-----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, AMZlLhkv988KP72V4gejuCTayWZz5i3s9ET23iujkH8EId7YzuhAYRW0OHs5TR9K 3MpmJfKuVAu/Q5K+oN5XTQ== 0001036848-03-000015.txt : 20030326 0001036848-03-000015.hdr.sgml : 20030325 20030326152737 ACCESSION NUMBER: 0001036848-03-000015 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20030325 FILED AS OF DATE: 20030326 EFFECTIVENESS DATE: 20030326 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: 1934 Act SEC FILE NUMBER: 001-13387 FILM NUMBER: 03618226 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 acy03finalars.txt 2003 ANNUAL MEETING PROXY 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: N/A - --------------------------------------------------------------------------- / / 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: Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ..... No .X. AEROCENTURY CORP. NOTICE OF 2003 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 24, 2003 TO OUR STOCKHOLDERS: You are cordially invited to attend the 2003 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 5:30 p.m. on April 24, 2003, 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 PricewaterhouseCoopers LLP as independent public accountants for the Company for the fiscal year ending December 31, 2003; 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 3, 2003, as the record date for determining those stockholders who will be entitled to vote at the 2003 Annual Meeting of Stockholders. 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 by proxy for the transaction of business at the Annual Meeting. Accordingly, it is important that your shares be represented at the 2003 Annual Meeting of Stockholders. 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 21, 2003 Burlingame, California PROXY STATEMENT FOR 2003 ANNUAL MEETING OF STOCKHOLDERS OF AEROCENTURY CORP. TO BE HELD ON APRIL 24, 2003 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 2003 Annual Meeting of Stockholders (the "2003 Annual Meeting" or the "Annual Meeting"), which will be held at 5:30 p.m. on April 24, 2003, 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 2003 Annual Meeting of Stockholders. This Proxy Statement and the proxy card were first mailed to stockholders on or about March 21, 2003. The Company's 2002 Annual Report is being mailed to stockholders concurrently with this Proxy Statement. The 2002 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 3, 2003, was the record date for stockholders entitled to notice of and to vote at the 2003 Annual Meeting. As of that date, the Company had 1,543,257 shares of Common Stock, $0.001 par value (the "Common Stock"), issued and outstanding. The presence at the Annual Meeting of a majority of the issued and outstanding Common Stock, or 771,629 shares, either present in person or represented by proxy, will constitute a quorum for the transaction of business at the Annual Meeting. All of the shares of the Company's Common Stock outstanding on the record date are entitled to vote at the 2003 Annual Meeting of Stockholders, and stockholders of record entitled to vote at the Annual 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 Annual 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 Annual Meeting. However, since you are not the stockholder of record, you may not vote those shares in person at the Annual 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 that are properly executed and returned to the Company will be voted at the 2003 Annual Meeting 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 the 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 Annual 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 Annual 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 Annual 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 and have the same effect as a negative vote. Broker non-votes are not counted for purposes of determining whether a proposal has been approved and therefore, do not have the same effect as votes in opposition to a specific proposal. 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 2003 Annual Meeting. 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 2003 Annual Meeting, 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 at the Annual Meeting will continue until the 2006 Annual Meeting of Stockholders or until the director's successor has been elected. Nominees To Board Of Directors Mr. Marc J. Anderson, age 66. 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 JetFleet Management Corp. ("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 ("PLM"), a transportation equipment leasing company where 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 69. 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 self-employed consultant on accounting matters. From 1992 until 2002, he was a partner at the accounting firm of Bregante + Company LLP. 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. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED ABOVE PROPOSAL 2 RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS The firm of PricewaterhouseCoopers LLP served as independent public accountants for the Company for the fiscal year ended December 31, 2002. The Board of Directors desires the firm to continue in this capacity for the current fiscal year. Accordingly, a proposal will be presented at the Annual Meeting to ratify the selection of PricewaterhouseCoopers 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, 2003, and to perform other appropriate services. In the event that stockholders fail to ratify the selection of PricewaterhouseCoopers LLP, the Board of Directors would reconsider such selection. A representative of PricewaterhouseCoopers LLP will be present at the Annual Meeting, will have the opportunity to make a statement if he or she so desires and will be available to respond to appropriate questions. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT PUBLIC ACCOUNTANTS. INFORMATION REGARDING AUDITORS Change in Auditors. On June 15, 2002, the Company terminated its relationship with its former auditor, Arthur Andersen LLP ("Andersen"), due to the conviction of Andersen on criminal charges in connection with Andersen's activities with respect to Enron Corp. PricewaterhouseCoopers LLP replaced Andersen as the Company's auditors. Audit Fees. The aggregate fees billed by the Company's auditors, PricewaterhouseCoopers LLP (the "Auditors"), for professional services rendered for the audit of the Company's financial statements for the fiscal year ended December 31, 2002 and for the reviews of the financial statements included in the Company's Forms 10-QSB during the 2002 fiscal year was $55,500. An additional $7,000 was billed by the Auditors in connection with their review of the Company's 2001 tax return. No other fees were billed by the Auditors to the Company. AUDIT COMMITTEE REPORT Notwithstanding anything to the contrary set forth in any of the Company's previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate future filings, including this Proxy Statement, in whole or in part, the following Report of the Audit Committe shall not be deemed to be "soliciting material" or to be "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any such filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. 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, internal controls, audit process and process for monitoring compliance with laws and regulations. The Audit Committee is responsible for the appointment, compensation and oversight of the work of the Auditors. The members of the Audit Committee are independent (as defined in Section 12(A) of the American Stock Exchange Company Guide). 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, PricewaterhouseCoopers 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, 2002, for filing with the Securities and Exchange Commission. The Audit Committee held three meetings during the fiscal year ended December 31, 2002. The Board of Directors has adopted a written charter for the Audit Committee. The Audit Committee reviewed and reassessed the charter. In light of the requirements of the Sarbanes-Oxley Act of 2002 (the "New Law"), the Committee recommended to the Board, and the Board approved, amendments to the charter (a copy of the charter, as amended, is attached hereto as Appendix A) conforming the charter to the current requirements of the New Law. Aside from that amendment, the Committee concluded that no changes are currently advisable. The Committee noted that further changes may need to be made when the Securities and Exchange Commission and the applicable national securities exchange or association on which the Company's shares are listed take further actions carrying out their responsibilities under the New Law. Submitted by the Audit Committee of the Board of Directors: Thomas W. Orr, Chair Evan M. Wallach INFORMATION REGARDING THE COMPANY'S DIRECTORS AND OFFICERS Current Board Of Directors The following directors have terms expiring at the Company's 2003 Annual Stockholder Meeting: Thomas W. Orr and Marc J. Anderson. 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 2004 Annual Stockholder Meeting: Mr. Neal D. Crispin, age 57. 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 JMC. Prior to forming CMA in 1983, Mr. Crispin spent two 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 48. Mr. Wallach is Managing Director, Fixed Income, at US Bancorp Piper Jaffray. Prior to that he served as Vice President, Finance of C-S Aviation from 1998 to 2001. 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 following directors have terms expiring at the Company's 2005 Annual Stockholder Meeting: Mr. Maurice J. Averay, age 72. 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 company with respect to marketing and new aircraft development. From 1990 to 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's Degree in Aero Engineering from the University of Bristol, United Kingdom. Ms. Toni M. Perazzo, age 55. Ms. Perazzo is a member of the Executive Committee 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 JMC, the management company for the Company since 1994, and 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. Board Meetings And Committees The Board of Directors of the Company held a total of five meetings during the fiscal year ended December 31, 2002 (the "2002 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, except for Mr. Anderson, who was not present at two meetings, and Mr. Crispin, who was not present at one meeting. 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, and such matters are considered by the entire Board. 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 currently consists of Thomas W. Orr, Chairman, and Evan M. Wallach. Both Mr. Orr and Mr. Wallach are "independent" directors as that term is defined in the American Stock Exchange Company Guide. The Audit Committee held three meetings during the 2002 fiscal year, and has held one meeting in the 2003 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 exercises all other powers of the Board of Directors except for those which require action by all of 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 the other officers of AeroCentury Corp. who are also key officers and employees of JMC, 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 34. 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 2001. 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's Degree in Finance from Babson College. Mr. Jack Humphreys, Vice President-Maintenance, age 55. Mr. Humphreys is responsible for portfolio aircraft maintenance and acts as a liaison with manufacturers and the technical departments of lessees. Mr. Humphreys has over 33 years of experience in aviation and has been with the Company since July 2002. He has held several positions in the industry in the areas of aviation maintenance management, quality assurance, aviation safety and training development. Before joining the Company, Mr. Humphreys was an Aviation Quality Control Manager for Raytheon-Range Systems Engineering-Raytheon Corporation from 1992 to 2002, where he was responsible for maintaining airworthiness for a fleet of airplanes and helicopters. Mr. Humphreys holds a degree in Professional Aeronautics from Embry-Riddle Aeronautical University, a Bachelor's Degree in Business Management from Columbia College, and an FAA Airframe and Powerplant certification. Mr. John Myers, Senior Vice President, age 57. Mr. Myers has been responsible for the administration of aircraft leases, marketing agreements and vendor agreements for the Company and JMC since joining the companies in March 2001. From 1991 to 2001, Mr. Myers was Vice President of Raytheon Aircraft Credit Corporation, where he was responsible for the management of a $1.3 billion commuter airline portfolio, customer financing transactions, credit risk analysis and structuring and negotiation and documentation of 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's Degree in Business Administration from Wichita State University. Mr. Glenn Roberts, Vice President, Controller, age 38. Mr. Roberts is responsible for financial accounting and analysis. He has been employed by affiliates of the Company for thirteen years in various capacities of increasing responsibility. Mr. Christopher B. Tigno, General Counsel, age 41. 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 of 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. Mr. Steven H. Wallace, Vice President, Remarketing, age 57. Mr. Wallace is responsible for remarketing of the Company's portfolio of aircraft assets. Prior to joining the Company in June 2002, Mr. Wallace was an aviation consultant (June 2000 to June 2002), and prior to that was Aviation Services Manager for Raytheon Aircraft Services (January 1995 to June 2000). Prior to his tenure at Raytheon Aircraft Services, Mr. Wallace served in the U.S. Army, where he attained the rank of Major. Mr. Wallace graduated from Troy State University with a Bachelor's Degree in 1971, and received a Master's Degree in Business Administration from Pepperdine University in 1975. Employee Compensation Since the Company receives management services from JMC, the Company has no employees and does not pay any compensation to its executive officers The cash compensation received by Neal Crispin from JMC in 2002 was $1, including bonuses, and is expected to be $1 in 2003. 2002 cash compensation received by Ms. Perazzo from JMC was $87,550, including bonuses, and is expected to be $90,100 in 2003. The only executive officer of JMC whose compensation exceeds $100,000 is Marc J. Anderson, Senior Vice President & Chief Operating Officer, whose salary, including bonus, was $256,000 in 2002, and is expected to be $225,000 in 2003. Two additional non-executive officers received and expect to receive compensation from JMC in excess of $100,000 as follows: John Myers received salary and bonus of $154,500 in 2002 and is expected to receive $160,400 in 2003, and Glenn Roberts received salary and bonus of $98,750 in 2002, and is expected to receive $101,000 in 2003. Compensation Committee Interlocks And Insider Participation Neal Crispin and Toni M. Perazzo are executive officers and directors of both 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. 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 3, 2003, by: (i) each person or entity that 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 No. Common Name, Position, & Address of Shares(1) Stock(2) Neal D. Crispin 315,286 20.43% Chairman of the Board, President and Principal Stockholder (3)(4) Toni M. Perazzo 315,286 20.43% Director, Senior Vice President - Finance, Secretary and Principal Stockholder (3)(4)(5) Marc J. Anderson 13,847 * Director, Senior Vice President and Chief Operating Officer (3)(6) Maurice J. Averay, 300 * Director (3) Thomas W. Orr, 1,500 * Director (3) Evan M. Wallach, 1,175 * Director (3) JetFleet Holding Corp. 199,992 12.96% Principal Stockholder (3)(7) All directors and executive 327,508 21.22% officers as a group (6 persons)(8) - ---------------------------------------------------- * 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 3, 2003, 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 282,211 shares owned by corporations of which Mr. Crispin is an officer, director and/or principal shareholder. (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 5,100 shares issuable upon exercise of stock bonus plan rights to receive AeroCentury Common Stock owned by JetFleet Holding Corp ("JHC"). (7) Consists of 111,692 shares owned directly and 88,300 shares owned by a wholly-owned subsidiary. (8) Consists of shares beneficially owned by officers and directors, but excludes 5,100 stock bonus plan shares described in footnote (6), since the shares issuable under this JHC plan are already counted in the 199,992 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. 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 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 2002 and 2001, the Company recognized as expense $1,725,330 and $1,758,050, respectively, of management fees payable to JMC. In connection with aircraft purchases during 2002 and 2001, the Company paid JMC a total of $325,500 and $0, respectively, in acquisition fees, which are included in the capitalized cost of the aircraft. During 2002 and 2001, the Company accrued a total of $0 and $13,500, respectively, in remarketing fees due to JMC. 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, 2002 with all Section 16(a) filing requirements applicable to the Company's officers, directors and greater than ten percent beneficial owners. STOCKHOLDER PROPOSALS Requirements for Stockholder Proposals to be Brought Before 2004 Annual Meeting. For stockholder proposals to be considered properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Company. For the 2004 Annual Meeting, to be timely, notice of stockholder proposals must be delivered to, or mailed and received by, the Secretary of the Company at the principal executive offices of the Company between February 9, 2004, and March 10, 2004. A stockholder's notice to the Secretary must set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the Annual Meeting and the reasons for conducting such business at the Annual Meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the number of shares of the Company's Common Stock which are beneficially owned by the stockholder, and (iv) any material interest of the stockholder in such business. Requirements for Stockholder Proposals to be Considered for Inclusion in the Company's Proxy Materials. Stockholder proposals submitted pursuant to Rule 14a-8 under the Exchange Act and intended to be presented at the Company's 2004 Annual Meeting of Stockholders must be received by the Company not later than November 20, 2003 in order to be considered for inclusion in the Company's proxy materials for that meeting. 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 Annual Meeting, regardless of the number of shares that you hold. YOU ARE, THEREFORE, URGED TO EXECUTE PROMPTLY AND RETURN THE ACCOMPANYING PROXY IN THE ENVELOPE THAT HAS BEEN ENCLOSED FOR YOUR CONVENIENCE. Stockholders who are present at the Annual 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 21, 2003 Burlingame, California ATTACHMENT A RESTATED AUDIT COMMITTEE CHARTER AEROCENTURY CORP. AUDIT COMMITTEE CHARTER Revised February, 2003 I. ORGANIZATION The Audit Committee shall be comprised of two or more directors, as determined by the Corporation's Board of Directors (the "Board"). The Audit Committee members shall be designated by the Board and shall serve at the discretion of the Board. Each member of the Audit Committee shall be an independent director. For purposes hereof, an "independent director" shall be one: o who accepts no consulting, advisory or other compensatory fee from the Corporation other than in his or her capacity as a member of the Committee, the Board or any other committee of the Board or is not otherwise an affiliated person of the Corporation, and o who is free from any relationship that, in the opinion of the Board, would interfere with the exercise of his or her independent judgment in carrying out the responsibilities of a director. Each member of the Audit Committee shall be able to read and understand fundamental financial statements in accordance with the rules of the American Stock Exchange (the "AMEX") audit committee requirements. At least one member shall have past employment experience in finance or accounting, a professional certification in accounting or other comparable experience or background that results in the individual's possessing the requisite financial sophistication, including a current or past position as a chief executive or financial officer or other senior officer with financial oversight responsibilities. II. STATEMENT OF POLICY The Audit Committee is appointed by the Board to oversee the accounting and financial reporting processes of the Corporation and audits of the financial statements of the Corporation and to have the sole responsibility for the appointment, compensation, oversight and termination of the Corporation's independent auditors ("Auditors"). The Audit Committee shall further provide assistance and expertise to the full corporate board of 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 Auditors, and the financial management of the Corporation. In addition, the Audit Committee shall review the policies and procedures adopted by the Corporation to fulfill its responsibilities regarding the fair and accurate presentation of financial statements in accordance with generally accepted accounting principles and applicable rules and regulations of the Securities and Exchange Commission and the AMEX audit committee requirements. III. POWERS The Audit Committee shall have the power to conduct or authorize investigations into any matters within the Committee's scope of responsibilities. The Committee shall be empowered to engage independent counsel and other advisers, as it determines necessary to carry out its duties. While the Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Committee to plan or conduct audits or to determine that the Corporation's financial statements are complete and accurate and are in accordance with generally accepted accounting principles. Those tasks are the responsibility of management and the independent auditor. The Board and the Committee are in place to represent the Corporation's stockholders. Accordingly, the independent auditor is ultimately accountable to the Board and the Committee. IV. RESPONSIBILITIES The Audit Committee shall undertake those specific duties and responsibilities listed below and such other duties as the Board shall from time to time prescribe. All powers of the Committee are subject to the restrictions designated in the Corporation's Bylaws and applicable law. 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: 1. Review and reassess the adequacy of this Charter annually. 2. With respect to the Corporation's Auditors: a. The Committee is responsible for the appointment, compensation and oversight of the work of the Corporation's Auditors. The Committee shall pre-approve all auditing services (including the provision of comfort letters) and non-audit services provided by the Auditors to the Corporation, other than as may be allowed by applicable law. The Committee may delegate to one or more designated Committee members the authority to grant pre-approvals required by the foregoing sentence. The decisions of any Committee member to whom authority is delegated hereunder shall be presented to the Committee at each of its scheduled meetings. The Auditors shall be ultimately accountable to the Board and to the Committee as representatives of the Corporation's stockholders. b. Review the independence of the Auditors, including a review of management consulting services, and related fees, provided by the Auditors. The Committee shall request that the Auditors at least annually provide a formal written statement delineating all relationships between the Auditors and the Corporation consistent with the AMEX audit committee requirements and request information from the Auditors and management to determine the presence or absence of a conflict of interest. The Committee shall actively engage the Auditors in a dialogue with respect to any disclosed relationships or services that may impact the objectivity and independence of the Auditors. The Committee shall take, or recommend that the full Board take, appropriate action to oversee the independence of the Auditors. 3. Review and discuss with management, before release, the audited financial statements and the Management's Discussion and Analysis proposed to be included in the Corporation's Annual Report on Form 10-KSB. Make a recommendation to the Board whether or not the audited financial statements should be included in the Corporation's Annual Report on Form 10-KSB. 4. In consultation with the Auditors and management, consider and review at the completion of the annual examinations and such other times as the Committee may deem appropriate: a. The Corporation's annual financial statements and related notes. b. The Auditors' audit of the financial statements and their report thereon. c. The Auditors' reports regarding critical accounting policies, alternative treatments of financial information and other material written communications between the Auditors and management. d. Any deficiency in, or suggested improvement to, the procedures or practices employed by the Corporation as reported by the Auditors in their annual management letter. 5. Periodically and to the extent appropriate under the circumstances, it may be advisable for the Committee, with the assistance of the Auditors and/or management, to consider and review the following: a. Any significant changes required in the Auditors' audit plan. b. Any difficulties or disputes with management encountered during the course of the audit. c. The adequacy of the Corporation's system of internal financial controls. d. The effect or potential effect of any regulatory regime, accounting initiatives or off-balance sheet structures on the Corporation's financial statements. e. Any correspondence with regulators or governmental agencies and any employee complaints or published reports that raise material issues regarding the Corporation's financial statements or accounting policies. f. Other matters related to the conduct of the audit, which are to be communicated to the Committee under generally accepted auditing standards. 6. Discuss with the Auditors the matters required to be discussed by Statement on Auditing Standards No. 61, as modified or supplemented. 7. Obtain from the Auditor assurance that it has complied with Section 10A of the Securities Exchange Act of 1934. 8. Establish procedures for (a) the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal accounting controls or auditing matters and (b) the confidential, anonymous submission by the Corporation's employees of concerns regarding questionable accounting or auditing matters. 9. Prepare a report in the Corporation's proxy statement in accordance with SEC requirements. 10. Review accounting and financial human resources and succession planning with the Corporation. 11. Submit the minutes of all meetings of the Audit Committee to, or discuss the matters discussed at each Committee meeting with, the Board 12. Investigate any matter brought to its attention within the scope of its duties, with the power to retain separate outside counsel, solely representing and reporting to the Audit Committee, for this purpose if, in its judgment, that is appropriate. V. 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. Meetings should provide the opportunity not only to review the Corporation'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 Auditor. VI. 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. PROXY [FRONT SIDE] AeroCentury Corp. 1440 Chapin Avenue, Suite 310, Burlingame, California 94010 This Proxy is Solicited on Behalf of the Board of Directors. 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 3, 2003, at the 2003 Annual Meeting of Stockholders of the Company to be held on April 24, 2003, or at any adjournment or postponement thereof. 1. ELECTION OF DIRECTORS FOR all nominees listed below (except as marked to the contrary below) WITHHOLD AUTHORITY 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) Marc J. Anderson - ---------- Thomas W. Orr - ---------- 2. PROPOSAL TO RATIFY THE APPOINTMENT OF PRICEWATERHOUSE COOPERS LLP as independent auditors for the Company for the fiscal year ending December 31, 2003. 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 [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 . SIGNATURE Title (if any) Date - --------------------------- -------------------- ------------- Title (if any) Date - --------------------------- -------------------- ------------- (Second Signature, if held jointly) EX-99 2 acy2003finalglossy3.txt 2003 ANNUAL REPORT [cover graphics] [AEROCENTURY LOGO] AEROCENTURY (R) WORLDWIDE - REGIONAL AIRCRAFT - LEASING 2002 ANNUAL REPORT TO OUR STOCKHOLDERS - -------------------------------------------------------------------------------- The global aviation market experienced another challenging year in 2002. Worldwide economic turmoil continues to adversely affect passenger traffic and cargo shipping levels. Several major carriers have declared bankruptcy in an effort to cut costs and restructure their operations. Under the current backdrop of economic volatility and uncertainty, AeroCentury continues to implement plans which we believe will enable us to continue to carefully increase the company's business and produce positive results for our stockholders. Some of the key factors which we believe will enable us to reach those goals are: o Regional market - we continue to look to foreign regional carriers as a source of new customers. These carriers have proven to be efficient and opportunistic and thus have displayed the ability to prosper in the face of industry turmoil. o Diversification - we ended 2002 with 21 aircraft, comprised of 7 different types, and 26 turboprop engines, on lease to customers in 12 countries worldwide, primarily outside the United States. We remarketed 7 aircraft during the year, 3 to new customers in new markets. We continue to search for opportunities to refresh our portfolio. o Management - we continue to develop our strong team which has exhibited the integrity, patience and people skills necessary to succeed in today's markets. In addition, developing and maintaining strong customer relationships is critical to our business, particularly in a difficult operating environment. o Financing - interest rates remain at their lowest level in decades. We are taking steps now to renew our revolving line of credit which matures in June 2003. This renewal will dramatically shape our ability to operate in the years ahead. Despite the severe industry conditions, our portfolio utilization rate for 2002 was 90%, which is better than many industry participants. Our ability to carefully balance the needs of our customers with our desired portfolio mix, lease rates and lease terms will be critical to maintaining high utilization in 2003. Thank you for your continued interest and support. /S/ Neal D. Crispin Neal D. Crispin President and Chairman of the Board Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: This Annual Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements in this Annual Report other than statements of historical fact are "forward-looking statements" for purposes of these provisions, including any statements of plans and objectives for future operations and any statements of assumptions underlying any of the foregoing. Statements that include the use of terminology such as "may," "will," "expects," "plans," "anticipates," "estimates," "potential," or "continue," or the negative thereof, or other comparable terminology are forward-looking statements. Forward-looking statements include: (i) in the Letter to Stockholders, statements regarding: the Company's ability to continue to increase its business and produce positive results for its stockholders and the factors enabling the Company to reach those goals; the Company's continuing to look to foreign regional carriers as a source of new customers; the ability of regional carriers to prosper in the face of industry turmoil; the Company's continuing search for opportunities to refresh its portfolio; the steps taken toward renewal of the revolving line of credit which matures in June 2003 and the impact of the renewal on the Company's ability to operate in the years ahead; the Company's ability to carefully balance the needs of its customers with its desired portfolio mix, lease rates and lease terms; and maintenance of the Company's high utilization in 2003; (ii) in "Management's Discussion and Analysis," statements regarding the Company's intention to achieve its business objective by reinvesting cash flow and obtaining short-term and long-term debt and/or equity financing (iii) in "Management's Discussion and Analysis -- Liquidity and Capital Resources," statements regarding the Company's expectation that it will be able to maintain compliance with its credit facility covenants through the expiration of the credit facility on June 28, 2003; the Company's expectation that it will be able to obtain a new revolving credit facility at reasonable market terms; the Company's belief that it has adequate cash flow to fund reasonably expected increases in interest rates applicable to its credit facility obligations; the Company's belief that it will be successful in extending the AeroCentury Investments II LLC financing; the Company's belief that it will have adequate cash flow to meet its on-going operational needs; the Company's belief that it will have sufficient cash to fund any necessary payments under its guaranty of certain payments to a third party vendor by a lessee; (iv) in "Management's Discussion and Analysis -- Outlook," statements regarding the Company approaching its banks regarding a further extension of covenant amendments that expired on February 28, 2003; the Company's expectation that even if the Company is unable to successfully negotiate an extension of the changes beyond February 28, 2003, the Company will nonetheless be able to maintain compliance with its credit facility covenants through the expiration of the credit facility on June 28, 2003; the Company's expectation that it will be able to obtain a new credit facility at reasonable market terms; the Company's expectation to have a lease extension and financing in place in the second quarter of 2003 for an asset held in a special purpose entity; the Company's belief that it will be able to purchase and lease such aircraft at prices and lease rates that will have a positive effect on the Company's earnings; (v) in "Management's Discussion and Analysis -- Factors that May Affect Future Results," statements regarding the possibility that certain current economic conditions may favor the Company in that there may be a greater likelihood of renewals by existing lessees and increased demand for more economically operated turboprop aircraft, which make up most of the Company's portfolio; the Company approaching its banks regarding a further extension of covenant amendments that expired on February 28, 2003; the Company's belief that it will be able to remain in compliance with its credit facility covenants and would not be required to make any repayments under the facility due to collateral base limitations through the expiration of the credit line in June 28, 2003; the Company's anticipated acquisition of primarily used aircraft; the opportunities available in overseas markets; JMC's competitiveness due to its experience and operational efficiency in financing transaction types desired by regional air carriers and its global reputation, the Company's ability to obtain third party guaranties, letters of credit or other credit enhancements from future lessees; and (vi) in "Notes to Consolidated Financial Statements," statements regarding the Company's approaching its banks regarding a further extension of the revised terms of the revolving credit facility; the Company's expectation that even if the Company is unable to successfully negotiate an extension of the changes beyond February 28, 2003, it will be able to maintain compliance with its credit facility covenants through the expiration of the credit facility on June 28, 2003; and the Company's anticipation that the Company will generate adequate future taxable income to realize the benefits of all deferred tax assets on the balance sheet; and the Company's expectation that it will be able to obtain a new credit facility upon expiration of the current facility on June 28, 2003. These forward-looking statements involve risks and uncertainties, and it is important to note that the Company's actual results could differ materially from those projected or assumed in such forward-looking statements. Among the factors that could cause actual results to differ materially are the factors detailed under the heading "Management's Discussion and Analysis -- Factors That May Affect Future Results," including general economic conditions, particularly those that affect the demand for regional aircraft and engines and the financial status of the Company's primary customers, regional passenger airlines; lack of any further disruptions to the air travel industry similar to that which occurred on September 11, 2001; the success of the Company's remarketing efforts with respect to aircraft that are returned upon expiration or termination of leases; the Company's ability to remain in compliance with the terms of its credit facility agreement or, if necessary, negotiate extensions of waivers of such compliance; the Company's ability to obtain a new credit facility on reasonable business terms at or prior to the expiration of its current credit facility; the financial performance of the Company's lessees and their compliance with rental, maintenance and return conditions under their respective leases; the availability of suitable aircraft acquisition transactions in the regional aircraft market; and future trends and results which cannot be predicted with certainty. The cautionary statements made in this Annual Report should be read as being applicable to all related forward-looking statements wherever they appear herein. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward-looking statement or risk factor. You should consult the risk factors listed from time to time in the Company's filings with the Securities and Exchange Commission. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS - --------------------------------------------------------------------------- AeroCentury Corp. ("AeroCentury"), a Delaware corporation, uses leveraged financing to acquire leased aircraft assets. Financial information for AeroCentury and its two wholly-owned subsidiaries, AeroCentury Investments LLC ("AeroCentury LLC") and AeroCentury Investments II LLC ("AeroCentury II LLC") (collectively, the "Company"), is presented on a consolidated basis. All intercompany balances and transactions have been eliminated in consolidation. The business of the Company is managed by JetFleet Management Corp. ("JMC"), pursuant to a management agreement between JMC and the Company, which is an integrated aircraft management, marketing and financing business and a subsidiary of JetFleet Holding Corp. ("JHC"). Certain officers of the Company are also officers of JHC and JMC and hold significant ownership positions in both JHC and the Company. The Company invests in used regional aircraft equipment leased to foreign and domestic regional air carriers. The Company's principal business objective is to increase stockholder value by acquiring additional aircraft assets and managing those assets in order to provide a return on investment through lease revenue and, eventually, sale proceeds. The Company intends to achieve its business objective by reinvesting cash flow and obtaining short-term and long-term debt and/or equity financing. Critical Accounting Policies In response to the Securities and Exchange Commission's Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies", the Company has identified the most critical accounting policies upon which its financial status depends. It determined the critical principles by considering accounting policies that involve the most complex or subjective decisions or assessments. The Company identified its most critical accounting policies to be those related to lease rental revenue recognition, depreciation policies and valuation of aircraft. 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. Depreciation Policies 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 based on appraisal. Valuation of Aircraft In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. Periodically, 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. Results of Operations Revenues The Company had revenues of $8,814,030 and net income of $1,009,490 for the year ended December 31, 2002 versus revenues of $11,231,990 and net income of $1,698,940 for the year ended December 31, 2001. Operating lease revenue was approximately $1,459,000 lower in 2002 versus 2001 primarily due to assets which came off lease during 2001 and 2002, some of which were subsequently re-leased at lower rates, and some of which remained off lease during a portion of 2002, and the sale of an aircraft during the fourth quarter of 2001. The negative effect was only partially offset by the additional lease revenue from aircraft purchased by the Company during the latter part of 2002. Gain on disposal of aircraft and aircraft engines was approximately $327,000 lower in 2002 because the Company did not sell any aircraft during 2002, versus one aircraft sold during 2001. Other income was lower by approximately $632,000 during 2002 versus 2001 primarily due to the net insurance proceeds received during 2001 as a result of damage to one of the Company's aircraft and also because of lower interest rates on lower cash balances during 2002 versus 2001. Expense Items Management fees, which are calculated on the net book value of the aircraft owned by the Company, were approximately $33,000 lower in 2002 versus 2001. Even though the Company purchased two aircraft during the second half of 2002, the effect of such purchases only partially offset the effect of the sale of an asset during the fourth quarter of 2001 and the decreased net book value of the Company's other aircraft as a result of depreciation recognized during 2002. Depreciation was approximately $62,000 higher in 2002 versus 2001 because depreciation recognized with respect to the aircraft purchased during 2002 was greater than the elimination of depreciation with respect to the aircraft sold during the fourth quarter of 2001. Interest expense was approximately $831,000 lower in 2002 versus 2001 because of lower interest rates and a lower average principal balance during 2002. Professional fees and general and administrative expenses were approximately $45,000 higher in 2002 versus 2001, primarily due to additional aircraft insurance expense which resulted from higher premiums, and due to higher accounting expense. The effect of such increases was partially offset by decreases in legal expense and certain other expense categories. Excluding the reversal of a portion of certain maintenance expenses estimated and accrued in prior periods, discussed below, maintenance expense was approximately $672,000 lower in 2002 versus 2001. This was primarily because a $609,000 estimate, related to compensation to the lessee in accordance with the return provisions of the leases for two aircraft, had been accrued in the fourth quarter of 2001. When compensation to the lessee was finalized in 2002, the Company reversed approximately $214,000 of the $609,000 estimate. During 2001, the Company reversed a total of $291,000, which was paid by the lessees of two aircraft subsequent to the accruals which had been made by the Company in the fourth quarter of 2000. The Company's effective tax rate in 2002 was approximately 32% versus approximately 33% in 2001. 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 assets primarily through credit facility borrowings and excess cash flow. The Company has a revolving credit facility totaling $50 million. The facility, which expires on June 28, 2003, bore interest through March 30, 2002, at the Company's option, at either (i) prime or (ii) LIBOR plus a margin of 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 revolving credit facility and, in accordance with the credit agreement, the Company must maintain compliance with certain financial covenants. The Company made repayments on its facility in the amount of $1,500,000 during 2002 because of certain collateral borrowing base limitations. On March 7, 2002, the Company and its lenders agreed to modify certain financial covenants contained in the loan agreement for the facility in order to enable the Company to continue to take advantage of business opportunities in the industry environment of increased market demand for shorter-term leases. The changes, originally in effect through December 31, 2002, were extended through February 28, 2003. In return for granting such changes, the Company's lenders increased the margin on the interest rates chosen by the Company from a floating margin to a fixed margin of 275 basis points, effective March 31, 2002. On March 1, 2003, the margin returned to its original floating rate. In order to maintain the flexibility afforded by the changes, the Company anticipates approaching its banks regarding a further extension of the revised terms of the revolving credit facility. Even if the Company is unable to successfully negotiate an extension of the changes beyond February 28, 2003, the Company expects that it will be able to maintain compliance with its credit facility covenants through the expiration of the credit facility on June 28, 2003. The Company is currently discussing the terms of a new credit facility with its agent bank and expects to be able to obtain such facility at reasonable market terms. At December 31, 2002, principal of $41,405,000 was outstanding under the credit facility and interest of $224,840 was accrued. The Company is currently in compliance with all covenants of the revolving credit facility. The majority of the Company's borrowings are currently financed using three- or six-month LIBOR rates. The Company believes it has adequate cash flow to fund reasonably expected increases in interest rates applicable to its credit facility obligations. The Company's interest expense generally moves up or down with the prevailing interest rates, as the Company has not entered into any interest rate hedge transactions. Because aircraft owners seeking financing generally can obtain financing through either leasing transactions or traditional secured debt financings, prevailing interest rates are a significant factor in determining market lease rates, and market lease rates generally move up or down with prevailing interest rates, assuming supply and demand of the desired equipment remain constant. However, because lease rates for the Company's assets typically are fixed under existing leases, the Company usually does not experience any positive or negative impact in revenue from changes in market lease rates due to interest rate changes until existing leases have terminated. In November 1999, AeroCentury LLC acquired two aircraft using cash and bank financing separate from its credit facility. The financing, which consisted of a note in the amount of $9,061,000, was collateralized by these aircraft and was non-recourse to the Company. The note bore fixed interest at 8.04% through February 15, 2002 and a floating rate thereafter. During 2002, the Company used funds from its revolving credit facility to repay the outstanding bank financing related to both aircraft. A similar special purpose entity financing for AeroCentury II LLC 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. The note is collateralized by this aircraft and is non-recourse to the Company. 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, 2002 was $2,585,450 and interest of $7,920 was accrued. The Company is in compliance with all covenants of the loan agreement pertaining to the financing of this aircraft. The lessee of the aircraft has indicated its willingness to extend the lease. Therefore, the Company is discussing terms for extending the financing of this aircraft with the lender. The Company believes it will be successful in extending the financing. 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 the time that an asset will be "off-lease." The Company's aircraft are subject to leases with varying expiration dates through November 2005. 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 its on-going operational needs. In connection with the re-lease of two of the Company's aircraft during 2002, the Company has guaranteed, up to a maximum of $150,000, the lessee's payments under a contract with a third party vendor for spare parts. The lessee has agreed to reimburse the Company for any payments made under the guarantee, upon demand by the Company. If the lessee does not make such reimbursements or does not comply with any provisions of the parts agreement, the Company may declare an event of default under the leases. During the fourth quarter of 2002, the Company and the lessee agreed to lease amendments which deferred certain overdue rent and reserve payments. The Company is monitoring this lessee's performance very closely. If the Company does have to perform, the Company believes it will have sufficient cash to fund any necessary payments. See "Outlook" below for a discussion of factors which may affect the Company's cash flow. The Company's cash flow from operations for the year ended December 31, 2002 versus 2001 increased by approximately $314,000. The increase was due primarily to the effect of the change in prepaid expenses and other assets, accrued interest on notes payable, maintenance deposits and accrued costs, and security deposits. The effect of these changes was only partially offset by the negative effect of the change in accounts receivable, accounts payable and accrued expenses, and deferred taxes. Specifically, the Company's cash flow from operations for the year ended December 31, 2002 consisted of net income of $1,009,490 and adjustments consisting primarily of depreciation of $2,851,860, increases in deposits, accounts receivable, accrued interest on notes payable, maintenance deposits and accrued costs, security deposits, and deferred taxes of $101,490, $1,204,770, $211,740, $562,350, $536,680 and $406,740, respectively, and decreases in prepaid expenses and other assets, accounts payable and accrued expenses, and prepaid rent of $168,730, $1,112,480 and $27,160, respectively. Specifically, the Company's cash flow from operations for the year ended December 31, 2001 consisted of net income of $1,698,940 and adjustments consisting primarily of depreciation of $2,789,550, increases in deposits, accounts receivable, prepaid expenses and other assets, and deferred taxes of $123,290, $24,710, $34,580 and $639,380, respectively, and decreases in accounts payable and accrued expenses, accrued interest on notes payable, maintenance reserves and accrued costs, security deposits and prepaid rent of $243,210, $48,300, $1,101,050, $96,030 and $142,090, respectively. The increase in cash flow provided by financing activities from year to year was primarily a result of borrowings on the Company's revolving credit facility to fund the Company's aircraft purchases during 2002. The increase in cash flow used for investing activities during 2002 was due to equipment added to aircraft already owned by the Company and the purchase of aircraft during 2002, versus a smaller amount of such spending during 2001. Outlook In order to maintain the flexibility afforded by the changes to the revolving credit facility discussed under "Liquidity and Capital Resources", the Company anticipates approaching its banks regarding a further extension of those changes. Even if the Company is unable to successfully negotiate an extension of the changes beyond February 28, 2003, the Company expects that it will be able to maintain compliance with its credit facility covenants through the expiration of the credit facility on June 28, 2003. The Company is currently discussing the terms of a new credit facility with its agent bank and expects to be able to obtain such facility at reasonable market terms. The Company has previously used special purpose asset-based financing for the acquisition of three aircraft and will continue to seek such financing as circumstances dictate. The lessee of the Company's one aircraft that is financed with special purpose asset-based financing has indicated its willingness to extend the lease. Therefore, the Company is discussing terms for extending the financing of this aircraft with the lender. The Company expects to have both the lease extension and the financing in place when the current aircraft lease expires during the second quarter of 2003. In order to increase earnings, the Company will need to add aircraft to its portfolio. Such growth will be possible only with additional financing, such as an increased credit facility or the issuance of debt and/or equity securities. The Company and its agent bank have begun discussing the terms of a new credit facility. The Company is also seeking sources of debt and equity financing. While the Company's revenues should increase with the purchase of additional aircraft, management fees, depreciation and interest expense will also increase. Although it is likely that market lease rates will remain significantly below prior market levels as a result of downward pressure from low interest rates and the slowdown in the air carrier industry in particular and the worldwide economy in general, the Company believes that it will be able to purchase and lease such aircraft at prices and lease rates that will have a positive effect on the Company's earnings. Whether the positive effect will lead to an overall increase in the Company's earnings will depend on the success and timeliness of remarketing of aircraft that were off lease at December 31, 2002 and those with leases due to expire during 2003. The Company continues to review its asset valuations in light of the worldwide economic downturn. Although the Company did not make any valuation adjustments during 2002, any future adjustments, if necessary, could negatively affect the Company's financial results and the collateral available for the Company's revolving credit facility. In addition, the Company's periodic review of the adequacy of its maintenance reserves, as well as routine and manufacturer-required maintenance for off-lease aircraft, may result in changes to estimated maintenance expense, further reducing earnings. Factors that May Affect Future Results General Economic Conditions. The Company's business is dependent upon general economic conditions and the strength of the travel and transportation industry. The industry is experiencing a cyclical downturn which began in mid-2001. This downturn was exacerbated by the terrorist attacks of September 11, 2001 and their aftermath. As a result, there has been a severe reduction in air travel, and less revenue and less demand for aircraft capacity by the major air carriers, particularly those that serve U.S. markets. The duration of the downturn is uncertain. The Company's lessees and targeted potential lessees have been primarily outside the U.S. If those lessees experience financial difficulties, this could, in turn, affect the Company's financial performance. It appears that the downturn has had an impact on some non-U.S. regional carriers, but it remains to be seen how widespread the impact will be and how severely such carriers will be affected. It is possible that in certain instances, current economic circumstances may favor the Company, in that planned aircraft replacements for the Company's leased aircraft by its lessees may be cancelled or postponed, resulting in greater likelihood of renewals by existing lessees. Further, demand for more economically operated turboprop aircraft, which make up the Company's portfolio, relative to the more expensive new regional jets, may increase (see "Leasing Risks" below). However, there can be no assurance that the Company will realize any increase in renewals of existing leases or experience an increase in demand for turboprop aircraft. Since regional carriers are generally not as well-capitalized as major air carriers, the downturn may result in the increased possibility of an economic failure of one or more of the Company's lessees. The combined effect of all or any decreased air travel, further weakening of the industry as a result of subsequent threats of attacks similar to the September 11 events, an increase in the price of jet fuel due to fears of hostilities, and increased costs and reduced operations by air carriers due to new security directives, depending on their scope and duration, could allhave a material adverse impact on the Company's lessees and thus the Company's results. At this time, in response to lower passenger loads, many carriers have reduced capacity, and as a result there has been a reduced demand for aircraft. As a result, market lease rental rates have decreased. This reduced market value for aircraft could affect the Company's results if the market value of an asset or assets in the Company's aircraft portfolio falls below book value, and the Company determines that a writedown of the value on the Company's book is appropriate. Another anticipated result of the economic situation is that lessees are likely to desire shorter-term leases which will give those lessees more flexibility to deal with the current downturn. The Company's ability to enter into such short-term leases is somewhat limited by credit facility covenants that govern to what extent aircraft on short-term leases can be added to the collateral base that determines how much the Company can draw under the revolving credit facility and how much debt may be outstanding under the facility (see "Credit Facility Repayments Based on Collateral Base" below). Renewal or Replacement of the Credit Facility. As discussed in "Outlook" above, the Company's credit facility will expire on June 28, 2003. If the company is not able to renew the credit facility for the full outstanding amount, and cannot find suitable alternative financing, it may be required to make a principal repayment of the outstanding balance, or that portion of the balance for which replacement financing is not obtained. The Company does not have sufficient cash reserves to make a repayment of a significant portion of the outstanding credit facility indebtedness and would be forced to sell assets in order to raise funds to make such repayment. Such sales would likely not be on favorable terms to the Company as the full market value of the assets sold may not be realized by the Company in order to expedite the consummation of the sales. Even if the Company is able to successfully sell a portion of its assets and use the proceeds to repay the credit line facility, if a renewed or replacement facility is not obtained, the Company's future ability to acquire assets would be significantly impaired, as the credit facility is the Company's primary means of financing acquisitions and no other sources of acquisition financing are immediately available. Thus the renewal or replacement of the Company's credit line facility in an amount equal or greater than the current $50 million limit will be critical to the Company's asset and revenue growth. Credit Facility Repayment Obligations. As discussed in "Outlook", above, the Company's ability to draw on its $50 million credit facility is dependent upon the status of its collateral base. If a significant portion of the collateral base is off-lease for an extended period of time (see "Ownership Risks" below), this could trigger a covenant default and an obligation to repay a portion of the outstanding indebtedness under the credit facility. The Company anticipates approaching its banks to renew the loan covenant amendments that expired on February 28, 2003 in order to maintain its flexibility with respect to financing of its assets during the remainder of the term of the credit facility. Obtaining such a renewal would enhance the likelihood that the Company could remain in compliance with the credit facility through its termination on June 28, 2003. If renewal of those amendments is not obtained, the Company believes that it, nonetheless, will be able to remain in compliance with its credit facility covenants and would not be required to make any repayments under the facility due to collateral base limitations through the expiration of the credit line in June 28, 2003. In all events, the Company's beliefs regarding the future collateral base repayment obligations are based on certain assumptions regarding renewal of existing leases, a lack of extraordinary interest rate increases, no lessee defaults or bankruptcies, and certain other matters that the Company deems reasonable in light of its experience in the industry. There can be no assurance that these assumptions will turn out to be correct. If the assumptions do not prove to be true, and the Company has not obtained an applicable waiver or amendment of applicable covenants from its lenders to deal with the situation, the Company may have to sell a significant portion of its portfolio in order to maintain compliance with the covenants, or, if that is not possible, default on its credit facility. Risks of Debt Financing. The Company's use of acquisition financing under its revolving credit facility and its special purpose financings subject the Company to increased risks of leveraging. If, due to a lessee default, the Company is unable to repay the debt secured by the aircraft acquired, then the Company could lose title to the acquired aircraft in a foreclosure proceeding. With respect to the revolving credit facility, the 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 seek subordinated debt or equity financings. Such financing would permit the Company to optimize use of its revolving credit facility. There can be no assurance that the Company will be able to obtain the necessary amount of supplemental subordinated debt or equity financing on favorable terms so as to permit optimal use of its 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. Interest rates are currently at historically low levels and this has partially offset the effect of falling market lease rates. If interest rates rise, and lease rates do not increase at the same time, the Company would experience lower net revenues and, if the interest rate increase were great enough, may not be able to cover its interest expense with lease revenue. 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 risks. Demand for lease or purchase of the assets depends on the economic condition of the airline industry which is, in turn, 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 reflects economic conditions and the strength of the travel and transportation industry. The demand for and value of many types of used 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 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. Reliance on JMC. All management of the Company is performed by JMC under a management agreement which is in its seventh 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 Company's 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, the 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. In addition, certain officers of the Company hold significant ownership positions in JHC and the Company. JMC is also the management company for two other aircraft portfolio owners, JetFleet III, which raised approximately $13,000,000 from investors, and AeroCentury IV, Inc. ("AeroCentury IV"), which raised approximately $5,000,000 from investors. JetFleet III and AeroCentury IV are in the liquidation or wrap-up phase. In the first quarter of 2002, AeroCentury IV defaulted on certain obligations to noteholders. The indenture trustee for AeroCentury IV's noteholders has foreclosed and has taken over management of the remaining two assets. JetFleet III is in compliance with the terms of its trust indenture. 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. All 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 are less than the entire anticipated 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 re-lease 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 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 be further adversely affected by a declaration of bankruptcy by a defaulting lessee. International Risks. The Company has focused on leases in overseas markets, which the Company believes present 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 than 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. A lease with a foreign lessee is subject to risks related to the economy of the country or region in which such lessee is located, which may be weaker than the U.S. economy. 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, the Company may agree in the future to leases that permit payment in foreign currency, which would subject such lease revenue to monetary risk due to currency fluctuations. Even with U.S. 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 U.S. dollar-denominated lease payments, increasing the risk of default of that lessee, particularly if its 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 and cost of complying with such requirements will fall primarily upon lessees of equipment, there can be no assurance that the cost 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 identifying and obtaining financing for 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 may be strong, but are generally unrated, 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, however, 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, may be named in a suit claiming damages for injuries or damage to property caused by its assets. As a triple net lessor, the Company is generally protected against such claims, since the lessee would be responsible for, insure against and indemnify the Company for, such claims. Further, some protection may be provided by the United States Aviation Act with respect to its aircraft assets. It is, however, 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. Also, although the Company's leases generally require a lessee to insure against likely risks, there may be certain cases where the loss is not entirely covered by the lessee or its insurance. Though this is a remote possibility, 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, as well as a potential claim directly against the Company. 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 a third party guaranty, letters of credit or other credit enhancement, if it deems them 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
ASSETS December 31, 2002 Assets: Cash and cash equivalents $ 1,707,650 Deposits 7,088,350 Accounts receivable 1,800,640 Aircraft and aircraft engines on operating leases, net of accumulated depreciation of $18,270,690 65,502,010 Note receivable 17,600 Prepaid expenses and other 482,530 --------------- Total assets $ 76,598,780 =============== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses $ 529,650 Notes payable and accrued interest 44,223,210 Maintenance reserves and accrued costs 5,771,490 Security deposits 2,254,450 Prepaid rent 186,030 Deferred taxes 3,762,840 --------------- Total liabilities 56,727,670 --------------- Stockholders' equity: Preferred stock, $.001 par value, 2,000,000 shares authorized, no shares issued and outstanding - Common stock, $.001 par value, 3,000,000 shares authorized, 1,606,557 shares issued and outstanding 1,610 Paid in capital 13,821,200 Retained earnings 6,552,370 --------------- 20,375,180 Treasury stock at cost, 63,300 shares (504,070) --------------- Total stockholders' equity 19,871,110 --------------- Total liabilities and stockholders' equity $ 76,598,780 =============== The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2002 2001 ---- ---- Revenues: Operating lease revenue $ 8,691,440 $ 10,150,920 Gain on disposal of aircraft and aircraft engines - 326,730 Other income 122,590 754,340 --------------- ---------------- 8,814,030 11,231,990 --------------- ---------------- Expenses: Management fees 1,725,330 1,758,050 Depreciation 2,851,860 2,789,550 Interest 1,969,160 2,800,470 Maintenance 242,060 861,540 Professional fees and general and administrative 542,910 497,710 --------------- ---------------- 7,331,320 8,707,320 --------------- ---------------- Income before taxes 1,482,710 2,524,670 Tax provision 473,220 825,730 --------------- ---------------- Net income $ 1,009,490 $ 1,698,940 =============== ================ Weighted average common shares outstanding 1,543,257 1,543,257 =============== ================ Basic earnings per share $ 0.65 $ 1.10 =============== ================ The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT Common Paid-in Retained Treasury Stock Capital Earnings Stock Total Balance, December 31, 2000 $ 1,610 $ 13,821,200 $ 3,843,940 $ (504,070) $ 17,162,680 Net income - - 1,698,940 - 1,698,940 ------------- -------------- ------------- ------------- ------------- Balance, December 31, 2001 1,610 13,821,200 5,542,880 (504,070) 18,861,620 Net income - - 1,009,490 - 1,009,490 ------------- -------------- ------------- ------------- ------------- Balance, December 31, 2002 $ 1,610 $ 13,821,200 $ 6,552,370 $ (504,070) $ 19,871,110 ============= ============== ============= ============= =============
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOW For the Years Ended December 31, 2002 2001 Operating activities: Net income $ 1,009,490 $ 1,698,940 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,851,860 2,789,550 Gain on disposal of aircraft and aircraft engines - (326,730) Change in operating assets and liabilities: Deposits (101,490) (123,290) Accounts receivable (1,204,770) (24,710) Prepaid expenses and other 168,730 (34,580) Accounts payable and accrued expenses (1,112,480) (243,210) Accrued interest on notes payable 211,740 (48,300) Maintenance reserves and accrued costs 562,350 (1,101,050) Security deposits 536,680 (96,030) Prepaid rent (27,160) (142,090) Deferred taxes 406,740 639,380 --------------- ---------------- Net cash provided by operating activities 3,301,690 2,987,880 Investing activities: Proceeds from disposal of aircraft and aircraft engines - 1,406,440 Purchase of aircraft and aircraft engines (11,826,520) (285,420) --------------- ---------------- Net cash (used)/provided by investing activities (11,826,520) 1,121,020 Financing activities: Payments received on note receivable 50,970 48,980 Issuance of notes payable 16,480,000 - Repayment of notes payable (8,978,650) (4,662,190) --------------- ---------------- Net cash provided/(used) by financing activities 7,552,320 (4,613,210) Net decrease in cash and cash equivalents (972,510) (504,310) Cash and cash equivalents, beginning of period 2,680,160 3,184,470 --------------- ---------------- Cash and cash equivalents, end of period $ 1,707,650 $ 2,680,160 =============== ================
During the years ended December 31, 2002 and 2001, the Company paid interest totaling $1,662,070 and $2,771,610, respectively, and income taxes totaling $10,000 and $388,270, respectively. The accompanying notes are an integral part of these statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- 1. Organization and Summary of Significant Accounting Policies (a) Basis of Presentation AeroCentury Corp. ("AeroCentury"), a Delaware corporation, uses leveraged financing to acquire leased aircraft assets. The Company purchases used regional aircraft on lease to foreign and domestic regional carriers. Financial information for AeroCentury and its two wholly-owned subsidiaries, AeroCentury Investments LLC ("AeroCentury LLC") and AeroCentury Investments II LLC ("AeroCentury II LLC") (collectively, the "Company"), is presented on a consolidated basis. All intercompany balances and transactions have been eliminated in consolidation. (b) Capitalization In 1998, in connection with the adoption of a stockholder rights plan, the Company filed a Certificate of Designation, setting forth the rights, preferences and privileges of a new Series A Preferred Stock. Pursuant to the plan, the Company issued rights to its stockholders, giving each stockholder the right to purchase one one-hundredth of a share of Series A Preferred Stock for each share of Common Stock held by the stockholder. Such rights are exercisable only under certain circumstances concerning a proposed acquisition or merger of the Company. The Company's Board of Directors adopted a stock repurchase plan in 1998, granting management the authority to repurchase up to 100,000 shares of the Company's common stock, in privately negotiated transactions or in the market, at such price and on such terms and conditions deemed satisfactory to management. The Company has repurchased 63,300 shares in total and has not repurchased any shares since 1999. 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, 2002, the Company held security deposits of $2,254,450, refundable maintenance reserves received from lessees of $1,535,030 and non-refundable maintenance reserves of $3,298,870. The Company's leases are typically structured so that if any event of default occurs under a lease, the Company may apply all or a portion of the lessee's security deposit to cure such default. If such 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, upon satisfaction of all lease terms. 1. Organization and Summary of Significant Accounting Policies (continued) (c) Cash and Cash Equivalents/Deposits (continued) 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 based on appraisal. (e) Impairment of Long-lived Assets In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. Periodically, the Company reviews its long-lived assets for impairment based on third party valuations. In the event such valuations are less than the recorded value of the assets, the assets are written down to their estimated realizable value. (f) 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. (g) 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, 2002, the Company had accrued maintenance costs of approximately $354,000 related to several of its aircraft. 1. Organization and Summary of Significant Accounting Policies (continued) (h) Income Taxes The Company follows the liability method of 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. (i) 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. (j) 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 the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates with regard to these financial statements are the residual values of the aircraft, the useful lives of the aircraft, and the estimated amount and timing of cash flow associated with each aircraft that are used to evaluate impairment, if any. (k) 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, 2002 and 2001. (l) Recent Accounting Pronouncements In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," which supercedes SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to Be Disposed Of." SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company adopted SFAS No. 144 on January 1, 2002. Because SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale, the adoption of SFAS No. 144 has not had a material effect on the Company's results of operations or financial position. In November 2002, the Financial Accounting Standards Board issued SFAS Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 is effective for guarantees issued or modified after December 31, 2002. The Company has one guarantee, which was issued prior to December 31, 2002 (Note 8). The Company has not recorded a liability for the fair value of the obligations it has assumed under this guarantee. 2. Aircraft and Aircraft Engines On Operating Leases At December 31, 2002, the Company owned five deHavilland DHC-8s, two deHavilland DHC-7s, three deHavilland DHC-6s, one Fairchild Metro III, two Shorts SD 3-60s, six Fokker 50s, two Saab 340As and 26 turboprop engines. During the fourth quarter of 2002, the Company acquired two of its deHavilland DHC-8 aircraft, in purchase and leaseback transactions with a new customer for terms of 38 and 36 months. The Company also capitalized $342,130 of equipment added to several aircraft during 2002. In addition, an engine which had been held in inventory was exchanged, along with a cash payment, for another engine which subsequently was leased to a customer for use on one of the Company's aircraft while an engine was being repaired. The Company did not sell any aircraft during the year. At December 31, 2002, all but two of the Company's aircraft were subject to operating lease agreements. The Company is seeking re-lease opportunities for the off-lease aircraft, which were returned by lessees in 2002 after lease expiration. The following aircraft were subject to leases which expired during 2002, but which remained in effect at December 31, 2002: The lease for one of the Company's Fokker 50 aircraft expired in September 2002, but the lessee, which is in financial difficulty, is required to continue to pay rent until the aircraft is returned and accepted by the Company, which is expected to occur in the second quarter of 2003. The Company holds a security deposit from this lessee, which is in excess of the rent accrued at December 31, 2002. In order to enforce its ability to use a portion of the security deposit toward unpaid rent, the Company sent a default notice to the lessee in October 2002. The Company and the lessee are negotiating the final amount of rent and maintenance payable to the Company when the aircraft is returned. As discussed in Note 10, the Company has signed a term sheet for the re-lease of this aircraft. In December 2002, the lease for another of the Company's Fokker 50 aircraft which had previously been extended to December 31, 2002, was extended through February 28, 2003. As discussed in Note 10, the lease has been extended through March 31, 2003. The leases for one of the Company's Saab 340A aircraft and one of the Company's turboprop engines remain in effect from their expiration dates of December 31, 2002 and October 31, 2002, respectively, until the pre-return inspections of the aircraft and engine are complete. Both are expected to be returned and accepted by the Company in the second quarter of 2003 and are being actively remarketed. Under the terms provided therein, the leases for two of the Company's other Fokker 50 aircraft remained in effect from their expiration date in January 2002, until their pre-return inspections were completed in July 2002. The lessee continued to pay rent through mutually-agreed dates in June. In late 2001, the Company conducted a preliminary inspection of the aircraft and concluded that, upon return, certain components would likely be in better condition than required by the return provisions of the leases. In such a situation, the leases stipulated that the Company was required to compensate the lessee. As a result, during 2001, the Company accrued an estimate of $609,000 of compensation related to these two aircraft. Both aircraft were returned to the Company in July 2002, at which time the Company and the lessee agreed on the final compensation of $395,310. At that time, the Company recorded a credit to maintenance expense of $213,690, which represented the amount of the Company's estimate in excess of the final amount. Both aircraft were re-leased to new customers in 2002. 2. Aircraft and Aircraft Engines On Operating Leases (continued) During November 2002, the Company and the lessee for three of the Company's aircraft signed lease amendments which cured the lessee's recent default for rent and reserves due and which provide for the deferral of such amounts. The arrearages are to be paid over time in installments. 3. Note Receivable At December 31, 2002, the Company's note receivable consisted 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 between 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 is being repaid through increased rent during the remainder of the lease term, which expires on April 30, 2003. 4. Operating Segments The Company operates in one business segment, leasing of regional aircraft to regional airlines, primarily foreign, and therefore does not present separate segment information for lines of business. Approximately 21% and 22% of the Company's operating lease revenue was derived from lessees domiciled in the United States during 2002 and 2001, respectively. All revenues relating to aircraft leased and operated internationally are denominated and payable in U.S. dollars. The tables below set forth geographic information about the Company's operating leased aircraft equipment, grouped by domicile of the lessee: Operating Lease Revenue for the Years Ended December 31, 2002 2001 ----------------------------------------- Europe and United Kingdom $ 3,465,160 $ 5,419,280 United States 1,809,160 2,236,910 Caribbean 1,563,500 1,185,150 South America 922,320 1,014,580 Asia 931,300 295,000 ---------------- --------------- $ 8,691,440 $ 10,150,920 ================ =============== 4. Operating Segments (continued) Net Book Value at December 31, 2002 2001 ------------------------------------- Asia $ 18,185,860 $ 2,230,770 Europe and United Kingdom 16,095,620 27,162,220 Caribbean 11,826,550 7,650,210 South America 10,443,360 5,765,290 United States 8,950,620 11,480,290 Other - 2,238,570 ---------------- --------------- $ 65,502,010 $ 56,527,350 ================ =============== For the year ended December 31, 2002, the Company had three significant customers, which accounted for 11%, 11% and 10%, respectively, of lease revenue. For the year ended December 31, 2001, the Company had three significant customers, which accounted for 19%, 13% and 11%, respectively, of lease revenue. As of December 31, 2002, minimum future operating lease revenue payments receivable under noncancelable leases were as follows: Year 2003 $ 6,685,180 2004 4,846,350 2005 3,111,830 2006 - 2007 - ---------------- $ 14,643,360 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 has a revolving credit facility totaling $50 million. The facility, which expires on June 28, 2003, bore interest through March 30, 2002, at the Company's option, at either (i) prime or (ii) LIBOR plus a margin of 200 to 250 basis points depending on certain financial ratios. On March 7, 2002, the Company and its lenders agreed to modify certain financial covenants contained in the loan agreement for the facility in order to enable the Company to continue to take advantage of business opportunities in the current industry environment of increased market demand for shorter-term leases. As discussed in Note 10, the changes, originally in effect through December 31, 2002, were extended through February 28, 2003. In return for granting such changes, the Company's lenders increased the margin on the interest rates chosen by the Company from a floating margin to a fixed margin of 275 basis points, effective March 31, 2002. On March 1, 2003, the margin returned to its original floating rate. In order to maintain the flexibility afforded by such changes, the Company anticipates approaching its banks regarding a 6. Notes Payable and Accrued Interest (continued) further extension of the revised terms of the revolving credit facility. Even if the Company is unable to successfully negotiate an extension of the changes beyond February 28, 2003, the Company expects that it will be able to maintain compliance with its credit facility covenants through the expiration of the credit facility on June 28, 2003. As discussed in Note 10, the Company is currently discussing the terms of a new credit facility with its agent bank. 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, 2002, the Company was in compliance with all such covenants, $41,405,000 was outstanding under the credit facility, and interest of $224,840 was accrued, using a combination of prime and LIBOR rates. In 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. This note, which bore fixed interest at 8.04% through February 15, 2002 and a floating rate thereafter, was collateralized by these aircraft and was non-recourse to the Company. During 2002, the Company used funds from its revolving credit facility to repay the outstanding bank financing related to both aircraft. 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. The note is collateralized by this aircraft and is non-recourse to the Company. 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, 2002 was $2,585,450 and interest of $7,920 was accrued. As of December 31, 2002, the Company was in compliance with all covenants of the loan agreement pertaining to the financing of this aircraft. 7. Income Taxes The items comprising income tax expense are as follows: For the Years Ended December 31, 2002 2001 ------------------------------------- Current tax provision/(benefit): Federal $ (17,020) $ 22,780 State 11,380 5,240 Foreign 72,120 158,320 --------------- --------------- Current tax provision 66,480 186,340 ---------------- --------------- Deferred tax provision/(benefit) Federal 435,600 670,570 State (28,860) (31,180) ---------------- --------------- Deferred tax provision 406,740 639,390 ---------------- --------------- Total provision for income taxes $ 473,220 $ 825,730 ================ =============== 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, 2002 2001 ------------------------------------- Income tax expense at statutory federal income tax rate $ 504,120 $ 858,390 State taxes net of federal benefit 10,520 19,250 Tax refunds (19,560) (15,470) Tax rate differences (21,860) (36,440) ---------------- --------------- Total income tax expense $ 473,220 $ 825,730 ================ =============== Temporary differences and carryforwards that gave rise to a significant portion of deferred tax assets and liabilities as of December 31, 2002 are as follows: Deferred tax assets: Maintenance reserves $ 1,105,740 Foreign tax credit carryover 118,640 Deferred maintenance 119,240 Net operating loss carryover 182,260 Prepaid rent and other 65,020 ---------------- Deferred tax assets 1,590,900 Deferred tax liabilities: Depreciation on aircraft and aircraft engines (5,078,800) Other (274,940) ---------------- Net deferred tax liabilities $ (3,762,840) ================ 7. Income Taxes (continued) 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. The excess foreign tax credits may be carried back to the two preceding tax years and then forward to the five succeeding tax years, expiring at the end of 2006. Net operating losses may be carried back to the five preceding tax years and then forward to the twenty succeeding tax years, expiring at the end of 2022. 8. Commitments and Contingencies In connection with the re-lease of two of the Company's aircraft, the Company has guaranteed, up to a maximum of $150,000, the lessee's payments under a contract with a third party vendor for spare parts. The term of the guarantee extends for 90 days after the expiration or termination of the leases in November 2005. The lessee has agreed to reimburse the Company for any payments made under the guarantee, upon demand by the Company. If the lessee does not make such reimbursements or does not comply with any provisions of the parts agreement, the Company may declare an event of default under the leases. 9. 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"), which is an integrated aircraft management, marketing and financing business and a subsidiary of JetFleet Holding Corp. ("JHC"). Certain officers of the Company are also officers of JHC and JMC and hold significant ownership positions in both JHC and the Company. Under the management 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. The Company recorded management fees of $1,725,330 and $1,758,050 during the years ended December 31, 2002 and 2001, respectively. During the year ended December 31, 2002, the Company paid a total of $325,500 in acquisition fees, which are included in the capitalized cost of the aircraft. Because the Company did not acquire any aircraft during 2001, no acquisition fees were paid to JMC. No remarketing fees were accrued to JMC during 2002. During 2001, the Company accrued a total of $13,500 in remarketing fees to JMC. 10. Subsequent Events In February 2003, the Company and one of its customers signed a term sheet for the lease of one of the Company's Fokker 50 aircraft. Delivery of the aircraft is anticipated to occur in the second quarter of 2003. In February 2003, the Company and the lessee for two of the Company's deHavilland DHC-8 aircraft, the leases for which expire in April 2003, signed lease amendments providing for a two-year extension of both leases and for the deferral of certain amounts due under the leases. 10. Subsequent Events (continued) In March 2003, the Company and a new customer signed a term sheet for the lease of the Company's Fairchild Metro III aircraft which was returned by the original lessee in October 2002. Delivery of the aircraft is anticipated to occur in the second quarter of 2003. In March 2003, a lease amendment was signed for the extension of the term for one of the Company's Fokker 50 aircraft from February 28, 2003 to March 31, 2003. In March 2002, the Company's banks agreed to changes to certain terms of the Company's credit facility through December 31, 2002. In early 2003, those changes were extended through February 28, 2003. In order to maintain the flexibility afforded by such changes, the Company anticipates approaching its banks regarding a further extension of the revised terms of the revolving credit facility. If, however, the Company is unable to successfully negotiate an extension of the changes beyond February 28, 2003, the Company expects that it will be able to maintain compliance with its credit facility covenants through the expiration of the credit facility on June 28, 2003. The Company is currently discussing the terms of a new credit facility with its agent bank and expects to be able to obtain such facility at reasonable market terms. If the company is not able to renew the credit facility for the full outstanding amount, and cannot find suitable alternative financing, it may be required to make a principal repayment of the outstanding balance, or that portion of the balance for which replacement financing is not obtained. The Company does not have sufficient cash reserves to make a repayment of a significant portion of the outstanding credit facility indebtedness and would be forced to sell assets in order to raise funds to make such repayment. Such sales would likely not be on favorable terms to the Company as the full market value of the assets sold may not be realized by the Company in order to expedite the consummation of the sales. Even if the Company is able to successfully sell a portion of its assets and use the proceeds to repay the credit line facility, if a renewed or replacement facility is not obtained, the Company's future ability to acquire assets would be significantly impaired, as the credit facility is the Company's primary means of financing acquisitions and no other sources of acquisition financing are immediately available. Thus the renewal or replacement of the Company's credit line facility in an amount equal or greater than the current $50 million limit will be critical to the Company's asset and revenue growth. PRICE WATERHOUSE COOPERS Price Waterhouse Coopers LLP 333 Market St. San Francisco, CA 94105 Telephone (415) 498 5000 Facsimile (415) 498 5100 Report of Independent Accountants To the Stockholders of AeroCentury Corp.: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, stockholders' equity and cash flows present fairly, in all material respects, the financial position of AeroCentury Corp. and subsidiaries at December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. 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 audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The consolidated financial statements of AeroCentury Corp. and subsidiaries as of December 31, 2001, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended, were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated January 18, 2002, (except with respect to the matters discussed in Note 9, as to which the date is March 7, 2002). PricewaterhouseCoopers LLP /s/PricewaterhouseCoopers LLP San Francisco, California January 17, 2003 (except with respect to the matters discussed in Note 10, as to which the date is March 12, 2003) THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of AeroCentury Corp.: We have audited the accompanying consolidated balance sheet of AeroCentury Corp. (a Delaware corporation) and its subsidiaries as of December 31, 2001 and the related consolidated statements of income, stockholders' investment and cash flows for the years ended December 31, 2001 and 2000. 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 21, 2001 and the results of their operations and their cash flows for the years ended December 31, 2001 and 2000 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP San Francisco, California, January 18, 2002 (except with respect to the matters discussed in Note 9, as to which the date is March 7, 2002) [INSIDE BACK COVER] 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 Managing Director, Fixed Income U.S. Bancorp Piper Jaffray Transfer Agent and Registrar Continental Stock Transfer and Trust Company 17 Battery Place, 8th Floor New York, NY 10004 Legal Counsel Morrison & Foerster LLP 755 Page Mill Road Palo Alto, CA 94304-1018 Independent Public Accountants PricewaterhouseCoopers LLP 333 Market Street 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 24, 2003 at 5:30 P.M. Form 10-K The Company's Annual Report on Form 10-K for 2002 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. [BACK COVER] AeroCentury Corp. 1440 Chapin Ave. Suite 310 Burlingame, CA 94010 650-340-1888 Fax: 650-696-3929 www.aerocentury.com -----END PRIVACY-ENHANCED MESSAGE-----