-----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, PiEg+/gziVndlg/7gaoLuWNp7hPRJVfA1Uf7oJfeErOsmr6Rb4TTsC5cN8VKzjZT MoBl35VpCZ2SkMytF2PCzg== /in/edgar/work/0001036848-00-000049/0001036848-00-000049.txt : 20001114 0001036848-00-000049.hdr.sgml : 20001114 ACCESSION NUMBER: 0001036848-00-000049 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AEROCENTURY CORP CENTRAL INDEX KEY: 0001036848 STANDARD INDUSTRIAL CLASSIFICATION: [7359 ] IRS NUMBER: 943263974 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13387 FILM NUMBER: 759193 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 10-Q 1 0001.txt 3RD QTR. 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 September 30, 2000 [ ] 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 November 10, 2000 the Issuer has 1,606,557 Shares of Common Stock outstanding, of which 63,300 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. Consolidated Balance Sheet ASSETS September 30, 2000 Assets: Cash and cash equivalents $ 2,005,750 Deposits 7,412,700 Accounts receivable 976,160 Aircraft and aircraft engines on operating leases, net of accumulated depreciation of $19,373,130 65,370,210 Prepaid expenses and other 591,580 --------------- Total assets $ 76,356,400 =============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses $ 1,379,790 Notes payable and accrued interest 45,493,500 Maintenance reserves and accrued costs 6,278,050 Security deposits 1,870,770 Prepaid rent 413,800 Deferred taxes 3,982,270 --------------- Total liabilities 59,418,180 --------------- 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 1,610 Paid in capital 13,821,200 Retained earnings 3,619,480 --------------- 17,442,290 Treasury stock at cost, 63,300 shares (504,070) --------------- Total shareholders' equity 16,938,220 --------------- Total liabilities and shareholders' equity $ 76,356,400 =============== The accompanying notes are an integral part of this statement.
AeroCentury Corp. Consolidated Statements of Operations
For the Nine Months Ended For the Three Months Ended September 30, September 30, 2000 1999 2000 1999 ---- ---- ---- ---- Revenues: Rent income $ 8,065,660 $ 4,709,870 $ 2,849,060 $ 1,874,600 Other income 304,220 194,810 120,600 46,490 --------------- --------------- --------------- ---------------- 8,369,880 4,904,680 2,969,660 1,921,090 --------------- --------------- --------------- ---------------- Expenses: Management fees 1,262,650 801,820 435,930 322,120 Depreciation 1,961,510 1,113,770 679,400 465,550 Interest 2,388,840 893,890 892,150 436,840 Maintenance 110,000 - 110,000 - Professional fees and general and administrative 426,980 397,610 112,630 144,750 --------------- --------------- --------------- ---------------- 6,149,980 3,207,090 2,230,110 1,369,260 --------------- --------------- --------------- ---------------- Income before taxes 2,219,900 1,697,590 739,550 551,830 Tax provision 773,020 596,680 251,190 188,150 --------------- --------------- --------------- ---------------- Net income $ 1,446,880 $ 1,100,910 $ 488,360 $ 363.680 =============== =============== =============== ================ Weighted average common shares outstanding 1,543,257 1,570,444 1,543,257 1,549,761 =============== =============== =============== ================ Basic earnings per share $ 0.94 $ 0.70 $ 0.32 $ 0.23 =============== =============== =============== ================ The accompanying notes are an integral part of this statement.
AeroCentury Corp. Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2000 1999 ---- ---- Net cash provided by operating activities $ 3,666,180 $ 2,498,170 Investing activities: Purchase of aircraft and aircraft engines (11,477,780) (23,562,000) --------------- --------------- Net cash used by investing activities (11,477,780) (23,562,000) Financing activities: Issuance of notes payable 9,885,000 21,590,000 Repayment of notes payable (1,319,380) - Purchase of treasury stock - (425,880) --------------- --------------- Net cash provided by financing activities 8,565,620 21,164,120 Net increase in cash and cash equivalents 754,020 100,290 Cash and cash equivalents, beginning of period 1,251,730 1,852,010 --------------- --------------- Cash and cash equivalents, end of period $ 2,005,750 $ 1,952,300 =============== =============== The accompanying notes are an integral part of this statement.
AeroCentury Corp. Notes to Consolidated Financial Statements September 30, 2000 1. Organization and Summary of Significant Accounting Policies (a) Basis of Presentation AeroCentury Corp. ("AeroCentury") was incorporated in the state of Delaware on February 28, 1997. AeroCentury 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. AeroCentury is continuing in the aircraft leasing business in which the Partnerships engaged and is using 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 was 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, AeroCentury was listed on the American Stock Exchange under the symbol ACY. During November 1999 and August 2000, AeroCentury Corp. formed two wholly-owned subsidiaries, AeroCentury Investments LLC ("AeroCentury LLC") and AeroCentury Investments II LLC ("AeroCentury II LLC"), respectively, for the purpose of acquiring aircraft using a combination of cash and bank financing separate from AeroCentury Corp.'s credit facility. Financial information for AeroCentury, AeroCentury LLC and AeroCentury II LLC (collectively, the "Company") is presented on a consolidated basis. All intercompany balances and transactions have been eliminated in consolidation. The accompanying balance sheet at September 30, 2000 and statements of operations and cash flows for the three months and nine months ended September 30, 2000 and 1999 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 such period are not necessarily indicative of results of operations for a full year. (b) Organization and Capitalization At December 31, 1997, all of the Company's outstanding stock was 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 and limited partners. JMC also manages the aircraft assets of JetFleet III and AeroCentury IV, Inc., California corporations that 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 nine months ended September 30, 2000 and 1999, the Company purchased no shares and 54,100 shares, respectively. Since adoption of the plan, the Company has purchased 63,300 shares. AeroCentury Corp. Notes to Consolidated Financial Statements September 30, 2000 1. Organization and Summary of Significant Accounting Policies (continued) 1. Organization and Capitalization (continued) As discussed above, AeroCentury is the sole member and manager of AeroCentury LLC and AeroCentury II LLC. (c) 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 reserves and security deposits and generally are subject to withdrawal restrictions. At September 30, 2000, the Company held security deposits of $1,870,770, refundable maintenance reserves received from lessees of $3,244,910 and non-refundable maintenance reserves of $2,297,020. The Company's leases are typically structured so that if any event of default occurs under the lease, the Company may apply all or a portion of the lessee's security deposit to cure such default. If such an application of the security deposit is made, the lessee typically is required to replenish and maintain the full amount of the deposit during the remaining term of the lease. All of the security deposits currently held by the Company are refundable to the lessee at the end of the lease. Maintenance reserves which are refundable to the lessee at the end of the lease may be retained by the Company if such amounts are necessary to meet the return conditions specified in the lease and, in some cases, to satisfy any other payments due under the lease. Non-refundable maintenance reserves held by the Company are accounted for as a liability until the aircraft has been returned at the end of the lease, at which time the Company evaluates the adequacy of the remaining reserves in light of maintenance to be performed as a result of hours flown. At that time, any excess is recorded as income and any deficiency is recorded as expense. When an aircraft is sold, any excess non-refundable maintenance reserves are recorded as income. (d) 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. (e) 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. (f) Maintenance Reserves and Accrued Costs Maintenance costs under the Company's triple net leases are generally the responsibility of the lessees. Maintenance reserves and accrued costs in the accompanying balance sheet include refundable and non-refundable maintenance payments received from lessees. The Company periodically reviews maintenance reserves for adequacy in light of the number of hours flown, airworthiness directives issued by the manufacturer or government authority, and the return conditions specified in the lease. As a result of such review, when it is probable that the Company has incurred costs for maintenance in excess of amounts received from lessees, the Company accrues its share of AeroCentury Corp. Notes to Consolidated Financial Statements September 30, 2000 1. Organization and Summary of Significant Accounting Policies (continued) (f) Maintenance Reserves and Accrued Costs (continued) costs for work to be performed as a result of hours flown. At September 30, 2000, the Company had accrued costs of approximately $434,000 related to two of its aircraft. (g) 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. (h) 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. (i) 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. (j) Comprehensive Income The Company does not have any comprehensive income other than the revenue and expense items included in the consolidated statements of income. As a result, comprehensive income equals net income for the three months and nine months ended September 30, 2000 and 1999. 2. Aircraft and Aircraft Engines On Operating Leases At September 30, 2000, the Company owned four deHavilland DHC-7, three deHavilland DHC-6, two Fairchild Metro III, three Shorts SD 3-60, six Fokker 50 aircraft, two Saab 340A aircraft, 26 turboprop engines, one of which is held in inventory as a spare and is not subject to a lease or to depreciation, and three deHavilland DHC-8 aircraft. The Company acquired the deHavilland DHC-8 aircraft during the third quarter of 2000. The lease for one of the Company's DHC-7 aircraft expired in April 1999. During September 2000, the Company entered into a new lease agreement effective upon the lessee's acceptance of the aircraft, which is anticipated to be in November 2000. The lease for one of the Company's Metro III aircraft was extended from August 31, 2000 until such time as the aircraft was returned pursuant to the conditions set forth in the lease which occurred in October 2000. In November 2000, the Company sold the aircraft and recognized a gain on the transaction. AeroCentury Corp. Notes to Consolidated Financial Statements September 30, 2000 2. Aircraft and Aircraft Engines On Operating Leases (continued) On February 24, 2000, the lessee of one of the Company's Shorts SD-360 aircraft filed for reorganization. The lessee is continuing to operate, and, under the reorganization plan, the lessee has agreed to continue leasing the Company's aircraft on a month to month basis at the same rent. The lessee has also begun paying monthly maintenance reserves based on the hours flown. During September 2000, the Company accrued $110,000 of maintenance costs in excess of reserves collected related to repairs performed. In addition, the Company is in the process of identifying any unfunded maintenance requirements related to the pre-reorganization period for which it will submit an unsecured claim to the reorganization administrator. 3. Notes Payable and Accrued Interest The Company's $35 million credit facility, which expired on June 30, 2000, bore interest, payable monthly, at either prime or LIBOR plus 200 basis points, at the Company's option. The Company's aircraft and aircraft engines served as collateral under the facility and, in accordance with the credit agreement, the Company was required to maintain compliance with certain financial covenants. The Company was in compliance with all such covenants through June 28, 2000, when all outstanding principal and accrued interest was paid. On June 28, 2000, the Company signed an agreement with a new agent for a revolving line of credit totaling $50 million. The new facility, which expires on June 28, 2003, bears interest, at the Company's option, at either (i) prime or (ii) LIBOR plus a margin ranging from 200 to 250 basis points, depending on certain financial ratios. The Company's assets serve as collateral under the facility and, in accordance with the credit agreement, the Company must maintain compliance with certain financial covenants. As of September 30, 2000, the Company was in compliance with all such covenants. As of September 30, 2000, $33,685,000 was outstanding under the credit facility, and interest of $47,610 was accrued, using a combination of prime and LIBOR rates. As discussed in Note 1, during November 1999, the Company acquired two aircraft using cash and bank financing separate from its credit facility. The financing consisted of a note in the amount of $9,061,000, due February 15, 2002, which bears fixed interest at 8.04%. Payments due under the note consist of monthly principal and interest and a balloon principal payment due on the maturity date. The balance of the note payable at September 30, 2000 was $8,223,630. A similar financing was concluded in September 2000, consisting of a note in the amount of $3,575,000, due April 18, 2003, which bears fixed interest at 8.36% for the acquisition of one aircraft. Payments due under the note consist of monthly principal and interest and a balloon principal payment due on the maturity date. The balance of the note payable at September 30, 2000 was $3,527,430 and interest of $9,830 was accrued. AeroCentury Corp. Notes to Consolidated Financial Statements September 30, 2000 4. Income Taxes The items comprising income tax expense are as follows:
For the Nine Months Ended September 30, 2000 1999 ---- ---- Current tax provision: Federal $ 61,050 $ 435,950 State 14,530 21,080 Foreign 118,750 - ---------------- --------------- Current tax provision 194,330 457,030 ---------------- --------------- Deferred tax provision: Federal 573,470 136,870 State 5,220 2,770 ---------------- --------------- Deferred tax provision 578,690 139,640 ---------------- --------------- Total provision for income taxes $ 773,020 $ 596,670 ================ ===============
Total income tax expense differs from the amount that would be provided by applying the statutory federal income tax rate to pretax earnings as illustrated below:
For the Nine Months Ended September 30, 2000 1999 ---- ---- Income tax expense at statutory federal income tax rate $ 754,770 $ 577,330 State taxes net of federal benefit 20,760 27,890 Tax rate differences (2,510) (8,550) ---------------- --------------- Total income tax expense $ 773,020 $ 596,670 ================ =============== Tax rate differences result from changes in the Company's effective state tax rates.
Temporary differences and carryforwards that gave rise to a significant portion of deferred tax assets and liabilities as of September 30, 2000 are as follows: Deferred tax assets: Amortization of organizational costs $ 34,700 Maintenance reserves 584,840 Prepaid rent 144,550 Deferred maintenance 84,300 --------------- Net deferred tax assets 848,390 Deferred tax liabilities: Depreciation on aircraft and engines (4,515,080) Other (315,580) ---------------- Net deferred tax liabilities $ (3,982,270) ================ No valuation allowance is deemed necessary, as the Company anticipates generating adequate future taxable income to realize the benefits of all deferred tax assets on the balance sheet.
AeroCentury Corp. Notes to Consolidated Financial Statements September 30, 2000 5. 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. JMC may also receive an acquisition fee for locating assets for the Company, provided that the aggregate purchase price including chargeable acquisition costs and any acquisition 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, acquisition fees and remarketing fees may not exceed the customary and usual fees that would be paid to an unaffiliated party for such services. During the first nine months of 2000 and 1999, the Company recognized as expense $1,262,650 and $801,820, respectively, of management fees payable to JMC. In connection with the purchases of aircraft during the first nine months of 2000 and 1999, the Company accrued a total of $371,300 and $780,100, respectively, in acquisition fees, which are included in the capitalized cost of the aircraft. No remarketing fees were paid to JMC during 2000 or 1999. Certain employees of JMC participate in an employee stock incentive plan which grants options to purchase shares of the Company held by JHC. As of September 30, 2000, 8,833 such options had been exercised. 6. Subsequent Events In November 2000, the lessee of three of the Company's DHC-7 aircraft purchased two of them pursuant to a purchase option contained in the leases. The Company realized a gain on the transaction and used a portion of the proceeds to pay down the Company's revolving line of credit. The lease for the third DHC-7 aircraft has been extended from September 30 to the later of December 31, 2000 or when its pre-return inspection, currently being performed, is completed and the aircraft is accepted by the Company. The Company is seeking re-lease opportunities for this aircraft. The lease for one of the Company's Metro III aircraft was extended from August 31, 2000 until such time as the aircraft was returned pursuant to the conditions set forth in the lease which occurred in October 2000. In November 2000, the Company sold the aircraft and recognized a gain on the transaction. 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 interest rate increases under its credit line; the adequacy of the Company's cash flow to meet ongoing operational needs, notwithstanding the lease status of certain aircraft scheduled for return in the coming quarter and whether the U.K lessee of the 30-seater aircraft pays a reduced rent or returns the aircraft or fails to pay all of its maintenance-related obligations; the stability of the aircraft industry and aircraft asset values and demand; the supply of suitable transaction opportunities for the Company; the use of proper asset and lessee selection to reduce the impact of industry downturns; the attractiveness of overseas markets; JMC's competitiveness due to its experience and operational efficiency in financing transaction types desired by regional air carriers; the Company's ability to obtain third party guaranties, letters of credit or other credit enhancements from future lessees contained in this "Item 2 -- Management's Discussion and Analysis or Plan of Operation" section are forward-looking statements. While the Company believes that such statements are accurate, they are dependent upon general economic conditions, particularly those that affect the demand for regional aircraft and engines, including competition for regional and other aircraft, and future trends and results which 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 also include those discussed below in the section entitled "Factors that May Affect Future Results." Results of Operations The Company had revenues of $8,369,880 and $4,904,680 and net income of $1,446,880 and $1,100,910 for the nine months ended September 30, 2000 and 1999, respectively, and revenues of $2,969,660 and $1,921,090 and net income of $488,360 and $363,680 for the quarters ended September 30, 2000 and 1999, respectively. Rent income was approximately $3,355,790 and $974,460 higher, respectively, for the nine month and three month periods in 2000 versus 1999 due to the purchases of additional on-lease aircraft during the first nine months of 1999 and additional purchases during third quarter 2000, which increases were only partially offset by the off-lease status of one of the Company's DHC-7 aircraft beginning in April 1999. Management fees were approximately $460,830 and $113,810 higher, respectively, in the nine month and three month periods of 2000 versus 1999 because of the aircraft acquisitions noted above. Such acquisitions had a similar effect on depreciation, which was approximately $847,740 and $213,850 higher, respectively, in the nine month and three months periods in 2000 versus 1999, and interest expense, which was approximately $1,494,950 and $455,310 higher in the same periods in 2000 than in 1999. Another contributing factor to the increase in interest expense was somewhat higher interest rates during 2000 compared to 1999. In addition, during 2000, the Company accrued approximately $110,000 of maintenance costs in excess of reserves collected related to one of its aircraft. Liquidity and Capital Resources The Company is currently financing its asset growth through borrowings secured by its assets and excess cash flow. As discussed in Note 3, the Company replaced its $35 million credit facility with a new $50 million facility during June 2000. The new facility, which expires on June 28, 2003, bears interest, at the Company's option, at either (i) prime or (ii) LIBOR plus a margin ranging from 200 to 250 basis points, depending on certain financial ratios. As of September 30, 2000, $33,685,000 was outstanding under the credit facility and interest of $47,610 was accrued, using a combination of prime and LIBOR rates. The prime rate was stable from November 1998 through June 1999 and increased by 25 basis points in each of July, August and November 1999 and February, March and May 2000. The majority of the Company's borrowings are financed using one-month or six-month LIBOR rates, both of which have increased since the Company began financing pursuant to such rates during June 1999. The Company believes it has adequate cash flow to meet recent increases in the interest rates applicable to its credit line obligations. A sudden, severe and prolonged increase in such rates, however, could adversely affect the Company's short-term cash flow by increasing the Company's interest expense. 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, with some time lag, by higher revenues on new leases and renewals of leases. The Company has evaluated whether it is advisable to enter into an interest rate hedge transaction, which would act to lock in current interest rates on its credit line obligations. The Company has determined that such a transaction is not advisable at this time. In making its decision, the Company analyzed interest rate trends, the likelihood of a severe increase in interest rates, the ongoing costs of maintaining the hedge and the magnitude of the impact of any interest rate swing. During November 1999, the Company acquired two aircraft using cash and bank financing separate from its credit facility. The financing consists of a note in the amount of $9,061,000, due February 15, 2002, which bears fixed interest at 8.04%. Payments due under the note consist of monthly principal and interest and a balloon principal payment due on the maturity date. The balance of the note payable at September 30, 2000 was $8,223,630. A similar financing was concluded in September 2000, consisting of a note in the amount of $3,575,000, due April 18, 2003, which bears fixed interest at 8.36% for the acquisition of one aircraft. Payments due under the note consist of monthly principal and interest and a balloon principal payment due on the maturity date. The balance of the note payable at September 30, 2000 was $3,527,430 and interest of $9,830 was accrued. The Company's primary source of revenue is lease rentals collected from lessees of its aircraft assets. It is the Company's policy to monitor each 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 Company's aircraft are subject to leases with varying expiration dates between September 30, 2000 and November 23, 2003. Two of the three aircraft whose leases expired on September 30, 2000 were sold during November 2000. The lease for the third DHC-7 aircraft has been extended from September 30 to the later of December 31, 2000 or when its pre-return inspection, currently being performed, is completed and the aircraft is accepted by the Company. The Company is seeking re-lease opportunities for this aircraft. During September 2000, the lease for one of the Company's Metro III aircraft was extended from August 31, 2000 until such time as the aircraft was returned pursuant to the conditions set forth in the lease. In November 2000, the Company sold the aircraft and recognized a gain on the transaction. 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. The Company has received notice that one of its lessees, which has leased one 30-seat aircraft, has filed for reorganization in the United Kingdom courts under the U.K.'s "administration" statutes. The lessee is continuing to operate, and, under the reorganization plan, the lessee has agreed to continue leasing the Company's aircraft on a month to month basis at the same rent. The lessee has also begun paying monthly maintenance reserves based on the hours flown. During September 2000, the Company accrued $110,000 of maintenance costs in excess of reserves collected related to repairs performed. In addition, the Company is in the process of identifying any unfunded maintenance requirements related to the pre-reorganization period for which it will submit an unsecured claim to the reorganization administrator. If the aircraft is returned at some point in the future, or the Company and the administrator for the lessee agree to a reduced rental, or if any maintenance-related unsecured claim is not fully discharged by the reorganization administrator, the Company's financial results could be adversely affected. In any event, the Company believes that it will have adequate cash flow to meet any ongoing operational needs notwithstanding any of the above. The Company's cash flow from operations for the nine months ended September 30, 2000 versus the same period in 1999 increased by approximately $1,168,000. The increase from year to year was partially due to the Company's acquisition of several aircraft during the first three quarters of 1999 and during the third quarter of 2000 which resulted in increased net income in 2000. The change in cash flow from operations from year to year also included the positive effect of the change in prepaid expenses and other, maintenance reserves and accrued costs, prepaid rent, and a net increase in deferred taxes, which changes were only partially offset by the change in deposits, accounts payable and accrued expenses, accrued interest on notes payable, and security deposits during 2000 versus 1999. Specifically, the Company's cash flow from operations for the nine months ended September 30, 2000 consisted of net income of $1,446,880 and adjustments consisting primarily of depreciation of $1,961,510, increases in deposits, accounts receivable, and prepaid expenses and other of $1,993,540, $668,400 and $232,450, respectively, increases in accounts payable and accrued expenses, maintenance reserves and accrued costs, security deposits, prepaid rent, and a net increase in deferred taxes of $472,820, $1,888,350, $85,630, $118,020 and $754,400, respectively, and a decrease of $167,040 in accrued interest on notes payable. The Company's cash flow from operations for the nine months ended September 30, 1999 consisted of net income of $1,100,910 and adjustments consisting primarily of depreciation of $1,113,770, increases in deposits, accounts receivable, and prepaid expenses and other of $1,883,450, $147,460, and $271,390, respectively, and increases in accounts payable and accrued expenses, accrued interest on notes payable, maintenance reserves and accrued costs, security deposits, prepaid rent, and a net increase in deferred taxes of $605,610, $59,680, $623,530, $1,029,650, $113,670, and $153,650, respectively. The decrease in cash flow used by investing activities of $12,084,220 from year to year was because the Company made fewer acquisitions in both quantity and total cost during the first nine months of 2000. The decrease in cash flow provided by financing activities of approximately $12,598,500 from year to year was because the Company added a lower amount of assets during 2000 and thus borrowed less during the period compared to 1999 while at the same time making principal repayments on its indebtedness during 2000, of which there were none during 1999. Factors that May Affect Future Results Risks of Debt Financing. The Company's use of acquisition financing under its revolving credit facility subjects the Company to increased risks of leveraging. The revolving loans are secured by the Company's existing assets as well as the assets acquired with each financing. Any default under the revolving credit facility 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 a portion of the revolving loans from proceeds of subsequent term debt or equity financings. Such replacement financing would likely provide the Company with more favorable long-term repayment terms and also would permit the Company to make further borrowings under the revolving credit facility 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 credit facility. All of the Company's current credit facility indebtedness carries a floating interest rate based upon either the lender's prime rate or a floating LIBOR rate. If the applicable index rate increases, and the Company has not entered into a mitigating hedge transaction, then the Company's payment obligations under the credit facility would increase and could result in lower net revenues for the Company. 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 generally 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 last year has seen a dramatic rise in the cost of fuel. Because of the current strong demand for air transport, carriers have been able to pass the increased cost on to passengers, and this fuel cost increase has not affected the air carrier market of the aircraft industry generally. If prices remain higher, however, it could affect values of less fuel-efficient aircraft in the Company's portfolio of aircraft, and begin to weaken the aircraft and air transport industry generally. The Company believes that the current aircraft market provides a good supply of suitable transaction opportunities for the Company, primarily in overseas markets, as well as domestically. There are currently some disparities between geographic regions with respect to the condition of the air transport industry, with certain areas of South America and the Pacific Rim, in particular, experiencing economic difficulties. 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 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 under a Management Agreement which is in its fourth year of 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, however, has ultimate control and supervisory responsibility over all aspects of the Company and owes 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 sell 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 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 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 its obligations under a lease, the Company may be limited in its ability to enforce remedies. Most of the Company's lessees are small 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 has focused recently 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 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 an aircraft 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 in which 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 U.S. economy does not. A foreign economic downturn may 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 to 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 would make 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 decline substantially. Competition. The aircraft leasing industry is highly competitive. The Company competes 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 JMC's experience and operational efficiency in financing the transaction types desired by 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 the major air carriers, is not well served by the Company's larger competitors in the aircraft industry. JMC 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 involves 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 remarket equipment at acceptable rates may depend on the demand and market values at the time of remarketing. 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 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 airframe or engine types should decline in value. If "regional jets" were to be used on short routes previously served by turboprops, even though regional jets are more expensive to operate than turboprops, the demand for turboprops could be decreased. 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 is 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. Leasing transactions with these types of lessees result in a generally higher lease rate on aircraft, but may entail higher risk of default or lessee bankruptcy. The Company evaluates the credit risk of each lessee carefully, and attempts 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 in 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 1.5 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. Part II. Other Information None. 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 November 10, 2000. AEROCENTURY CORP. By: /s/ Neal D. Crispin -------------------- Neal D. Crispin Title: President /s/ Toni M. Perazzo -------------------- Toni M. Perazzo Title: Senior Vice President - Finance and Secretary the Registrant (Principal Financial and Accounting Officer) EX-27 2 0002.txt FDS --
5 (Replace this text with the legend) 0001036848 AEROCENTURY CORP. 1 U.S. DOLLARS 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 1 9,418,450 0 976,160 0 0 76,356,400 84,743,340 19,373,130 76,356,400 59,418,180 0 0 0 1,610 16,936,610 76,356,400 0 8,369,880 0 0 3,761,140 0 2,388,840 2,219,900 773,020 1,446,880 0 0 0 1,446,880 0.94 0.94
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