-----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, R8XO4rUih7d0fvUy6tdH+Gzh6zwoW850TWUq5USUYYRb7ysmMHbvM1Db+VtelTll k8zX8cXv0CUUWVBv1yk95g== 0001036848-04-000006.txt : 20040329 0001036848-04-000006.hdr.sgml : 20040329 20040329155040 ACCESSION NUMBER: 0001036848-04-000006 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040329 FILED AS OF DATE: 20040329 EFFECTIVENESS DATE: 20040329 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: 04695944 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 proxystmt2004.txt 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 2004 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 29, 2004 TO OUR STOCKHOLDERS: You are cordially invited to attend the 2004 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 29, 2004, 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 auditors for the Company for the fiscal year ending December 31, 2004; and 3. To act upon such other business as may properly come before the meeting or any adjournment or postponement thereof. These matters are more fully described in the Proxy Statement accompanying this Notice. The Board of Directors has fixed the close of business on March 1, 2004, as the record date for determining those stockholders who will be entitled to vote at the 2004 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 2004 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, Neal D. Crispin CHAIRMAN OF THE BOARD March 26, 2004 Burlingame, California PROXY STATEMENT FOR 2004 ANNUAL MEETING OF STOCKHOLDERS OF AEROCENTURY CORP. TO BE HELD ON APRIL 29, 2004 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 2004 Annual Meeting of Stockholders (the "2004 Annual Meeting" or the "Annual Meeting"), which will be held at 5:30 p.m. on April 29, 2004, 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 2004 Annual Meeting of Stockholders. This Proxy Statement and the proxy card were first mailed to stockholders on or about March 27, 2004. The Company's 2003 Annual Report is being mailed to stockholders concurrently with this Proxy Statement. The 2003 Annual Report is not to be regarded as proxy soliciting material or as a communication by means of which any solicitation of proxies is to be made. VOTING RIGHTS AND SOLICITATION The close of business on March 1, 2004, was the record date for stockholders entitled to notice of and to vote at the 2004 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 2004 Annual Meeting, 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 & Trust 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 2004 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 Auditors." 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. HOUSEHOLDING OF ANNUAL MEETING MATERIALS Some brokers and other nominee record holders may be participating in the practice of "householding" proxy statements and annual reports. This means that only one copy of the proxy statement and annual report may have been sent to multiple stockholders in a stockholder's household. The Company will promptly deliver a separate copy of either document to any stockholder who contacts the Company's Investor Relations Department at (650) 340-1888 requesting such copies. If a stockholder is receiving multiple copies of the proxy statement and annual report at the stockholder's household and would like to receive a single copy of the proxy statement and annual report for a stockholder's household in the future, stockholders should contact their broker, other nominee record holder, or the Company's investor relations department to request mailing of a single copy of the proxy statement and annual report. PROPOSAL 1 ELECTION OF DIRECTORS Two of the Company's six directors will be elected at the 2004 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 2004 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 2007 Annual Meeting of Stockholders or until the director's successor has been elected. Nominees To Board Of Directors Mr. Neal D. Crispin, age 58. 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 Chairman of CMA Consolidated, Inc. ("CMA") and JetFleet Management Corp., ("JMC"), the management company for AeroCentury Corp. 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 49. Mr. Wallach is a Managing Director, Fixed Income Institutional Sales, at Piper Jaffray & Co. Prior to that, he served as Vice President, Finance of C-S Aviation from 1998 to 2000. Mr. Wallach 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 BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED ABOVE. PROPOSAL 2 RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS The firm of PricewaterhouseCoopers LLP served as independent auditors for the Company for the fiscal year ended December 31, 2003. 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 auditors to audit the accounts and records of the Company for the fiscal year ending December 31, 2004, 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 AUDITORS. INFORMATION REGARDING AUDITORS Fees Paid to Auditors. Audit and Audit-Related Fees. The aggregate fees billed by the Company's auditors, PricewaterhouseCoopers LLP (the "Auditors"), for professional services rendered for the audits of the Company's financial statements for the fiscal years ended December 31, 2002 and 2003 and for the reviews of the financial statements included in the Company's Forms 10-QSB during the 2002 and 2003 fiscal years was $61,000 and $90,000, respectively. No fees were paid to the Auditors for audit-related services during the fiscal years ended December 31, 2002 and 2003. Tax Fees. In connection with their review of the Company's tax returns, the Company paid the Auditors $7,000 and $14,020, in the fiscal years ended December 31, 2002 and 2003, respectively. All Other Fees. No other fees were paid to the Auditors in the fiscal years ended December 31, 2002 and 2003. Audit Committee Approval. The retainer agreements between the Company and the Auditors containing the terms and conditions and estimated fees to be paid to the Auditors for 2003 for audit and tax return preparation services were pre-approved by the Audit Committee at the beginning of the 2003 fiscal year. The Audit Committee's policy is to pre-approve all audit and non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The Audit Committee has delegated pre-approval authority to its Chairperson when expedition of services is necessary. The independent auditors and management are required to periodically report to the full Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. None of the services rendered by the Auditors were rendered pursuant to the de minimis exception established by the Securities and Exchange Commission. 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 Standards, 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, 2003, for filing with the Securities and Exchange Commission. The Audit Committee held five meetings during the fiscal year ended December 31, 2003. 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 2004 Annual Stockholder Meeting: Neal D. Crispin and Evan M. Wallach. They have been nominated for election to the Board of Directors. For their biographical information, see "PROPOSAL 1: ELECTION OF DIRECTORS," above. The following directors have terms expiring at the Company's 2005 Annual Stockholder Meeting: Mr. Maurice J. Averay, age 74. Mr. Averay was a self-employed aviation consultant from 1996 until his retirement in 2003 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 57. 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 Chief Financial Officer, Treasurer, Senior Vice President-Finance and Secretary and has held these same positions with JMC 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. The following directors have terms expiring at the Company's 2006 Annual Stockholder Meeting: Mr. Marc J. Anderson, age 67. Mr. Anderson has been a member of the Company's Board of Directors since its inception in 1997. Mr. Anderson is the Company's Chief Operating Officer and Senior Vice President. He holds the same officer positions with JMC. Prior to joining JMC in 1994, Mr. Anderson was an aviation consultant (1992 to 1994) and prior to that spent seven years (1985 to 1992) as Senior Vice President-Marketing for PLM International ("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 70. 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 & Co., Certified Public Accountants, where he retired as a partner in 1986. Mr. Orr received his Bachelor's Degree in Business Administration, with distinction (Accounting major), from the University of Minnesota. He is a member of the American Institute of Certified Public Accountants, the California Society of Certified Public Accountants, and a former member of the California State Board of Accountancy. Board Meetings And Committees The Board of Directors of the Company held a total of five meetings during the fiscal year ended December 31, 2003 (the "2003 fiscal year"). Each director attended every meeting of the Board and every meeting held by all committees of the Board on which the director served. The Company has an Audit Committee and an Executive Committee of the Board of Directors. The Audit Committee operates under a Charter approved by the Board of Directors. The Charter is on file with the Securities and Exchange Commission as an appendix to the Company's Proxy Statement for the 2003 Annual Meeting. The Audit Committee meets with the Company's financial management and its independent auditors 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. The Board has determined that Mr. Orr and Mr. Wallach are independent within the meaning of independence as set forth in the rules of the American Stock Exchange Company Guide. The Board of Directors has determined that at least one member of the Audit Committee is a "financial expert" within the meaning of Item 401(e)(1) of Regulation S-B of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Mr. Orr is both a "financial expert" within the meaning of such regulation and is also "independent" within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act. Mr. Orr is a self-employed accounting consultant and former partner of the accounting firms Bregante + Co. and Arthur Young & Company. In the course of his career, Mr. Orr acquired (i) an understanding of generally accepted accounting principles and financial statements, (ii) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves, (iii) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company's financial statements, (iv) an understanding of internal control over financial reporting, and (v) an understanding of audit committee functions. The Audit Committee held five meetings during the 2003 fiscal year, and has held two meetings in the 2004 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. The Company does not have a formal Nominating Committee. The full Board of Directors reviews potential candidates for the Board of Directors. While the Board of Directors does not have a specific policy for considering nominees recommended by Stockholders, this does mean that a recommendation would not be considered if received from a Stockholder. The Board has not yet considered adopting a policy for considering nominees recommended by Stockholders in addition to those procedures already contained in the Bylaws of the Company. Communication between Stockholders and Directors The Company's Board of Directors currently does not have a formal process for Stockholders to send communications to the Board of Directors and does not believe such procedures are necessary at this time because it believes that informal communications are sufficient to communicate questions, comments and observations that could be useful to the Board. Director Attendance at Annual Meeting It is the policy of the Company and Board of Directors that all directors attend the Annual Meeting of Stockholders and be available for questions from the Stockholders. Two sitting directors nominated for election were in attendance at the 2003 Annual Meeting of Stockholders. It is anticipated that both directors nominated for election at the 2004 Annual Meeting also will be in attendance at that meeting. Board Independence If all of the nominees to the Board of Directors are elected, "independent directors", as that term is used in the American Stock Exchange Company Guide, will constitute 50% of the entire Board of Directors of the Company. 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, Chief Financial Officer, Treasurer, 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 35. Mr. Ginna is responsible for all corporate communications, investor relations and public relations of the Company and JMC. Mr. Ginna joined JMC in 2001 and 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 56. 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. Harold M. Lyons - Vice President, Finance, age 45. Mr. Lyons is responsible for overseeing tax, accounting and financial analysis as well as tax and accounting analysis of leasing transactions. Mr. Lyons is also Senior Vice President of CMA, which he joined in 1992. Before joining CMA in 1992, Mr. Lyons was a Manager in the Tax Department of Coopers & Lybrand, Certified Public Accountants and, before that, Mr. Lyons was a Manager in the Tax Department of Arthur Young & Co., Certified Public Accountants. He received a Bachelor's Degree in Business Administration (specializing in Accounting and Applied Economics) and a Master's Degree in Business Administration (specializing in finance and management science) from the University of California, Berkeley. Mr. Lyons is a Certified Public Accountant, and is a member of the American Institute of Certified Public Accountants (and a member of the Tax Section) and of the California Society of Public Accountants. Mr. John S. Myers, Senior Vice President, age 58. Mr. Myers is responsible for the administration of aircraft leases, marketing agreements and vendor agreements for the Company and JMC. Mr. Myers joined the Company and JMC 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, negotiating, 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 a Bachelor's Degree in Business Administration from Wichita State University. Mr. Glenn Roberts, Vice President, Controller, age 39. Mr. Roberts is responsible for financial accounting and analysis. He has been employed by affiliates of the Company for fourteen years in various capacities of increasing responsibility. Mr. Christopher B. Tigno, General Counsel, age 42. 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 58. 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 Mr. Crispin from JMC in 2003 was $1 in 2003, including bonuses, and is expected to be $1 in 2004. 2003 cash compensation received by Ms. Perazzo from JMC was $90,100, including bonuses, and is expected to be $90,100 in 2004. 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 $225,000 in 2003, and is expected to be $225,000 in 2004. 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 $160,000 in 2003 and is expected to receive $160,000 in 2004, and Glenn Roberts received salary and bonus of $101,000 in 2003, and is expected to receive $101,000 in 2004. Compensation Committee Interlocks And Insider Participation Neal D. Crispin and Toni M. Perazzo are executive officers and directors of both the Company and JMC. Marc J. 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 1, 2004, 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 327,386 21.21% Chairman of the Board, President and Principal Stockholder (3)(4) Toni M. Perazzo 327,386 21.21% Director, Senior Vice President - Finance, Secretary and Principal Stockholder (3)(4)(5) Marc J. Anderson 19,847 1.29% Director, Senior Vice President and Chief Operating Officer (3)(6) Maurice J. Averay, 1,050 * 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 340,758 22.08% 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 1, 2004, 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 291,848 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 10,200 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 10,200 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 2003 and 2002, the Company recognized as expense $1,909,850 and $1,725,330, respectively, of management fees payable to JMC. In connection with aircraft purchases during 2003 and 2002, the Company paid JMC a total of $0 and $325,500, respectively, in acquisition fees, which are included in the capitalized cost of the aircraft. No remarketing fees were accrued to JMC during 2003 or 2002. 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, 2003 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 2005 Annual Meeting of Stockholders ("2005 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 2005 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 January 11, 2005, and February 10, 2005. 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 2005 Annual Meeting must be received by the Company not later than November 27, 2004 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, Neal D. Crispin, President March 26, 2004 Burlingame, California EX-99 2 proxycard.txt PROXY CARD Proxy card back PLEASE MARK, SIGN AND DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS SPECIFIED ON THE REVERSE SIDE. IF NO SPECIFICATION IS MADE, THEN THIS PROXY WILL BE VOTED "FOR" THE NOMINEES LISTED ON THE REVERSE SIDE FOR THE BOARD OF DIRECTORS AND "FOR" PROPOSAL NO. 2 . Please sign exactly as your name appears on the attached label. When shares are held by joint tenants, both should sign. When signing as an attorney, executor, administrator, trustee, or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person. Change of Address (if applicable): SIGNATURE(S) (below) ________________________________________ Title (if any) _______________________ Date_______________ ________________________________________ Title (if any) _______________________ Date_______________ (Second Signature, if held jointly) Proxy card front AeroCentury Corp. This Proxy is Solicited on Behalf of the Board of Directors. 1440 Chapin Avenue, Suite 310, Burlingame, California 94010 The undersigned hereby appoints Marc J. Anderson and Toni M. Perazzo, as Proxies, with full power of substitution, and hereby authorizes them to represent and to vote, as designated below, all of the shares of Common Stock of AeroCentury Corp. held of record by the undersigned on March 1, 2004, at the 2004 Annual Meeting of Stockholders of the Company to be held on April 29, 2004, or at any adjournment or postponement thereof. 1. ELECTION OF DIRECTORS FOR all nominees listed below WITHHOLD AUTHORITY (except as marked to the contrary below) to vote for all nominees listed below (Instruction: To withhold authority to vote for any individual nominee strike a line through the nominee's name in the list below) Neal D. Crispin Evan M. Wallach 2. PROPOSAL TO RATIFY THE APPOINTMENT OF PRICEWATERHOUSE COOPERS LLP as independent auditors for the Company for the fiscal year ending December 31, 2004. 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 EX-99 3 annualreport2003.txt 2003 ANNUAL REPORT [graphics omitted] AeroCentury Corp. Worldwide o Regional Aircraft o Leasing 2003 Annual Report TO OUR STOCKHOLDERS AeroCentury experienced a challenging year in 2003 primarily due to the default of our Haitian lessee in June. The good news is we were able to recover the aircraft before the entire country fell into disarray. The airline industry appeared to be settling down in 2003. Progress was made in dealing with post-9/11 excess capacity. In general, airlines continued to reduce costs and restructure routes. This produced opportunities for several of the regional airlines as majors moved away from less profitable routes which were taken over by the more cost efficient regionals. Despite the Haitian problem, our fleet utilization was 90% for the year. We continue to search for opportunities to enable the Company to grow and achieve profitability. Reaching these goals will be influenced by the following factors: o Regional market - we continue to focus on foreign carriers, primarily in Europe, Asia, and the West Indies. We believe these sectors will have a continued requirement for reliable, low-cost, short-haul aircraft such as those in the Company's portfolio. o Diversification - the portfolio consists of 21 aircraft, comprised of 7 different types, and 26 turboprop engines, on lease to customers in 12 countries worldwide. The risks associated with leasing regional aircraft will always remain. Careful consideration of aircraft type, customer and the customer's market is critical to managing those risks. o Management - maintaining our opportunistic and flexible style would be impossible without the dedication, experience and skill of our team. Our ability to meet the often disparate needs of our customer base remains critical to continued success. o Financing - interest rates remain close to historic lows. Our revolving credit facility is scheduled to mature in August 2004. Another successful renewal of this facility is essential to the Company's ability to thrive in the years ahead. In addition, we are always looking for new funding sources. We will continue to focus on managing our portfolio with the goal of increasing fleet utilization, and we hope to add to the fleet as we service our customer base and judiciously incorporate new customers. We appreciate your patience, interest and support. 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 continuing to search for opportunities to enable it to grow and achieve profitability; the Company continuing to focus on foreign carriers; the Company's belief that several sectors of the worldwide regional market will have a continued requirement for reliable, low-cost, short-haul aircraft such as those in the Company's portfolio; the Company continuing to focus on managing its portfolio with the goal of increasing fleet utilization; (ii) in "Management's Discussion and Analysis," statements regarding the Company's intent 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 belief that it will continue to be in compliance with all covenants of its credit facility; the Company's belief that the Company will have adequate cash flow to meet its on-going operational needs, including required repayments under the credit facility; the Company's expectation regarding increased accounting fees in 2004; (iv) in "Management's Discussion and Analysis - Outlook," statements regarding the Company's anticipation that revenue will decrease unless the Company can complete acquisition of leased assets; the Company's belief that its DHC-7 aircraft will be relatively difficult to remarket; the Company's belief that it will have sufficient cash to fund any required repayments; the Company's expectation that a note from a Brazilian former lessee will be signed in the first half of this year; (v) in "Management's Discussion and Analysis - Factors that May Affect Future Results," statements regarding the Company's belief that it will have sufficient cash funds to make any payment that arises due to the remarketing of assets that are to come off lease in the near term; the Company's anticipated acquisition of primarily used aircraft; the opportunities available in overseas markets; and (vi) in "Notes to Consolidated Financial Statements," statements regarding the Company's expectation regarding acquisition of four Fokker 50 aircraft to one of the Company's existing customers; the Company's expectation regarding the execution of a note from a former Brazilian lessee. 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 or Plan of Operation -- 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; 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; 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 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. MANAGEMENT'S DISCUSSION AND ANALYSIS [GRAPHIC OMITTED] 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 the Company and 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. The Company is engaged in the business of investing 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 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 policies by considering those that involve the most complex or subjective decisions or assessments. The Company identified these policies to be those related to lease rental revenue recognition, depreciation policies, valuation of aircraft and maintenance reserves and accrued costs. a. Use of Estimates In preparing its financial statements, as well as in evaluating future cash flow, the Company makes significant estimates, including the residual values of the aircraft, the useful lives of the aircraft, the amount and timing of cash flow associated with each aircraft that are used to evaluate impairment, if any, accrued maintenance costs in excess of amounts received from lessees, and amounts recorded as bad debt allowances. Actual results will likely vary from estimates. Historically, the Company has realized at least its carrying value on the sale of any asset. However, in 2000, the Company recognized an impairment on two of its assets as a result of third party valuations. With respect to estimated maintenance costs, the Company has found its accruals to be generally accurate, except as follows: (1) a circumstance in 2003 where a defaulted lessee failed to perform substantial maintenance required under the lease and (2) in 2001, the Company accrued an estimate related to compensation to be paid to the lessee of two aircraft, based on the maintenance-related return provisions of the leases. In the latter circumstance, the two aircraft were returned in 2002, at which time the final amount of compensation was determined. The Company reversed approximately $214,000 of its accrual, which represented the amount of the Company's estimate in excess of the final amount. The Company continually evaluates both short and long term maintenance expected to be required for each of its aircraft, including the estimated cost thereof, and compares it to the maintenance reserves established for each aircraft. b. 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. If the Company deems a portion of operating lease revenue as potentially uncollectible, the Company records an allowance for doubtful accounts. c. 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 from the date of acquisition), to an estimated residual value based on appraisal. d. Impairment of Long-lived Assets The Company periodically reviews its portfolio of assets for impairment in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." Such review necessitates estimates of current market values, residual values and component values. The estimates are based on currently available market data and third-party appraisals and are subject to fluctuation from time to time. The Company initiates its review periodically, whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows (without interest charges) that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. Significant management judgment is required in the forecasting of future operating results which are used in the preparation of projected undiscounted cash flows and should different conditions prevail, material write downs may occur. e. 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 each of its aircraft 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 well as the condition of the aircraft upon return or inspection. As a result of such review, if 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. Results of Operations a. Revenues Operating lease revenue was approximately $73,000 higher in 2003 versus 2002, primarily because of lease revenue from aircraft purchased during the second half of 2002 and the re-lease of several aircraft which had been off-lease during a portion of 2002. These increases totaling approximately $1,865,000 more than offset a decrease in operating lease revenue of approximately $1,792,000 resulting from both lower average lease rates and aircraft off-lease during 2003. Other income was approximately $23,000 higher in 2003 versus 2002 because of note payments received from a former lessee on a fully reserved note. b. Expense items Depreciation was approximately $509,000 higher in 2003 versus 2002, as a result of the purchase of two aircraft during the second half of 2002. Management fees, which are calculated on the net book value of the aircraft owned by the Company, were approximately $185,000 higher in 2003 versus 2002 for the same reason, the effect of which was partially offset by depreciation in 2003. Maintenance expense was approximately $1,849,000 higher in 2003 compared to 2002, primarily because three aircraft, which had been returned early by a lessee declared in default of its payment obligations under two of its leases, had not been maintained in accordance with lease provisions. Interest expense was approximately $28,000 lower in 2003 versus 2002 because of lower average interest rates during 2003, the effect of which was partially offset by a higher average principal balance. Bad debt expense was approximately $900,000 in 2003 versus no such expense in 2002. During 2003, the Company recorded bad debt expense of approximately $650,000 for all rent and maintenance reserves owed by a lessee which defaulted on its payment obligations under leases for two aircraft. The Company also expensed $250,000 to establish an allowance related to amounts due from another lessee for rent and maintenance necessary to meet the return conditions under its lease. Professional fees and general and administrative expenses were approximately $200,000 higher in 2003, versus 2002, primarily due to higher legal expense in connection with aircraft re-leased in late 2002 and in 2003, as well as higher accounting expense. The Company amortizes such legal fees over the re-lease term for each aircraft. Legal expense was also higher in 2003 due to fees which would have been amortized over the remaining lease terms of three aircraft, but which were written off in connection with the early return of the aircraft by the lessee, which had been declared in default. Insurance expense was approximately $100,000 higher in 2003 versus 2002 primarily because of higher premium rates for both aircraft and directors and officers insurance. The Company's effective tax rates in 2003 and 2002 were approximately 37% and 32%, respectively. The change in rate was primarily a result of the recognition of tax benefits relating to different state tax rates than had been accrued in prior years. Since the Company incurred a loss for the year ended December 31, 2003, the recognition of the tax benefits related to reduced state tax rates increased the Company's tax benefit from the loss and its effective tax rate. In contrast, the Company had income for the year ended December 31, 2002, so that the recognition of tax benefits related to the reduced state tax rates decreased the Company's effective tax rate. Liquidity and Capital Resources The Company is currently financing its assets primarily through credit facility borrowings, special purpose financing and excess cash flow. a. Credit facility The Company's credit facility, originally set to expire 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. 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 June 2003, the Company reached an agreement with its lenders to accommodate the departure of one of the participating lenders that had decided it no longer wished to participate in aviation finance, and to extend the maturity date of its credit facility from June 28, 2003 until August 28, 2003. The Company made a repayment of $800,000 to reduce total outstanding indebtedness to $39,905,000, which was allocated between the two remaining participants. The credit limit was reduced from $50 million to $40 million for the remaining term. At the same time, the Company reached agreement with its lenders to amend its credit agreement to make certain revisions to the financial covenants relating to net worth and debt coverage ratios and age of aircraft collateral. The amendment also provided for a fixed interest rate margin of 275 basis points. In August 2003, the Company reached agreement with its lenders to further extend the maturity date of its credit facility from August 28, 2003 to August 31, 2004 and to make additional revisions relating to a requirement for positive quarterly earnings, bank approval of new leases and a net worth ratio. In addition, the facility was changed to bear interest, at the Company's option, at either (i) prime plus a margin of 50 to 150 basis points or (ii) LIBOR plus a margin of 275 to 375 basis points. Both the prime and LIBOR margins are determined by certain financial ratios. In January 2004, a new bank was added to the Company's credit facility participant group. The new participant has agreed to finance $10 million and, therefore, the Company's credit facility limit has been returned to $50 million, of which the Company has available approximately $12 million, but which is subject to collateral restrictions. In accordance with the agreement for the credit facility, the Company must maintain compliance with certain financial covenants. As a result of the substantial net loss incurred during the second quarter of 2003, the Company was out of compliance with a financial ratio covenant on June 30, 2003. The Company obtained a waiver from its banks regarding that covenant. As of December 31, 2003, the Company was in compliance with all covenants, $39,155,000 was outstanding under the credit facility, and interest of $153,830 was accrued. Based on its current projections, the Company believes it will continue to be in compliance with all covenants of its credit facility. See "Factors That May Affect Future Results - 'Credit Facility Obligations' and 'Risks of Debt Financing'," below. The Company's interest expense in connection with the credit facility generally moves up or down with the prevailing interest rates, as the Company has not entered into any interest rate hedge transactions for the credit facility indebtedness. 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 normally 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. b. Special purpose financing In November 1999, AeroCentury LLC acquired two aircraft using cash and bank financing separate from its credit facility. During 2002, the Company used funds from its credit facility to repay the outstanding bank financing related to both aircraft. A similar financing for the acquisition of a deHavilland DHC-8 aircraft using a wholly owned subsidiary LLC, AeroCentury Investments II LLC, was executed in September 2000. This financing involved a note in the amount of $3,575,000, due April 18, 2003, which bore fixed interest at 8.36% through maturity. The note was collateralized by the deHavilland DHC-8 aircraft and was non-recourse to the Company. Payments due under the note consisted of monthly principal and interest and a balloon principal payment due on the maturity date. The Company and the lessee agreed to a short-term extension of the lease through November 15, 2003, with periodic options to terminate it. At the same time, the lender agreed to extend the financing through March 19, 2006, pending the extension of the lease, with borrower prepayment options at June 30, 2003 and November 30, 2003. During the third quarter of 2003, the Company and the lessee agreed to extend the lease through April 15, 2006, and the lender extended the financing. During the term of the extension, payments due under the note consist of monthly principal and interest at the rate of one-month LIBOR plus 3%, with a balloon payment at maturity. The financing also provides for a six month remarketing period at the expiration or earlier termination of the lease. Payments due on the financing are reduced during this remarketing period and the balloon principal payment is due at the end of the six month period. The balance of the note payable at December 31, 2003 was $2,180,600 and interest of $3,770 was accrued. As of December 31, 2003, the Company was in compliance with all covenants of this loan agreement. The availability of special purpose financing in the future will depend on several factors including (1) the availability of funds to be used for the equity portion of the financing, (2) the type of asset being financed and (3) the creditworthiness of the underlying lessee. The availability of funds for the equity portion of the financing will be dependent on the Company's cash flow, as discussed in "Cash Flow," below. c. Cash flow The Company's primary source of revenue is lease rentals 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 customer will not be renewing its lease, the Company immediately initiates marketing efforts to locate a potential new lessee or purchaser for the aircraft. The goal of this procedure is to reduce the time that an asset will be "off-lease." The Company's aircraft are subject to leases with varying expiration dates through October 2007. Management believes that the Company will have adequate cash flow to meet its on-going operational needs, including required repayments under its credit facility, based upon (i) its estimates of future revenues and expenditures and (ii) the expectation that the credit facility will be renewed on or before expiration. The Company's expectations concerning such cash flows are based on existing lease terms and rents, as well as numerous estimates, including (1) rents on assets to be re-leased, (2) sale proceeds of certain assets currently under lease, (3) the cost and anticipated timing of maintenance to be performed and (4) acquisition of additional aircraft and the lease thereof at favorable lease terms. While the Company believes that the assumptions it has made in forecasting its cash flow are reasonable in light of experience, actual results could deviate from such assumptions. Among the more significant external factors outside the Company's control that could have an impact on the accuracy of cash flow assumptions are (i) lessee non-performance or non-compliance with lease obligations (which may affect credit line collateral limitations as well as revenue and expenses) and (ii) an unexpected deterioration of demand for aircraft equipment beyond what the Company has assumed. (i) Operating activities The Company's cash flow from operations for the year ended December 31, 2003 versus 2002 decreased by approximately $103,000. The change in cash flow is a result of changes in several cash flow items during the year, including principally the following: Lease rents, maintenance reserves and security deposits Lease rental collections were approximately $780,000 higher in 2003 than in 2002, reflecting both increased lease revenue resulting from aircraft purchased during 2002 and the re-lease of several aircraft that had been off lease, offset by lower average lease rates and different aircraft off lease in 2003. Cash flow also reflects the collection of amounts outstanding at the end of 2002, as reflected in the lower receivables at the end of 2003 as compared to 2002. It is expected that rental rates on aircraft to be re-leased will continue to decline, so that, absent additional acquisitions by the Company, lease rentals can be expected to decline over the long term. Additionally, payments received from lessees for maintenance reserves increased by approximately $1,780,000 in 2003 versus 2002, reflecting principally an increase in aircraft that are owned and on lease by the Company. These increased cash flows were offset by a reduction in security deposits held by the Company, resulting in a reduced cash flow of approximately $1,360,000, as a result of the refund of security deposits at lease end or the application of deposits to amounts owed by lessees in 2003. Expenditures for maintenance Expenditures for maintenance were approximately $70,000 more in 2003 than in 2002. A substantial portion of the costs accrued during 2003 in connection with the return of three aircraft from a lessee declared in default of its obligations are to be paid during 2004; as such, it is likely that expenditures for maintenance will be at least as high in 2004 as in 2003. Expenditures for interest Expenditures for interest expense increased by approximately $320,000 for 2003 versus 2002. Although interest rates declined generally from 2002 to 2003, the increased payment was a result of the Company having higher accrued interest at the end of 2002 versus 2003, which amount was paid during 2003. Interest expenditures in future periods will be a product of prevailing interest rates and the outstanding principal balance on financings, which may be influenced by future acquisitions and/or required repayments resulting from changes in the collateral base. Management fees Expenditures for management fees, which are calculated on the net book value of the aircraft owned by the Company, were approximately $210,000 higher in 2003 than in 2002, as a result of additional aircraft purchased in 2002, which effect was partially offset by depreciation in 2003. Professional fees and general and administrative Expenditures for professional fees were approximately $200,000 higher during 2003 as compared to 2002, principally as a result of higher legal expense related to aircraft re-leased in late 2002 and 2003, as well as higher accounting expense. It is expected that accounting fees will be higher in 2004 than in 2003. Income taxes Current income tax payments increased by approximately $120,000, as a result of increased taxable income, largely resulting from additional lease revenue during 2003 as compared to 2002 as a result of the acquisition of additional aircraft during 2002 and of off-lease aircraft being re-leased. This was partially offset by reduced lease revenue from aircraft coming off lease and from increased depreciation deductions on aircraft acquired in 2002, as well as related expenses (such as the management fee). (ii) Investing activities The decrease in cash flow used for investing activities from 2002 to 2003 was primarily because there were no aircraft acquisitions during 2003 compared to two acquisitions in 2002. (iii) Financing activities The decrease in cash flow provided by financing activities from year to year was primarily because, although the Company repaid a portion of its notes payable in both years, the Company did not borrow on its revolving credit facility during 2003 as it did in 2002 for several acquisitions and refinancings. Outlook The default by a lessee of three aircraft combined with the weak credit position of a Brazilian lessee significantly affected the Company's results for 2003. The Company continues to monitor the financial condition of its lessees in order to minimize the likelihood of similar events with other lessees. In particular, the Company is currently monitoring both the financial position as well as the operations of a startup airline which leases two of its aircraft. In addition, if the aircraft industry weakens further, this may affect the performance of lessees that currently appear creditworthy. See "Factors that May Affect Future Results - General Economic Conditions," below. The lease rates for the Company's aircraft continue to be depressed due to the weakened financial condition of the airline industry, and the Company does not foresee a recovery in lease rates in the short term. Therefore, as older leases expire and are replaced by renewals or re-leases to new customers at current market rates, it is likely that average lease revenues will decline further. In the near term, the Company anticipates that revenue will decrease unless the Company can complete acquisitions of leased assets. 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 or 2003, any future adjustments, if necessary, would negatively affect the Company's financial results and the collateral available for the Company's 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 any off-lease aircraft, may result in changes to estimated maintenance expense, further reducing earnings. Maintenance on one of the three aircraft which were returned early by a defaulted lessee was completed and the aircraft was delivered to a new lessee in the first quarter of 2004. Maintenance on the other two assets, both of which are DHC-7 aircraft, has begun and is expected to be complete in the first and second quarters of 2004. The Company believes that the aircraft, once ready, will be relatively difficult to remarket based on prior experience with this type of aircraft. Therefore, the Company anticipates that a substantial amount of time may pass before these DHC-7 aircraft return to revenue-generating status. See "Factors that May Affect Future Results - Remarketing of Repossessed Dash 7 Aircraft," below. As a result of depreciation and collateral restrictions of aircraft leases set to expire in 2004, the Company may be required to make principal repayments under its credit facility. A focus of the Company, therefore, will be on re-leasing aircraft that come off lease. Management believes that the Company will have sufficient cash to fund any required repayments. The former Brazilian lessee of a Fokker 50 aircraft has agreed to deliver a note, with a principal amount equal to the rent and maintenance in excess of the security deposit held by the Company. The required maintenance has been performed and the Company has determined that the amount of the note will be approximately $600,000. The Company has recorded a $250,000 allowance against the estimated amount receivable and believes this allowance is adequate to cover any shortfall in payment under the note. The Company expects that the note will be signed in the first half of 2004. Factors that May Affect Future Results Term of Credit Facility. As discussed in "Outlook" above, the term of the credit facility was extended for one year, until August 31, 2004. The Company's longer term viability will depend upon its ability to continue renewing the revolving credit facility at its expiration with the existing or replacement lenders, or to refinance the revolving credit facility using equity or alternative debt financing. There is no assurance that the Company will be able to achieve either alternative prior to the currently scheduled expiration of the credit line on August 31, 2004. 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. Remarketing of Repossessed Dash 7 Aircraft. In 2003, the Company repossessed two deHavilland DHC-7 aircraft from a Haitian lessee. These two aircraft are special purpose aircraft with short take-off and landing abilities, which make them attractive to specific niche operators. Because they have four engines, however, they are relatively more expensive to operate than two- engine 50-passenger turboprop aircraft and, therefore, unattractive to operators who do not require the aircraft's special characteristics. Thus, it has been the Company's experience that the remarketing period for DHC-7 aircraft may be significantly longer than for other similar turboprop aircraft. Consequently, a significant amount of time may pass before the DHC-7 aircraft begin to generate cash flow and contribute to earnings for the Company either through a re-lease or sale of the aircraft. Credit Facility Obligations. The Company is obligated to make repayment of principal under the credit facility in order to maintain certain debt ratios with respect to its assets in the collateral pool. Assets that come off lease and remain off-lease for a period of time are removed from the collateral pool. The Company believes it will have sufficient cash funds to make any payment that arises due to the remarketing of assets that are to come off lease in the near term. The Company's belief is 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 the Company's assumptions will turn out to be correct. If the assumptions do not prove to be true (for example, if an asset in the collateral base unexpectedly goes off-lease for an extended period of time) 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 covenants or face default on its credit facility. Risks of Debt Financing. The Company's use of acquisition financing under its 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 credit facility, the loans are secured by the Company's existing assets as well as the assets acquired with each financing. In addition to payment obligations, the credit facility also requires the Company to comply with certain financial covenants, including a requirement of positive quarterly earnings, interest coverage and net worth ratios. Any default under the credit facility, if not waived by the lenders, could result in foreclosure upon not only the asset acquired using such financing, but also the existing assets of the Company securing the loan. 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 a reduction in airline passenger loads caused by Severe Acute Respiratory Syndrome ("SARS"). As a result, there continues to be an overall severe reduction in air travel and less demand for aircraft capacity by the major air carriers. The duration of the downturn is uncertain. The Company's lessees and targeted potential lessees have been primarily outside the U.S. If these 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 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 and increased costs and reduced operations by air carriers due to new security directives, depending on their scope and duration, could have 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 and a corresponding decrease in market lease rental rates. 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 write-down of the value on the Company's book is appropriate. Furthermore, as older leases expire and are replaced by lease renewals or re-leases at current depressed rates, the lease revenue of the Company on its existing portfolio is likely to decline, with the magnitude of the decline dependent on the length of the downturn and the depth of the decline in market rents. 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. However, if interest rates rise, and lease rates do not increase at the same time, the Company would experience lower net revenues. If the interest rate increase were great enough, the Company 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. The 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 lessen. This could result in lower lease rates and values for the Company's existing turboprop aircraft. Lessee Credit Risk. If a customer defaults upon its lease obligations, 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, Section 1110 of the Bankruptcy Code would automatically prevent the Company from exercising any remedies for a period of 60 days. After the 60-day period has passed, the lessee must agree to perform the obligations and cure any defaults, or the Company will 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. Risks Related to Regional Air Carriers. Because the Company has concentrated its existing leases and intends to concentrate on future leases to regional air carriers, it is subject to certain risks. 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. 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 enhancements, if it deems them necessary. There is no assurance, however, that such enhancements will be available or that if obtained they will fully protect the Company from losses resulting from a lessee default or bankruptcy. Also, 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. Reliance on JMC. All management of the Company is performed by JMC under a management agreement which is in the 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 has ultimate control and supervisory responsibility over all aspects of the Company and owes fiduciary duties to the Company and its stockholders. 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. The JMC management agreement may be terminated if JMC defaults on its obligations to the Company. However, the agreement provides for liquidated damages in the event of its wrongful termination 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 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. JMC has acted as 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. In the first quarter of 2002, AeroCentury IV defaulted on certain obligations to noteholders. In June 2002, the indenture trustee for AeroCentury IV's noteholders repossessed AeroCentury IV's assets and took over management of AeroCentury IV's remaining assets. JetFleet III anticipates that it will default on its Bond obligation of $11,076,350 on the April 30, 2004 maturity date. JetFleet III has disclosed that it is currently seeking purchasers for its aircraft, and anticipates that the indenture trustee for JetFleet III bondholders will repossess JetFleet III's unsold assets immediately after the maturity date. 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 leases for such equipment expire, the Company's business, financial condition, cash flow, ability to service debt and results of operations could be adversely affected. Furthermore, during the ownership of an asset, an asset impairment charge against the Company's earnings may result from the occurrence of unexpected adverse changes that impact the Company's estimates of expected cash flows generated from such asset. The Company periodically reviews long-term assets for impairments, in particular, when events or changes in circumstances indicate the carrying value of an asset may not be recoverable. An impairment loss is recognized when the carrying amount of an asset is not recoverable and exceeds its fair value. The Company may be required to recognize asset impairment charges in the future as a result of the continued weak economic environment, challenging market conditions in the airline industry or events related to particular lessees, assets or asset types. 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 or repossession 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 do 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 make it more difficult for the Company to recover an aircraft in the event of a default by a foreign lessee. 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 that 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. However, the Company 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 that JMC's reputation 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. 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 the Company's aircraft assets. It is, however, not clear to what extent such statutory protection would be available to the Company, and the United States Aviation 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. Possible Volatility of Stock Price. The market price of the Company's common stock could be subject to fluctuations in response to the Company's operating results, 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 Company's shares. Consequently, a single or small number of trades could result in a market fluctuation not related to any business or financial development concerning the Company. CONSOLIDATED BALANCE SHEET
December 31, 2003 - -------------------------------------------------------------------------------------------------------------- ASSETS Assets: Cash and cash equivalents $ 9,448,630 Accounts receivable, net of allowance for doubtful accounts of $250,000 1,359,700 Aircraft and aircraft engines on operating leases, net of accumulated depreciation of $21,631,290 62,151,420 Prepaid expenses and other 699,460 ---------------- Total assets $ 73,659,210 ================ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses $ 484,390 Notes payable and accrued interest 41,493,200 Maintenance reserves and accrued costs 8,736,050 Security deposits 1,431,550 Prepaid rent 198,760 Deferred taxes 2,784,450 ---------------- Total liabilities 55,128,400 ---------------- 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 5,212,070 ---------------- 19,034,880 Treasury stock at cost, 63,300 shares (504,070) ---------------- Total stockholders' equity 18,530,810 ---------------- Total liabilities and stockholders' equity $ 73,659,210 ================ The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2003 2002 - ------------------------------------------------------------------------------------------------------------------- REVENUES: Operating lease revenue $ 8,764,040 $ 8,691,440 Other income 145,470 122,590 --------------- ---------------- 8,909,510 8,814,030 --------------- ---------------- EXPENSES: Depreciation 3,360,600 2,851,860 Maintenance 2,091,200 242,060 Interest 1,940,920 1,969,160 Management fees 1,909,850 1,725,330 Bad debt expense 899,910 - Professional fees and general and administrative 572,750 372,660 Insurance 269,950 170,250 --------------- ---------------- 11,045,180 7,331,320 --------------- ---------------- (Loss)/income before taxes (2,135,670) 1,482,710 Tax (benefit)/provision (795,370) 473,220 --------------- ---------------- Net (loss)/income $ (1,340,300) $ 1,009,490 =============== ================ Weighted average common shares outstanding 1,543,257 1,543,257 =============== ================ Basic (loss)/earnings per share $ (0.87) $ 0.65 =============== ================ The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Paid-in Retained Treasury Stock Capital Earnings Stock Total - -------------------------------------------------------------------------------------------------------------- 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 Net loss - - (1,340,300) - (1,340,300) ------------- -------------- ------------- ------------- ------------- Balance, December 31, 2003 $ 1,610 $ 13,821,200 $ 5,212,070 $ (504,070) $ 18,530,810 ============= ============== ============= ============= ============= The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2003 2002 - ------------------------------------------------------------------------------------------------------------------- Operating activities: Net (loss)/income $ (1,340,300) $ 1,009,490 Adjustments to reconcile net (loss)/income to net cash provided by operating activities: Depreciation 3,360,600 2,851,860 Deferred taxes (978,390) 406,740 Change in operating assets and liabilities: Accounts receivable 440,940 (1,204,770) Prepaid expenses and other (216,930) 168,730 Accounts payable and accrued expenses (45,260) (1,112,480) Accrued interest on notes payable (75,160) 211,740 Maintenance reserves and accrued costs 2,964,560 562,350 Security deposits (822,900) 536,680 Prepaid rent 12,730 (27,160) --------------- ---------------- Net cash provided by operating activities 3,299,890 3,403,180 Investing activities: Payments received on note receivable 17,600 50,970 Purchase of aircraft and aircraft engines (10,010) (11,826,520) --------------- ---------------- Net cash provided/(used) by investing activities 7,590 (11,775,550) Financing activities: Issuance of notes payable - 16,480,000 Repayment of notes payable (2,654,850) (8,978,650) --------------- ---------------- Net cash (used)/provided by financing activities (2,654,850) 7,501,350 Net increase/(decrease) in cash and cash equivalents 652,630 (871,020) Cash and cash equivalents, beginning of period 8,796,000 9,667,020 --------------- ---------------- Cash and cash equivalents, end of period $ 9,448,630 $ 8,796,000 =============== ================ During the years ended December 31, 2003 and 2002, the Company paid interest totaling $1,969,950 and $1,662,070, respectively, and income taxes totaling $181,530 and $10,000, 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. 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. Because the Company's leases do not restrict the Company's use of such amounts, cash previously reported as deposits, representing cash balances held related to maintenance reserves and security deposits, has been reclassified to free cash. The Company records a matching liability for all such amounts. At December 31, 2003, the Company held security deposits of $1,431,550, refundable maintenance reserves received from lessees of $387,630 and non-refundable maintenance reserves of $6,137,680. 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. 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. 1. Organization and Summary of Significant Accounting Policies (continued) (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 from the date of acquisition), to an estimated residual value based on appraisal. (e) Impairment of Long-lived Assets The Company periodically reviews its portfolio of assets for impairment in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." Such review necessitates estimates of current market values, residual values and component values. The estimates are based on currently available market data and are subject to fluctuation from time to time. The Company initiates its review periodically, whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows (without interest charges) that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. Significant management judgment is required in the forecasting of future operating results which are used in the preparation of projected undiscounted cash flows and should different conditions prevail, material write downs may occur. (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 well as the condition of the aircraft upon return or inspection. 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, 2003, the Company had accrued maintenance costs, in excess of reserve amounts received under the leases, of approximately $1,676,000 related to several of its aircraft. (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. 1. Organization and Summary of Significant Accounting Policies (continued) (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. If the Company deems a portion of operating lease revenue as potentially uncollectible, the Company records an allowance for doubtful accounts. (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, the amount and timing of cash flow associated with each aircraft that are used to evaluate impairment, if any, accrued maintenance costs in excess of amounts received from lessees, and the amounts recorded as bad debt allowances. (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, 2003 and 2002. (l) Recent Accounting Pronouncements 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 had one guarantee, which was issued prior to December 31, 2002. During the second quarter of 2003, the Company recorded a liability for the maximum obligation it had assumed under this guarantee and wrote off the related receivable. During the fourth quarter of 2003, the vendor waived the amount due, and the Company reversed its accrual (See Note 7). In January 2003, the FASB issued interpretation FIN No. 46, Consolidation of Variable Interest Entities ("FIN 46"), which was subsequently revised in December 2003 ("FIN 46R"). FIN 46R requires a variable interest entity to be consolidated by a company if that company is the primary beneficiary of the entity. A company is a primary beneficiary if it is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46R also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. FIN 46R was applicable immediately to variable interest entities created after January 31, 2003, and will be effective for all other existing entities in financial statements for periods ending after December 15, 2004. Certain of the disclosure requirements apply in all financial statements issued after December 31, 2003, regardless of when the variable interest entity was established. The Company has no material interest in any variable interest entity, and does not expect the full adoption of FIN 46R to have an impact on the Company's consolidated financial condition or results of operations. 1. Organization and Summary of Significant Accounting Policies (continued) (l) Recent Accounting Pronouncements (continued) SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, was effective for exit or disposal activities that were initiated after December 31, 2002. SFAS 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that meets the criteria of EITF No. 94-3 prior to the adoption of SFAS 146. The effect of adoption of SFAS 146 will change, on a prospective basis, the timing of when restructuring charges are recorded from a commitment date approach to when the liability is incurred. The adoption of this pronouncement had no effect on the Company's financial statements. SFAS 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equities, addresses how to classify and measure certain financial instruments with characteristics of both liabilities (or an asset in some circumstances) and equity. SFAS 150 requirements apply to issuers classification and measurement of freestanding financial instruments, including those that comprise more than one option or forward contract. It requires that all instruments with characteristics of both liabilities and equity be classified as a liability and remeasured at fair value on each reporting date. SFAS 150 was effective immediately for all financial instruments entered into or modified after May 31, 2003, and for the first interim period beginning after June 15, 2003 for all other instruments. The adoption of SFAS 150 had no impact on the Company's financial statements. (m) Reclassifications Certain amounts in the accompanying 2002 consolidated financial statements have been reclassified in order to conform to the presentation of the 2003 consolidated financial statements. 2. Aircraft and Aircraft Engines On Operating Leases At December 31, 2003, 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. The Company did not acquire or sell any aircraft during 2003. In May 2003, the Company signed a term sheet for the acquisition of four Fokker 50 aircraft, which are currently leased to one of the Company's customers. Although financing for the acquisition was delayed due to the default and early return of three aircraft by one of the Company's lessees, the Company now has available borrowing capacity on its revolving credit facility. The Company is in the process of negotiating final lease terms and anticipates completing the acquisition in the first quarter of 2004. At December 31, 2003, three of the Company's aircraft and two of its turboprop engines were off-lease. As discussed in Note 9, one of the Company's Shorts SD 3-60 aircraft has been re-leased to a new customer. The Company is seeking re-lease or sale opportunities for the two remaining off-lease aircraft. 2. Aircraft and Aircraft Engines On Operating Leases (continued) In April 2003, the Company and the lessee for three of the Company's aircraft signed lease amendments, which cured the lessee's default for rent and reserves due for the Company's two deHavilland DHC-7 aircraft. The amendments provided for deferral of the overdue rent and reserves and for payment of such amounts in installments. The Company and the lessee also agreed to terminate the lease for the third aircraft, a Shorts SD 3-60. All rent and reserves due for the Shorts SD 3-60 aircraft were paid by the lessee in April 2003 and the Company accepted the aircraft in the third quarter of 2003, upon completion of the pre-return inspection. In July 2003, the Company declared an event of default under the leases for the two deHavilland DHC-7 aircraft because the lessee had failed to pay non-deferred amounts due in June 2003. As a result, at June 30, 2003, the Company recorded a bad debt expense of $649,910 for all rent and maintenance reserves owed for the two deHavilland DHC-7 aircraft. During the second quarter, the Company also expensed $33,240 in legal fees, which would have been amortized over the remaining lease term. In addition, the Company accrued $1,493,560 of maintenance expense for work to bring all three aircraft to the return conditions under the leases, $100,000 of which was reversed in the fourth quarter, based on revised cost estimates. During the third quarter of 2003, the two DHC-7 aircraft were returned to the Company and a settlement agreement was reached with the lessee in the amount of $500,000. The lessee paid $20,000 to the Company at the time of the settlement and signed a note in the amount of $480,000. The Company recorded an allowance for the full amount of the note and is recording income as note payments are received. The Company has entered into an agreement with a third party, who assisted the Company in the protection, management and recovery of the Company's assets from the lessee, which provides that the third party receives 40% of all amounts collected under the note. The lease for one of the Company's Fokker 50 aircraft expired in September 2002, but the lessee was obligated by the lease to continue to pay rent until certain return conditions were met. The Company and the lessee have agreed to certain terms and conditions regarding the return of the aircraft and the amounts owed by the lessee. Although the Company held a security deposit from this lessee, the amount of the deposit was not sufficient to pay the rent accrued through the return date and reimburse the Company for maintenance work which has been performed to meet the return conditions of the lease. The lessee has agreed to deliver a note in 2004, with a principal amount equal to the rent and maintenance in excess of the security deposit. The required maintenance has been performed and the Company has determined that the amount of the note will be approximately $600,000. The Company has recorded a $250,000 allowance against the estimated amount receivable and believes that such allowance is adequate to cover any shortfall in payment under the note. The Company expects that the note will be signed in the first half of 2004. In September 2003, the aircraft was delivered to a new lessee on a 37-month term, with options to extend for three additional one-year periods. 3. 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 11% and 21% of the Company's operating lease revenue was derived from lessees domiciled in the United States during 2003 and 2002, 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, 2003 2002 ---- ---- Asia $ 3,094,620 $ 931,300 Europe and United Kingdom 2,331,360 3,465,160 Caribbean 1,250,670 1,563,500 United States and Canada 1,082,220 1,809,160 South America 1,005,170 922,320 ---------------- --------------- $ 8,764,040 $ 8,691,440 ================ =============== Net Book Value at December 31, 2003 2002 ---- ---- Asia $ 22,393,990 $ 18,185,860 Caribbean 15,265,420 11,826,550 Europe and United Kingdom 15,121,890 16,095,620 South America 4,759,320 10,443,360 United States and Canada 4,610,800 8,950,620 ---------------- --------------- $ 62,151,420 $ 65,502,010 ================ =============== For the year ended December 31, 2003, the Company had two significant customers, which accounted for 22% and 11%, respectively, of lease revenue. For the year ended December 31, 2002, the Company had three significant customers, which accounted for 11%, 11% and 10%, respectively, of lease revenue. As of December 31, 2003, minimum future operating lease revenue payments receivable under noncancelable leases were as follows: Year 2004 $ 6,106,490 2005 4,147,490 2006 980,000 2007 376,120 2008 - ---------------- $ 11,610,100 ================
4. 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. 5. Notes Payable and Accrued Interest (a) Credit facility The Company's credit facility, originally set to expire 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 facility. On March 7, 2002, the Company and its lenders agreed to modify certain financial covenants contained in the loan agreement permitting certain assets with short-term leases to remain in the collateral base. 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 June 2003, the Company reached an agreement with its lenders to accommodate the departure of one of the participating lenders that had decided it no longer wished to participate in aviation finance, and to extend the maturity date of its credit facility from June 28, 2003 until August 28, 2003. The Company made a repayment of $800,000 to reduce total outstanding indebtedness to $39,905,000, which was allocated between the two remaining participants. The credit limit was reduced from $50 million to $40 million for the remaining term. At the same time, the Company reached agreement with its lenders to amend its credit agreement to make certain revisions to financial covenants relating to net worth and debt coverage ratios and age of aircraft collateral. The amendment also provided for a fixed interest rate margin of 275 basis points. In August 2003, the Company reached agreement with its lenders to further extend the maturity date of its credit facility from August 28, 2003 to August 31, 2004 and to make additional revisions relating to a requirement for positive quarterly earnings, bank approval of new leases and a net worth ratio. In addition, the facility was changed to bear interest, at the Company's option, at either (i) prime plus a margin of 50 to 150 basis points or (ii) LIBOR plus a margin of 275 to 375 basis points. Both the prime and LIBOR margins are determined by certain financial ratios. In January 2004, a new bank was added to the Company's credit facility participant group. The new participant has agreed to finance $10 million and, therefore, the Company's credit facility limit has been returned to $50 million. In accordance with the agreement for the credit facility, the Company must maintain compliance with certain financial covenants. As a result of the substantial net loss incurred during the second quarter of 2003, the Company was out of compliance with a financial ratio covenant on June 30, 2003. The Company obtained a waiver from its banks regarding that covenant for the quarter ended June 30, 2003. As of December 31, 2003, the Company was in compliance with all covenants, $39,155,000 was outstanding under the credit facility, and interest of $153,830 was accrued. 5. Notes Payable and Accrued Interest (continued) (a) Credit facility (continued) The Company's longer term viability will depend upon its ability to continue renewing the revolving credit facility at its expiration with the existing or replacement lenders, or to refinance the revolving credit facility using equity or alternative debt financing. There is no assurance that the Company will be able to achieve either alternative prior to the currently scheduled expiration of the credit line on August 31, 2004. 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. (b) Special purpose financing In November 1999, the Company acquired two aircraft using cash and bank financing separate from its credit facility. During 2002, the Company used funds from its credit facility to repay the outstanding bank financing related to the two aircraft. A similar stand-alone financing for the acquisition of a deHavilland DHC-8 aircraft was concluded in September 2000, resulting in a note obligation in the amount of $3,575,000, due April 18, 2003, which bore fixed interest at 8.36% through maturity. The note was collateralized by this aircraft and was non-recourse to the Company. Payments due under the note consisted of monthly principal and interest and a balloon principal payment due on the maturity date. The lease for the deHavilland aircraft was originally set to expire on April 15, 2003. In March 2003, the Company and the lessee agreed to a short-term extension of the lease through November 15, 2003, with periodic options to terminate. At the same time, the lender agreed to extend the financing through March 19, 2006, pending the extension of the lease, with borrower prepayment options at June 30, 2003 and November 30, 2003. During the third quarter of 2003, the Company and the lessee agreed to extend the lease through April 15, 2006, with an option to terminate it in July 2004, and the lender extended the financing. During the term of the extension, payments due under the note consist of monthly principal and interest at the rate of one-month LIBOR plus 3%, with a balloon payment at maturity. The financing also provides for a six month remarketing period at the expiration or earlier termination of the lease. Payments due on the financing are reduced during this remarketing period and the balloon principal payment is due at the end of the six month period. The balance of the note payable at December 31, 2003 was $2,180,600 and interest of $3,770 was accrued. As of December 31, 2003, the Company was in compliance with all covenants of this note obligation. 6. Income Taxes The items comprising income tax (benefit)/expense are as follows:
For the Years Ended December 31, 2003 2002 ---- ---- Current tax provision/(benefit): Federal $ 171,700 $ (17,020) State 11,320 11,380 Foreign - 72,120 --------------- --------------- Current tax provision/(benefit) 183,020 66,480 ---------------- --------------- Deferred tax provision/(benefit): Federal (900,770) 435,600 State (77,620) (28,860) ---------------- --------------- Deferred tax provision/(benefit) (978,390) 406,740 ---------------- --------------- Total provision/(benefit) for income taxes $ (795,370) $ 473,220 ================ =============== Total income tax expense/(benefit) 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, 2003 2002 ---- ---- Income tax expense/(benefit) at statutory federal income tax rate $ (726,130) $ 504,120 State tax expense/(benefit), net of federal benefit (8,840) 10,520 Tax refunds - (19,560) Tax rate differences (60,400) (21,860) ---------------- --------------- Total income tax expense/(benefit) $ (795,370) $ 473,220 ================ =============== Temporary differences and carryforwards that gave rise to a significant portion of deferred tax assets and liabilities as of December 31, 2003 are as follows: Deferred tax assets: Bad debt allowance $ 242,140 Deferred maintenance 603,740 Maintenance reserves 2,193,390 Prepaid rent and other 68,870 ---------------- Deferred tax assets 3,108,140 Deferred tax liabilities: Depreciation on aircraft and aircraft engines (5,625,670) Unearned income (61,710) Other (205,210) ---------------- Net deferred tax liabilities $ (2,784,450) ================ 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.
7. Commitments and Contingencies In connection with the re-lease of two of the Company's aircraft, the Company guaranteed, up to a maximum amount of $150,000, the lessee's payments under a contract with a third party vendor for spare parts. The guaranty agreement provided for the lessee to reimburse the Company for any payments made under the guaranty, upon demand by the Company. As discussed in Note 2, the Company declared the lessee in default of its payment obligations under its leases during the third quarter of 2003. In anticipation that the Company may eventually have been obligated to pay the entire amount of its guaranty obligation to the vendor, the Company recorded a payable to the vendor of $150,000 at June 30, 2003. At the same time, it recorded a $150,000 receivable for lessee reimbursement obligations and wrote off the full amount as bad debt expense. During the fourth quarter of 2003, the vendor waived the amount due, and the Company reversed the $150,000. 8. Related Party Transactions Since the Company has no employees, the Company's portfolio of leased aircraft assets is managed and administered under the terms of a management agreement with JetFleet Management Corp. ("JMC"), 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 $1,909,850 and $1,725,330 during the years ended December 31, 2003 and 2002, respectively. Because the Company did not acquire any aircraft during 2003, no acquisition fees were paid to JMC for this period. 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 acquired. No remarketing fees were accrued to JMC during 2003 or 2002. 9. Subsequent Events The leases for two of the Company's Fokker 50 aircraft have been extended on a series of short-term extensions through March 31, 2004. The Company and the customer are currently discussing a long-term extension of both leases. In the first quarter of 2004, the lease for the Company's Fairchild Metro III aircraft was extended for one year, through April 3, 2005. In the first quarter of 2004, one of the Company's Shorts SD 3-60 aircraft was re-leased to a new customer for a term of 36 months. In March 2004, the lessee for one of the Company's deHavilland DHC-6 aircraft notified the Company that the lessee intends to extend the lease for two additional years, through April 30, 2006. In March 2004, the lessee for the Company's deHavilland DHC-8 financed in a special purpose subsidiary notified the Company that the lessee will not exercise its early termination option and, therefore, the lease will continue through April 15, 2006. Report of Independent Auditors To the Stockholders of AeroCentury Corp.: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of AeroCentury Corp. and subsidiaries at December 31, 2003, and the results of their operations and their cash flows for the years ended December 31, 2003 and 2002 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 audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California January 21, 2004 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 Accounting Consultant Evan M. Wallach Director and Managing Director, Fixed Income Institutional Sales Piper Jaffray LLC 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 29, 2004 at 5:30 P.M. Form 10-K The Company's Annual Report on Form 10-K for 2003 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 [graphics omitted] AeroCentury Corp. 1440 Chapin Ave., Suite 310 Burlingame, CA 94010 650-340-1888 Fax: 650-696-3929 www.aerocentury.com -----END PRIVACY-ENHANCED MESSAGE-----