-----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, QfMSed+egXIfCN33bZw5kT6B7gPWILJkCf/E3lwSglsR7zVYmTxAJJuTmtfq8KCE Q5FaapUWzVxFgjyrhdUH9Q== 0001036848-01-000018.txt : 20010328 0001036848-01-000018.hdr.sgml : 20010328 ACCESSION NUMBER: 0001036848-01-000018 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010327 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: DEF 14A SEC ACT: SEC FILE NUMBER: 001-13387 FILM NUMBER: 1580067 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 DEF 14A 1 0001.txt PROXY STATEMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 14A (Rule 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14 INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. *) Filed by the Registrant /X/ Filed by a Party other than the Registrant / / Check the appropriate box: / / Preliminary Proxy Statement / / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) / x / Definitive Proxy Statement / / Definitive Additional Materials / / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12 AEROCENTURY CORP. - ------------------------------------------------------------------- (Name of Registrant as Specified in Its Charter) - ------------------------------------------------------------------- Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): /X/ No fee required. / / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: - -------------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: - --------------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): N/A - - ------------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: N/A ------------------------------------------------------------------------- (5) Total Fee Paid: - --------------------------------------------------------------------------- / / Fee paid previously with preliminary materials. / / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount previously paid: - -------------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: - - ------------------------------------------------------------------------- (3) Filing Party: - - ------------------------------------------------------------------------- (4) Date Filed: - - ------------------------------------------------------------------------- AEROCENTURY CORP. NOTICE OF 2001 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 27, 2001 TO OUR STOCKHOLDERS: You are cordially invited to attend the 2001 Annual Meeting of Stockholders of AeroCentury Corp. (the "Company"), which will be held at the Hiller Aviation Museum, 601 Skyway Road, San Carlos, California at 6:00 p.m. on April 27, 2001, for the following purposes: 1. To elect two directors to the Board of Directors; 2. To consider and vote upon a proposal to ratify the selection of Arthur Andersen LLP as independent public accountants for the Company for the fiscal year ending December 31, 2001; and 3. To act upon such other business as may properly come before the meeting or any adjournment or postponement thereof. These matters are more fully described in the Proxy Statement accompanying this Notice. The Board of Directors has fixed the close of business on March 1, 2001, as the record date for determining those stockholders who will be entitled to vote at the meeting. The stock transfer books will not be closed between the record date and the date of the meeting. A quorum comprising the holders of the majority of the outstanding shares of Common Stock of the Company on the record date must be present or represented for the transaction of business at the Annual Meeting. Accordingly, it is important that your shares be represented at the meeting. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE. Your proxy may be revoked at any time prior to the time it is voted. If you plan to attend the meeting, please call the Company's Investor Relations Department at (650)-340-1888, so that your name can be placed on the guest list at the Hiller Aviation Museum entrance. Please read the proxy material carefully. Your vote is important and the Company appreciates your cooperation in considering and acting on the matters presented. Sincerely yours, /s/ Neal D. Crispin Neal D. Crispin CHAIRMAN OF THE BOARD March 27, 2001 Burlingame, California PROXY STATEMENT FOR 2001 ANNUAL MEETING OF STOCKHOLDERS OF AEROCENTURY CORP. TO BE HELD ON APRIL 27, 2001 This Proxy Statement is furnished in connection with the solicitation by the Board of Directors of AEROCENTURY CORP. (the "Company") of proxies to be voted at the 2001 Annual Meeting of Stockholders, which will be held at 6:00 p.m. on April 27, 2001 at the Hiller Aviation Museum, 601 Skyway Road, San Carlos, California, or at any adjournments or postponements thereof, for the purposes set forth in the accompanying Notice of 2001 Annual Meeting of Stockholders. This Proxy Statement and the proxy card were first mailed to stockholders on or about March 27, 2001. The Company's 2000 Annual Report is being mailed to stockholders concurrently with this Proxy Statement. The 2000 Annual Report is not to be regarded as proxy soliciting material or as a communication by means of which any solicitation of proxies is to be made. VOTING RIGHTS AND SOLICITATION The close of business on March 1, 2001 was the record date for stockholders entitled to notice of and to vote at the 2001 Annual Meeting of Stockholders. As of that date, the Company had 1,543,257 shares of Common Stock, $0.001 par value (the "Common Stock"), issued and outstanding. All of the shares of the Company's Common Stock outstanding on the record date, are entitled to vote at the 2001 Annual Meeting of Stockholders, and stockholders of record entitled to vote at the meeting will have one vote for each share of Common Stock so held with regard to each matter to be voted upon. If your shares are registered directly in your name with the Company's transfer agent, Continental Stock & Transfer Co., you are considered, with respect to those shares, the "stockholder of record" and these proxy materials are being sent directly to you by the Company. As the stockholder of record, you have the right to grant your voting proxy directly to the Company or to vote in person at the meeting. The Company has enclosed a proxy card for your use which should be returned to the Company. If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the "beneficial owner" of shares held "in street name" and these proxy materials are being forwarded to you by your broker or nominee who is considered, with respect to those shares, the stockholder of record. As the beneficial owner, you have the right to direct your broker on how to vote and are also invited to attend the meeting. However, since you are not the stockholder of record, you may not vote those shares in person at the meeting. Your broker or nominee has enclosed a voting instruction card for your use, which must be returned to your broker or nominee. Shares of the Company's Common Stock represented by proxies in the accompanying form which are properly executed and returned to the Company will be voted at the 2001 Annual Meeting of Stockholders in accordance with the instructions of the stockholder of record contained therein. In the absence of contrary instructions, shares represented by such proxies will be voted FOR the election of each of the directors as described herein under "Proposal 1: Election of Directors" and FOR ratification of the selection of accountants as described herein under "Proposal 2: Ratification of Selection of Independent Public Accountants." Management does not know of any matters to be presented at this Annual Meeting other than those set forth in this Proxy Statement and in the Notice accompanying this Proxy Statement. If other matters should properly come before the meeting, the proxy holders will vote on such matters in accordance with their best judgment. Any stockholder of record has the right to revoke his or her proxy at any time before it is voted at the meeting. Election of directors by stockholders shall be determined by a plurality of the votes cast by the stockholders of record entitled to vote at the election present in person or represented by proxy. Ratification of the selection of accountants shall be determined by a majority of the votes cast by the stockholders of record entitled to vote at the meeting. Abstentions and broker non-votes are each included in the determination of the number of shares present for quorum purposes. Abstentions are counted in tabulations of the votes cast on proposals presented to stockholders, whereas broker non-votes are not counted for purposes of determining whether a proposal has been approved. The entire cost of soliciting proxies will be borne by the Company. Proxies will be solicited principally through the use of the mails, but, if deemed desirable, may be solicited personally or by telephone, telegraph or special letter by officers and regular Company employees for no additional compensation. Arrangements may be made with brokerage houses and other custodians, nominees and fiduciaries to send proxies and proxy material to the beneficial owners of the Company's Common Stock, and such persons may be reimbursed for their expenses. PROPOSAL 1 ELECTION OF DIRECTORS Two of the Company's six directors will be elected at the 2001 Annual Meeting of Stockholders. The nominees for the Board of Directors are set forth below. The proxy holders intend to vote all proxies received by them in the accompanying form for the nominees for director listed below, unless instructions to the contrary are marked on the proxy. In the event that a nominee is unable or declines to serve as a director at the time of the 2001 Annual Meeting of Stockholders, the proxies will be voted for any nominee who shall be designated by the present Board of Directors to fill the vacancy. In the event that additional persons are nominated for election as directors, the proxy holders intend to vote all proxies received by them for the nominees listed below. As of the date of this Proxy Statement, the Board of Directors is not aware of any nominee who is unable or will decline to serve as a director. The term of office of each person elected as a director will continue until the 2004 Annual Meeting of Stockholders or until the director's successor has been elected. Nominees To Board Of Directors Mr. Neal D. Crispin, age 55. Mr. Crispin is Chairman of the Board and President of the Company. He is a member of the Executive committee of the Board and has served on the Board since its inception in 1997. He is also President and a Chairman of CMA Consolidated, Inc. ("CMA") and JetFleet Management Corp. ("JMC"). Prior to forming CMA in 1983, Mr. Crispin spent 2 years as vice President-Finance of an oil and gas company. Previously, Mr. Crispin was a manager with Arthur Young & Co., Certified Public Accountants. Prior to joining Arthur Young & Co., Mr. Crispin served as a management consultant, specializing in financial consulting. Mr. Crispin is the husband of Toni M. Perazzo, a Director and Officer of JMC and the Company. He received a Bachelor's Degree in Economics from the University of California at Santa Barbara and a Master's Degree in Business Administration (specializing in Finance) from the University of California at Berkeley. Mr. Crispin, a CPA, is a member of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants. Mr. Evan M. Wallach, age 46. Mr. Wallach is Managing Director, Fixed Income, at US Bancorp Piper Jaffrey. Prior to that he served as Vice President, Finance of C-S Aviation from 1998 to 2000. He is a member of the Audit Committee and has served on the Board since 1997. From 1996 to 1998, he was President and Chief Executive Officer of Global Airfinance Corporation. He has specialized in aircraft and airline financing over the past seventeen years, having held senior level positions with The CIT Group (1994 to 1996), Bankers Trust Company (1992 to 1994), Kendall Capital Partners (1990 to 1992), Drexel Burnham Lambert (1987 to 1990), and American Express Aircraft Leasing (1985 to 1987). Mr. Wallach received a Bachelor's Degree in Political Science from State University of New York at Stony Brook and a Master's Degree in Business Administration from the University of Michigan. THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ELECTION OF ALL OF THE ABOVE NOMINEES FOR ELECTION AS DIRECTORS. PROPOSAL 2 RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS The firm of Arthur Andersen LLP served as independent public accountants for the Company for the fiscal year ended December 31, 2000. The Board of Directors desires the firm to continue in this capacity for the current fiscal year. Accordingly, a resolution will be presented to the meeting to ratify the selection of Arthur Andersen LLP by the Board of Directors as independent public accountants to audit the accounts and records of the Company for the fiscal year ending December 31, 2001, and to perform other appropriate services. In the event that stockholders fail to ratify the selection of Arthur Andersen LLP, the Board of Directors would reconsider such selection. A representative of Arthur Andersen LLP will be present at the Annual Meeting to respond to appropriate questions and to make a statement if such representative desires to do so. THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS INDEPENDENT PUBLIC ACCOUNTANTS. INFORMATION REGARDING AUDITORS Auditor Fees. The aggregate fees billed by the Company's auditors, Arthur Andersen LLP ("Auditors"), for professional services rendered for the audit of the Company's financial statement for the fiscal year ended December 31, 2000 and the reviews of the financial statements included in the Company's Forms 10-QSB during the 2000 fiscal year was $45,000. An additional $6,500 was billed by the Auditors in connection with their review of the Company's 2000 tax return. No other fees were billed by the Auditors to the Company. Audit Committee Report. The Audit Committee of the Board of Directors of the Company serves as the representative of the Board for general oversight of the Company's financial accounting and reporting process, system of internal control, audit process, and process for monitoring compliance with laws and regulations. The Company's management has primary responsibility for preparing the Company's financial statements and the Company's financial reporting process. The Company's Auditors, Arthur Andersen LLP, are responsible for expressing an opinion on the fairness and conformity of the Company's audited financial statements to generally accepted accounting principles. In this context, the Audit Committee hereby reports as follows: 1. The Audit Committee has reviewed and discussed the audited financial statements with the Company's management. 2. The Audit Committee has discussed with the Auditors the matters required to be discussed by SAS 61 (Codification of Statements on Auditing Standard, AU 380). 3. The Audit Committee has received the written disclosures and the letter from the independent accountants required by Independence Standards Board Standard No. 1 (Independence Standards Board Standards No. 1, Independence Discussions with Audit Committees) and has discussed with the Auditors their independence. 4. Based on the review and discussion referred to in paragraphs (1) through (3) above, the Audit Committee recommended to the Board of Directors of the Company, and the Board has approved, that the audited financial statements be included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000, for filing with the Securities and Exchange Commission. The undersigned members of the Audit Committee have submitted this Report to the Audit Committee: Thomas W. Orr Evan M. Wallach Toni M. Perazzo INFORMATION REGARDING THE COMPANY'S DIRECTORS AND OFFICERS Current Board Of Directors The following directors have terms expiring at the Company's 2001 Annual Stockholder Meeting: Neal D. Crispin and Evan M. Wallach. They have been nominated for election to the Board of Directors. For their biographical information, see "PROPOSAL 1: ELECTION OF DIRECTORS," above. The following directors have terms expiring at the Company's 2002 Annual Stockholder Meeting: Mr. Maurice J. Averay, age 70. Mr. Averay has been an aviation consultant since 1996 and has served on the Board since 1997. From 1995 to 1996 he was a full-time consultant to Saab Aircraft of America and its parent with respect to marketing and new aircraft development. From 1990 - 1995, he was Senior Vice President of the Sales and Marketing team of Saab Aircraft of America responsible for North and South American turboprop airliner sales. Prior to that Mr. Averay was Vice President of Sales Support for Saab Aircraft International, Ltd.; Sales Engineering Manager for Fairchild Aircraft, Inc., San Antonio, Texas; Vice President, Planning, for Chautauqua Airlines, Jamestown, New York, a U.S. Airways commuter associate; and Vice President of Shorts Aircraft USA, Inc., Mr. Averay holds a Bachelor of Science in Aero Engineering from the University of Bristol, United Kingdom. Ms. Toni M. Perazzo, age 53. Ms. Perazzo is a member of the Audit and Executive Committees of the Board of Directors and has served on the Board since its inception in 1997. She is the Company's Senior Vice President-Finance and Secretary and has held these same positions with JetFleet Management Corp. ("JMC"), the management company for the Company since 1994, and CMA Consolidated, Inc. ("CMA") since 1990. Prior to joining CMA in 1990, she was Assistant Vice President for a savings and loan, controller of an oil and gas syndicator and a senior auditor with Arthur Young & Co., Certified Public Accountants. Ms. Perazzo is the wife of Neal D. Crispin, a director and officer of JMC and the Company. She received her Bachelor's Degree from the University of California at Berkeley, and her Master's Degree in Business Administration from the University of Southern California. Ms. Perazzo, a CPA, is a member of the California Society of Certified Public Accountants and the American Institute of Certified Public Accountants. The following directors have terms expiring at the Company's 2003 Annual Stockholder Meeting: Mr. Marc J. Anderson, age 64. Mr. Anderson has been a member of the Company's Board of Directors since its inception in 1997. Mr. Anderson is the Company's Chief Operating Officer and Senior Vice President. He holds the same officer positions with JMC. Prior to joining JMC in 1994, Mr. Anderson was an aviation consultant (1992 to 1994) and prior to that spent seven years (1985 to 1992) as Senior Vice President-Marketing for PLM International, a transportation equipment leasing company. He was responsible for the acquisition, modification, leasing and remarketing of all aircraft. Prior to PLM, Mr. Anderson served as Director-Contracts for Fairchild Aircraft Corp.; Director of Aircraft Sales for Fairchild SAAB Joint Venture; and Vice President, Contracts for SHORTS Aircraft USA, Inc. Prior to that, Mr. Anderson was employed with several airlines in various roles of increasing responsibility beginning in 1959. Mr. Thomas W. Orr, age 67. Mr. Orr has served on the Company's Board of Directors since 1997, and was also, during that time, a member of the Audit Committee of the Board of Directors. Mr. Orr is currently a partner at the accounting firm of Bregante + Company LLP, where he has been a partner since joining that firm in 1992. Prior to that, beginning in 1986, Mr. Orr was Vice President, Finance, at Scripps League Newspapers, Inc. Beginning in 1958, Mr. Orr was in the audit department of Arthur Young & Company, where he retired as a partner in 1986. Mr. Orr received his Bachelor's degree in Business Administration, with distinction (Accounting major), from the University of Minnesota. He is a member of the American Institute of Certified Public Accountants, the California Society of Certified Public Accountants, and a former member of the California State Board of Accountancy. Board Meetings And Committees The Board of Directors of the Company held a total of four meetings during the fiscal year ended December 31, 2000 (the "2000 fiscal year"). Each director attended every meeting of the Board and every meeting held by all committees of the Board on which the director served. The Company has an Audit Committee and an Executive Committee of the Board of Directors. There is no compensation or nominating committee or committee performing the functions of such committees. The Audit Committee was formed pursuant to a written charter approved by the Board of Directors. The Audit Committee meets with the Company's financial management and its independent public accountants to review internal financial information, audit plans and results, and financial reporting procedures. This committee, which currently consists of Thomas W. Orr, Chairman, Evan M. Wallach and Toni M. Perazzo. Of the three directors on the Audit Committee, only one, Toni M. Perazzo, is not "independent" as defined under the American Stock Exchange Company Guide. The Audit Committee held one meeting during the 2000 fiscal year, and has held one meeting in the 2001 fiscal year to date. The Executive Committee has the authority to acquire, dispose of and finance investments for the Company and execute contracts and agreements, including those related to the borrowing of money by the Company, and generally exercise all other powers of the Board of Directors except for those which require action by all the directors or the independent directors under the Certificate of Incorporation or the Bylaws of the Company, or under applicable law. The Executive Committee currently consists of three directors, Neal D. Crispin, Chairman, Toni M. Perazzo, and Marc J. Anderson. Director Compensation Non-employee members of the Board are each paid an annual fee of $14,000 and are reimbursed for all reasonable out-of-pocket costs incurred in connection with their attendance at such meetings. Non-employee members also receive $1,000 annually for each committee membership. Board members who are officers of the Company do not receive any compensation for Board or committee membership. Officers And Key Employees For biographies of Neal D. Crispin, President & Chairman of the Board, Marc J. Anderson, Chief Operating Officer & Senior Vice President, and Toni M. Perazzo, Senior Vice President - Finance & Secretary, see "Board of Directors" above. Listed below are other officers of AeroCentury Corp. who are also key officers and employees of JetFleet Management Corp., the Company's management company, and are responsible for the management of various aspects of the Company's business: Mr. Brian J. Ginna, Vice President, Corporate Development, age 32. Mr. Ginna has been responsible for all corporate communications, investor relations and public relations of the Company and JMC and its related companies since joining JMC in 2000. He is also Controller for CMA which he joined in 1991 and where he has held various positions of increasing responsibility. Mr. Ginna received a Bachelor of Science degree in Finance from Babson College. Mr. John S. Myers, Senior Vice President, age 55. Mr. Myers is responsible for the administration of aircraft leases, marketing agreements and vendor agreements for the Company and JMC. From 1991 to 2000, Mr. Myers was Vice President of Raytheon Aircraft Credit Corporation responsible for the management of a $1.3 billion commuter ailine portfolio, customer financing transactions, credit risk analysis and structuring, and negotiating and documenting aircraft financing transactions. From 1976 until 1991, he was Senior Vice President and Chief Financial Officer of Air Midwest, Inc., a regional airline. Mr. Myers has Bachelor of Business Administration from Wichita State University. Ms. Polly Prelinger, Vice President, Marketing, age 43. Ms. Prelinger is in charge of research and market development for the Company and JMC. Prior to joining JMC in 1998, Ms. Prelinger was Vice President-Sales and Marketing for 2 years with Fairchild Aircraft Incorporated, a major commuter aircraft manufacturer. During the period 1987 - 1996, Ms. Prelinger was at PLM International, a diversified equipment leasing company where she held positions of Director, Research and Market Development and Vice President, Aircraft Marketing. Ms. Prelinger holds a Bachelor of Arts degree in Russian Studies from the University of Michigan. Mr. Christopher B. Tigno, General Counsel, age 39. Mr. Tigno is responsible for all legal matters of the Company and JMC and its related companies, including supervision of outside counsel, documentation of aircraft asset acquisition transactions, and corporate and securities matters. He is also General Counsel for CMA. He joined JMC and CMA in 1996. He was most recently employed as Senior Counsel with the firm of Wilson, Ryan & Campilongo (1992 to 1996), and prior to that was associated with Fenwick & West and Morrison & Foerster. Mr. Tigno received his Juris Doctor degree from the University of California at Berkeley, Boalt Hall School of Law, and was admitted to the California Bar in 1986. He also holds a Bachelor's Degree in Chemical Engineering from Stanford University. Employment Contracts The cash compensation received by Neal Crispin from JMC including bonuses, for 2000 was $100,000 and is expected to be $103,260 in 2001. The cash compensation received by Ms. Perazzo from JMC including bonuses for 2000 was $85,860 and is expected to be $85,000 in 2001. The only executive officers of JMC whose compensation exceeds $100,000 are Marc J. Anderson, Senior Vice President & Chief Operating Officer, whose salary and bonus was $192,600 in 2000 and is expected to be $204,730 in 2001 Compensation Committee Interlocks And Insider Participation Neal Crispin and Toni M. Perazzo are both executive officers and directors of the Company and JMC. Marc Anderson is an executive officer and director of the Company and an executive officer of JMC. As described above under "Employment Contracts," the Company has no employees and does not pay any compensation to its executive officers. Other than that, no executive officers of the Company currently serve on the compensation committee (or any other committee of the board of directors performing similar functions) of another entity. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information regarding the beneficial ownership of the Company's Common Stock as of March 1, 2001 by: (i) each person who is known to the Company to own beneficially more than five percent of the outstanding shares of the Company's Common Stock; (ii) each director; and (iii) all directors and executive officers as a group. Percentage of Ownership of Common Name, Position, & Address No. of.Shares(1) Stock(2) Neal D. Crispin 277,561 17.99% Chairman of the Board, President and Principal Shareholder (3)(4) Toni M. Perazzo 277,561 17.99% Director, Sr. Vice President - Finance, Secretary and Principal Shareholder (3)(4)(5) Marc J. Anderson 6,657 * Director, Senior Vice President and Chief Operating Officer (1)(3)(6) Maurice J. Averay, 300 * Director (3) Thomas W. Orr, 600 * Director (3) Evan M. Wallach, 175 * Director (3) Pine Capital Management, Incorporated; 117,850 7.64% Phillip Economopoulos; Bob L. Arnett; Kevin Daly (7) JetFleet Holding Corp. 220,167 14.27% Principal Shareholder (3)(8) All directors and executive 280,793 18.19% officers as a group (6 persons)(9)
- ------------------------------------------------ * Less than 1% Footnotes to Security Ownership: (1) Except as indicated in the footnotes to this table, the stockholders named in the table are known to the Company to have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable. The number of shares beneficially owned includes Common Stock of which such individual has the right to acquire beneficial ownership either currently or within 60 days after March 1, 2001, including, but not limited to, upon the exercise of an option. (2) For purposes of calculating percentages, total outstanding shares consists of 1,543,257 shares of outstanding Common Stock, which excludes shares held by the Company as treasury stock. (3) The mailing address is c/o AeroCentury Corp., 1440 Chapin Avenue Suite 310, Burlingame, California 94010. (4) Includes 271,561 shares owned by corporations of which Mr. Crispin is an officer, director and/or principal shareholder. To avoid double counting the same shares, does not include 20,000 shares issuable upon exercise of options granted to Mr. Crispin by JetFleet Holding Corp. ("JHC") to purchase AeroCentury Common Stock owned by JHC. (The shares issuable upon exercise of these options would come from the 220,267 shares already counted as beneficially owned by Mr. Crispin and Ms. Perazzo indirectly through JHC.) (5) Consists of shares owned by corporations, of which Ms. Perazzo is an officer, director and/or principal shareholder, plus other shares owned beneficially by Mr. Crispin, spouse of Ms. Perazzo. (6) Includes shares issuable upon exercise of options to purchase 4,500 shares issuable upon exercise of options granted by JHC to purchase AeroCentury Common Stock owned by JHC. (7) Disclosure based on a copy of a form 13-G received by the Company. Shares are held for the account of clients of Pine Capital Management, Incorporated ("Pine"). The address is 353 Sacramento Street, 10th Floor, San Francisco, CA 94111. Pine holds the shares in a fiduciary capacity and Messrs. Economopoulos, Arnett and Daly are its controlling shareholders. Clients of Pine have the right to receive, or the power to direct the reecipt of, dividends from, or the proceeds of the sale of their respective shares. The Company is informed that no client is known by Pine to have the right or power with respect to more than 5% of the outstanding shares. (8) In May 1998, the original holder of the shares of the Company, JetFleet Management Corp., was renamed "JetFleet Holding Corp." The rights and obligations under the Management Agreement were then assigned by JetFleet Holding Corp. to a newly-created wholly-owned subsidiary named "JetFleet Management Corp." (9) Consists of shares beneficially owned by officers and directors, but excludes option shares described in footnote (4) and (6), since the shares issuable upon exercise of these options are already counted in the 220,167 shares beneficially owned by Mr. Crispin and Ms. Perazzo indirectly through JHC, and therefore included in the shares counted as beneficially owned by officers and directors. RELATED PARTY TRANSACTIONS Management Agreement. JetFleet Management Corp. ("JMC") acts as the management company for the Company under the Management Agreement, dated December 31, 1997, as amended on February 3, 1998, between JMC and the Company. The officers of the Company are also officers of JMC and two members of the JMC's Board of Directors are on the Board of Directors of the Company. Under the Management Agreement, the Company pays a monthly management fee to JMC equal to 0.25% of the net book value of the Company's assets as of the end of the month for which the fee is due. In addition, JMC may 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 2000 and 1999, the Company recognized as expense $1,725,250 and $1,148,800, respectively, of management fees payable to JMC. In connection with the purchases of aircraft during 2000 and 1999, the Company paid JMC a total of $371,300 and $1,080,100, respectively, in acquisition fees, which are included in the capitalized cost of the aircraft. During 2000 and 1999, the Company paid JMC a total of $77,250 and $0, respectively, in remarketing fees. Office Space. The Company maintains its principal office at the offices of JMC at 1440 Chapin Avenue, Suite 310, Burlingame, California, without reimbursement to JMC. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent stockholders are required by Securities and Exchange Commission regulation to furnish the Company with copies of all Section 16(a) reports they file. Based solely upon review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that there was compliance for the fiscal year ended December 31, 2000 with all Section 16(a) filing requirements applicable to the Company's officers, directors and greater than ten percent beneficial owners. STOCKHOLDER PROPOSALS Stockholder proposals intended to be considered at the 2002 Annual Meeting of Stockholders must be received by the Company no later than November 27, 2001. Proposals submitted after that date will be considered untimely, and will not be considered at the 2002 Annual Meeting. The proposal must be mailed to the Company's principal executive offices, 1440 Chapin Avenue, Suite 310, Burlingame, California 94010. Such proposals may be included in next year's proxy statement if they comply with certain rules and regulations promulgated by the Securities and Exchange Commission. OTHER MATTERS Management does not know of any matters to be presented at this Annual Meeting other than those set forth herein and in the Notice accompanying this Proxy Statement. It is important that your shares be represented at the meeting, regardless of the number of shares which you hold. YOU ARE, THEREFORE, URGED TO EXECUTE PROMPTLY AND RETURN THE ACCOMPANYING PROXY IN THE ENVELOPE WHICH HAS BEEN ENCLOSED FOR YOUR CONVENIENCE. Stockholders who are present at the meeting may revoke their proxies and vote in person or, if they prefer, may abstain from voting in person and allow their proxies to be voted. By Order of the Board of Directors, /s/ Neal D. Crispin Neal D. Crispin, President March 27, 2001 Burlingame, California APPENDIX A AUDIT COMMITTEE CHARTER AEROCENTURY CORP. BOARD OF DIRECTORS AUDIT COMMITTEE CHARTER Revised July 21, 2000 I. ORGANIZATION The Audit Committee will consist of a majority of directors who are independent of the management of the Corporation and are free of any relationship that, in the opinion of the Board would interfere with their exercise of independent judgment as a Committee member. II. STATEMENT OF POLICY The Audit Committee shall provide assistance to the corporate directors in fulfilling their responsibility to the shareholders, potential shareholders, and investment community relating to corporate accounting, reporting practices of the corporation, and the quality and integrity of the financial reports of the corporation. In so doing, it is the responsibility of the audit committee to maintain free and open means of communication between the directors, the independent auditors, and the financial management of the Corporation. III. RESPONSIBILITIES In carrying out its responsibilities, the Audit Committee believes its policies and procedures should remain flexible, in order to best react to changing conditions and to ensure to the directors and shareholders that the corporate accounting and reporting practices of the Corporation are in accordance with all requirements and are of the highest quality. The Audit Committee's responsibilities shall be as follows: A. Review and recommend to the Board the independent auditors to be selected to audit the financial statements of the Corporation and its divisions and subsidiaries. B. Meet with the independent auditors and financial management of the Corporation to review the scope of the proposed audit for the current year and the audit procedures to be utilized, and at the conclusion thereof, review such audit, including any comments or recommendations of the independent auditors. C. Review with the independent auditors and financial and accounting personnel, the adequacy and effectiveness of the accounting and financial controls of the Corporation, and elicit any recommendations for the improvement of such internal control procedures or particular areas where new or more detailed controls or procedures are desirable. Particular emphasis should be given to the adequacy of such internal controls to expose any payments, transactions, or procedures that might be deemed illegal or otherwise improper. Further, the Committee periodically should review company policy statements to determine their adherence to the code of conduct. D. Review the financial statements contained in the annual report of the shareholders with management and the independent auditors to determine that the independent auditors are satisfied with the disclosure and content of the of the financial statements to be presented to the shareholders. Any changes in accounting principles should be reviewed. E. Provide sufficient opportunity for the independent auditors to meet with the members of the Audit Committee without members of management present. Among the items to be discussed in these meetings are the independent auditors' evaluation of the Corporation's financial, accounting, and auditing personnel, and the cooperation that the independent auditors received during the course of the audit. F. Review accounting and financial human resources and succession planning with the corporation. I. Submit the minutes of all meetings of the Audit Committee to, or discuss the matters discussed at each Committee meeting with, the Board. J. Investigate any matter brought to its attention within the scope of its duties, with the power to retain outside counsel for this purpose if, in its judgment, that is appropriate. IV. MEETINGS Periodic meetings of the Audit Committee should be regularly scheduled, and should include at least the following meetings: 1. Prior to the annual audit; 2. After completion of the annual audit and before financial statements are issued; 3. Before the annual meeting of shareholders, which would include the preparation of the Audit Committee's report to the entire Board of Directors. Meetings should provide the opportunity not only to review the Company's quarterly and annual financial results but also perform a preliminary review of annual and quarterly financial reports of the Corporation, and review filings with the Securities and Exchange Commission. The Audit Committee should set its own agenda and should be able to secure whatever information it may feel it needs to be well informed as to the issues before it. Special meetings of the Committee may be called by any member of the Audit Committee or at the request of the independent auditor. V. MINUTES Minutes shall be kept of each meeting of the Committee and will be provided to each member of the Board. Any action of the Committee shall be subject to revision, modification or rescission by the Board. AEROCENTURY CORP. KEY ISSUES REGARDING THE AUDIT COMMITTEE A. Composition of the Audit Committee o The Board of Directors of the Corporation shall appoint an Audit Committee of the Board composed of a majority of "independent" members and assure those members are of a tenure long enough to establish consistency and time to implement long-term strategies. o "Independent" members: Directors who are (I) not employed by the Corporation or any its affiliates within the last three years, (ii) not members of the immediate family of a current executive officer of the company or an affiliate; and (iii) in the view of the Corporation's Board, are free of any relationship that would interfere with the exercise of independent judgment. B. Functions of the Audit Committee o Define the scope of the Audit Committee's functions which will generally be broader than overseeing the Corporation's financial reporting process and internal controls. Such objectives should always be considered in the context of what is in the best interests of the Corporation and its shareholders. o Specific issues within the jurisdiction of the Audit Committee might include: (1) Recommend which firm to engage as the Corporation's external auditor and whether to terminate that relationship. (2) Review the external auditor's compensation, the proposed term of its engagement, and its independence; (3) Review the appointment and replacement of the senior internal auditing executive, if any. (4) Serve as a channel of communication between the external auditor and the board and between the senior internal auditing executive, if any, and the board; (5) Review the results of each external audit, including any qualifications in the external auditor's opinion, any related management letter, management's responses to recommendations made by the external auditor in connection with the audit, and management's responses to those reports. (6) Review the Corporation's financial statements and any significant disputes between management and the external auditor that arose in connection with the preparation of those financial statements; (7) Consider, in consultation with the external auditor and the senior internal auditing executive, if any, the adequacy of the Corporation's internal financial controls. Among other things, these controls must be designed to provide reasonable assurance that the Corporation's publicly reported financial statements are presented fairly in conformity with generally accepted accounting principles; (8) Review the activities, organizational structure and qualification of the internal audit function, if any; (9) Consider major changes and other major questions regarding the appropriate auditing and accounting principles and practices to be followed when preparing the Corporation's financial statements; (10) Review the procedures employed by the Corporation in preparing published financial statements and related management commentaries. (11) Meet periodically with management to review the Corporation's major financial risk exposures, such as legal matters that could have a significant impact on the Corporation's financial statements; (12) Review the findings of any examinations by regulatory agencies, such as the Securities and Exchange Commission. C. Audit Committee Meetings. o Periodic meetings of the Audit Committee should be regularly scheduled, and should include at least the following meetings: (1) Prior to the annual audit; (2) After completion of the annual audit and before financial statements are issued; and (3) Before the annual meeting of the shareholders, which would include the preparation of the Audit Committee's report to the entire Board of Directors. o Meetings should provide the opportunity not only to review the Corporation's quarterly and annual financial results but to also perform a preliminary review of annual and quarterly financial reports of the Corporation, and review periodic filings with the Securities and Exchange Commission. The Audit Committee should set its own agenda and be able to secure whatever information it may feel it needs to be well informed as to the issues before it. o Empower the Audit Committee to engage such accountants, attorneys or other advisers as they see fit and provide free access to such information as such accountants, attorneys or other advisers may need. Such accountants, attorneys or other advisers should be directly responsible and report only to the Audit Committee. o Assure that proper records are kept of the deliberations of the Audit Committee and the actions taken as well as any supporting information underlying their decisions. The records should reflect reality and reality should reflect an active deliberative process on the basis of adequate information and opportunity to deliberate. o Adopt a program for the implementation of revisions to corporate policy and procedures as a result of feedback received from the independent auditor. OTHER MATTERS Management does not know of any matters to be presented at this Annual Meeting other than those set forth herein and in the Notice accompanying this Proxy Statement. It is important that your shares be represented at the meeting, regardless of the number of sharees which you hold. YOU ARE, THEREFORE, URGED TO EXECUTE PROMPTLY AND RETURN THE ACCOMPANYING PROXY IN THE ENVELOPE WHICCH HAS BEEN ENCLOSED FOR YOUR CONVENIENCE. Stockholders who are present at the meeting may revoke their proxies and vote in person or, if they prefer, may abstain from voting in person and allow their proxies to be voted. By Order of the Board of Directors, /s/ Neal D. Crispin Neal D. Crispin, President (Date) Burlingame, California PROXY AeroCentury Corp. This Proxy is Solicited on Behalf of - ---------------------- the Board of Directors. 1440 Chapin Avenue, Suite 310, Burlingame, California 94010 The undersigned hereby appoints Neal D. Crispin and Toni M. Perazzo, as Proxies, with full power of substitution, and hereby authorizes them to represent and to vote, as designated below, all of the shares of Common Stock of AeroCentury Corp. held of record by the undersigned on March 1, 2001, at the 2001 Annual Meeting of Stockholders of the Company to be held on April 27, 2001, or at any adjournment or postponement thereof. 1. ELECTION OF DIRECTORS FOR all nominees listed below WITHHOLD AUTHORITY - ---- ---- (except as marked to the contrary below) to vote for all nominees listed below (Instruction: To withhold authority to vote for any individual nominee strike a line through the nominee's name in the list below) Neal D. Crispin Evan M. Wallach 2. PROPOSAL TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN LLP as independent auditors for the Company for the fiscal year ending December 31, 2001. FOR AGAINST ABSTAIN ---- ---- ---- 3. In their discretion, the Proxies are authorized to vote upon such other matters as may properly come before the meeting. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS NO. 1 AND 2 PLEASE TURN OVER, DATE AND SIGN REVERSE SIDE - -------------------------------------------------------------------------------- PLEASE MARK, SIGN AND DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS SPECIFIED ON THE REVERSE SIDE, IF NO SPECIFICATION IS MADE, THEN THIS PROXY WILL BE VOTED "FOR" THE NOMINEES LISTED ON THE REVERSE SIDE FOR THE BOARD OF DIRECTORS AND "FOR" PROPOSAL NO. 2. Please sign exactly as your name appears on the attached label. When shares are held by joint tenants, both should sign. When signing as an attorney, executor, administrator, trustee, or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person. SIGNATURE Title (if any) Date - -------------------------- ---------------------- -------------- Title (If any) Date - -------------------------- ---------------------- -------------- (Second Signature, if held jointly) EX-20 2 0002.txt ANNUAL REPORT ACCOMPANYING PROXY STATEMENT Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Certain statements contained in this Annual Report and, in particular, the discussion regarding the Company's beliefs, plans, objectives, expectations and intentions contained in "Item 1 --Business" and this "Item 2 -- Management's Discussion and Analysis or Plan of Operation" section (particularly the "Outlook" section hereof) regarding: the Company's enhanced capability to proactively manage its portfolio and derive maximum value from financing opportunities; the Company's flexibility to take advantage of attractive opportunities as they become available; the Company's work toward increased awareness of the Company; the Company's managed growth and continued profitability being rewarded by a higher stock price; the Company's objective of increasing shareholder value by acquiring additional assets that will generate lease revenue and resale proceeds; reinvesting cash flow and obtaining short and long term financing; the Company's ability to purchase assets at an appropriate price and keep assets on lease, and to purchase assets likely to retain value; the adequacy of the Company's cash flow to cover management fees, professional fees and interest expense and provide excess cash flow for investment in additional assets; the adequacy of the Company's cash flow to meet interest rate increases under its credit line; the reduction of concentration of credit risk with respect to lease receivables; the adequacy of the Company's cash flow to meet ongoing operational needs; the consummation of the re-lease of the Company's two DHC-6 aircraft; the Company's ability to increase its asset base and grow its earnings; the Company's expectations regarding lease revenue and earnings for the first quarter and fiscal year 2001; the availability of special purpose asset based financing for acquisitions; the Company's intention to repay a portion of the revolving loans from proceeds of subsequent debt or equity financings; 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; and the Company's ability to obtain third party guaranties, letters of credit or other credit enhancements from future lessees; 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, the financial performance of the Company's lessees, 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." TO OUR SHAREHOLDERS During 1999, we experienced significant growth, doubling the number of aircraft in our portfolio. This growth, combined with several acquisitions in the second half of 2000, produced record revenues and net income in 2000. 2000 was a transition year for AeroCentury. During 2000, we continued to diversify our portfolio in terms of aircraft type and customer base, improved our ability to manage our current portfolio, and obtained financing to enable future growth. During 2000, we made our first significant disposals of aircraft, selling a total of three aircraft. While these aircraft were older, first generation turboprops, we were able to record a gain on sale in each transaction. We acquired three deHavilland Dash-8 aircraft during the second half of the year, our first purchases of this aircraft type. These aircraft are leased to customers in Norway and Jamaica, two new markets for us. At the end of 2000, our portfolio consisted of 20 aircraft, comprised of 7 different types, and 26 turboprop engines, on lease to customers in 12 countries worldwide. One of our most valuable assets continues to be our experienced management team and its ability to develop and maintain strong customer relationships. Several management changes during 2000 and early 2001 have enhanced our capability to proactively manage our portfolio and derive maximum value from financing opportunities. In June 2000, we obtained a new $50 million line of credit which expires in June 2003. Our previous line credit line had a $30 million limit. This new line of credit, combined with other sources of financing, should give us the flexibility to take advantage of attractive opportunities as they become available. We increased our investor relations efforts during 2000. We placed several ads in financial publications to increase our visibility to retail and institutional investors. We continue to work towards increased awareness of our company, emphasizing our growth strategy and diversification of our assets and customers. Our focus remains enhancing the value of your investment. We feel that carefully managed growth and continued profitability should ultimately be rewarded by a higher stock price. We appreciate your patience and support. /s/ Neal D. Crispin Neal D. Crispin President and Chairman of the Board MANAGEMENT'S DISCUSSION AND ANALYSIS AeroCentury Corp. ("AeroCentury") was incorporated in the state of Delaware on February 28, 1997 ("Inception"). AeroCentury was formed solely for the purpose of acquiring JetFleet Aircraft, L.P. ("JetFleet I") and JetFleet Aircraft II, L.P. ("JetFleet II"), California limited partnerships (collectively, the "Partnerships") in a statutory merger (the "Consolidation"). JetFleet I and JetFleet II were organized in October 1989 and October 1991, respectively. Prior to the Consolidation, the Partnerships engaged in the business of ownership, management, leasing and acquisition of a portfolio of aircraft equipment. Upon completion of the Consolidation, which occurred on January 1, 1998, AeroCentury succeeded to the Partnerships' business. 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 Company is engaged in the business of investing in primarily used regional aircraft equipment leased to domestic and foreign regional air carriers. By assuming the business of the Partnerships in January 1998, the Company became owner of a portfolio of unleveraged aircraft and engines on lease and generating positive cash flow. The Company's principal business objective is to increase shareholder value by acquiring additional aircraft assets that will provide a return on investment through lease revenue from creditworthy lessees, and eventually sale proceeds. The Company intends to achieve its business objective by reinvesting cash flow and obtaining short-term and long-term financing and/or equity financing. Results of Operations Revenues The Company had revenues of $12,107,760 and net income of $1,671,340 for the year ended December 31, 2000 versus revenues of $7,380,140 and net income of $1,405,420 for the year ended December 31, 1999. Rent income is approximately $3,751,000 higher in 2000 versus 1999 due to the purchases of additional aircraft on lease during 2000 and the effect of a full year of rent from aircraft purchased throughout 1999. Gain on disposal of aircraft and aircraft engines is approximately $648,000 higher in 2000 due to the sale of three aircraft during the fourth quarter compared to one aircraft engine during 1999. Other income for the year ended December 31, 2000 is higher by approximately $328,000 versus 1999 because of interest earned on higher cash balances maintained during 2000. During November 2000, the Company sold, and recorded gains on, two DHC-7 aircraft and one Metro III aircraft, the leases for which expired during the fourth quarter of 2000. The lease for another of the Company's DHC-7 aircraft has been extended from September 30, 2000 to its pre-return inspection completion. The inspection is still in process and the Company expects the aircraft to be returned no later than March 31, 2001. Expense Items Management fees, which are calculated on the net book value of the aircraft owned by the Company, are approximately $576,000 higher in 2000 versus 1999 because the Company purchased additional aircraft during 1999 and 2000. Depreciation is approximately $974,000 higher in 2000 versus 1999 because of the aircraft acquisitions during both years. Interest expense is approximately $1,872,000 higher in 2000 versus 1999 because of higher average balances on the Company's credit facility and other debt financings during 2000 compared to 1999 and because of the higher interest rate environment in 2000. Professional fees and general administrative expense were approximately the same in both years. During 2000, the Company increased maintenance reserves and accrued costs and recognized related one-time maintenance charges of approximately $760,000. The charges consist of approximately $730,000 incurred in connection with the early termination of three of the Company's aircraft leases and the Company's obligations under a cost sharing arrangement with one of its lessees, discussed below. The remaining $30,000 of charges was a result of the Company's periodic review of the adequacy of its maintenance reserves 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. One of the aircraft which was returned prior to its original expiration date was a Shorts SD-360 which, at the time of purchase, was subject to a 48-month lease, expiring in March 2002, with a British regional airline. The original lease, entered into in 1998, did not require that the lessee pay maintenance reserves based on usage because, at the time, the lessee was considered creditworthy. It had recently been named Airline of the Year by the European Regions Airline Association and had its own facility which was certified to perform any required maintenance. Subsequent to the Company's purchase of the aircraft, the airline's management pursued a policy of rapid expansion, which led to a financial crisis and, on February 24, 2000, the lessee filed for reorganization. The lessee has continued to operate, and, under the reorganization plan, the lessee agreed to continue leasing the Company's aircraft on a month to month basis, at the same rent. During the fourth quarter, the Company was able to inspect the aircraft in order to identify its maintenance requirements and estimate the funds needed to complete such maintenance. Although the lessee paid a portion of the reserves due for hours flown after the reorganization filing, the Company accrued $521,000 of maintenance costs, related to hours flown prior to the reorganization filing, which the Company does not believe it will receive from the lessee or from the reorganization administrator. The Company is seeking re-lease opportunities for the aircraft. The other aircraft which are being returned early are two of the Company's DHC-6 aircraft. During February 2001, the Company and the lessee of these aircraft signed an agreement, under which the lessee is required to pay all rent and reserves through the return dates and to perform certain maintenance procedures prior to such return. During 2000, however, the Company accrued approximately $80,000 of maintenance, which represents both work which the lessee is not required to perform prior to the return of the aircraft and a reserve against a maintenance receivable which was recorded by the Company prior to signing the termination agreement. On February 28, 2001, the Company and a regional airline signed a term sheet for a thirty-six month lease of both aircraft. The Company subsequently received two $60,000 security deposits which are refundable only if the airline rejects the condition of either or both aircraft, which are to be delivered no later than April 30, 2001. During 2000, the Company and one of its lessees agreed to a cost sharing arrangement concerning a manufacturer-required inspection of the aircraft and repair of certain components. Pursuant to the agreement, a portion of the cost was funded by maintenance reserves previously paid by the lessee and the remaining cost was allocated between the Company and the lessee. The Company recorded a note receivable for the lessee's portion, net of interest to be received, which will be repaid through increased rent during the remainder of the lease term. The Company recorded approximately $130,000, which represented its share of the cost, as maintenance expense. During December 2000, the Company also recorded as expense approximately $462,000 to reflect a reduction in the carrying value of two aircraft, based on the current appraisal of and management's analysis of market conditions for the aircraft. The Company's effective tax rate in 2000 was approximately 34% versus approximately 31% in 1999. The Company's tax rate is subject to changes in the mix of domestic and foreign leased assets, the proportions of revenue generated within and outside of California and numerous other factors, including changes in tax laws. Liquidity and Capital Resources The Company is currently financing its asset growth through credit facility borrowings and excess cash flow. 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, excluding those of AeroCentury LLC and AeroCentury II LLC, serve as collateral under the facility and, in accordance with the credit agreement, the Company must maintain compliance with certain financial covenants. As of December 31, 2000, the Company was in compliance with all such covenants. As of December 31, 2000, $29,725,000 was outstanding under the credit facility, and interest of $59,440 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 and decreased by 50 basis points in each of January and February 2001. Throughout 2000, the majority of the Company's borrowings were 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 any increases in interest rates applicable to its credit line obligations. A sudden, severe and prolonged increase in such rates, however, could adversely affect the Company's cash flow by increasing the Company's interest expense almost immediately. 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. A continued decline in interest rates, however, would have a positive effect on the Company's results, which effect may be partially offset by a corresponding decrease in lease rates. The Company has periodically 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 continued to determine 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. 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 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 March 2001 and April 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. The Company's cash flow from operations for the year ended December 31, 2000 versus 1999 increased by approximately $301,000. The increase from year to year was partially due to the Company's acquisition of several aircraft during 2000 and 1999 which resulted in increased net income and higher depreciation expense in 2000, as well as the positive effect of the change in accounts payable and accrued expenses. The effect of these changes was partially offset by the negative effect of the change in deposits, accounts receivable, notes receivable, prepaid expenses and other assets, accrued interest on notes payable, security deposits, maintenance reserves and accrued costs prepaid rent, and deferred taxes during 2000 versus 1999. Specifically, the Company's cash flow from operations for the year ended December 31, 2000 consisted of net income of $1,671,340 and adjustments consisting primarily of depreciation of $2,673,950, increases in deposits, accounts receivable, notes receivable, and prepaid expenses and other assets of $1,444,410, $263,400, $117,550 and $257,550, respectively, an increase in accounts payable and accrued expenses of $978,370, increases in maintenance reserves and accrued costs, security deposits and prepaid rent of $1,920,500, $59,500 and $28,660, respectively, and decreases in accrued interest on notes payable and deferred taxes of $155,160 and $511,150, respectively. Specifically, the Company's cash flow from operations for the year ended December 31, 1999 consisted of net income of $1,405,420 and adjustments consisting primarily of depreciation of $1,700,000, increases in deposits, accounts receivable, and prepaid expenses and other assets of $3,834,900, $142,210 and $211,660, respectively, an increase in accounts payable and accrued expenses of $657,570, an increase in accrued interest on notes payable of $184,700, and increases in maintenance reserves and accrued costs, security deposits, prepaid rent, and deferred taxes of $2,728,370, $1,306,040, $235,330 and $67,840, respectively. During 2000, the decrease in cash flow provided by financing activities and the decrease in cash flow used by investing activities compared to 1999 were both a result of the Company borrowing less on its credit facility to purchase additional aircraft than it did in 1999. Outlook As discussed above in "Results of Operations", three of the Company's aircraft are being returned before lease end. Six others have terms which have expired or will do so prior to October 15, 2001. Under the provisions of the Company's credit facility, the status of these aircraft reduces the collateral base, and such reductions preclude the Company from utilizing the $22 million of unused credit on its facility unless and until the collateral base is increased. The re-lease or sale of these aircraft, therefore, is required in order to permit the Company's additional use of its credit facility to purchase additional assets. These circumstances, unless changed, are expected to limit the Company's ability during 2001 to increase its asset base and grow its earnings. While the Company has previously used special purpose asset-based financing for the acquisition of three aircraft and may have such financing available again in the future, the credit line is currently the Company's only readily available funding source for new acquisitions. Therefore, the Company's management has made remarketing the focus of its efforts in the first and second quarters of 2001 in order to resolve the credit line limitations discussed above. Because of the lease terminations and expirations discussed above, it is likely that both lease revenues and earnings for first quarter 2001 will be lower than for the same period last year. In addition, it is likely that lease revenues for the year in total will be lower than in 2000. Projected earnings for 2001, although positive, will likely be lower than 2000 unless the Company sells assets at a gain during the remainder of the year. 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. As discussed above, however, he Company may also have available to it financing separate from its credit facility, which financing has carried a fixed rate of interest in the past. As discussed above, in "Liquidity and Capital Resources", the Company's ability to draw on its $50 million credit line is dependent upon the status of its asset base. If a significant portion of the collateral base is off-lease for an extended period of time, this may affect the amount the Company can borrow under its credit line. Since the Company currently does not have additional, immediately available sources of acquisition funding, the ability to draw fully on its credit line will be a critical factor in the Company's continued asset and revenue growth. Further, since the maximum amount of indebtedness permitted under the credit line is affected by the number of off-lease aircraft in the collateral base, if a significant portion of the Company's assets are off lease for an extended period of time (see "Ownership Risks", below), the Company may be required to pay down its indebtedness under the credit line. If the Company's cash reserves are insufficient to make the required repayment, and the Company is unable to sell aircraft at a price sufficient to generate enough cash to cover the required payment, the entire indebtedness could be accelerated and the Company's assets foreclosed upon. 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, some carriers have been able to pass the increased cost on to passengers, while others have experienced decreased profitability. If prices remain higher, 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 still 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, 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, some of the lessees in the regional air carrier market are 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. CONSOLIDATED BALANCE SHEET December 31, 2000 ASSETS Assets: Cash and cash equivalents $ 3,184,470 Deposits 6,863,570 Accounts receivable 571,160 Aircraft and aircraft engines on operating leases, net of accumulated depreciation of $13,071,300 60,111,200 Note receivable 117,550 Prepaid expenses and other 616,680 -------------- Total assets $ 71,464,630 ============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses $ 1,885,340 Notes payable and accrued interest 41,220,610 Maintenance reserves and accrued costs 6,310,200 Security deposits 1,813,800 Prepaid rent 355,280 Deferred taxes 2,716,720 -------------- Total liabilities 54,301,950 -------------- 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 3,843,940 ------------- 17,666,750 Treasury stock at cost, 63,300 shares (504,070) -------------- Total shareholders' equity 17,162,680 -------------- Total liabilities and shareholders' equity $71,464,630 ==============
The accompanying notes are an integral part of this statement. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------- REVENUES: Rent income $ 10,880,130 $ 7,128,690 Gain on disposal of aircraft and aircraft engines 746,570 98,400 Other income 481,060 153,050 --------------------------------------- 12,107,760 7,380,140 --------------------------------------- EXPENSES: Management fees 1,725,250 1,148,800 Depreciation 2,673,950 1,700,000 Interest 3,471,450 1,599,050 Professional fees and general and administrative 494,260 516,950 Maintenance 762,920 374,240 Provision for impairment in value of aircraft 462,500 - --------------------------------------- 9,590,330 5,339,040 --------------------------------------- Income before taxes 2,517,430 2,041,100 Tax provision 846,090 635,680 --------------------------------------- Net income $ 1,671,340 $ 1,405,420 ======================================= Weighted average common shares outstanding 1,543,257 1,563,591 ======================================= Basic earnings per share $ 1.08 $ 0.90 =======================================
The accompanying notes are an integral part of this statement. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
Common Paid-in Retained Treasury Stock Capital Earnings Stock Total - ------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 $ 1,610 $ 13,821,200 $ 767,180 $ (78,190) $ 14,511,800 Purchase of treasury stock, 54,100 shares - - - (425,880) (425,880) Net income - - 1,405,420 - 1,405,420 ------------------------------------------------------------------------------------ Balance, December 31, 1999 1,610 13,821,200 2,172,600 (504,070) 15,491,340 Net income - - 1,671,340 - 1,671,340 ------------------------------------------------------------------------------------ Balance, December 31, 2000 $ 1,610 $ 13,821,200 $ 3,843,940 $ (504,070) $ 17,162,680 ====================================================================================
The accompanying notes are an integral part of this statement. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Operating activities: Net income $ 1,671,340 $ 1,405,420 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,673,950 1,700,000 Gain on disposal of aircraft and aircraft engines (746,570) (98,400) Provision for impairment in value of aircraft 462,500 - Change in operating assets and liabilities: Deposits (1,444,410) (3,834,900) Accounts receivable (263,400) (142,210) Note receivable (117,550) - Prepaid expenses and other (257,550) (211,660) Accounts payable and accrued expenses 1,154,080 657,570 Accrued interest on notes payable (155,160) 184,700 Maintenance reserves and accrued costs 1,920,500 2,728,370 Security deposits 28,660 1,306,040 Prepaid rent 59,500 235,330 Deferred taxes (686,860) 67,840 ---------------------------------------- Net cash provided by operating activities 4,299,030 3,998,100 Investing activities: Proceeds from disposal of aircraft and aircraft engines 5,096,560 98,400 Purchase of aircraft and aircraft engines (11,743,700) (25,680,340) ---------------------------------------- Net cash used by investing activities (6,647,140) (25,581,940) Financing activities: Issuance of notes payable 9,885,000 21,590,000 Repayment of notes payable (5,604,150) (180,560) Purchase of treasury stock - (425,880) ---------------------------------------- Net cash provided by financing activities 4,280,850 20,983,560 Net increase/(decrease) in cash and cash equivalents 1,932,740 (600,280) Cash and cash equivalents, beginning of period 1,251,730 1,852,010 ---------------------------------------- Cash and cash equivalents, end of period $ 3,184,470 $ 1,251,730 ========================================
During 1999, $9,061,000 of the purchase price of two aircraft acquired by the Company was financed by a note payable to the seller. During the years ended December 31, 2000 and 1999, the Company paid interest totaling $3,813,950 and $1,400,830, respectively, and income taxes totaling $388,270 and $148,920, respectively. The accompanying notes are an integral part of this statement. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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. (b) Capitalization 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 2000, the Company purchased no such shares. During 1999, the Company purchased 54,100 shares. Since adoption of the plan, the Company has purchased 63,300 shares. 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 December 31, 2000, the Company held security deposits of $1,813,800, refundable maintenance reserves received from lessees of $3,203,720 and non-refundable maintenance reserves of $1,846,050. 1. Organization and Summary of Significant Accounting Policies (continued) (c) Cash and Cash Equivalents/Deposits (continued) 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. 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 costs for work to be performed as a result of hours flown. At December 31, 2000, the Company had accrued costs of approximately $789,000 related to four of its aircraft. (g) Income Taxes The Company follows the liability method of accounting for income taxes as required by the provisions of Statement of Financial Accounting Standards ("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. 1. Organization and Summary of Significant Accounting Policies (continued) (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 accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect certain reported amounts, disclosures and contingent assets and liabilities. 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 years ended December 31, 2000 and 1999. (k) Impairment of Long-lived Assets In accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to Be Disposed Of," assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. At each year-end, the Company reviews its long-lived assets for impairment based on estimated future nondiscounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated realizable value. (l) Recent Accounting Pronouncements SFAS No. 137, which amended the effective date of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1999. The Company adopted SFAS No. 133 on January 1, 2001. This statement establishes accounting and reporting standards requiring that all derivative instruments are recorded on the balance sheet as either an asset or a liability, measured at fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met and such hedge accounting treatment is elected. Because the Company does not hold any derivatives as defined in SFAS No. 133, the adoption of SFAS No. 133 did not have a material impact on its results of operations or financial position. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB 101, as amended, summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 was adopted by the Company in 2000. The adoption of the provisions of SAB 101 did not have a material effect on the Company's consolidated operating results, statement of financial position or cash flow. 2. Aircraft and Aircraft Engines On Operating Leases At December 31, 2000, the Company owned three deHavilland DHC-8s, two deHavilland DHC-7s, three deHavilland DHC-6s, one Fairchild Metro III, three Shorts SD 3-60, six Fokker 50s, two Saab 340As and 26 turboprop engines, one of which is held in inventory as a spare and is not subject to a lease or to depreciation. During 2000, the Company acquired the three deHavilland DHC-8 aircraft. 2. Aircraft and Aircraft Engines On Operating Leases (continued) During 2000, the Company sold two deHavilland DHC-7 and one Fairchild Metro III aircraft and recognized gains totaling $746,570. The lease for one of the Company's two remaining DHC-7 aircraft has been extended from September 30, 2000 to its pre-return inspection completion. The inspection is still in process and the Company expects the aircraft to be returned no later than March 31, 2001. The Company is currently seeking re-lease or sale opportunities for both DHC-7 aircraft. At the time of purchase, one of the Company's Shorts SD-360 aircraft was subject to a 48-month lease, expiring in March 2002, with a British regional airline. The original lease, entered into in 1998, did not require that the lessee pay maintenance reserves based on usage because, at the time, the lessee was considered creditworthy. Subsequently, the airline experienced financial difficulties and, on February 24, 2000, filed for reorganization. The lessee has continued to operate the aircraft, and, under the reorganization plan, the lessee agreed to continue leasing the Company's aircraft on a month to month basis, at the same rent. Upon its return to the Company during the fourth quarter, the Company was able to inspect the aircraft in order to identify its maintenance requirements and estimate the funds needed to complete such maintenance. Based on this inspection, the Company accrued $521,000 of maintenance costs, related to hours flown prior to the reorganization filing, which the Company does not believe it will receive from the lessee or from the reorganization administrator. The Company is seeking re-lease opportunities for the aircraft. During 2000, the Company recorded as expense approximately $462,000 to reflect a reduction in the carrying value of two aircraft, based on the current appraisal of and management's analysis of market conditions for the aircraft. 3. Note Receivable At December 31, 2000, the Company's note receivable consists of a loan to one of the Company's long-standing lessees in connection with a manufacturer-required inspection of the aircraft and repair of certain components. The Company and the lessee agreed to a cost sharing arrangement whereby a portion of the cost was funded by maintenance reserves previously paid by the lessee and the remaining cost was allocated to the Company and the lessee. The Company recorded a note receivable for the lessee's portion, net of interest to be received at a rate of 5%, which will be repaid through increased rent during the remainder of the lease term, which expires on April 30, 2003. The Company recorded approximately $130,000, which represented its share of the cost, as maintenance expense. 4. Operating Segments The Company operates in one business segment, regional aircraft leasing, and therefore does not present separate segment information for lines of business. Approximately 31% and 41% of the Company's operating lease revenue was derived from lessees domiciled in the United States during 2000 and 1999, respectively. All leases relating to aircraft leased and operated internationally are denominated and payable in U.S. dollars. 4. Operating Segments (continued) The tables below set forth geographic information about the Company's operating leased aircraft equipment, grouped by domicile of the lessee: For the Year Ended December 31, 2000
Operating Net Region lease revenue book value United States $ 3,379,790 $ 11,924,430 Spain 1,978,730 10,679,550 Sweden 1,501,560 7,247,870 Brazil 965,630 6,072,050 Belgium 942,900 3,706,170 Jamaica 396,870 6,516,040 Other 1,714,650 13,965,090 ------------------------------------------ $ 10,880,130 $ 60,111,200 ========================================== For the Year Ended December 31, 1999 Operating Net Region lease revenue book value United States $ 2,940,890 $ 17,236,150 Brazil 1,134,110 6,378,800 Belgium 840,000 3,910,190 Sweden 666,960 7,371,640 Spain 247,340 11,114,450 Other 1,299,390 9,842,710 ------------------------------------------ $ 7,128,690 $ 55,853,940 ==========================================
For the year ended December 31, 2000, the Company had three significant customers, which accounted for 18%, 14% and 11%, respectively, of lease revenue. For the year ended December 31, 1999, the Company had four significant customers, which accounted for 20%, 16%, 12% and 12%, respectively, of lease revenue. As of December 31, 2000, minimum future lease rent payments receivable under noncancelable leases were as follows: Year 2001 $ 8,904,550 2002 4,469,590 2003 645,400 2004 - 2005 - --------------- $ 14,019,540
5. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash deposits and receivables. The Company places its deposits with financial institutions and other creditworthy issuers and limits the amount of credit exposure to any one party. 6. 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, excluding those of AeroCentury LLC and AeroCentury II LLC, serve as collateral under the facility and, in accordance with the credit agreement, the Company must maintain compliance with certain financial covenants. As of December 31, 2000, the Company was in compliance with all such covenants. During 2000, the Company paid interest at an average rate of approximately 8.7%. As of December 31, 2000, $29,725,000 was outstanding under the credit facility, and interest of $59,440 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 December 31, 2000 was $7,995,080. 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 December 31, 2000 was $3,431,210 and interest of $9,880 was accrued. As of December 31, 2000, the Company was in compliance with all covenants of the loan agreements pertaining to the financing of these three aircraft. 7. Income Taxes The items comprising income tax expense are as follows:
For the Years Ended December 31, 2000 1999 -------------------------------------- Current tax provision: Federal $ 1,299,500 $ 538,070 State 75,120 13,280 Foreign 158,330 16,490 -------------------------------------- Current tax provision 1,532,950 567,840 -------------------------------------- Deferred tax provision/(benefit): Federal (651,930) 135,060 State (34,930) (67,220) -------------------------------------- Deferred tax provision/(benefit) (686,860) 67,840 -------------------------------------- Total provision for income taxes $ 846,090 $ 635,680 ======================================
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 Years Ended December 31, 2000 1999 -------------------------------------- Income tax expense at statutory federal income tax rate $ 855,890 $ 693,970 State taxes net of federal benefit 24,100 16,260 ---- Other (33,900) (74,550) -------------------------------------- Total income tax expense $ 846,090 $ 635,680 ======================================
Temporary differences and carryforwards that gave rise to a significant portion of deferred tax assets and liabilities as of December 31, 2000 are as follows: Deferred tax assets: Organizational costs $ 30,870 Maintenance reserves 418,140 Prepaid rent 124,190 Deferred maintenance 513,030 --------------- Deferred tax assets 1,086,230 Deferred tax liabilities: Depreciation on aircraft and engines (3,499,560) Other (303,390) ---------------- Net deferred tax liabilities $ (2,716,720) ================
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. 8. 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 JetFleet Management Corp. ("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 2000 and 1999, the Company recognized as expense $1,725,250 and $1,148,800, respectively, of management fees payable to JMC. In connection with the purchases of aircraft during 2000 and 1999, the Company paid JMC a total of $371,300 and $1,080,100, respectively, in acquisition fees, which are included in the capitalized cost of the aircraft. During 2000 and 1999, the Company paid JMC a total of $77,250 and $0, respectively, in remarketing fees. 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 December 31, 2000, 8,833 such options had been exercised. 9. Subsequent Events Early in 2001, the Company and the lessee of two of the Company's DHC-6 aircraft agreed to the terms pertaining to the early termination of the leases for the two aircraft. Under the agreement, the lessee is required to pay all rent and reserves through the return dates, required to be no later than April 15, 2001, and to perform certain maintenance procedures prior to such return. Recently, the Company and a regional airline signed a term sheet for a thirty-six month lease of both aircraft. On March 2, 2001, the Company received two $60,000 security deposits which are refundable only if the airline rejects the condition of either or both aircraft, which are to be delivered no later than April 30, 2001. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of AeroCentury Corp.: We have audited the accompanying consolidated balance sheet of AeroCentury Corp. (a Delaware corporation) and its subsidiaries as of December 31, 2000 and the related consolidated statements of income, shareholders' investment and cash flows for the years ended December 31, 2000 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AeroCentury Corp. and its subsidiaries as of December 31, 2000 and the results of their operations and their cash flows for the years ended December 31, 2000 and 1999 in conformity with accounting principles generally accepted in the United States. /S/ Arthur Andersen LLP San Francisco, California, January 18, 2001 (except with respect to the matters discussed in Note 9, as to which the date is March 2, 2001) CORPORATE INFORMATION Officers and Directors Neal D. Crispin President and Chairman of the Board Marc J. Anderson Director, Chief Operating Officer, and Senior Vice President Toni M. Perazzo Director, Secretary and Senior Vice President - Finance Christopher B. Tigno General Counsel Maurice J. Averay Director and Aircraft Consultant Thomas W. Orr Director and Partner, Bregante + Company LLP Evan M. Wallach Director and Vice President, Finance of C-S Aviation Transfer Agent and Registrar Continental Stock Transfer and Trust Company 2 Broadway, 19th Floor New York, NY 10004 Legal Counsel Morrison & Foerster LLP 755 Page Mill Road Palo Alto, CA 94304-1018 Independent Public Accountants Arthur Andersen LLP 101 2nd Street, Suite 1100 San Francisco, CA 94105 Corporate Headquarters AeroCentury Corp. 1440 Chapin Ave., Suite 310 Burlingame, CA 94010 Annual Meeting The Annual Meeting of Stockholders will be held at The Hiller Aviation Museum 601 SkyWay Road San Carlos, CA, on April 27, 2001 at 6 P.M. Form 10-K The Company's Annual Report on Form 10-K for 2000 may be obtained by writing: AeroCentury Corp. 1440 Chapin Ave., Suite 310 Burlingame, CA 94010 Stock Price and Shareholder Data The Company's common stock is traded on the AMEX national market system under the symbol ACY. -----END PRIVACY-ENHANCED MESSAGE-----