|
Income taxes refunded |
|
$ |
368 |
|
|
$ |
242 |
|
|
|
|
|
|
|
|
8
TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine |
|
|
|
Months Ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with
conversion of New Senior Notes |
|
$ |
54,363 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with
conversion of Junior Notes |
|
$ |
2,642 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale investment equity change |
|
$ |
(341 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property through capital lease |
|
$ |
|
|
|
$ |
2,224 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
(Amounts and Shares in Thousands, Except Per Share Data)
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION and LIQUIDITY
DESCRIPTION OF BUSINESS
TIMCO Aviation Services, Inc. (the Company) is a Delaware corporation, which through its
subsidiaries, provides aircraft maintenance, repair and overhaul (MRO) services to commercial
passenger airlines, air cargo carriers, aircraft leasing companies, maintenance and repair
facilities and aircraft parts redistributors throughout the world. In June 2005, the Company made
the decision to integrate its refurbishment of aircraft interior components with its other MRO
facilities. As a result of this decision, the Company has shut-down its Aircraft Interior Design
operations located in Dallas, Texas. See Note 11 for further discussion.
In January 2005, the Company announced an offering and consent solicitation to the holders of its
8% Senior Subordinated Convertible paid-in-kind (PIK) Notes due 2006 (New Senior Notes) and to
the holders of its 8% Junior Subordinated Convertible PIK Notes due 2007 (Junior Notes) to
receive a 15% premium for agreeing to an early conversion of their Notes into shares of the
Companys authorized but unissued common stock. The Company completed the tender offer on March 8,
2005 and accepted tenders and related consents from the holders of 47.0% in aggregate principal
amount of the New Senior Notes and tenders and related consents from holders of 75.2% in aggregate
principal amount of the Junior Notes. At the closing of the offer on March 15, 2005, the Company
issued 224,919 in aggregate shares of its authorized but unissued common stock to the holders of
the New Senior Notes who tendered in the offering, to the holders of the Junior Notes who tendered
in the offer, and to LJH Ltd. (an entity controlled by the Companys principal stockholder) in
connection with its partial exercise of the LJH Warrant (defined below). See Note 9 for further
information.
In August 2005, the Company announced an offering to the holders of its remaining New Senior Notes
and Junior Notes, and solicited consents from the holders of the remaining New Senior Notes to
proposed amendments governing the New Senior Note indentures. This offering and consent
solicitation was subsequently amended in September 2005. As amended, the Company offered the
remaining holders of its New Senior Notes and Junior Notes the right to receive a 15% premium for
agreeing to an early conversion of their Notes into shares of the Companys authorized but unissued
common stock. The Company completed the tender offer on October 6, 2005 and accepted tenders and
related consents from holders of 98% of its remaining New Senior Notes and 33% of its remaining
Junior Notes. At the closing of the offer on October 12, 2005, the Company issued 223,060 in
aggregate shares of its authorized but unissued common stock to the holders of the New Senior Notes
who tendered in the offering, to the holders of the Junior Notes who tendered in the offer, and to
LJH Ltd. in connection with its partial exercise of the amended LJH Warrant. See Notes 9 and 13
for further information.
On October 21, 2005, the Company filed an amended registration statement on Form S-1 with the SEC
with respect to a proposed rights offering. This amended registration statement was declared
effective on October 21, 2005 by the SEC. In the rights offering, stockholders holding shares of
the Companys common stock as of October 19, 2005 (the record date) have the right to purchase
additional shares of the Companys post-reverse split common stock for a subscription price of
$4.80 per share ($0.12 per pre-reverse split share). For every 40 pre-reverse split shares (one
post-reverse split share) of common stock held on the record date, stockholders have been granted
1.50 subscription rights. Also, the Company intends to allow its principal stockholder the use of
amounts due to him under a promissory note (see Note 8 for a description of this note) as
consideration for the purchase of a portion of the shares that he is permitted to purchase in the
rights offering. Finally, the Company plans to effect, simultaneously with the closing of the
rights offering, a reverse split of its common stock on a one-new-share-for-40-old-shares basis.
In conjunction with the reverse split, the Company plans to amend to its certificate of
incorporation to reduce its authorized common stock, $0.001 par value, from 500,000 (on a
pre-reverse split basis) to 100,000 (on a post-reverse split basis) shares. All of these actions
were approved by the holders of a majority of the Companys outstanding common stock at a
stockholders meeting held on October 7, 2005.
10
On September 20, 2005, the Company entered into a letter agreement with Owl Creek Asset Management
LP (Owl Creek), which beneficially owned approximately $24,900 in aggregate principal amount of
the New Senior Notes. In the letter agreement, Owl Creek agreed to tender the New Senior Notes
that it owned in the August 2005 tender offer and to participate in the rights offering to the full
extent of its basic subscription privilege. In October 2005, the Company issued 59,558 shares of
its common stock to Owl Creek in the August 2005 tender offer, which will give them the right to
purchase 2,233 post-reverse split shares of the Companys common stock in the rights offering. Owl
Creek also agreed in the letter agreement to lock up the shares that it received in the August 2005
tender offer for 180 days.
BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on
Form 10-Q. Pursuant to such rules and regulations, certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted. The accompanying unaudited
interim condensed consolidated financial statements should be read in conjunction with the
Companys consolidated financial statements and the notes thereto included in the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2004, File No. 001-11775 (the Form
10-K).
In the opinion of management, the accompanying unaudited interim condensed consolidated financial
statements of the Company contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position of the Company as of September 30, 2005, the
results of its operations for the three and nine month periods ended September 30, 2005 and 2004
and its cash flows for the nine month periods ended September 30, 2005 and 2004. The results of
operations and cash flows for the nine month period ended September 30, 2005 are not necessarily
indicative of the results of operations or cash flows which may be reported for the year ending
December 31, 2005.
LIQUIDITY
On April 12, 2005, the Company closed a financing arrangement with Monroe Capital Advisors LLC in
which the Company obtained a $7,000 senior secured term loan and a $3,000 delayed draw term loan
designated for capital expenditures. Additionally, Monroe Capital acquired the $8,000 senior
secured term loan previously made to the Company by Hilco Capital LP. The original $8,000 term
loan due to Hilco Capital (and acquired by Monroe Capital as part of this financing) and the new
$7,000 term loan (collectively the Term Loans) mature on December 31, 2007. Borrowings for
capital expenditures made under the $3,000 delayed draw term loan (the Monroe Capital Line of
Credit and together with the Term Loans the Monroe Capital Loans) are payable in monthly
installments (as set forth in the financing agreement with Monroe Capital) with the balance due on
December 31, 2007. For further details of this financing agreement, see Note 7.
On September 28, 2005, CIT Group and Monroe Capital amended certain covenants in their financing
agreements with the Company. Based on the amended financing agreements, the Company was in
compliance with all financial covenants as of September 30, 2005.
For the year ended December 31, 2004 and the nine month period ended September 30, 2005, the
Company incurred a loss from continuing operations of $667 and $3,957, respectively. The Company
also had a net stockholders deficit as of December 31, 2004 and September 30, 2005, and for the
year ended December 31, 2004 required additional cash flow above amounts provided from operations
to meet its working capital requirements. The Companys ability to service its debt obligations as
they come due, including maintaining compliance with the covenants and provisions of all of its
debt obligations, is dependent upon the Companys future financial and operating performance. That
performance, in turn, is subject to various factors, including many factors beyond the Companys
control, such as changes in conditions affecting the airline industry and changes in the overall
economy. See the Form 10-K and this Form 10-Q for information about factors that affect the
Companys performance.
The Company is highly leveraged and has significant obligations under its outstanding debt and
lease agreements. As a result, a significant amount of cash flow from operations is needed to make
required payments of the Companys debt and lease obligations, thereby reducing funds available for
other purposes. Even if the Company is able to meet its debt service and other obligations when
due, the Company may not be able to comply with the covenants and other provisions under its debt
instruments. A failure to comply, unless waived by the lenders, would be an event of default and
would permit the lenders to accelerate the maturity of these debt obligations. It would also permit
the lenders to terminate their commitments to extend additional credit under their financing
agreements. Additionally, the Companys senior credit facilities provide for the termination of the
financing agreements and repayment of all obligations in the event of a material adverse change in
the
11
Companys business, as defined. If the Company was unable to meet its obligations under its debt
instruments, or if the Company could not obtain waivers of defaults under any such agreements
(including defaults caused by the failure to meet financial covenants), the lenders could proceed
against the collateral securing these financing obligations and exercise all other rights available
to them. While the Company expects that it will be able to make all required debt payments and meet
all financial covenants in 2005, there can be no assurance that it will be able to do so.
2. STOCK COMPENSATION PLANS
As permissible under SFAS No. 123, Accounting for Stock-Based Compensation, the Company currently
accounts for all stock-based compensation arrangements using the intrinsic value method prescribed
by Accounting Principles Board Opinion No. 25, Accounting for Certain Transactions Involving Stock
Compensation. Accordingly, no compensation cost is recognized for stock option awards granted to
employees at or above fair market value.
The following table illustrates the effects on net income and earnings per share if the Company had
applied the fair value recognition of FASB Statement No. 123 to stock-based employee compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
For the Nine Months |
|
|
Ended September 30, |
|
Ended September 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net (loss) income as reported |
|
$ |
(6,346 |
) |
|
$ |
261 |
|
|
$ |
(3,817 |
) |
|
$ |
130 |
|
Additional expense |
|
|
(19 |
) |
|
|
(22 |
) |
|
|
(58 |
) |
|
|
(230 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income pro forma |
|
$ |
(6,365 |
) |
|
$ |
239 |
|
|
$ |
(3,875 |
) |
|
$ |
(100 |
) |
Net (loss) income per share, basic as reported |
|
$ |
(0.02 |
) |
|
$ |
0.01 |
|
|
$ |
(0.02 |
) |
|
$ |
|
|
Net (loss) income per share, diluted as reported |
|
|
(0.02 |
) |
|
|
|
|
|
|
(0.02 |
) |
|
|
|
|
Net (loss) income per share, basic pro forma |
|
|
(0.02 |
) |
|
|
0.01 |
|
|
|
(0.02 |
) |
|
|
|
|
Net (loss) income per share, diluted pro forma |
|
|
(0.02 |
) |
|
|
|
|
|
|
(0.02 |
) |
|
|
|
|
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment, which is a
revision of FASB Statement 123, Accounting for Stock-Based Compensation. SFAS No. 123 (Revised
2004) will require the Company to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which an employee is required to
provide service in exchange for the award. This Statement, as amended in April 2005, will be
adopted by the Company during the first quarter of 2006.
3. INVENTORIES
Inventories are stated at the lower of cost or market value. At September 30, 2005 and December
31, 2004, inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Finished goods |
|
$ |
16,474 |
|
|
$ |
14,274 |
|
Work in progress |
|
|
13,115 |
|
|
|
6,455 |
|
Raw materials |
|
|
1,627 |
|
|
|
1,515 |
|
|
|
|
|
|
|
|
|
|
$ |
31,216 |
|
|
$ |
22,244 |
|
|
|
|
|
|
|
|
12
4. DEFERRED FINANCING COSTS
Costs associated with obtaining financing are included in the accompanying condensed consolidated
balance sheets as deferred financing costs and are being amortized over the terms of the loans to
which such costs relate. The cost and accumulated amortization of deferred financing costs as of
September 30, 2005 and December 31, 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Original basis |
|
$ |
8,542 |
|
|
$ |
7,447 |
|
Accumulated amortization |
|
|
(5,243 |
) |
|
|
(4,184 |
) |
|
|
|
|
|
|
|
|
|
$ |
3,299 |
|
|
$ |
3,263 |
|
|
|
|
|
|
|
|
5. OTHER COMPREHENSIVE INCOME
In April 2005, the Company received 1,364 shares of common stock of Kitty Hawk, Inc. in settlement
of a bankruptcy claim. See Note 10. These shares have been designated as available for sale in
accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Accumulated other comprehensive loss for the Company consisted of accumulated unrealized losses on
marketable securities. This amount is included as a separate component of stockholders deficit.
The components of comprehensive (loss) income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net (loss) income |
|
$ |
(6,346 |
) |
|
$ |
261 |
|
|
$ |
(3,817 |
) |
|
$ |
130 |
|
Unrealized loss on
marketable
securities, net of
tax |
|
|
(55 |
) |
|
|
|
|
|
|
(341 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
(loss) income, net
of tax |
|
$ |
(6,401 |
) |
|
$ |
261 |
|
|
$ |
(4,158 |
) |
|
$ |
130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. SALE OF ASSETS
In March 2004, the Company sold an office and warehouse facility located in Miramar, Florida that
had previously been used in the Companys parts redistribution operation for a sales price of
$26,000. The proceeds of the sale were used to repay the $23,824 balance of the Companys tax
retention operating lease (TROL) financing obligation and to pay transaction expenses and other
expenses associated with the property. The remainder of the proceeds was used in April 2004 to
repay amounts outstanding under a previously outstanding senior credit facility. As a result of
this transaction, the Company recognized a gain on disposal of fixed assets of $825. This gain,
along with the related rental income, depreciation expense and interest expense, is included within
income from discontinued operations, net of income taxes within the accompanying condensed
consolidated statement of operations for the nine month period ended September 30, 2004. See the
Form 10-K for particulars of the Companys TROL financing obligation and with respect to the April
2004 refinancing of all of the Companys senior debt obligations.
7. SENIOR CREDIT FACILITIES
In April 2004, the Company closed on a refinancing of all of its senior debt as contemplated by a
financing agreement between the Company and the CIT Group. Under this financing agreement, the
Company obtained the CIT Group Revolving Line of Credit, which is a $35,000 senior secured
revolving line of credit, and the CIT Group Term Loan, which is a $6,400 senior secured term loan.
The Company used the proceeds from the CIT Group Credit Facility to repay in full amounts
outstanding under its previously outstanding senior credit facility, to repay a warrant repurchase
obligation due to a previous lender and for
working capital. See the Form 10-K for particulars of the Companys refinancing of all of its
previously outstanding senior debt and the warrant repurchase obligation due to a previous lender.
13
The CIT Group Revolving Line of Credit is due December 31, 2007 and bears interest, at the
Companys option, at (a) Prime plus an advance rate ranging from 0.00% to 0.75%, or (b) LIBOR plus
an advance rate ranging from 2.50% to 4.00%, with the
advance rates contingent on the Companys leverage ratio. The Company has currently elected both
Prime and LIBOR options for portions of the outstanding revolving line of credit. Also, in
accordance with the requirements of EITF 95-22, the Company has presented the revolving line of
credit as a short-term obligation. The CIT Group Term Loan is due in quarterly installments of
$291, which commenced on October 1, 2004, with the final quarterly installment due on December 31,
2007. The CIT Group Term Loan bears interest at the prevailing rate of the CIT Group Revolving
Line of Credit plus one percent. Also, the CIT Group Credit Facility contains certain financial
covenants regarding the Companys financial performance and certain other covenants, including
limitations on the incurrence of additional debt, and provides for the termination of the CIT Group
Credit Facility and repayment of all debt in the event of a change in control, as defined. In
addition, an event of default under the Monroe Capital Loans (described below) will also result in
a default under the CIT Group Credit Facility. Borrowings under the CIT Group Credit Facility are
secured by a lien on substantially all of the Companys assets. Borrowings under the revolving
line of credit are based on a borrowing base formula that takes into account the level of the
Companys receivables and inventory. Further, the amounts that the Company can borrow under the
revolving line of credit are affected by various availability reserves that are established by the
lenders under the financing agreement, and the Companys borrowings under the revolving line of
credit are limited based on the ratio of the Companys debt to EBITDA. Finally, the agreement
relating to the revolving line of credit requires that at the time of each additional borrowing,
the Company must make various representations and warranties to its lenders regarding its business
(including several reaffirming that there have been no changes in the status of specific aspects of
the Companys business that could reasonably be expected to have a material adverse effect upon the
business operation, assets, financial condition or collateral of the Company and its subsidiaries
taken as a whole), and be in compliance with various affirmative and negative covenants, all as
more particularly set forth in the agreement. As of September 30, 2005, the outstanding aggregate
amount borrowed under the CIT Group Revolving Line of Credit was $7,520, the outstanding CIT Group
Term Loan was $5,236, the amount of outstanding letters of credit under the revolving line of
credit was $11,434, and $11,961 was available for additional borrowing under the revolving line of
credit.
Simultaneous with the inception of the CIT Group Credit Facility, the Company obtained the Hilco
Term Loan, which was an $8,000 term loan, from Hilco Capital LP (which loan has now been assigned
to Monroe Capital; see below). The Company used the proceeds from the Hilco Term Loan to repay
amounts outstanding under its previously outstanding senior credit facility. See the Form 10-K for
particulars of the Company refinancing of all of its previously outstanding senior debt and
specifics of the Hilco Term Loan.
On April 12, 2005, the Company closed on a financing arrangement with Monroe Capital Advisors LLC
in which the Company obtained a $7,000 senior secured term loan and a $3,000 delayed draw term loan
designated for capital expenditures. Additionally, Monroe Capital acquired the $8,000 senior
secured term loan previously made to the Company by Hilco Capital LP. The original $8,000 term
loan due to Hilco Capital (and acquired by Monroe Capital as part of this financing) and the new
$7,000 term loan (collectively the Term Loans) mature on December 31, 2007. The Term Loans bear
cash interest at the annual rate of LIBOR (which for purposes of the Term Loans shall never be
lower than 2.25%) plus 6.00% and PIK interest at the rate of 2.00% per annum. Borrowings for
capital expenditures made under the $3,000 delayed draw term loan (the Monroe Capital Line of
Credit and together with the Term Loans the Monroe Capital Loans) are payable in monthly
installments (as set forth in the financing agreement), with the balance due on December 31, 2007.
The Monroe Capital Line of Credit bears cash interest at the per annum rate of LIBOR (which for
purposes of the Monroe Capital Line of Credit shall never be lower than 2.25% nor greater than
5.00%) plus 6.00% and PIK interest at the rate of 1.00% per annum.
The financing agreements related to the Monroe Capital Loans contain certain financial covenants
regarding the Companys financial performance and certain other covenants, including limitations on
the incurrence of additional debt, and provide for the termination of the Monroe Capital Loans and
the repayment of all debt in the event of a change in control, as defined. In addition, an event
of default under the Companys CIT Group Credit Facility (described above) will also result in a
default under the Monroe Capital Loans. Borrowings under the Monroe Capital Loans are secured by:
(i) a first lien on the assets that the Company acquires or refinances with the Monroe Capital Line
of Credit, and (ii) a second lien on substantially all of the Companys other assets.
On September 28, 2005, CIT Group and Monroe Capital amended certain covenants in their financing
agreements with the Company. Based on the amended financing agreements, the Company was in
compliance with all financial covenants as of September 30, 2005.
14
8. TERM LOAN TO A RELATED PARTY
In April 2004, the Company entered into an agreement with its principal stockholder pursuant to
which it combined all of its previously outstanding debt (principal plus accrued and unpaid
interest) with its principal stockholder into a related party term loan due on January 31, 2008
(the LJH Term Loan). The LJH Term Loan combines the $1,300 loan relating to the Brice
acquisition, the $6,050 related party term loan made in May 2003, the $900 obligation related to
the AMS inventory purchase, the $5,000 loan which replaced the Companys previous term loan with
Bank of America and PIK interest previously paid on these obligations. See the Form 10-K for
particulars regarding these previously outstanding debt obligations. The LJH Term Loan bears
interest at 18% per annum, 6% of which is payable in cash (or at the Companys option, PIK) and the
balance of which is payable-in-kind. Additionally, the PIK interest balance compounds into
principal debt semi-annually in January and August. During 2005, the Company has elected the full
payable-in-kind election. The LJH Term Loan is pari-passu with the New Senior Notes, but is
secured by a lien on substantially all of the Companys assets. The LJH Term Loan also contains
cross acceleration provisions if the Companys obligations to the CIT Group and Monroe Capital are
accelerated.
In October 2005, the Company filed an amended registration statement on Form S-1 with the
Securities and Exchange Commission with respect to a proposed rights offering. In connection with
the rights offering, the Company has agreed to allow its principal stockholder to use amounts due
to him under the LJH Term Loan as consideration (on a dollar-for-dollar basis) for the purchase of
shares in the rights offering. See Note 13 for further discussion regarding the proposed rights
offering.
As partial consideration for the funding of a $6,050 term loan with the Company principal
stockholder in 2003, of which this amount has become part of the related party term loan discussed
above, the Company issued a warrant (the LJH Warrant) to its principal stockholder to acquire,
for nominal consideration, 30% of the Companys outstanding common stock (on a fully-diluted basis)
as of the day the warrant is exercised. The warrant is exercisable on or before January 31, 2007.
The warrant valuation, as determined by an independent business valuation specialist through a fair
market value assessment of the Company, was recorded at $1,258 in 2003. The Company recorded the
value of this warrant as deferred financing costs and was amortizing this amount to expense over a
three-year period (the original period of this loan). As a result of the related party term loan
refinancing described above, effective April 2004 the Company reset the amortization period for the
unamortized deferred financing balance and was amortizing this amount over the term of the newly
established related party term loan. In conjunction with the Companys rights offering, however,
and the use by its principal stockholder of the LJH Note as partial consideration in the offering,
the Company anticipates writing off the unamortized deferred financing balance (approximately $736)
during the fourth quarter of 2005. See Note 13 for further details.
In January and August 2005, the Company extended offers for early conversion of its New Senior
Notes and Junior Notes. As part of these offers, the Companys principal stockholder agreed to
certain amended terms with respect to the LJH Warrant. Upon the completion of the Companys tender
offers, its principal stockholder partially exercised the LJH Warrant. As a result of these
partial exercises, the Companys principal stockholder received 70,942 shares and 60,560 shares,
during the January and August tender offers respectively, of the Companys authorized but unissued
common stock. Additionally, upon the maturity of the remaining untendered New Senior Notes and
Junior Notes, which is to occur on December 31, 2006 and January 2, 2007, respectively, and the
automatic conversion of these notes into common stock, the Companys principal stockholder will
have the right to exercise the remainder of the amended warrant to receive an additional 1,885
shares of common stock. See Notes 9 and 13 for specifics of these tender offers.
9. SUBORDINATED NOTES
OFFERING AND CONSENT SOLICITATION January 2005 Tender Offer
In January 2005, the Company extended an offering and consent solicitation relating to the New
Senior Notes and the Junior Notes. Under the contractual terms of the New Senior Notes and the
Junior Notes (collectively, the Notes), the Notes will automatically convert at their maturity
into a fixed number of shares of the Companys authorized but unissued common stock unless, prior
to their maturity, the Notes are redeemed in accordance with their terms for cash and additional
shares of common stock.
In the offering and consent solicitation, the Company offered holders of the Notes the right to
receive a 15% premium payable in shares of its common stock if the holders agreed to an early
conversion of their Notes into common stock during the conversion period, which expired on March 8,
2005. The Company also solicited consents from the holders of its New Senior Notes and Junior Notes
to remove all material covenants contained in the indentures, including the covenant restricting
the amount of senior debt that the Company may incur and the covenant requiring the Company to
redeem the Notes upon a change of control. If the holders tendered their Notes, they were
automatically
15
consenting to the proposed amendments to the
indentures. To become effective for
each class of Notes, the amendments required the consent of a majority of the holders of the Notes
(excluding from this computation the Notes held by the Companys principal stockholder).
In accordance with the terms of the offer, all Notes that were properly tendered were accepted for
early conversion. The Company received consents representing a majority in aggregate principal
amount of the outstanding Junior Notes in the January 2005 consent solicitation, and accordingly,
the proposed amendments to the indentures governing the Junior Notes have become effective. Since
the Company did not receive consents representing a majority in aggregate principal amount of the
outstanding New Senior Notes in the consent solicitation, the indentures governing the New Senior
Notes were not amended.
The Company received tenders and related consents from holders of 47.0% in aggregate principal
amount of the New Senior Notes and tenders and related consents from holders of 75.2% in aggregate
principal amount of the Junior Notes. Based on the level of premium shares that have been issued
(see below), for this offering and consent solicitation, the Company recorded an inducement charge
of $160 and incurred related transaction expenses of $240. The aggregate inducement charge of $400
is included within the accompanying condensed consolidated statements of operations for the nine
month period ended September 30, 2005.
At the closing of the offer, the Company issued 145,916 shares of its authorized but unissued
common stock to the holders of the New Senior Notes who tendered in the offer (including 19,032
premium shares), 8,060 shares of its authorized but unissued common stock to the holders of the
Junior Notes who tendered in the offer (including 1,051 premium shares), and 70,942 shares to LJH
Ltd. (an entity controlled by the Companys principal stockholder) in connection with its partial
exercise of the LJH Warrant. See Note 8 for information about the LJH Warrant. After the closing
of the January 2005 tender offer, the Company had 256,559 shares outstanding and the Companys
principal stockholder owned approximately 57% of the outstanding common stock.
OFFERING AND CONSENT SOLICITATION August 2005 Tender Offer
In August 2005, the Company announced an offering to the holders of its remaining New Senior Notes
and Junior Notes, and solicited consents from the holders of the remaining New Senior Notes to
proposed amendments governing the New Senior Note indentures. This offering and consent
solicitation was subsequently amended in September 2005. As amended, the Company offered the
remaining holders of its New Senior Notes and Junior Notes the right to receive a 15% premium for
agreeing to an early conversion of their Notes into shares of the Companys authorized but unissued
common stock. The Company closed the August 2005 tender offer on October 12, 2005. See Note 13
for the results of this tender offer.
On September 20, 2005, the Company entered into a letter agreement with Owl Creek Asset Management
LP (Owl Creek), who beneficially owned approximately $24,900 in aggregate principal amount of the
New Senior Notes. In the letter agreement, Owl Creek agreed to tender the New Senior Notes that it
owned in the August 2005 tender offer and to participate in the rights offering to the full extent
of its basic subscription privilege. In October 2005, the Company issued 59,558 shares of its
common stock to Owl Creek in the August 2005 tender offer, which will give them the right to
purchase 2,233 post-reverse split shares of the Companys common stock in the rights offering. Owl
Creek also agreed in the letter agreement to lock up the shares that it received in the August 2005
tender offer for 180 days.
8% SENIOR SUBORDINATED PIK NOTES DUE 2006
In February 2002, in connection with its capital and debt restructuring, the Company issued
$100,000 face value, in aggregate, principal amount of 8.0% senior subordinated convertible
paid-in-kind (PIK) notes (New Senior Notes), which mature on December 31, 2006. On March 8,
2005, in conjunction with the Companys offering and consent solicitation (see above), the Company
received tenders and related consents from holders of 47.0% in aggregate principal amount of the
New Senior Notes. After consummation of the offer and as of September 30, 2005, $61,437 of New
Senior Notes remained outstanding. The New Senior Notes bear interest from the date of issuance
and are payable at the Companys option either in cash or paid-in-kind through the issuance of
additional New Senior Notes semiannually on June 30 and December 31 of each year.
The New Senior Notes are redeemable for cash at the Companys option at the following percentages
of par plus accrued interest on the par value through the date of redemption: 2005 75.625% and
2006 77.5%. The New Senior Notes also provide that the holders will receive a fixed number of
shares of common stock if the New Senior Notes are redeemed in 2005 or 2006.
16
If the New Senior Notes have not already been redeemed or repurchased, the New Senior Notes,
including those New Senior Notes previously issued as paid-in-kind interest and all accrued but
unpaid interest, will automatically convert on December 31, 2006 into a fixed number of shares of
common stock. Holders of New Senior 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.
In August 2005, the Company announced an offering and consent solicitation to the holders of its
remaining New Senior Notes, which was subsequently amended in September 2005. As amended, the
Company offered the remaining holders of its New Senior Notes the right to receive a 15% premium
for agreeing to an early conversion of their Notes into shares of the Companys authorized but
unissued common stock. The Company closed the August 2005 tender offer on October 12, 2005. See
Note 13 for the results of this tender offer.
8 1/8% SENIOR SUBORDINATED NOTES DUE 2008
In 1998, the Company sold $165,000 of senior subordinated notes (Old Notes) with a coupon rate of
8.125% at a price of 99.395%, which mature on February 15, 2008. On February 28, 2002, $149,000
face value of these notes were cancelled as part of a note exchange in exchange for cash and
securities, and substantially all of the covenants contained in the indenture relating to the
remaining Old Notes were extinguished. As a result of the exchange offer and consent solicitation,
$16,247 in aggregate principal amount, net of unamortized discount, of Old Notes remain outstanding
at September 30, 2005. Interest on the Old Notes is payable on February 15 and August 15 of each
year.
The Old Notes are redeemable, at the Companys option, in whole or in part, at any time after
February 15, 2003, at the following redemption prices, plus accrued and unpaid interest and
liquidated damages, if any, to the redemption date: (i) 2005101.354%; and (ii) 2006 and
thereafter100%. Upon the occurrence of a change in control, the Company will be required to make
an offer to repurchase all or any part of each holders senior subordinated notes at a repurchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid interest and
liquidated damages, if any, thereon to the repurchase date. There can be no assurance that the
Company will have the financial resources necessary to purchase the remaining Old Notes upon a
change in control or that such repurchase will then be permitted under the Companys senior credit
facilities.
8% JUNIOR SUBORDINATED PIK NOTES DUE 2007
In September 2002, as part of a class action settlement, the Company issued $4,000 face value, in
aggregate, junior subordinated convertible PIK notes (Junior Notes). On March 8, 2005, in
conjunction with the Companys offering and consent solicitation (see above), the Company received
tenders and related consents from holders of 75.2% in aggregate principal amount of the Junior
Notes. After consummation of the offer, $872 of Junior Notes remain outstanding. The
Junior Notes bear interest at 8% and mature on January 2, 2007. Interest on the Junior Notes is
payable, at the Companys option, either in cash or paid-in-kind through the issuance of additional
notes semiannually on June 30 and December 31 of each year. The Junior Notes were recorded as of
September 20, 2002 (the effective date) at the then current fair value of $2,500. As a result of
the Companys tender offer, the current fair value (as of September 30, 2005) approximates $947.
The discount on these Junior Notes is being accreted to the redemption value of the Junior Notes at
maturity in January 2007.
The Junior Notes are redeemable for cash at the Companys option at the following percentages of
par plus accrued interest on the par value through the date of redemption: 2005 75.625% and 2006
77.5%. The Junior Notes also provide that the holders will receive a fixed number of shares of
common stock if the Junior Notes are redeemed in 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 a fixed number of 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.
In August 2005, the Company announced an offering to the holders of its remaining Junior Notes,
which was subsequently amended in September 2005. As amended, the Company offered the remaining
holders of its Junior Notes the right to receive a 15% premium for agreeing to an early conversion
of their Notes into shares of the Companys authorized but unissued common stock. The Company
closed the August 2005 tender offer on October 12, 2005. See Note 13 for the results of this
tender offer.
17
10. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company is taking remedial action pursuant to Environmental Protection Agency and Florida
Department of Environmental Protection (FDEP) regulations at TIMCO-Lake City. Ongoing testing is
being performed and new information is being gathered to continually assess the impact and
magnitude of the required remediation efforts on the Company. The Company is currently monitoring
the remediation, which will extend into the future. Based on current testing, technology,
environmental law and clean-up experience to date, the Company believes that it has established an
adequate accrual for the estimated costs associated with its current remediation strategies.
Additionally, during 2003 the Company secured an insurance policy to comply with the financial
assurances required by the FDEP. During the 2004 fiscal year and the first nine months of fiscal
2005, the Company has proceeded with its remediation plan with no significant change in the
estimated compliance costs and has maintained its insurance policy to comply with the financial
assurances required by the FDEP.
Additionally, there are other areas adjacent to TIMCO-Lake Citys facility that could also require
remediation. The Company does not believe that it is responsible for these areas; however, it may
be asserted that the Company and other parties are jointly and severally liable and are responsible
for the remediation of those properties.
Accrued expenses in the accompanying September 30, 2005 and December 31, 2004 condensed
consolidated balance sheets include $800 related to obligations to remediate the environmental
matters described above. Future information and developments will require the Company to
continually reassess the expected impact of the environmental matters discussed above. Actual
costs to be incurred in future periods may vary from the estimates, given the inherent
uncertainties in evaluating environmental exposures. These uncertainties include the extent of
required remediation based on testing and evaluation not yet completed and the varying costs and
effectiveness of remediation methods. In the opinion of management, the ultimate resolution of
these environmental exposures will not have a material adverse effect upon the financial condition
or results of operations of the Company.
LEASE COMMITMENTS WITH RELATED PARTIES
In 2002, an entity controlled by the Companys principal stockholder acquired the operating assets
of Aviation Management Systems, Inc. (AMS) located in Phoenix, Arizona. Additionally, this entity
assumed a lease with the City of Phoenix for facilities previously leased by AMS at the Goodyear
Airport. In 2003, the Company entered into an operating sublease agreement with its principal
stockholder to operate the business in these facilities. The term of the sublease is for three
years with rental payments of $432 annually. Under the sublease agreement, the Company is also
responsible for insurance, taxes and charges levied by the City of Phoenix. Further, in 2004, the
Company entered into an equipment lease with its principal stockholder with respect to certain
equipment and tooling used at the Goodyear facility (which equipment and tooling had been acquired
by the Companys principal stockholder in the AMS bankruptcy proceedings). The lease, which is
recorded as a capital lease, is for a two-year term and requires monthly payments of $74.
During 2002, the Company sold certain real estate and fixtures located in Dallas, Texas, to the
Companys principal stockholder. The gross sale price for these assets was approximately $2,400,
which was the estimated fair market value, based on a third party appraisal, on the sale date.
Simultaneous with this sale, the Company entered into a lease agreement with the principal
stockholder for substantially all of these assets. The term of this lease was ten years. Annual
rental payments were approximately $300 per year, with the Company being responsible for, among
other things, taxes, insurance and utilities. The sale and resulting leaseback qualified for sale
leaseback accounting pursuant to SFAS No. 98, Accounting for Leases. The Company deferred the
gain on sale of approximately $1,700 and was amortizing this gain to income over the term of the
lease agreement as an offset to rent expense. In September 2005, the Company entered into an
amendment to this operating lease which, among other things, modified the lease arrangement to a
month-to-month commitment. As a result of this modification and in accordance with SFAS No. 98,
the unamortized deferred income as of September 30, 2005 of approximately $1,178 is included as a
gain on sale of fixed assets within the accompanying condensed consolidated financial statements
for the three
and nine month periods ended September 30, 2005. Finally, see Note 11 for discussion regarding the
Companys decision to integrate these operations into the other MRO facilities and to shut-down
this facility.
These leases are believed to be on terms not less favorable to the Company than could be obtained
from an unaffiliated third party.
18
LITIGATION AND CLAIMS
The Company is involved in various lawsuits and contingencies arising out of its operations in the
normal course of business.
In the opinion of management, the ultimate resolution of these claims and lawsuits will not have a
material adverse effect upon the financial condition or results of operations of the Company.
Also, see Note 13 for events occurring subsequent to September 30, 2005.
OTHER MATTERS
In August 2004, a settlement agreement for unsecured claims was reached with the entity from which
the Company acquired its Oscoda, Michigan engine and airframe maintenance facilities in 1999.
Pursuant to that entitys plan of reorganization under Chapter 11 of the United States Bankruptcy
Code, the Company would receive a pro rata portion of 7,000 shares of common stock in the
reorganized company (Kitty Hawk, Inc.) based on the Companys unsecured claim as compared to the
total of all unsecured claims. On April 21, 2005, the Company received 1,364 shares of new common
stock in the reorganized company in settlement of its claim against that entitys bankruptcy
estate. Based on the stock price of the reorganized company on April 21, 2005, which approximated
$1.30 per share, the Company recorded a gain of $1,773 within the accompanying condensed
consolidated financial statements for the nine month period ended September 30, 2005. See Note 5.
An entity controlled by the Companys principal stockholder purchases aircraft for resale and
lease, and the Company provides aircraft maintenance service work to that entity. Services
provided to that entity are charged at not less then the rates that would be charged for such
services to an unaffiliated third party. During the nine month period ended September 30, 2005,
the billings related to the services that were provided to such entity were approximately $1,747.
At September 30, 2005, the Company had a net receivable from this entity of $1,225, of which $1,000
has been received subsequent to the end of the third quarter.
During 2005, the Company has obtained some of its contract labor through Aviation Partners, a
contract labor firm owned by an immediate family member of the Companys Chief Executive Officer.
The fees charged and the terms of payment with Aviation Partners are not less favorable to the
Company than those generally made available by unrelated third party contract labor firms. Total
contract labor fees paid to Aviation Partners through September 30, 2005 were $759, and the Company
owed Aviation Partners $71 as of September 30, 2005.
On April 15, 2005, the Company entered into an operating lease agreement with Maxus Leasing Group
for tooling and other equipment to be used for the repair and overhaul of CFM-56 engines. The
initial term of the lease is 48 months with a cancellation option, contingent upon the payment of a
cancellation fee, after the first 12 months. Rental payments approximate $1,320 per year, with the
Company also responsible for insurance, taxes, and other upfront expenditures.
The Company has employment agreements with all of its executive officers and certain of its key
employees. The employment agreements provide that such officers and key employees may earn
bonuses, based upon a sliding percentage scale of their base salaries, provided the Company
achieves certain financial operating results, as defined. Further, certain of these employment
agreements provide for severance benefits in the event of a change of control.
11. RESTRUCTURING ACTIVITIES
In June 2005, management approved a restructuring plan related to the Companys Aircraft Interior
Design operations located in Dallas, Texas. As part of the restructuring plan, the Company decided
to integrate its refurbishment of aircraft interior components within its other MRO facilities and
to relocate certain assets to those facilities. In addition, the Company is working with its
principal stockholder to sell or sublease its Dallas facility, for which the Company recently
entered into a modification of its lease arrangement for this facility and now has a month-to-month
lease commitment (see Note 10).
The implementation of this restructuring plan began in the quarter ended June 30, 2005 and has been
substantially completed as of September 30, 2005. The Companys restructuring actions have
resulted in total pre-tax charges of approximately $140,
which have been fully recognized as of September 30, 2005, with only the month-to-month operating
lease commitment remaining for future periods.
19
12. WEIGHTED AVERAGE SHARES
Basic income per share is computed using the weighted-average number of shares outstanding during
the period. Diluted income per share uses the weighted-average number of shares outstanding during
the period plus the dilutive effect of stock options, convertible debt instruments and stock
warrants calculated using the treasury stock method. Also, the potential effect of diluted
securities during periods when the Company is in a loss position for continuing operations are not
included as the impact would be anti-dilutive. Weighted average shares used in the computation of
basic and diluted income per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
For the Nine |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Weighted average common and common
equivalent shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
256,559,172 |
|
|
|
31,640,615 |
|
|
|
191,472,959 |
|
|
|
31,640,615 |
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debt |
|
|
|
|
|
|
279,595,558 |
|
|
|
|
|
|
|
|
|
Stock warrants and options |
|
|
|
|
|
|
13,537,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
256,559,172 |
|
|
|
324,773,881 |
|
|
|
191,472,959 |
|
|
|
31,640,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents outstanding
which are not included in the
calculation of diluted earnings
per share because their impact
is antidilutive |
|
|
223,372,441 |
|
|
|
15,421,031 |
|
|
|
223,320,736 |
|
|
|
308,533,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed within Note 13, on October 21, 2005, the Company filed a registration statement on
Form S-1 with the Securities and Exchange Commission with respect to a proposed rights offering.
The completion of the proposed rights offering could significantly impact the Companys amount of
basic and diluted shares outstanding.
13. SUBSEQUENT EVENTS
Subsequent to September 30, 2005, the Company was named as the defendant in a lawsuit which alleges
that the Company breached a purported verbal agreement for indemnification. The suit seeks damages
of $6,600, plus interest, costs and attorneys fees. While the Company does not believe that any
such indemnification agreement exists, believes that it has meritorious defenses to the claim and
intends to vigorously defend the lawsuit, there can be no assurance as to its outcome.
On October 12, 2005 the Company closed on its tender offer and consent solicitation to the holders
of its remaining New Senior Notes and Junior Notes (collectively, the Notes) to receive a 15%
premium for agreeing to an early conversion of their Notes into shares of the Companys authorized
but unissued common stock. The Company also solicited consents from the holders of its remaining
New Senior Notes to remove all material covenants contained in the indentures, including the
covenant restricting the amount of senior debt that the Company may incur and the covenant
requiring the Company redeem the New Senior Notes up a change of control. No such consent was
sought from the holders of the outstanding Junior Notes since the covenant protections related to
the Junior Notes were previously eliminated as a result of the Companys January 2005 tender offer
(see Note 9).
The Company received tenders and related consents from holders of 98% in aggregate principal amount
of its outstanding New Senior Notes and tenders from the holders of 33% in aggregate principal
amount of its outstanding Junior Notes. Based on the level of premium shares that have been
issued (see below), for this offering and consent solicitation, the Company will record, during the
fourth quarter of 2005, an inducement charge of $155 and incurred related transaction expenses of
approximately $175.
At the closing of the offer, the Company issued 161,625 shares of its authorized but unissued
common stock to the holders of the New Senior Notes who tendered in the offer (including 21,082
premium shares), 875 shares of its authorized but unissued common stock to the holders of the
Junior Notes who tendered in the offer (including 144 premium shares), and 60,560 shares to LJH
Ltd. (an entity controlled by the Companys principal stockholder) in connection with the partial
exercise of the LJH Warrant. See Note 8 for information about the LJH Warrant. After the closing
of the offer, the Company has 479,619 shares
20
outstanding and the Companys principal stockholder holds approximately 43% of the outstanding
common stock.
In accordance with the terms of the offer, all Notes that were properly tendered were accepted for
early conversion. The Company received consents representing a majority in aggregate principal
amount of the outstanding New Senior Notes in the consent solicitation, and accordingly, the
proposed amendments to the indentures governing the New Senior Notes have become effective.
After consummation of the offer and consent solicitation, approximately $1,221 of the New Senior
Notes and $635 of the Junior Notes remain outstanding. Upon maturity of such notes in 2006 and
2007, respectively, the New Senior Notes will automatically convert into 2,849 shares of the
Companys common stock and the Junior Notes will automatically convert into 1,550 shares of the
Companys common stock. At such time, the Companys principal stockholder will be able to fully
exercise the LJH Warrant and receive 1,885 shares of the Companys common stock.
On September 20, 2005, the Company entered into a letter agreement with Owl Creek Asset Management
LP (Owl Creek), who beneficially owned approximately $24,900 in aggregate principal amount of the
New Senior Notes. In the letter agreement, Owl Creek agreed to tender the New Senior Notes that it
owned in the August 2005 tender offer and to participate in the rights offering to the full extent
of its basic subscription privilege. In October 2005, the Company issued 59,558 shares of its
common stock to Owl Creek in the August 2005 tender offer, which will give them the right to
purchase 2,233 post-reverse split shares of the Companys common stock in the rights offering.
In July 2005, the Company filed a registration statement on Form S-1 with the Securities and
Exchange Commission with respect to a proposed rights offering. The registration statement became
effective on October 21, 2005. Within the registration statement, the Company set forth the
following:
|
|
|
The Company has granted rights to stockholders who own shares, as of a October 19, 2005
(record date), the right to purchase additional shares of the Companys post-reverse
split common stock for a subscription price of $4.80 per share ($0.12 per pre-reverse split
share). For every 40 pre-reverse split shares (one post-reverse split share) of common
stock held on the record date, stockholders have been granted 1.50 subscription rights. |
|
|
|
|
The Company will allow its principal stockholder to use amounts due to him under the LJH
Term Loan (including interest previously paid in kind and accrued but unpaid cash and PIK
interest to the closing date of the rights offering) as consideration (on a
dollar-for-dollar basis) to exercise rights that he has received to purchase shares of
common stock in the rights offering. The Companys principal stockholder has agreed to use
the balance of the LJH Term Loan to the full extent of amounts due as of the closing date
of the rights offering. |
|
|
|
|
Based on his current ownership, the Companys principal stockholder will have the right
to purchase 7,744 post-reverse split shares in the rights offering for a total purchase
price of $37,170. The related party term loan had a balance due (including interest
previously paid in kind and accrued but unpaid cash and PIK interest) as of October 31,
2005 of $18,872. As such, if the rights offering had closed on October 31, 2005, the
Company would have issued to its principal stockholder 3,932 post-reverse split shares of
common stock based on his use of the LJH Term Loan to pay the purchase price for such
shares. Further, the Companys principal stockholder would have the right at that date, but
not the obligation, to purchase up to an additional 3,812 post-reverse split shares of
common stock in the rights offering for an aggregate cash purchase price of $18,298. |
|
|
|
|
If the Companys principal stockholder is the only participant in the rights offering
and if the level of his participation is only to the extent of using the LJH Term Loan as
full payment to purchase shares, and no other stockholders exercise their right to purchase
shares in the rights offering, the Companys principal stockholder will own approximately
57% of the Companys outstanding common stock. |
|
|
|
|
In addition to the rights offered to the Companys stockholders under a basic
subscription privilege, the Company also granted its stockholders an oversubscription
privilege. The oversubscription privilege entitled stockholders to purchase additional
shares of the Companys common stock, to the extent available, at the same $4.80 per share
subscription price. The Company will satisfy the oversubscription privilege only if other
stockholders do not elect to purchase all of the shares offered under their basic
subscription privilege. If the oversubscription requests exceed shares available, the
Company will allocate the available shares pro rata among those who oversubscribed based on
the number of shares each subscriber for additional shares has purchased under the basic
subscription privilege. |
21
|
|
|
In addition to the basic and oversubscription privileges that the Company is offering,
it will have the right to sell shares not otherwise purchased in the rights offering to one
or more brokerage firms that will sell such shares to investors in the public market. The
Company does not currently have any arrangements in place with brokerage firms to sell
these shares. |
|
|
|
|
If stockholders purchase all of the shares available for purchase in the rights
offering, the Company will have 29,976 post-reverse split shares outstanding after the
completion of the rights offering and will have raised gross proceeds of approximately
$67,460 (excluding the amount of the LJH Note). There can be no assurance that any shares
(other than shares issued to the Companys principal stockholder based on the use of the
LJH Note to purchase shares) will be purchased in the rights offering. |
|
|
|
|
The Company plans to effect, simultaneously with the closing of the rights offering, a
reverse split of its common stock on a one-new-share-for-40-old-shares basis. In
conjunction with the reverse split, the Company will amend its certificate of incorporation
to reduce its authorized common stock, $0.001 par value, from 500,000 (on a pre-reverse
split basis) to 100,000 (on a post-reverse split basis) shares. |
All of the above actions were approved by the holders of a majority of the Companys outstanding
common stock at a stockholders meeting held on October 7, 2005.
22
The following table sets forth (1) the Companys actual capitalization as of September 30, 2005,
(2) the Companys pro forma capitalization as of September 30, 2005 as if on that date the August
2005 tender offer, which closed on October 12, 2005, had been completed, and (3) the Companys pro
forma capitalization as of September 30, 2005 as if on that date (a) the August 2005 tender offer
had been completed as set forth in (2) above and (b) the LJH Note had been used to purchase shares
in the rights offering as described above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
|
(1) |
|
|
|
|
|
|
(2) |
|
|
|
|
|
|
(3) |
|
|
|
Actual |
|
|
Adjustments |
|
|
Pro Forma |
|
|
Adjustments |
|
|
Pro Forma |
|
|
|
Unaudited |
|
|
Unaudited |
|
|
Unaudited |
|
|
Unaudited |
|
|
Unaudited |
|
Revolving loan |
|
$ |
7,520 |
|
|
$ |
|
|
|
$ |
7,520 |
|
|
$ |
|
|
|
$ |
7,520 |
|
Notes payable to
financial institutions |
|
|
23,018 |
|
|
|
|
|
|
|
23,018 |
|
|
|
|
|
|
|
23,018 |
|
Capital lease obligation |
|
|
4,240 |
|
|
|
|
|
|
|
4,240 |
|
|
|
|
|
|
|
4,240 |
|
Related party term loan |
|
|
18,321 |
|
|
|
|
|
|
|
18,321 |
|
|
|
(18,321 |
)(C) |
|
|
|
|
Old senior subordinated
notes due 2008 |
|
|
16,247 |
|
|
|
|
|
|
|
16,247 |
|
|
|
|
|
|
|
16,247 |
|
New senior subordinated
convertible PIK notes due
2006 |
|
|
61,437 |
|
|
|
(60,216 |
)(A) |
|
|
1,221 |
|
|
|
|
|
|
|
1,221 |
|
Junior subordinated
convertible PIK notes due
2007 |
|
|
947 |
|
|
|
(312 |
)(A) |
|
|
635 |
|
|
|
|
|
|
|
635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
131,730 |
|
|
$ |
(60,528 |
) |
|
$ |
71,202 |
|
|
$ |
(18,321 |
) |
|
$ |
52,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
(deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value,
1,000 shares authorized,
none outstanding, 15
shares designated series
A junior participating |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Common Stock, $0.001 par
value, 500,000 shares
authorized, 256,559
shares issued and
outstanding on September
30, 2005, 479,619 shares
issued and outstanding
pro forma, and 636,883
shares issued and
outstanding pro forma |
|
|
257 |
|
|
|
223 |
(B) |
|
|
480 |
|
|
|
157 |
(C) |
|
|
637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid in capital |
|
|
239,099 |
|
|
|
60,366 |
(B) |
|
|
299,465 |
|
|
|
18,164 |
(C) |
|
|
317,629 |
|
Accumulated other
comprehensive loss, net
of tax |
|
|
(341 |
) |
|
|
|
|
|
|
(341 |
) |
|
|
|
|
|
|
(341 |
) |
Accumulated deficit |
|
|
(280,789 |
) |
|
|
(155 |
)(B) |
|
|
(280,944 |
) |
|
|
(736 |
) (C) |
|
|
(281,680 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders
(deficit) equity |
|
$ |
(41,774 |
) |
|
$ |
60,434 |
|
|
$ |
18,660 |
|
|
$ |
17,585 |
|
|
$ |
36,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
89,956 |
|
|
$ |
(94 |
) |
|
$ |
89,862 |
|
|
$ |
(736 |
) |
|
$ |
89,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Represents the results of the August 2005 tender offer, which closed on
October 12, 2005. |
|
(B) |
|
Reflects: (i) the issuance of 162,500 shares to the holders of the New
Senior Notes and Junior Notes upon the tendering of such Notes; and (ii) the
issuance of 60,560 shares to the Companys principal stockholder upon the
partial exercise of the LJH Warrant. After the closure of the August 2005
tender offer and the partial exercise of the LJH Warrant, the Company has
479,619 shares of common stock outstanding. |
|
(C) |
|
Represents the use of the LJH Note to purchase shares in the rights
offering in the manner described above (including a charge that will be
recognized during the fourth quarter for the write-off of unamortized deferred
financing costs). After the closure of the August 2005 tender offer described
above and upon the use of the LJH Note to purchase shares in the rights
offering, the Company will have 636,883 shares of common stock outstanding. |
23
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise requires, references to TIMCO, we, our, and us, in this
Quarterly Report on Form 10-Q (Form 10-Q) includes TIMCO Aviation Services, Inc. and its
subsidiaries. This Form 10-Q contains, or may contain, forward-looking statements, such as
statements regarding our prospects, strategy and anticipated trends in the industry in which we
operate. These forward-looking statements are based on our current expectations and are subject to
a number of risks, uncertainties and assumptions relating to our operations and results of
operations, competitive factors, shifts in market demand, and other risks and uncertainties,
including, in addition to those described below and elsewhere in this Form 10-Q and in our Annual
Report on Form 10-K for the year ended December 31, 2004 (the Form 10-K), our ability to continue
to generate sufficient working capital to meet our operating requirements and service our
indebtedness, our maintaining good working relationships with our vendors and customers,
competitive pricing for our products and services, our ability to achieve gross profit margins at
which we can be profitable, including margins on services we perform on a fixed price basis,
competition in the aircraft maintenance, repair and overhaul market and the impact on that market
and on us of the ongoing global war on terrorism, 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 MRO facilities, our ability to
effectively integrate future acquisitions, our ability to effectively manage our business, economic
factors which affect the airline industry, generally including the amount of aircraft maintenance
outsourced by various airlines, and future changes in government regulations. Should one or more
of these risks or uncertainties materialize, or should the assumptions underlying our
forward-looking statements prove incorrect, actual results may differ significantly from results
expressed or implied in any forward-looking statements made by us in this Form 10-Q. We do not
undertake any obligation to revise these forward-looking statements to reflect future events or
circumstances.
The following discussion and analysis should be read in conjunction with the information set forth
under Managements Discussion and Analysis of Financial Condition and Results of Operations in
the Form 10-K.
GENERAL
TIMCO Aviation Services, Inc. is one of the worlds largest providers of aviation maintenance,
repair and overhaul (MRO) services for major commercial airlines, regional air carriers, aircraft
leasing companies, government and military units and air cargo carriers. We provide MRO services
through several subsidiaries: Triad International Maintenance Corporation (known in the industry as
TIMCO), which, with its four active locations, is one of the largest independent providers of
aircraft heavy maintenance services in the world and also provides aircraft storage and line
maintenance services; Brice Manufacturing, which specialize in the sale of new aircraft seats and
aftermarket parts and in the refurbishment of aircraft interior components; TIMCO Engineered
Systems, which provides engineering services both to our MRO operations and our customers; and
TIMCO Engine Center, which overhauls and maintains JT8D engines and performs on-wing repairs for
both JT8D and CFM-56 series engines. Visit TIMCO online at www.timco.aero.
Our goal is to be the vendor of choice to our customers, providing aircraft maintenance solutions
to meet our customers MRO requirements. The services that we offer allow our customers to reduce
their costs by outsourcing some of their MRO functions.
At present, approximately 80% of our business is airframe heavy maintenance, and we are one of the
largest independent providers of these services in the world. We have begun expansion into line
maintenance and hope to significantly expand that business, believing it to be a service that
airlines will seriously consider outsourcing in the future. We also are planning to expand our
engine operation by establishing a repair shop to overhaul and maintain CFM-56 engines. There can
be no assurance we can successfully expand in these areas.
Our principal executive offices are at 623 Radar Road, Greensboro, North Carolina 27410, and our
telephone number is (336) 668-4410.
24
RESULTS OF OPERATIONS
General
Operating revenues consist primarily of service revenues and sales of materials consumed while
providing services, net of allowances for any reworks, discounts, or returns. Cost of sales
consists primarily of labor, materials, overhead, and freight charges.
Our operating results have fluctuated in the past and may fluctuate significantly in the future.
Many factors affect our operating results, including the factors described above and the following
factors:
|
|
|
the 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 MRO service providers, |
|
|
|
|
the number of airline customers seeking repair services at any time, |
|
|
|
|
the impact of fixed pricing on gross margins and our ability to accurately project our
costs in a dynamic environment, |
|
|
|
|
our ability to fully utilize our hangar space dedicated to maintenance and repair
services, |
|
|
|
|
the impact during future periods on airline use of out-of-production aircraft (such as
727, DC 8, DC 9 and DC 10) and JT8D engines as a result of increased fuel costs and other
factors, |
|
|
|
|
our ability to retain the services of our executive officers |
|
|
|
|
our ability to attract and retain a sufficient number of mechanics to perform the
maintenance, repair and overhaul 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.
Three and Nine Months Ended September 30, 2005 and 2004
Operating revenue for the nine month period ended September 30, 2005 increased $14,335 or 6.1% to
$249,989, from $235,654 for the same period in 2004. Operating revenue for the three month period
ended September 30, 2005 increased $4,040 or 5.4% to $78,192, from $74,152 for the same period in
2004. The increase in revenues for the three month and nine month periods ended September 30, 2005
compared to the revenues for the comparable periods in 2004 can primarily be attributed to
additional revenue in our airframe heavy maintenance operations (described below), in our engine
center operation due to an expanded customer base, the addition of JT8D-200 overhaul capabilities
and FAA initiated maintenance directives for certain engine types, and in our Brice seat
manufacturing and overhaul operation, which has benefited from the cross sales of our other service
offerings and from an expanded customer base, including its first major U.S. carrier for its
aircraft seats, partially offset by lower revenues from engineering services.
During 2005, particularly within our airframe MRO facilities, we have continued to expand our
customer base and, in some instances, we have increased our share of outsourced maintenance from
our existing customers. The impact on revenue for the first nine months of 2005 was an increase in
revenue for our airframe MRO facilities over the 2004 same period of approximately $12,372 or
6.7%. The revenue increase within our airframe MRO facilities has been coupled with increased
revenue from our engine center operation ($13,001 or 133.2%), our line services operations ($3,983
or 286.7%), and our Brice operation ($1,542 or 11.2%). These 2005 nine month increases over 2004
same periods were partially offset by lower revenue from our engineering services business as
substantial customer programs were completed during the first nine months of 2004 with 2005
customer programs not expecting significant shipments until the final quarter of 2005.
The increased revenue for the third quarter ended September 30, 2005 over the prior year third
quarter has been substantially driven by increased revenue from our engine center operation ($8,606
or 268.8%) and our line services operations ($1,436 or 248.3%). The increases within our engine
center operation and line services operations more than offset slight declines during the third
quarter of 2005 as compared to the 2004 same period within our airframe MRO facilities ($1,136 or
2.0%) and within our engineering services business ($3,824 or 63.1%), while our Brice operation has
remained relatively flat during the third quarter of 2005 as compared to the third quarter of 2004.
25
While our 2005 revenues are significantly improved over 2004, our gross profit for 2005 continued
to be unfavorably impacted by general economic conditions affecting the airline industry, which has
continued to put pricing pressures on our business, and by continued over capacity in the MRO
markets in which we operate. Also, delays and changes in customer maintenance schedules have
impacted us in the past and are likely to impact us in the future.
In September 2005, America West Airlines, a primary customer of our Macon, Georgia MRO facility and
a substantial customer of our Lake City, Florida and Goodyear, Arizona MRO facilities, merged with
US Airways. In the near term we do not believe that this merger will adversely affect our business
with America West. However, in the long term we are unable to predict the impact of this merger on
our business. Additionally, on September 14, 2005, one of our ten largest customers, Delta
Airlines, Inc., filed a petition for reorganization under Chapter 11 of the United States
Bankruptcy Code. Based on currently available information, we do not expect the bankruptcy filing
of Delta Airlines, Inc. to have a material adverse effect on our results of operations or financial
position.
Gross profit decreased to $17,554 for the first nine months of 2005 compared with a gross profit of
$20,221 for the first nine months of 2004. Gross profit as a percentage of revenue decreased to
7.0% for the first nine months of 2005 compared with 8.6% for the first nine months of 2004. Gross
profit decreased to $598, or 0.8% of revenue, for the third quarter ended September 30, 2005
compared with a gross profit of $7,122, or 9.6% of revenue, for the third quarter ended September
30, 2004. The decline in gross profit for the three and nine month periods ended September 30,
2005 as compared to the same period for 2004 was mainly the result of operational inefficacies
within our airframe MRO facilities. While increased revenues were achieved during the first nine
months of 2005 as compared to the 2004 same period, manpower shortages within several of our
airframe MRO operations, required additional overtime and caused operational inefficiencies
resulting in unfavorable impacts to gross margins. Additionally, throughout 2005 and in particular
during the third quarter of 2005, most of our airframe MRO facilities, and in particular our two
largest facilities, transitioned the aircraft fleet type and/or customers that they were servicing.
These transitions resulted in additional training requirements, learning curve issues and overall
operational inefficiencies. These factors caused deteriorations to gross margin results,
particularly, the third quarter of 2005. Also, shortages of engine parts during most of the third
quarter of 2005 resulted in increased cost for required engine parts and a deterioration in gross
margin results for our engine center operation.
Gross margins during any particular period are dependent upon the number and type of aircraft
serviced, the contract terms under which services are performed and the efficiencies that can be
obtained in the performance of such services. Significant changes in any one of these factors
could have a material impact on the amount and percentage of gross profits in any particular period
and from period to period. Additionally, gross profit could be impacted in the future by
considerations as to the value of our inventory. We continue to evaluate market and industry
exposures in connection with the establishment of appropriate reserves for inventory obsolescence.
While we believe that we have appropriately valued our inventory at the lower of cost or market,
additional allowances may be required in the future, depending on the market for aircraft parts
during any particular period and the applicability of the parts in our inventory compared to the
types of aircraft for which we are performing maintenance procedures.
Operating expenses for the nine month period ended September 30, 2005 were $18,310 compared to
$15,987 for the nine month period ended September 30, 2004. Operating expenses for the third
quarter of fiscal 2005 were $5,973 compared to $5,164 for the third quarter of fiscal 2004. As a
percentage of revenues, operating expenses were 7.3% and 6.8% for the 2005 and 2004 nine month
periods, respectively, and were 7.6% and 7.0% for the 2005 and 2004 third quarters, respectively.
Operating expenses for the three and nine month periods ended September 30, 2005 increased over the
same period of 2004 as a result of increased costs as we expand our operations to support increased
revenue levels, including increased headcount, increased marketing, travel and entertainment, and
fees paid for financial advisory services. Also, the nine month period ended September 30, 2005
was impacted by professional fees (that did not qualify for deferred financing treatment) incurred
for the recently completed Monroe Capital debt refinancing (see Note 7 of Notes to Condensed
Consolidated Financial Statements).
In September 2005, we entered into an amendment, with our principal stockholder, to the lease
arrangement for our Dallas facility. Under this amendment, our lease commitment for this facility
was modified to a month-to-month arrangement. As a result of this modification and in accordance
with SFAS No. 98, the unamortized deferred income as of September 30, 2005 of approximately $1,178
has been included as a gain on sale of fixed assets within the accompanying condensed consolidated
financial statements for the three and nine month periods ended September 30, 2005.
As a result of these factors, loss from operations was $422 for the first nine months of 2005,
compared to income from operations of $4,234 for the first nine months of 2004, and loss from
operations was $4,197 for the third quarter of 2005, compared to income from operations of $1,958
for the third quarter of 2004.
26
Interest expense (excluding amortization of deferred financing fees) for the nine month period
ended September 30, 2005 increased by $755 to $5,800, from $5,045 for the nine month period ended
September 30, 2004. Interest expense (excluding amortization of deferred financing fees) for the
three month period ended September 30, 2005 increased by $404 to $2,183, from $1,779 for the three
month period ended September 30, 2004. The increase during 2005 over the first nine months and
third quarter of 2004 is primarily attributable to interest expense on our restructured related
party term loan (established April 8, 2004) and overall high borrowing levels under this related
party loan, the additional interest expense on our $8,000 Hilco Term Loan (established April 8,
2004 and modified April 12, 2005), and the additional interest expense on our $7,000 Monroe Capital
Term Loan and $3,000 Monroe Capital Line of Credit (established April 12, 2005).
Amortization of deferred financing costs for the first nine months of 2005 was $1,059, compared to
$1,001 for the first nine months of 2004. Amortization of deferred financing costs for the third
quarter of 2005 was $396, compared to $314 for the third quarter of 2004. During the nine month
period ended September 30, 2004 we wrote-off $145 of deferred financing fees that related to a
short-term extension of a previously outstanding credit facility. See the Note 4 of Notes to
Consolidated Financial Statements within our 2004 Form 10-K for specifics of this short-term
extension.
In August 2004, we entered into a settlement agreement with the entity from which we acquired our
Oscoda, Michigan engine and airframe maintenance facilities in 1999. Pursuant to that entitys
plan of reorganization under Chapter 11 of the United States Bankruptcy Code, we were to receive a
pro rata portion of 7,000 shares of common stock in the reorganized company based on our unsecured
claim as compared to the total of all unsecured claims. On April 21, 2005, we received 1,364
shares of new common stock in the reorganized company in settlement of our claim against that
entitys bankruptcy estate. Based on the stock price of the reorganized company on April 21, 2005,
which was $1.30 per share, we have recorded a gain of $1,773 for the nine month period ended
September 30, 2005.
During the first nine months of 2005, we completed an offering and consent solicitation (the
January 2005 tender offer) relating to our New Senior Notes and our Junior Notes. As a result of
this tender offer, we recognized an inducement charge of $160 relating to the value of the premium
shares issued as a part of the offering. Additionally, we incurred transaction fees related to the
offering of $240. See Note 9 of Notes to Condensed Consolidated Financial Statements for specifics
regarding this tender offer.
Other income net was $740 and $736 for the nine months of 2005 and 2004, respectively. Other
income net was $388 and $303 for the third quarters of 2005 and 2004, respectively. Other income
net for the first nine months of 2005 included a $250 gain from the receipt of life insurance
proceeds on a former key employee and a $238 gain relating to a job creation incentive program
established with the State of Florida. Other income net for the first nine months of 2004
included a $209 gain on the settlement of a warrant repurchase obligation (see Note 6 of the Notes
to Consolidated Financial Statements within our 2004 Form 10-K).
As a result of the above factors, our loss from continuing operations before income taxes and
discontinued operations for the nine month period ended September 30, 2005 was $4,325 compared to
our loss from continuing operations before income taxes and discontinued operations of $1,077 for
the nine month period ended September 30, 2004. Our loss from continuing operations before income
taxes and discontinued operations for the third quarter of 2005 was $6,388 compared to our income
from continuing operations before income taxes and discontinued operations of $168 for the third
quarter of 2004.
During the first nine months of 2005, we recognized a $368 income tax benefit, which primarily was
the result of income tax refunds for the overpayment of state taxes for our Oscoda, Michigan
operations.
For the reasons set forth above, our loss from continuing operations for the nine month period
ended September 30, 2005 was $3,957, or $0.02 per basic share and diluted share, compared to a loss
of $1,077, or $0.03 per basic share and diluted share, for the nine month period ended September
30, 2004. Our loss from continuing operations for the third quarter of 2005 was $6,388, or $0.02
per basic share and diluted share, compared to income of $168, or $0.01 per basic share and $0.00
per diluted share, for the third quarter of 2004.
Income from discontinued operations for the first nine months of 2005 was $140, or $0.00 per basic
share and diluted share, compared to income of $1,207, or $0.03 per basic share and diluted share,
for the first nine months of 2004. Income from discontinued operations for the third quarter of
2005 was $42, or $0.00 per basic share and diluted share, compared to income of $93, or $0.00 per
basic share and diluted share, for the third quarter of 2004. Income from discontinued operations
for 2004 includes an $825 gain on the disposition of our office and warehouse facility located in
Miramar, Florida and net rental income and expenses associated with this former facility received
prior to its disposition. Results for both the first nine months of 2005 and 2004 include
collections on receivables and the sale of residual inventory that
27
remain after the sale of our
redistribution operation and new parts bearings operation, all of which is fully reserved. Since our collections
on assets from discontinued operations are winding down, we do not expect that our income from
discontinued operations will be significant in future periods.
For the reasons set forth above, our net loss for the first nine months of 2005 was $3,817 ($0.02
per basic share and diluted share), compared to net income of $130 for the first nine months of
2004 ($0.00 per basic share and diluted share). Our net loss for the three months ended September
30, 2005 was $6,346 ($0.02 per basic share and per diluted share), compared to net income of $261
for the comparable 2004 period ($0.01 per basic share and $0.00 per diluted share).
28
LIQUIDITY AND CAPITAL RESOURCES
Developments Concerning the Aviation Industry and Our Operations
The condition of the airline industry has a substantial effect on our business, since our customers
consist of passenger airlines and freight carriers, aircraft leasing companies, maintenance and
repair facilities that service airlines, and original equipment manufacturers. Generally, when
economic factors adversely affect the airline industry, they tend to reduce the overall demand for
maintenance and repair services, causing downward pressure on pricing and increasing the credit
risks associated with doing business with airlines. Additionally, the price of jet fuel affects the
maintenance and repair markets, since older aircraft, which consume more fuel and which currently
account for a significant portion of our maintenance and repair services business, become less
viable as the price of fuel increases.
The September 11, 2001 terrorist attacks against the United States of America and the resulting
increase in airline insurance costs, additional government mandated passenger taxes and fees, and
increased airport security costs, have had a severe impact on the aviation industry. These
factors, in conjunction with an overall slowdown in the U.S. economy, a reduction in passenger
levels from fiscal 2001 through fiscal 2003, and the overall instability in the Middle East
(including the ongoing global war on terrorism) have resulted in operating losses for U.S. airline
carriers in excess of $10.3 billion for 2001, $8.6 billion for 2002, $3.6 billion for 2003, and an
estimated $5.0 billion for 2004. In addition to these adverse factors, fiscal 2003 was further
impacted by the outbreak of the SARS virus in Asia and fiscal 2004 and the first nine months of
2005 were impacted by significantly increased fuel costs. As a result of these factors, during
2003 and 2004, 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). These factors have also
caused several commercial airlines to file for bankruptcy protection under Chapter 11 of the United
States Bankruptcy Code. 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 has been 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. Further, two other major airlines, Delta
Airlines, Inc. and Northwest Airlines, Inc., filed for protection from creditors under Chapter 11
on September 14, 2005, and 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
reductions.
We believe that all of the above factors could continue to have a negative impact on our business
in the foreseeable future. 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 MRO business.
29
Contractual Payment Obligation and Other Commercial Commitments
Below is a table setting forth our contractual payment obligations and other commercial commitments
as of September 30, 2005, which have been aggregated in order to facilitate a basic understanding
of our liquidity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual |
|
|
|
|
|
Less than |
|
|
Payments due by period |
|
Obligations |
|
Total |
|
|
One Year |
|
|
1-3 years |
|
|
4-5 years |
|
|
After 5 years |
|
Revolving
Credit
Facility |
|
$ |
7,520 |
|
|
$ |
7,520 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Long-Term
Debt |
|
|
119,969 |
|
|
|
1,416 |
|
|
|
118,553 |
* |
|
|
|
|
|
|
|
|
|
Capital
Leases |
|
|
4,240 |
|
|
|
1,012 |
|
|
|
285 |
|
|
|
336 |
|
|
|
2,607 |
|
|
Operating
Leases |
|
|
22,701 |
|
|
|
3,975 |
|
|
|
7,674 |
|
|
|
3,644 |
|
|
|
7,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual
cash
obligations |
|
$ |
154,430 |
|
|
$ |
13,923 |
|
|
$ |
126,512 |
|
|
$ |
3,980 |
|
|
$ |
10,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
Less than |
|
|
Payments due by period |
|
Commitments |
|
Total |
|
|
One Year |
|
|
1-3 years |
|
|
4-5 years |
|
|
After 5 years |
|
Letters of
Credit + |
|
|
11,434 |
|
|
|
11,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other
Commercial
Commitments |
|
$ |
11,434 |
|
|
$ |
11,434 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Included within this amount is $61,437 of our New Senior Subordinated Notes and $947 of our
Junior Subordinated Notes. As a result of our August 2005 tender offer, which closed on October
12, 2005, we currently have $1,221 of our New Senior Subordinated Notes and $635 of our Junior
Subordinated Notes outstanding. If not redeemed or repurchased by the Company prior to the
maturity dates of these obligations, these remaining notes ($1,856 in aggregate) automatically
convert to 2,849 and 1,550 shares, respectively, of our authorized but unissued common stock. |
|
+ |
|
Outstanding letters of credit primarily relate to security for our obligation to make payments on
an operating lease requiring future aggregate payments of approximately $8,200. This amount is
removed from the operating lease and total contractual cash obligations line because it is included
within the letters of credit. |
We are also committed under employment agreements with all of our executive officers and several of
our key employees.
Liquidity
For the year ended December 31, 2004 and the nine month period ended September 30, 2005, we
incurred losses from continuing operations of $667 and $3,957, respectively. We also had a net
stockholders deficit as of December 31, 2004 and September 30, 2005. Further, during 2004 we
required additional cash flow above amounts currently being provided from operations to meet our
working capital requirements.
30
Our ability to service our debt and note obligations as they come due, including maintaining
compliance with the covenants and provisions under our current and future 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, the ongoing global war on
terrorism, the outbreak of the SARS virus in Asia and competitive price reductions in airfare
prices. These and other factors may adversely affect our customers in the future.
Cash flow from operations is used to service 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. Additionally, our senior credit facilities limit our ability
to continue to borrow additional funds in the event of a material adverse change in our business,
as defined. If we were unable to repay the debt to the lenders or obligations to the noteholders,
or otherwise obtain a waiver, the lenders and holders could proceed against the collateral securing
the financing obligations and notes, and exercise all other rights available to them. While we
expect to be in a position to continue to meet our obligations in future periods, there can be no
assurance we will be able to do so.
On April 12, 2005, we closed on a financing arrangement with Monroe Capital Advisors LLC in which
we obtained a $7,000 senior secured term loan and a $3,000 delayed draw term loan designated for
capital expenditures. Additionally, Monroe Capital acquired the $8,000 senior secured term loan
previously made to us by Hilco Capital LP. The original $8,000 term loan due to Hilco Capital (and
acquired by Monroe Capital as part of this financing) and the new $7,000 term loan (collectively
the Term Loans) mature on December 31, 2007. Borrowings for capital expenditures made under the
$3,000 delayed draw term loan (the Monroe Capital Line of Credit and together with the Term Loans
the Monroe Capital Loans) are payable in monthly installments (as set forth in the financing
agreement) with the balance due on December 31, 2007. For further details regarding this amended
and restated financing agreement, see Note 7 of Notes to Condensed Consolidated Financial
Statements.
At
November 9, 2005, the outstanding aggregate borrowed on the CIT Group Revolving Line of
Credit was $13,177, the outstanding CIT Term Loan was $4,945, outstanding letters of credit under the
revolving line of credit was $11,434 and $4,818 was available for additional borrowing under the
revolving line of credit.
Additionally, the degree to which we are leveraged could have important consequences to us,
including:
|
- |
|
our vulnerability to adverse general economic and industry conditions; |
|
|
- |
|
our ability to obtain additional financing for future working capital expenditures, general
corporate or other purposes, particularly where our current lenders have a lien on all of our assets; |
|
|
- |
|
the requirement that we obtain the consent from our lenders if we wish to borrow additional
amounts; and |
|
|
- |
|
the dedication of a significant portion of our cash flow from operations to the payment of
principal and interest on indebtedness, thereby reducing the funds available for operations. |
In addition, subject to the limitations set forth in the indenture for the New Senior 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.
We believe that we will meet our working capital requirements during 2005 from funds available
under our revolving credit agreement, our new term loans from Monroe Capital and our operations.
We may also sell assets or our equity securities (including any shares sold in the rights
offering), 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 expectation.
31
Source and Use of Cash
Net cash provided by our continuing operating activities during the nine month period ended
September 30, 2005 was $487, compared to net cash used in continuing operating activities during
the same period of 2004 of $5,323. Decreases in accounts receivable of $1,011, and increases in
customer deposits and accounts payable of $10,613 and $4,410, respectively, along with proceeds
from the exercise of a common stock warrant of $71, borrowings of $4,612 under our senior credit
facilities, and $140 cash provided by our discontinued operations were used primarily to fund our
operations, to fund increases in inventory and other assets of $8,972 and $4,211, respectively, to
reduce other liabilities by $4,331, to purchase fixed assets of $3,435, to pay capital lease
obligations by $680 and to fund financing costs of $1,095.
Senior Credit Facilities
See discussion of our senior credit facilities in Note 6 to Notes to Condensed Consolidated
Financial Statements and in our 2004 Form 10-K.
Subordinated Notes
In January 2005, we extended an offering and consent solicitation relating to the New Senior Notes
and the Junior Notes. In the offering and consent solicitation, we offered holders of the Notes
the right to receive a 15% premium payable in shares of our common stock if the holders agreed to
an early conversion of their Notes into common stock during the conversion period, which expired as
of March 8, 2005. We also solicited consents from the holders of our New Senior Notes and Junior
Notes to remove all material covenants contained in the indentures, including the covenant
restricting the amount of senior debt that we may incur and the covenant requiring us to redeem the
Notes upon a change of control. Within this offering, we received consents from the holders of a
majority of our Junior Notes, thus, the proposed amendments have become effective. As we did not
receive consents from the holders of a majority of our New Senior Noteholders, the proposed
amendments to the New Senior Notes have not been adopted.
At the closing of the offer, we issued 145,916 shares of our authorized but unissued common stock
to the holders of the New Senior Notes who tendered in the offer (including 19,032 premium shares),
8,060 shares of its authorized but unissued common stock to the holders of the Junior Notes who
tendered in the offer (including 1,051 premium shares), and 70,942 shares to LJH Ltd. (an entity
controlled by our principal stockholder) in connection with its partial exercise of the LJH
Warrant. After the closing of the offer, we had 256,559 shares outstanding and our principal
stockholder held approximately 57% of the outstanding common stock.
On October 12, 2005, we closed on a tender offer to the holders of our remaining New Senior Notes
and Junior Notes (collectively, the Notes) to receive a 15% premium for agreeing to an early
conversion of their Notes into shares of our authorized but unissued common stock. We also
solicited consents from the holders of our remaining New Senior Notes to remove all material
covenants contained in the indentures, including the covenant restricting the amount of senior debt
that we may incur and the covenant requiring that we redeem the New Senior Notes up a change of
control. If the holders tendered their New Senior Notes, they were automatically consenting to the
proposed amendments to the indentures. To become effective, the amendments required the consent of
a majority of the holders of the remaining New Senior Notes. No such consent was sought from the
holders of the outstanding Junior Notes since the covenant protections related to the Junior Notes
were previously eliminated as a result of our January 2005 tender offer (see Notes 9 and 13 of
Notes to Condensed Consolidated Financial Statements).
We received tenders and related consents from holders of 98% in aggregate principal amount of our
outstanding New Senior Notes and tenders from the holders of 33% in aggregate principal amount of
our outstanding Junior Notes. As we received consents from the holders of a majority of our New
Senior Notes, the proposed amendments have become effective. At the closing of the offer, we
issued 161,625 shares of our authorized but unissued common stock to the holders of the New Senior
Notes who tendered in the offer (including 21,082 premium shares), 875 shares of our authorized but
unissued common stock to the holders of the Junior Notes who tendered in the offer (including 144
premium shares), and 60,560 shares to LJH Ltd. (an entity controlled by the Companys principal
stockholder) in connection with the partial exercise of the LJH Warrant. After the closing of the
offer, we have 479,619 shares outstanding and our principal stockholder holds approximately 43% of
the outstanding common stock.
After consummation of the offer and consent solicitation, approximately $1,221 of the New Senior
Notes and $635 of the Junior Notes remain outstanding. Upon maturity of such notes in 2006 and
2007, respectively, the New Senior Notes will automatically convert into 2,849 shares of our common
stock and the Junior Notes will automatically convert into 1,550 shares of our common stock. At
such time, our principal stockholder will be able to fully exercise the LJH Warrant and receive
1,885 shares of our common stock.
32
On September 20, 2005, we entered into a letter agreement with Owl Creek Asset Management LP (Owl
Creek), who beneficially owned approximately $24,900 in aggregate principal amount of our New
Senior Notes. In the letter agreement, Owl Creek agreed to tender the New Senior Notes that it
owned in the August 2005 tender offer and to participate in the rights offering to the full extent
of its basic subscription privilege. In October 2005, we issued 59,558 shares of our common stock
to Owl Creek in the August 2005 tender offer, which will give them the right to purchase 2,233
post-reverse split shares of our common stock in the rights offering. Owl Creek also agreed in the
letter agreement to lock up the shares that it received in the August 2005 tender offer for 180
days.
Rights Offering
In July 2005, we filed a registration statement on Form S-1 with the Securities and Exchange
Commission with respect to a proposed rights offering. The registration statement became effective
on October 21, 2005. Within the registration statement, we set forth the following:
|
|
|
We have granted rights to stockholders owning our shares, as of a October 19, 2005
(record date), the right to purchase additional shares of our post-reverse split common
stock for a subscription price of $4.80 per share ($0.12 per pre-reverse split share). For
every 40 pre-reverse split shares (one post-reverse split share) of common stock held on
the record date, stockholders have been granted 1.50 subscription rights. If, for example,
a stockholder owned 400 shares of pre-reverse split common stock on the record date, the
stockholder would own 10 post-reverse split shares after the reverse split (see below) and
would have the right to purchase an additional 15 post-reverse split shares of our common
stock for $4.80 per share. |
|
|
|
|
We will allow our principal stockholder the use of amounts due to him under the LJH Term
Loan (including interest previously paid in kind and accrued but unpaid cash and PIK
interest to the closing date of the rights offering) as consideration (on a
dollar-for-dollar basis) to exercise rights that he has received to purchase shares of
common stock in the rights offering. Our principal stockholder has agreed to use the
balance of the LJH Term Loan to the full extent of amounts due as of the closing date of
the rights offering. |
|
|
|
|
Based on his current ownership, our principal stockholder will have the right to
purchase 7,744 post-reverse split shares in the rights offering for a total purchase price
of $37,170. The related party term loan had a balance due (including interest previously
paid in kind and accrued but unpaid cash and PIK interest) as of October 31, 2005 of
$18,872. As such, if the rights offering had closed on October 31, 2005, we would have
issued to our principal stockholder 3,932 post-reverse split shares of common stock based
on his use of the LJH Term Loan to pay the purchase price for such shares. Further, our
principal stockholder would have the right at that date, but not the obligation, to
purchase up to an additional 3,812 post-reverse split shares of common stock in the rights
offering for an aggregate cash purchase price of $18,298. |
|
|
|
|
If our principal stockholder is the only participant in the rights offering and if the
level of his participation is only to the extent of using the LJH Term Loan as full payment
to purchase shares, and no other stockholders exercise their right to purchase shares in
the rights offering, our principal stockholder will own approximately 57% of our
outstanding common stock. |
|
|
|
|
In addition to the rights offered to our stockholders under a basic subscription
privilege, we also granted our stockholders an oversubscription privilege. The
oversubscription privilege entitled stockholders to purchase additional shares of our
common stock, to the extent available, at the same $4.80 per share subscription price. We
will satisfy the oversubscription privilege only if other stockholders do not elect to
purchase all of the shares offered under their basic subscription privilege. If the
oversubscription requests exceed shares available, we will allocate the available shares
pro rata among those who oversubscribed based on the number of shares each subscriber for
additional shares has purchased under the basic subscription privilege. |
|
|
|
|
In addition to the basic and oversubscription privileges that we are offering, we will
have the right to sell shares not otherwise purchased in the rights offering to one or more
brokerage firms that will sell such shares to investors in the public market. We do not
currently have any arrangements in place with brokerage firms to sell these shares. |
33
|
|
|
If stockholders purchase all of the shares available for purchase in the rights
offering, we will have 29,976 post-reverse split shares outstanding after the completion of
the rights offering and will have raised gross proceeds of approximately $67,460 (excluding
the amount of the LJH Note). There can be no assurance that any shares (other than shares
issued to our principal stockholder based on the use of the LJH Note to purchase shares)
will be purchased in the rights offering. |
|
|
|
|
We plan to effect, simultaneously with the closing of the rights offering, a reverse
split of our common stock on a one-new-share-for-40-old-shares basis. In conjunction with
the reverse split, we will amend our certificate of incorporation to reduce our authorized
common stock, $0.001 par value, from 500,000 (on a pre-reverse split basis) to 100,000 (on
a post-reverse split basis) shares. |
All of the above actions were approved by the holders of a majority of our outstanding common stock
at a stockholders meeting held on October 7, 2005.
34
The following table sets forth (1) our actual capitalization as of September 30, 2005, (2) our pro
forma capitalization as of September 30, 2005 as if on that date the August 2005 tender offer,
which closed on October 12, 2005, had been completed, and (3) our pro forma capitalization as of
September 30, 2005 as if on that date (a) the August 2005 tender offer had been completed as set
forth in (2) above and (b) the LJH Note had been used to purchase shares in the rights offering as
described above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
|
(1) |
|
|
|
|
|
|
(2) |
|
|
|
|
|
|
(3) |
|
|
|
Actual |
|
|
Adjustments |
|
|
Pro Forma |
|
|
Adjustments |
|
|
Pro Forma |
|
|
|
Unaudited |
|
|
Unaudited |
|
|
Unaudited |
|
|
Unaudited |
|
|
Unaudited |
|
Revolving loan |
|
$ |
7,520 |
|
|
$ |
|
|
|
$ |
7,520 |
|
|
$ |
|
|
|
$ |
7,520 |
|
Notes payable to financial
institutions |
|
|
23,018 |
|
|
|
|
|
|
|
23,018 |
|
|
|
|
|
|
|
23,018 |
|
Capital lease obligation |
|
|
4,240 |
|
|
|
|
|
|
|
4,240 |
|
|
|
|
|
|
|
4,240 |
|
Related party term loan |
|
|
18,321 |
|
|
|
|
|
|
|
18,321 |
|
|
|
(18,321 |
)(C) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old senior subordinated notes
due 2008 |
|
|
16,247 |
|
|
|
|
|
|
|
16,247 |
|
|
|
|
|
|
|
16,247 |
|
New senior subordinated
convertible PIK notes due 2006 |
|
|
61,437 |
|
|
|
(60,216 |
)(A) |
|
|
1,221 |
|
|
|
|
|
|
|
1,221 |
|
Junior subordinated
convertible PIK notes due 2007 |
|
|
947 |
|
|
|
(312 |
)(A) |
|
|
635 |
|
|
|
|
|
|
|
635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
131,730 |
|
|
$ |
(60,528 |
) |
|
$ |
71,202 |
|
|
$ |
(18,321 |
) |
|
$ |
52,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par
value, 1,000 shares
authorized, none outstanding,
15 shares designated series A
junior participating |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Common Stock, $0.001 par
value, 500,000 shares
authorized, 256,559 shares
issued and outstanding on
September 30, 2005, 479,619
shares issued and outstanding
pro forma, and 636,883 shares
issued and outstanding pro
forma |
|
|
257 |
|
|
|
223 |
(B) |
|
|
480 |
|
|
|
157 |
(C) |
|
|
637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid in capital |
|
|
239,099 |
|
|
|
60,366 |
(B) |
|
|
299,465 |
|
|
|
18,164 |
(C) |
|
|
318,629 |
|
Accumulated other
comprehensive loss, net of tax |
|
|
(341 |
) |
|
|
|
|
|
|
(341 |
) |
|
|
|
|
|
|
(341 |
) |
Accumulated deficit |
|
|
(280,789 |
) |
|
|
(155 |
)(B) |
|
|
(280,944 |
) |
|
|
(736 |
) (C) |
|
|
(281,680 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders (deficit)
equity |
|
$ |
(41,774 |
) |
|
$ |
60,434 |
|
|
$ |
18,660 |
|
|
$ |
17,585 |
|
|
$ |
36,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
89,956 |
|
|
$ |
(94 |
) |
|
$ |
89,862 |
|
|
$ |
(736 |
) |
|
$ |
89,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Represents the results of the August 2005 tender offer, which
closed on October 12, 2005. |
|
(B) |
|
Reflects: (i) the issuance of 162,500 shares to the holders of the New
Senior Notes and Junior Notes upon the tendering of
such Notes; and (ii) the issuance of 60,560 shares to our principal
stockholder upon the partial exercise of the LJH Warrant. After the closure
of the August 2005 tender offer and the partial exercise of the LJH Warrant, we
have 479,619 shares of common stock outstanding. |
|
(C) |
|
Represents the use of the LJH Note to purchase shares in the rights
offering in the manner described above (including a charge
that will be recognized during the fourth quarter for the write-off of
unamortized deferred financing costs). After the closure of the August 2005
tender offer described above and upon the use of the LJH Note to purchase
shares in the rights offering, we will have 636,883 shares of common stock
outstanding. |
35
CONTINGENCIES
We are involved in various litigation and environmental matters arising in the ordinary course of
business. These are discussed in Notes 10 and 13 of Notes to Condensed Consolidated Financial
Statements. We maintain insurance coverage against certain potential claims in amounts that we
believe to be adequate. Although the final outcome of these legal and environmental matters cannot
be determined, based on the facts presently known, it is managements opinion that the final
resolution of these matters will not have a material adverse effect on our financial position or
future results of operations.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Financial Reporting Release No. 60 requires all companies to include a discussion of critical
accounting policies or methods used in the preparation of its financial statements. Our
consolidated financial statements include a summary of the significant accounting policies and
methods used in the preparation of our consolidated financial statements.
See our Annual Report on Form 10-K for the year ended December 31, 2004 for a discussion of our
critical accounting policies and use of estimates. During the nine month period ended September
30, 2005, there have been no material changes to our critical accounting policies and use of
estimates.
36
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk for changes in interest rates. We have no exposure to foreign
currency exchange rates or to commodity price risk. We do not hold or issue any financial
instruments for trading or other speculative purposes.
Our obligations under our CIT Group Revolving Credit Facility and our Monroe Capital Term Loans
bear interest at floating rates and therefore, we are impacted by changes in prevailing interest
rates. However, our $18,321 related party term loan from our principal stockholder, and our New
Senior Notes, Old Senior Notes, and Junior Notes all bear fixed interest rates and therefore we 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 2005 by approximately $292 before
taxes and would change the fair value of our financial instruments by approximately $11,000.
ITEM 4: CONTROLS AND PROCEDURES
(a) |
|
Our Chief Financial Officer and Chief Executive Officer evaluated our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange
Act of 1934, as amended (the Exchange Act)). Based on that evaluation, these officers have
concluded that as of September 30, 2005 our disclosure controls and procedures were effective in
timely alerting them to material information relating to our company (including our consolidated
subsidiaries) required to be included in our reports filed or submitted by us under the Exchange
Act. |
|
|
|
As of September 30, 2005, we have carried out an evaluation, under the supervision and with the
participation of our management, including our principal executive officer and principal financial
officer, of the effectiveness of the design and operation of our disclosure controls and
procedures. Based on such evaluation, our principal executive officer and principal financial
officer concluded that the Companys disclosure controls and procedures are effective. |
|
(b) |
|
There have been no significant changes in our internal controls or in other factors that
could significantly affect the internal controls subsequent to the date of their evaluation in
connection with the preparation of this quarterly report on Form 10-Q. |
37
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Notes 10 and 13 to the Companys Unaudited Condensed Consolidated Financial Statements included
in this filing.
ITEM 2. CHANGES IN SECURITIES
See Notes 9 and 13 to the Companys Unaudited Condensed Consolidated Financial Statements included
in this filing.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On October 7, 2005, the Company held its 2005 Annual Meeting of Stockholders to consider and vote
upon seven matters. Stockholders representing 254,040 shares of the Companys outstanding common
stock were present in person or by proxy at the meeting, constituting 99.02% of the Companys
outstanding common stock. All seven matters that were brought to a vote were approved by more than
a majority of the Companys stockholders. See the Companys Form 8-K that was filed on October 12,
2005 for specifics and results of the seven matters voted upon by stockholders.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K
(a) Exhibits
|
10.1 |
|
First Amendment to lease, dated September 1, 2005, between LJH, Ltd. and Aircraft
Interior Design, Inc. |
|
|
31.1 |
|
Certification of CEO and CFO under Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
32.2 |
|
Certification of CEO and CFO under Section 906 the Sarbanes-Oxley Act of 2002 |
(b) Reports on Form 8-K
During the quarter ended September 30, 2005, the Company filed (i) a Current Report on Form 8-K
reporting under Item 2.02 the issuance of a press release announcing the Companys financial
results for the three and six month periods ended June 30, 2005, (ii) a Current Report on Form 8-K
reporting under Item 2.02 the issuance of a press release announcing the Companys acquisition of
tooling to service CFM56 aircraft engines, (iii) a Current Report on Form 8-K reporting under Item
8.01 the issuance of a press release reporting its commencement of an offering for early conversion
of its outstanding New Senior Notes and Junior Notes into common stock, and (iv) a Current Report
on Form 8-K reporting under Item 1.01 the appointment of James H. Tate to serve as the Companys
Executive Vice President, Chief Administrative Officer and Chief Financial Officer, under Item 1.01
the Companys employment agreement with James H. Tate, under Item 1.01 the fact that the Company
had entered into amendments to its credit facility agreements with CIT Credit Group and Monroe
Capital Advisors LLC, under Item 5.02 the resignation of James H. Tate as a director of the
Company, and under Item 7.01 the issuance of a press release setting forth revised earnings
guidance for the quarter ended September 30, 2005 and the fiscal year ended December 31, 2005.
Subsequent to the quarter ended September 30, 2005, the Company filed (i) a Current Report on Form
8-K reporting under Item 8.01 the issuance of a press release reporting the Companys commencement
of the rights offering, and (ii) a Current Report on Form 8-K reporting under Item 1.01 the results
of the Companys August 2005 tender offer, which closed on October 12, 2005 and under Item 8.01 the
results of stockholder votes taken during the 2005 Annual Meeting of Stockholders (see Item 4
above).
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
TIMCO Aviation Services, Inc.
|
|
|
|
|
|
|
|
|
By
|
|
: /s/ Roy T. Rimmer, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
(Principal Executive Officer)
|
|
|
Dated:
November 10, 2005
39
Exhibit Index
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.1
|
|
First Amendment to lease, dated September 1, 2005, between LJH, Ltd. and Aircraft
Interior Design, Inc. |
|
|
|
31.1
|
|
Certification of CEO and CFO under Section 302 the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of CEO and CFO under Section 906 the Sarbanes-Oxley Act of 2002 |
40