-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LmCmnVZu2zf4He3m76yzxNuBk4sFVgVu1ERHdVWv1jqf32xV20vk2CK46JrbSWO8 mbl9YL1Tg/u3T5QuVTFQ8A== 0001036848-99-000012.txt : 19990518 0001036848-99-000012.hdr.sgml : 19990518 ACCESSION NUMBER: 0001036848-99-000012 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AEROCENTURY CORP CENTRAL INDEX KEY: 0001036848 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 943263974 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-13387 FILM NUMBER: 99625923 BUSINESS ADDRESS: STREET 1: 1440 CHAPIN AVE STE 310 CITY: BURLINGAME STATE: CA ZIP: 94010 BUSINESS PHONE: 6503401888 MAIL ADDRESS: STREET 1: 1440 CHAPIN AVENUE SUITE 310 CITY: BURLINGAME STATE: CA ZIP: 94010 FORMER COMPANY: FORMER CONFORMED NAME: AEROMAX INC DATE OF NAME CHANGE: 19970331 10QSB 1 1ST QTR 10QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB (Mark One) [ X ] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1999 [ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to ____________ Commission File Number: 001-13387 AeroCentury Corp. (Name of small business issuer in its charter) Delaware 94-3263974 State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1440 Chapin Avenue, Suite 310 Burlingame, California 94010 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (650) 340-1888 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which Registered Common Stock, $0.001 par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Check whether the Issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of May 13, 1999 the Issuer has 1,606,557 Shares of Common Stock outstanding, of which 38,100 are held as Treasury Stock. Transitional Small Business Disclosure Format (check one): Yes No X --- --- Part I. Financial Information Item 1. Financial Statements
AeroCentury Corp. Balance Sheet ASSETS March 31, 1999 Cash and cash equivalents $ 1,431,340 Deposits 2,740,820 Accounts receivable 315,550 Aircraft and aircraft engines on operating leases, net of accumulated depreciation of $16,018,220 30,106,000 Prepaid expenses and other 174,180 Deferred taxes 219,240 --------------- Total assets $ 34,987,130 =============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses $ 484,240 Notes payable and accrued interest 12,885,420 Maintenance deposits and accrued costs 2,503,130 Security deposits 699,600 Prepaid rent 82,440 Deferred taxes 3,421,400 Taxes payable 141,800 --------------- Total liabilities 20,218,030 --------------- Shareholders' Equity: Preferred stock, $.001 par value, 2,000,000 shares authorized, no shares issued and outstanding - Common stock, $.001 par value, 3,000,000 shares authorized, 1,606,557 shares issued and outstanding 1,610 Paid in capital 13,821,200 Retained earnings 1,107,510 --------------- 14,930,320 Treasury stock at cost, 17,800 shares (161,220) --------------- Total shareholders' equity 14,769,100 --------------- Total liabilities and shareholders' equity $ 34,987,130 ===============
The accompanying notes are an integral part of this statement.
AeroCentury Corp. Statements of Operations For the Three Months Ended March 31, 1999 1998 Revenues: Rent income $ 1,395,330 $ 809,920 Other income 25,190 12,000 --------------- ---------------- 1,420,520 821,920 --------------- ---------------- Expenses: Management fees 241,290 141,110 Depreciation 306,970 162,820 Interest 209,430 8,090 Professional fees and general and administrative 116,040 81,420 -------------- ---------------- 873,730 393,440 -------------- ---------------- Income before taxes 546,790 428,480 Tax provision 206,470 170,440 -------------- ---------------- Net income $ 340,320 $ 258,040 ============== ================ Weighted average common shares outstanding 1,592,811 1,606,557 ============== ================ Basic earnings per share $ 0.21 $ 0.16 ============== ================
The accompanying notes are an integral part of this statement.
AeroCentury Corp. Statements of Cash Flows For the Three Months Ended March 31, 1999 1998 Net cash provided by operating activities $ 862,360 $ 1,062,670 Investing activities: Purchase of aircraft (7,600,000) (1,124,480) -------------- --------------- Net cash used by investing activities (7,600,000) (1,124,480) Financing activities: Issuance of notes payable 6,400,000 - Purchase of treasury stock (83,030) - Issuance of secured note - 866,670 -------------- --------------- Net cash provided by financing activities 6,316,970 866,670 Net change from consolidation of partnerships - 22,860 -------------- --------------- Net (decrease)/increase in cash and cash equivalents (420,670) 827,720 Cash and cash equivalents, beginning of period 1,852,010 7,980 -------------- --------------- Cash and cash equivalents, end of period $ 1,431,340 $ 835,700 ============== ===============
The accompanying notes are an integral part of this statement. AeroCentury Corp. Notes to Financial Statements March 31, 1999 1. Basis of Presentation AeroCentury Corp. (the "Company") was incorporated in the state of Delaware on February 28, 1997. The Company was formed solely for the purpose of acquiring JetFleet Aircraft, L.P. and JetFleet Aircraft II, L.P., partnerships formed under California law for the purpose of investing in leased aircraft equipment, (collectively, the "Partnerships") in a statutory merger (the "Consolidation"), which was effective January 1, 1998. The Company is continuing in the aircraft leasing business in which the Partnerships engaged and plans to use leveraged financing to acquire additional aircraft assets on lease. Because greater than 90% of the limited partnership units of each of the Partnerships agreed to the Consolidation, it has been treated as a pooling-of-interests under generally accepted accounting principles with the assets and liabilities of the combining entities recorded at historical cost on the Consolidation date. On January 16, 1998, the Company was listed on the American Stock Exchange under the symbol ACY. The accompanying balance sheet at March 31, 1999 and statements of operations and cash flows for the three months ended March 31, 1999 and 1998 reflect all adjustments (consisting of only normal recurring accruals) which are, in the opinion of the Company, necessary for a fair presentation of the financial results. The results of operations of such period are not necessarily indicative of results of operations for a full year. Organization and Capitalization At December 31, 1997, all 150,000 of the Company's outstanding shares were owned by JetFleet Holding Corp. ("JHC"), a California corporation. On January 1, 1998, 1,456,557 additional common shares were issued as a result of the Consolidation. JetFleet Management Corp. ("JMC"), a wholly owned subsidiary of JHC, is an integrated aircraft management, marketing and financing business. Prior to the Consolidation, JMC managed the aircraft assets of the Partnerships on behalf of their general partners and limited partners. JMC also manages the aircraft assets of JetFleet III and AeroCentury IV, Inc., California corporations which are affiliates of JMC. On April 17, 1998, in connection with the adoption of a shareholder rights plan, the Company filed a Certificate of Designation designating the rights, preferences and privileges of a new Series A Preferred Stock. Pursuant to the plan, the Company issued rights to its shareholders of record as of April 23, 1998, entitling each shareholder to the right to purchase one one-hundredth of a share of Series A Preferred Stock for each share of Common Stock held by the shareholder. Such rights are exercisable only under certain circumstances concerning a proposed acquisition or merger of the Company. On October 23, 1998, the Company's Board of Directors adopted a stock repurchase plan, granting management the authority to purchase up to 100,000 shares of the Company's common stock, in privately negotiated transactions or on the market, at such price and on such terms and conditions deemed satisfactory to management. During the quarter ended March 31, 1999, the Company purchased 8,600 shares of its common stock and, since the adoption of the plan, has purchased 17,800 shares. Revenue Recognition Revenue from leasing of aircraft assets is recognized as operating lease revenue on a straight-line basis over the terms of the applicable lease agreements. Interest income includes interest earned from two finance leases which expired in December 1997 and June 1998. AeroCentury Corp. Notes to Financial Statements March 31, 1999 1. Basis of Presentation (continued) Aircraft and Aircraft Engines On Operating Leases The Company's interests in aircraft and aircraft engines are recorded at cost, which includes acquisition costs. Depreciation is computed using the straight-line method over the aircraft's estimated economic life (generally assumed to be twelve years), to an estimated residual value. The depreciable base of the assets acquired by the Company in the Consolidation was equal to the net book value of the assets at December 31, 1997. Loan Commitment and Related Fees To the extent that the Company is required to pay loan commitment fees and legal fees in order to secure debt, such fees are amortized over the life of the related loan. Maintenance Deposits and Accrued Costs Maintenance costs under the Company's triple net leases are generally the responsibility of the lessees. Maintenance deposits and accrued costs in the accompanying balance sheet include refundable and non-refundable maintenance payments received from lessees as well as amounts accrued by the Company for future work to be performed on one of its aircraft. Income Taxes The Company follows the liability method of accounting for income taxes as required by the provisions of SFAS No. 109 Accounting for Income Taxes. Under the liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in the tax rates is recognized in income in the period that includes the enactment date. Cash and Cash Equivalents/Deposits The Company considers highly liquid investments readily convertible into known amounts of cash, with original maturities of 90 days or less, as cash equivalents. Deposits represent cash balances held related to maintenance and security deposits and are subject to withdrawal restrictions. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. 2. Aircraft and Aircraft Engines On Operating Leases At March 31, 1999, the Company owned four de Havilland DHC-7, three de Havilland DHC-6, two Fairchild Metro III, one Shorts SD 3-60 and two Fokker 50 aircraft, and 24 turboprop engines. During the first quarter of 1999, the Company purchased one of the Fairchild Metro III and one of the Fokker 50 aircraft, leased to carriers in North America and Brazil, respectively, for a total of $7,600,000, including acquisition costs. AeroCentury Corp. Notes to Financial Statements March 31, 1999 3. Notes Payable and Accrued Interest On June 30, 1998 the Company obtained a $15 million revolving credit facility to acquire turboprop aircraft and engines under lease. The facility, which expires on June 30, 2000 and which may be renewed annually thereafter, bears interest, payable monthly, at either prime or LIBOR plus 200 basis points, at the Company's option. The facility may be expanded to $30 million with participation of additional banks, and, on April 1, 1999, the Company signed an agreement increasing its facility to $22.5 million. The Company's aircraft and aircraft engines serve as collateral under the facility and, in accordance with the credit agreement, the Company must maintain compliance with certain financial covenants. As of March 31, 1999, the Company was in compliance with all such covenants. As of March 31, 1999, $12.8 million was outstanding under the credit facility and interest of $85,420 was accrued, using a prime rate of 7.75%. 4. Income Taxes The items comprising income tax expense are as follows: For the Quarters Ended March 31, 1999 1998 Current tax provision: Federal 122,020 $ - State 33,470 - Current tax provision 155,490 - Deferred tax provision: Federal 41,850 145,480 State 9,130 24,960 Deferred tax provision 50,980 170,440 Total provision for income taxes 206,470 $ 170,440 Total income tax expense differs from the amount which would be provided by applying the statutory federal income tax rate to pretax earnings as illustrated below: Income tax expense at statutory federal income tax rate $ 185,910 $ 145,680 State taxes net of federal benefit 31,900 25,000 Tax rate differences (11,340) (240) Total income tax expense $ 206,470 $ 170,440 AeroCentury Corp. Notes to Financial Statements March 31, 1999 4. Income Taxes (continued) Temporary differences and carryforwards which gave rise to a significant portion of deferred tax assets and liabilities as of March 31, 1999 are as follows: March 31, 1999 Deferred tax assets: Amortization of organizational costs $ 66,200 State taxes 11,360 Maintenance reserves 108,840 Prepaid rent 32,840 Net deferred tax assets 219,240 Deferred tax liabilities: Depreciation on aircraft and engines (3,421,400) Net deferred tax liability $ 3,202,160 5. Supplementary Disclosures of Cash Flow Information During the quarters ended March 31, 1999 and 1998, the Company paid interest totaling $163,780 and $8,090, respectively. 6. Related Party Transactions Since the Company has no employees, the Company's portfolio of leased aircraft assets is managed and administered under the terms of a management agreement with JMC. Under this agreement, JMC receives a monthly management fee based on the net asset value of the assets under management. During the first quarter of 1999, the Company paid JMC $221,920 of management fees. In addition, JMC may receive a brokerage fee for locating assets for the Company, provided that the aggregate purchase price including chargeable acquisition costs and any brokerage fee does not exceed the fair market value of the asset based on appraisal, and a remarketing fee in connection with the sale or re-lease of the Company's assets. The management fees, brokerage fees and remarketing fees may not exceed the customary and usual fees that would be paid to an unaffiliated party for such services. In March 1998, the Company acquired an aircraft on lease using cash and a loan in the amount of $866,700 from an affiliate. The Company paid $8,090 of interest during the first quarter of 1998. The loan was repaid during August 1998. Certain employees of JMC participate in an employee stock incentive plan which granted options to purchase shares of the Company held by JHC. As of March 31, 1999, 2,833 such options had been exercised. 7. Subsequent Events Stock Repurchases During April and May 1999, the Company repurchased 20,300 shares of its common stock. Expansion of Credit Facility On April 1, 1999, the Company signed an agreement, increasing its $15 million revolving credit facility to $22.5 million. S/N 72 Lease Expiration The lease for S/N 72 expired on April 25, 1999. The Company has been seeking re-lease opportunities for S/N 72 and is discussing lease terms with interested parties. Raytheon Lease Renewal Raytheon has exercised its two-year renewal option for the three Dash-7 aircraft. At December 31, 1998, Raytheon had received government funding for the full two year term on two of the aircraft, and government funding through March 31, 1999 on the third aircraft. During April 1999, Raytheon received government funding for the full renewal term of the third aircraft. Item 2. Management's Discussion and Analysis or Plan of Operation. Forward-Looking Statements Certain statements contained in this report, and, in particular, the discussion regarding the Company's beliefs, plans, objectives, expectations and intentions regarding: the adequacy of the Company's cash flow to meet increases in its credit line interest rate; the company's ability to meet its ongoing operational cash flow needs; the Company's intention to repay revolving loan indebtedness from future equity or debt financings; the Company's ability to reduce the "off-lease" time for an asset by monitoring and immediate marketing responses; the Company's intention and ability to increase its credit facility; the Company's intention to use proceeds of its credit line to acquire additional assets; the stability of the air transport industry and asset sale and lease prices; the supply of suitable transaction opportunities for the Company; the Company's ability to reduce the impact of an industry downturn through proper asset and lessee selection; the Company's competitiveness in the regional aircraft market; and the Company's ability to obtain credit enhancement for its lessees, such as letters of credit or third party guaranties, are forward-looking statements. While the Company believes that such statements are accurate, the Company's business is dependent upon general economic conditions, particularly those that affect the demand for turboprop aircraft and engines, general portfolio ownership risks, and the availability of financing for the Company's turboprop equipment, and future trends and results cannot be predicted with certainty. The Company's actual results could differ materially from those discussed in such forward-looking statements. The cautionary statements made in this Report should be read as being applicable to all related forward-looking statements wherever they appear in this Report. Factors that could cause or contribute to such differences include those discussed below in the section entitled "Factors that May Affect Future Results." Results of Operations The Company had revenues of $1,420,520 and $821,920 and net income of $340,320 and $258,040 for the quarters ended March 31, 1999 and 1998, respectively. Rent income is approximately $585,000 higher in 1999 versus 1998 due to the purchases of additional aircraft on lease during the fourth quarter of 1998 and first quarter of 1999. Management fees and depreciation are approximately $100,000 and $144,000 higher, respectively, in 1999 versus 1998 because of the 1998 and 1999 aircraft acquisitions. Interest expense is approximately $201,000 higher in 1999 than in 1998 because the Company's credit facility was not used until the fourth quarter of 1998. Professional fees and general administrative expense are approximately $35,000 higher in 1999 primarily due to an increase in legal expenses associated with using the Company's credit facility. Liquidity and Capital Resources The Company is currently financing its asset growth through borrowings secured by its lease portfolio and excess cash flow. The Company has a $22.5 million credit facility which expires on June 30, 2000 and which is renewable annually thereafter. The facility bears interest at either prime or LIBOR plus 200 basis points, at the Company's option. The facility may be expanded to $30 million with participation of additional banks. As of March 31, 1999, $12.8 million was outstanding under the credit facility and interest of $85,420 was accrued, using a prime rate of 7.75%. The prime rate has been stable since November 1998. The Company believes it has adequate cash flow to meet increases in the interest rate applicable to its credit line obligations. Any increase in such interest rates is likely to be the result of increased prevailing interest rates. Increased prevailing interest rates generally result in higher lease rates as well, and so an increase in credit line payments may be offset at least partially by higher revenues on new leases and renewals of leases entered into by the Company. The Company is studying whether it is advisable to enter into an interest rate hedge transaction, which for a fee would act to lock in current interest rates on its credit line obligations. In making its decision, the Company is analyzing interest rate trends, the ongoing costs of maintaining the hedge and the magnitude of the impact of any interest rate swing. It is the Company's policy to monitor lessee's needs in periods before leases are due to expire. If it appears that a lessee will not be renewing its lease, the Company immediately initiates marketing efforts to locate a potential new lessee or purchaser for the aircraft. This procedure helps the Company reduce any potential that an asset will be "off-lease" for a significant time. The lease for S/N 72 expired on April 25, 1999. The Company has been seeking re-lease opportunities for S/N 72 since the lessee provided notice that it would not renew the lease, and the Company is discussing lease terms with interested parties. Management anticipates that such discussions will minimize the amount of time that S/N 72 is off lease. The Company's other aircraft are subject to leases with varying expiration dates between July 1, 1999 and November 23, 2003. Given the varying lease terms and expiration dates for the aircraft in the Company's portfolio, management believes that the Company will have adequate cash flow to meet any on-going operational needs, even if S/N 72 remains off-lease for an extended period of time. Factors that May Affect Future Results Risks of Debt Financing. The Company's use of acquisition financing under its revolving credit agreement will subject the Company to increased risks of leveraging. The revolving loans are secured by the Company's existing assets as well as the assets to be acquired with the financing. Any default under the revolving credit agreement could result in foreclosure upon not only the asset acquired using such financing, but also the existing assets of the Company securing the revolving loan. In order to achieve optimal benefit from the revolving credit facility, the Company intends to repay the revolving loans from proceeds of subsequent term debt or equity financings. Such replacement financing would provide the Company with more favorable long-term repayment terms and also would permit the Company to make further draws under the revolving credit line equal to the amount of revolving debt refinanced. There can be no assurance that the Company will be able to obtain the necessary amount of replacement term debt or equity financing on favorable terms so as to permit multiple draws on the revolving line of credit. The Company anticipates that it will request an increase in its credit facility to the full $30 million limit. Funding of the remaining amount requested is dependent upon the ability of the original revolving credit lender ("Lender") to find additional loan participants, and there is no assurance that such participants will be located by the Lender. The revolving line of credit has an initial term of two years expiring in June 2000, and is renewable at the sole discretion of Lender and its participants, if any. There is no assurance that the line of credit will be renewed. If the revolving loan is not renewed by the Lender and its participants, then all indebtedness under the revolving loan agreement will become immediately due and payable. There is no assurance that the Company will have adequate replacement financing in place in order to meet such accelerated repayment obligations. All of the Company's current credit line indebtedness carries a floating interest rate based on the lender's prime rate. The Company has the ability to convert the prime rate loans to loans based on a floating LIBOR rate. If the applicable index rate increases, then the Company's payment obligations under the line of credit would increase and could result in lower net revenues for the Company. Acquisition of Additional Assets. The Company intends to use the proceeds of its revolving credit facility to acquire additional assets for the purpose of generating income for the Company. The Company anticipates that it will be able to expend the entire net financing proceeds on the acquisition of additional assets on terms favorable to the Company, but the Company has not entered into any contracts for acquisition of any assets, and there is no assurance that the Company will be able to purchase assets or lease such assets on favorable terms. General Economic Conditions. The market for used aircraft has been cyclical, and usually reflects economic conditions and the strength of the travel and transportation industry. The Company believes that the air transport industry is currently stable, with demand for aircraft, asset prices and lease rates level, and in some cases, increasing. Nonetheless at any time, the market for used aircraft may be adversely affected by such factors as airline financial difficulties, higher fuel costs, and improved availability and economics of new replacement aircraft. The Company believes that the current aircraft market provides a good supply of suitable transaction opportunities for the Company, primarily in overseas markets, but domestically as well. There are currently some disparities between geographic regions with respect to the condition of the air transport industry, with the Pacific Rim, in particular, not currently experiencing the growth that is taking place in the U.S. and other foreign markets. This economic slowdown has not had a significant effect on the Company's business, as it does not currently have any assets placed with Pacific Rim lessees. There have also been disruptions in the currency markets in certain geographic areas. To the extent that such disruptions adversely affect a region's economic growth, suitable transactions may be more difficult for the Company to find in that region and the Company's lessees in that area may be adversely affected. An adverse change in the global air travel industry, however, could result in reduced carrier revenue and excess capacity and increase the risk of failure of some weaker regional air carriers. While the Company believes that with proper asset and lessee selection in the current climate, as well as during such downturns, the impact of such changes on the Company can be reduced, there is no assurance that the Company's business will escape the effects of such a global downturn, or a regional downturn in an area where the Company has placed a significant amount of its assets. Reliance on JMC. All management of the Company is performed by JMC pursuant to a Management Agreement between JMC and the Company which has a 20-year term and provides for an asset-based management fee. JMC is not a fiduciary to the Company or its stockholders. The Board of Directors does, however, have ultimate control and supervisory responsibility over all aspects of the Company and does owe fiduciary duties to the Company and its stockholders. In addition, while JMC may not owe any fiduciary duties to the Company by virtue of the Management Agreement, certain officers of JMC are also officers of the Company, and in that capacity owe fiduciary duties to the Company and the stockholders by virtue of holding such offices with the Company. The Management Agreement may be terminated upon a default in the obligations of JMC to the Company, and provides for liquidated damages in the event of a wrongful termination of the agreement by the Company. Many of the officers of JMC are also officers of the Company, and certain directors of the Company are also directors of JMC. Consequently, the directors and officers of JMC may have a conflict of interest in the event of a dispute over obligations between the Company and JMC. Although the Company has taken steps to prevent conflicts of interest arising from such dual roles, such conflicts may still occur. Ownership Risks. Most of the Company's portfolio is leased under operating leases, where the terms of the leases do not take up the entire useful life of an asset. The Company's ability to recover its purchase investment in an asset subject to an operating lease is dependent upon the Company's ability to profitably re-lease or resell the asset after the expiration of the initial lease term. Some of the factors that have an impact on the Company's ability to release or re-sell include worldwide economic conditions, general aircraft market conditions, regulatory changes that may make an asset's use more expensive or preclude use unless the asset is modified, changes in the supply or cost of aircraft equipment and technological developments which cause the asset to become obsolete. In addition, a successful investment in an asset subject to an operating lease depends in part upon having the asset returned by the lessee in serviceable condition as required under the lease. If the Company is unable to remarket or sell its aircraft equipment on favorable terms when the operating lease for such equipment expires, the Company's business, financial condition, cash flow, ability to service debt and results of operation could be adversely affected. Lessee Credit Risk. If a lessee defaults upon his obligations under a lease, the Company may be limited in its ability to enforce remedies. Most of the Company's lessees are small domestic and foreign regional passenger airlines, which may be even more sensitive to airline industry market conditions than the major airlines. As a result, the Company's inability to collect rent under a significant lease or to repossess equipment in the event of a default by a lessee could have a material adverse effect on the Company's revenue. If a lessee that is a certified U.S. airline is in default under the lease and seeks protection under Chapter 11 of the United States Bankruptcy Code, under Section 1110 of the Bankruptcy Code, the Company would be automatically prevented from exercising any remedies for a period of 60 days. By the end of the 60 day period, the lessee must agree to perform the obligations and cure any defaults, or the Company would have the right to repossess the equipment. This procedure under the Bankruptcy Code has been subject to significant recent litigation, however, and it is possible that the Company's enforcement rights may still be further adversely affected by a declaration of bankruptcy by a defaulting lessee. International Risks. The Company may focus in the near term on leases in overseas markets, which markets are currently dynamic and which the Company believes present attractive opportunities. Leases with foreign lessees, however, may present somewhat different credit risks than those with domestic lessees. Foreign laws, regulations and judicial procedures may be more or less protective of lessor rights as those which apply in the United States. The Company could experience collection problems related to the enforcement of its lease agreements under foreign local laws and the attendant remedies in foreign jurisdictions. The protections potentially offered by Section 1110 of the Bankruptcy Code would not apply to non-U.S. carriers, and applicable local law may not offer similar protections. Certain countries do not have a central registration or recording system with which to locally establish the Company's interest in equipment and related leases. This could add difficulty in recovering equipment in the event that a foreign lessee defaults. Leases with foreign lessees are subject to risks related to the economy of the country or region that such lessee is located even if the U.S. economy remains strong. On the other hand, a foreign economy may remain strong even though the domestic U.S. economy is not. A foreign economic downturn may occur and impact a foreign lessee's ability to make lease payments, even though the U.S. and other economies remain stable. Furthermore, foreign lessees are subject to risks related currency conversion fluctuations. Although the Company's current leases are all payable in U.S. dollars, in the future, the Company may agree to leases that permit payment in foreign currency, which would subject such lease revenue to monetary risk due to currency fluctuations. Even with dollar-denominated lease payment provisions, the Company could still be affected by a devaluation of the lessee's local currency which makes it more difficult for a lessee to meet its dollar-denominated lease payments, increasing the risk of default of that lessee, particularly if that carrier's revenue is primarily derived in the local currency. Government Regulation. There are a number of areas in which government regulation may result in costs to the Company. These include aircraft registration, safety requirements, required equipment modifications, and aircraft noise requirements. Although it is contemplated that the burden of complying with such requirements will fall primarily upon lessees of equipment, there can be no assurance that the cost of complying with such government regulations will not fall on the Company. Furthermore, future government regulations could cause the value of any non-complying equipment owned by the Company to substantially decline. Competition. The aircraft leasing industry is highly competitive. The Company will compete with aircraft manufacturers, distributors, airlines and other operators, equipment managers, leasing companies, equipment leasing programs, financial institutions and other parties engaged in leasing, managing or remarketing aircraft, many of which have significantly greater financial resources and more experience than the Company. The Company, however, believes that it is competitive because of its experience and operational efficiency in financing the transaction types desired by the regional air carriers. This market segment, which is characterized by transaction sizes of less than $10 million and lessee credits that are strong, but generally unrated and more speculative than that of the major air carriers, is not well served by the Company's larger competitors in the aircraft industry. JMC, the management company for the Company, has developed a reputation as a global participant in this segment of the market, and the Company believes this will benefit the Company. There is no assurance that the lack of significant competition from the larger aircraft leasing companies will continue or that the reputation of JMC will continue to be strong in this market segment and benefit the Company. Casualties, Insurance Coverage. The Company, as owner of transportation equipment, could be held liable for injuries or damage to property caused by its assets. Though some protection may be provided by the United States Aviation Act with respect to its aircraft assets, it is not clear to what extent such statutory protection would be available to the Company and such act may not apply to aircraft operated in foreign countries. Though the Company may carry insurance or require a lessee to insure against a risk, some risks of loss may not be insurable. An uninsured loss with respect to the Equipment or an insured loss for which insurance proceeds are inadequate, would result in a possible loss of invested capital in and any profits anticipated from such equipment. Leasing Risks. The Company's successful negotiation of lease extensions, re-leases and sales may be critical to its ability to achieve its financial objectives, and will involve a number of substantial risks. Demand for lease or purchase of the assets depends on the economic condition of the airline industry which is in turn highly sensitive to general economic conditions. Ability to re-lease or resell equipment at acceptable rates may depend on the demand and market values at the time of re-lease or resale. The Company anticipates that the bulk of the equipment it acquires will be used aircraft equipment. The market for used aircraft is cyclical, and generally, but not always, reflects economic conditions and the strength of the travel and transportation industry. The demand for and resale value of many types of older aircraft in the recent past has been depressed by such factors as airline financial difficulties, increased fuel costs, the number of new aircraft on order and the number of older aircraft coming off lease. The Company's expected concentration in a limited number of airframe and aircraft engine types (generally, turboprop equipment) subjects the Company to economic risks if those aircraft or engine types should decline in value. The recent introduction of "regional jets" to serve on short routes previously thought to be economical only for turboprop aircraft operation could decrease the demand for turboprop aircraft, while at the same increasing the supply of used turboprop aircraft. This could result in lower lease rates and values for the Company's existing turboprop aircraft. Risks Related to Regional Air Carriers. Because the Company has concentrated its existing leases and intends to concentrate on leases to regional air carriers, it will be subject to certain risks. First, lessees in the regional air carrier market include a number of companies that are start-up, low capital, low margin operations. Often, the success of such carriers is dependent upon arrangements with major trunk carriers, which may be subject to termination or cancellation by such major carrier. This market segment is also characterized by low entry costs, and thus, there is strong competition in this industry segment from start-ups as well as major airlines. Thus, leasing transactions with these types of lessees results in a generally higher lease rate on aircraft, but may entail higher risk of default or lessee bankruptcy. The Company will evaluate the credit risk of each lessee carefully, and will attempt to obtain third party guaranties, letters of credit or other credit enhancements, if it deems such is necessary. There is no assurance, however, that such enhancements will be available or that even if obtained will fully protect the Company from losses resulting from a lessee default or bankruptcy. Second, a significant area of growth of this market is in areas outside of the United States, where collection and enforcement are often more difficult and complicated than the United States. Possible Volatility of Stock Price. The market price of the Company's Common Stock could be subject to fluctuations in response to operating results of the Company, changes in general conditions in the economy, the financial markets, the airline industry, changes in accounting principles or tax laws applicable to the Company or its lessees, or other developments affecting the Company, its customers or its competitors, some of which may be unrelated to the Company's performance. Also, because the Company has a relatively small capitalization of approximately 1.6 million shares, there is a correspondingly limited amount of trading of the shares. Consequently, a single or small number of trades could result in a market fluctuation not related to any business or financial development relating to the Company. Year 2000 Considerations. Management of the Company has directed its information technology ("IT") manager to require any software or hardware purchased for use by the Company to have a warranty of Year 2000 compliance. It has also directed its IT manager to study any systems that may require Year 2000 remediation. The IT manager has determined that, because the Company's IT system is based on a "MacOS" system, the Company's internal technology systems are ready for Year 2000, and there should not be any material costs associated with such remediation. Furthermore, the phone and internet systems have been warranted by their vendors for Year 2000 compliance. The Company's internal and administrative operations are not highly dependent on any other advanced technology system, and, consequently, management believes that the Company's exposure to loss as a result of Year 2000 issues in its internal and administrative operations is not significant. Management believes that the electronic systems used in the equipment leased by the Company to lessees will not be materially affected by the Year 2000 and that any remediation of the technology systems embedded in the aircraft that it leases will not be a material expense to the Company. The Company has notified all lessees of the Year 2000 problem and has requested information on the status of each lessee's study and remediation plans. The Company believes that there should not be any material costs in connection with such a study. The Company has been consulting with all the manufacturers of its leased equipment to confirm Year 2000 compliance. Since the Company's leases generally place all maintenance and repair obligations on the lessees, to the extent that the aircraft are on lease when the Year 2000 problem is identified, it would generally be the lessee's and not the Company's responsibility to remediate any Year 2000 problem with the leased aircraft. To the extent that a lessee has Year 2000 problems that significantly adversely affect its overall financial status, such material problems may affect the lessee's operations and increase the risk of default by a lessee under its lease with the Company. Furthermore, Year 2000 issues may have a material impact on FAA operations and the operations of certain air carriers, which in turn would negatively affect the aircraft industry in general. The Company's essential functions are not dependent upon any key third party vendors or service providers related to the leasing or finance business, and consequently, the interruption of goods and services from any such industry-specific third party vendor or service provider to the Company is not likely to cause a material loss to the Company. Of course, the Company's ordinary business operation is dependent upon vendors that provide basic services to businesses generally, such as utility companies, phone and long distance companies, courier services, banking institutions. The Company is monitoring the Year 2000 readiness of such providers. Management believes that a temporary interruption in services to the Company by these types of service providers caused by Year 2000 problems would not cause material losses to the Company. An extended loss of these services, however, could adversely affect the Company's business and financial performance. The Company has not yet made any contingency plans for the extended loss of these basic services. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 13, 1999. AEROCENTURY CORP. By: /s/ Neal D. Crispin Neal D. Crispin Title: President In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on May 13, 1999. Signature Title /s/ Neal D. Crispin Director, President and Chairman of the - ------------------------------- Board of Directors of the Registrant Neal D. Crispin (Principal Executive Officer) /s/ Toni M. Perazzo Director, Vice President-Finance and Secty. - ------------------------------- of the Registrant (Principal Financial and Toni M. Perazzo Accounting Officer) /s/ Marc J. Anderson Director, Chief Operating Officer, Senior - ------------------------------- Vice President Marc J. Anderson EX-27 2 FDS --
5 0001036848 AEROCENTURY CORP. 1 U.S. DOLLARS 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 4,172,160 0 315,550 0 0 4,661,890 46,124,220 16,018,220 34,987,130 20,218,030 0 0 0 1,610 14,767,490 34,987,130 0 1,420,520 0 0 664,300 0 209,430 546,790 206,470 340,320 0 0 0 340,320 0.21 0.21
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