-----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, Vw7s3F+YwxfXvt0F9CkxTm0PHfvKwCBr8FiaNEZLz65XHxANzOQnZzcYKjwyQDnz AVPMl3bjBsIvjYk9HX+Dlg== 0001036848-98-000003.txt : 19980512 0001036848-98-000003.hdr.sgml : 19980512 ACCESSION NUMBER: 0001036848-98-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980511 SROS: AMEX 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-13387 FILM NUMBER: 98615134 BUSINESS ADDRESS: STREET 1: 1440 CHAPIN AVE STE 310 CITY: BURLINGAME STATE: CA ZIP: 94010 BUSINESS PHONE: 6503401888 MAIL ADDRESS: STREET 1: 1440 CHAPIN AVENUE SUITE 310 CITY: BURLINGAME STATE: CA ZIP: 94010 FORMER COMPANY: FORMER CONFORMED NAME: AEROMAX INC DATE OF NAME CHANGE: 19970331 10-Q 1 FIRST QUARTER 1998 FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 001-13387 AeroCentury Corp. (Exact name of Registrant as specified in its charter) Delaware 94-3263974 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1440 Chapin Avenue, Suite 310 Burlingame, California 94010 (Address of principal executive offices) (Zip code) 650-340-1888 (Registrant's telephone number including area code) Not applicable (Former name, former address, and former fiscal year, if changed since last report) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Check whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No ____ (APPLICABLE ONLY TO CORPORATE REGISTRANTS) State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title Outstanding Common Stock 1,606,557 Rights to Purchase Series A Preferred Stock 0 Transitional Small Business Disclosure Format (check one); Yes___ No X Part I. Financial Information Item 1. Financial Statements AeroCentury Corp. Balance Sheets
ASSETS March 31, December 31, 1998 1997 (Unaudited) Cash and cash equivalents $ 835,700 $ 7,980 Deposits 982,140 - Accounts receivable 62,620 - Lease payments receivable 60,000 - Aircraft and aircraft engines under operating leases and aircraft held for operating leases, net of accumulated depreciation of $15,269,110 in 1998 17,099,640 - Organization costs, net 430 450 Prepaid expenses 33,130 5,000 Deferred tax asset 202,640 87,770 ---------------- --------------- Total assets $ 19,276,300 $ 101,200 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable $ 86,630 $ 207,690 Payable to affiliates 55,620 157,100 Notes payable 866,670 - Accrued maintenance costs 1,535,340 - Security deposits 143,100 - Unearned interest income 32,230 - Prepaid rent received 116,130 - Deferred taxes 2,844,330 - Taxes payable 880 880 -------------------- ---------------- Total liabilities 5,680,930 365,670 Shareholders' Equity: Preferred stock, $.001 par value, 2,000,000 shares authorized, no shares issued and outstanding - - Common stock, $.001 par value, 3,000,000 shares authorized, 1,606,557 and 150,000 shares issued and outstanding in 1998 and 1997, respectively 1,610 150 Paid in capital 13,750,200 149,850 Accumulated deficit (156,440) (414,470) ----------------- ------------- Total shareholders' equity 13,595,370 (264,470) --------------- --------------- Total liabilities and shareholders' equity $ 19,276,300 $ 101,200 =============== =============== See accompanying notes.
AeroCentury Corp. Statements of Operations (Unaudited)
For the Period from Inception For the Quarter (February 28, 1997) to Ended March 31, 1998 March 31, 1997 -------------------- -------------- Revenues: Rent income $ 809,920 $ - Interest income 12,000 230 ------------- --------------- 821,920 230 Expenses: Management fees 141,110 - Depreciation 162,800 - Amortization 20 - Interest 8,090 - Professional fees and general and administrative 78,420 - Consolidation offering costs - 18,010 Franchise taxes 3,000 - ------------- --------------- 393,440 18,010 -------------- --------------- Income before taxes 428,480 (17,780) Tax provision 170,440 - ---------------- --------------- Net income/(loss) $ 258,040 $ (17,780) ============== =============== Weighted average common shares outstanding 1,606,557 150,000 =========== =============== Earnings/(loss) per share $ 0.16 $ (0.12) =============== ==============
See accompanying notes. AeroCentury Corp. Statements of Cash Flows (Unaudited)
For the Period from Inception For the Quarter (February 28, 1997) to Ended March 31, 1998 March 31, 1997 -------------------- -------------- Net cash provided by operating activities $ 1,062,670 $ 680 Investing activity - Purchase of aircraft (1,124,480) - --------------- ----------------- Net cash used in investing activities (1,124,480) - Financing activities: Issuance of secured note 866,670 - Sale of common stock - 150,000 Organization costs - (450) -------------------- ---------------- Net cash provided by investing activities 866,670 149,550 Net change from consolidation of partnerships 22,860 - Net increase in cash and cash equivalents 827,720 150,230 Cash and cash equivalents, beginning of period 7,980 - ------------------ ----------------- Cash and cash equivalents, end of period $ 835,700 $ 150,230 ============= ==============
See accompanying notes. AeroCentury Corp. Notes to Financial Statements March 31, 1998 (Unaudited) 1. Basis of Presentation AeroCentury Corp. (the "Company") was incorporated in the state of Delaware on February 28, 1997. The Company was formed solely for the purpose of acquiring JetFleet Aircraft, L.P. and JetFleet Aircraft II, L.P., partnerships formed under California law for the purpose of investing in leased aircraft equipment, (collectively, the "Partnerships") in a statutory merger (the "Consolidation"). A Registration Statement on Form S-4 for the proposed Consolidation became effective on September 23, 1997 and the Consolidation was effective January 1, 1998. The Company intends to continue in the aircraft leasing business in which the Partnerships engaged and plans to use leveraged financing to acquire additional aircraft assets on lease. Because greater than 90% of the limited partnership units of each of the Partnerships agreed to the Consolidation, it has been treated as a pooling-of-interests under generally accepted accounting principles with the assets and liabilities of the combining entities recorded at historical cost on the Consolidation date. On January 16, 1998, the Company was listed on the American Stock Exchange under the symbol ACY. The accompanying balance sheets at March 31, 1998 and December 31, 1997 and statements of operations and cash flows for the quarter ended March 31, 1998 and the period from inception (February 28, 1997) to March 31, 1997 reflect all adjustments (consisting of only normal recurring accruals) which are, in the opinion of the Company, necessary for a fair presentation of the financial results. The results of operations of such periods are not necessarily indicative of results of operations for a full year. Organization and Capitalization At December 31, 1997, all of the Company's outstanding stock was owned by JetFleet Management Corp. ("JMC"), a California corporation formed in January 1994. On January 1, 1998, 1,456,557 additional common shares were issued as a result of the Consolidation. JMC is an integrated aircraft management, marketing and financing business. Prior to the Consolidation, JMC managed the aircraft assets of the Partnerships on behalf of their general partners and limited partners. JMC also manages the aircraft assets of JetFleet III and AeroCentury IV, Inc., California corporations which are subsidiaries of JMC. Aircraft and aircraft engines under operating leases and aircraft held for operating leases The Company's interests in aircraft and aircraft engines are recorded at cost, which includes acquisition costs and loan fees. Depreciation is computed using the straight-line method over the aircraft's estimated economic life (generally assumed to be twelve years), to an estimated residual value. The depreciable base of the assets acquired by the Company in the Consolidation is equal to the net book value of the assets at December 31, 1997. AeroCentury Corp. Notes to Financial Statements March 31, 1998 (Unaudited) 1. Basis of presentation (continued) Investment in capital lease The Company's investment in a McDonnell Douglas DC-9 aircraft is recorded as an investment in a capital lease because the lessee has a bargain purchase option at the end of the lease term. The gross investment is recorded as lease payments receivable and the difference between the gross investment and the acquisition cost is recorded as unearned interest income. Income taxes The Company follows the liability method of accounting for income taxes as required by the provisions of Statement of Financial Accounting Standards No. 109 - Accounting for Income Taxes. Cash and cash equivalents The Company considers highly liquid investments readily convertible into known amounts of cash, with original maturities of 90 days or less, as cash equivalents. Deposits As of March 31, 1998 the Company held deposits which represent maintenance reserves collected from lessees and interest earned on those funds, as applicable. This amount is not included in the cash balance for statement of cash flow purposes. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Maintenance reserves All aircraft are operated pursuant to triple net leases under which the lessee is responsible for maintenance and overhaul, insurance, and operating costs. In some cases, reserves are collected from the lessee based on estimated maintenance cost. Annually, management reviews the level of maintenance reserves collected from lessees for each asset, as applicable, in order to determine whether reserves collected in the future should be adjusted based on changes in estimated costs. AeroCentury Corp. Notes to Financial Statements March 31, 1998 (Unaudited) 2. Aircraft and aircraft engines under operating leases and aircraft held for operating leases Upon consummation of the Consolidation, the Company succeeded to the ownership of the following aircraft assets:
Asset % Interest Year Acquired DHC-7-103 S/N 72 99.90 (*) 1991 DHC-7-102 S/N 57 99.90 (*) 1991 DHC-7-102 S/N 44 100.00 1992 DHC-7-103 S/N 11 100.00 1992 DHC-6-300 S/N 666 100.00 1995 Metro III SA-227-AC 100.00 1995 Metro II SA-226 50.00 (**) 1996 Turboprop Engines (24) 100.00 1993-1994 PT6A-50 Engine 100.00 1993
(*) 0.1% owned by unrelated third party seller of aircraft. (**) The other 50% undivided interest is owned by JetFleet III, an affiliated equipment program. On March 6, 1998 the Company acquired a Shorts SD-360 turboprop aircraft on lease to a regional airline operating in the United Kingdom. 3. Accounts receivable and accounts payable Accounts receivable at March 31, 1998 consists primarily of maintenance reserves receivable from lessees and a refund for overpaid franchise taxes. Accounts payable and payable to affiliates primarily consist of trade payables and management fees payable to JMC. 4. Notes payable In connection with its purchase of the Shorts SD-360 during March 1998 the Company borrowed $866,670 from an affiliate and issued a secured promissory note which bears interest at the rate of 12% per annum, payable monthly in arrears, and is due on March 31, 1999, but may be prepaid without penalty at any time. AeroCentury Corp. Notes to Financial Statements March 31, 1998 (Unaudited)
5. Income Taxes The items comprising income tax expense are as follows: 1997 Current tax provision: Federal $ 0 State 0 ------------------ Current tax provision $ 0 ================== Deferred tax provision: Federal $ 145,480 State 24,960 ------------------ Deferred tax provision $ 170,440 Total provision for income taxes $ 170,440 ================== Total income tax expense differs from the amount which would be provided by applying the statutory federal income tax rate to pretax earnings as illustrated below: Income tax expense at statutory federal income tax rate $ 145,680 State taxes net of federal benefit 25,000 Nondeductible meals & entertainment (80) Other (160) ------------------ Total income tax expense $ 170,440 ================== Temporary differences and carryforwards which gave rise to a significant portion of deferred tax assets and liabilities as of March 31, 1998 are as follows: 1997 Deferred tax assets: Amortization of organizational costs $ 87,170 Prepaid rent 46,260 Net operating loss carryforwards 69,210 ------------------ Subtotal $ 202,640 Less valuation allowance 0 ------------------ Net deferred tax assets $ 202,640 Deferred tax liabilities: Depreciation on aircraft and engines (2,844,330) ------------------ Net deferred tax liability $ (2,641,690) ================== No valuation allowance is deemed necessary, as the Company anticipates generating adequate future taxable income to realize the benefits of all deferred tax assets on the balance sheet. The Company's net operating losses may be carried forward for fifteen years and expire in 2012.
AeroCentury Corp. Notes to Financial Statements March 31, 1998 (Unaudited) 6. Related party transactions The Company's portfolio of leased aircraft assets is managed and administered under the terms of a management agreement with JMC. Under this agreement, JMC receives a monthly management fee based on the net asset value of the assets under management. In addition, JMC may receive a brokerage fee for locating assets for the Company, provided that such fee is not more than the customary and usual brokerage fee that would be paid to an unaffiliated party for such a transaction, and provided further that the aggregate purchase price including chargeable acquisition costs and any brokerage fee shall not exceed the fair market value of the asset based on appraisal. On March 6, 1998, the Company acquired an aircraft on lease using cash and a loan of $866,670 from an affiliate. 7. Pro forma selected financial information for 1997 Following is pro forma condensed information giving effect to the January 1, 1998 Consolidation as if it had been completed on January 1, 1997.
Quarter ended Summary of Operations: March 31, 1997 Revenues $848,300 Net income $283,400 Earnings per share $0.18 Number of common shares outstanding 1,606,557 Summary Balance Sheet: March 31, 1997 Total assets $18,857,000 Total liabilities 3,668,000 Shareholders' equity $15,189,000 The above results include pro forma adjustments for management fees and for depreciation expense.
8. Subsequent event On April 17, 1998, in connection with the adoption of a shareholder rights plan, the Company filed a Certificate of Designation designating the rights, preferences and privileges of a new Series A Preferred Stock. The Certificate of Designation created a series of 100,000 shares of Series A Preferred Stock, $.001 par value, out of the total class of 2,000,000 shares of Preferred Stock. Pursuant to the shareholder rights plan, the Company issued rights to its shareholders of record as of April 23, 1998, entitling each shareholder to the right to purchase one one-hundredth of a share (a "Unit") of Series A Preferred Stock for each share of Common Stock held by the shareholder. The purchase price of $66.00 per Unit is subject to adjustment and is exercisable only upon the occurrence of certain events. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Liquidity and Capital Resources During the quarter ended March 31, 1998, the Company's primary source of liquidity was cash flow from operating leases. In connection with the purchase of an aircraft in March 1998, the Company borrowed $866,667 and issued a 12% note due March 31, 1999. The Company plans to use its net cash flow to pay the note interest and principal, which may be prepaid without penalty. In addition, the Company is seeking bank financing in order to acquire additional assets under lease and expects to use any excess cash flow to provide any required equity. Results of Operations The Company had no significant operations during first quarter 1997 other than incurring costs in connection with the proposed Consolidation. On a pro forma basis, giving effect to the January 1, 1998 Consolidation as if it had been completed on January 1, 1997, the Company would have had revenues of $848,300 and net income of $283,400 ($0.18 per share) for the quarter ended March 31, 1997 versus revenues of $821,920 and net income of $258,040 ($0.16 per share) for the quarter ended March 31, 1998. Pro forma 1997 interest income is higher by approximately $30,000 versus 1998 because of a finance lease which expired in June 1997. The 1997 higher revenues are partially offset by increased rent income of approximately $3,000 in 1998 versus 1997 due to the purchase of an additional aircraft on lease in early March 1998. Depreciation and management fees are approximately $8,000 higher in 1998 versus pro forma amounts for 1997 also because of the 1998 aircraft acquisition. Factors that May Affect Future Results Certain statements contained in this report and, in particular, the discussion in the "Management's Discussion and Analysis or Plan of Operation" are forward-looking statements. These include statements of the Company's beliefs, plans, objectives, expectations and intentions regarding the Company's ability to meet cash flow requirements, obtain acquisition indebtedness, and acquire additional assets. While the Company believes that such statements are accurate, the Company's business is dependent upon general economic conditions, particularly those that affect the demand for turboprop aircraft and engines, and future trends and results cannot be predicted with certainty. The Company's actual results could differ materially from those discussed in such forward looking statements. The cautionary statements made in this Report should be read as being applicable to all related forward-looking statements wherever they appear in this Report. Factors that could cause or contribute to such differences include those discussed below. Availability of Financing. The Company's ability to achieve its business objectives is dependent, in part, on the ability of the Company to obtain debt and/or equity financing for acquisition of additional assets. While the Company is in discussions with financial institutions regarding financing, the Company has not yet received any enforceable agreement for an institution to provide such financing. There can be no assurance that the necessary amount of capital will be available to the Company on favorable terms, or at all. If the Company were unable to continue to obtain any portion of required financing on favorable terms, the Company's ability to add new leased assets to its portfolio would be limited, which would have a material adverse effect on the Company's business objective of increasing its revenue. Additional debt financing will subject the Company to increased risks of leveraging. Such financing may have to be secured by the Company's currently unleveraged assets as well as any assets acquired with the acquisition financing proceeds. Additional equity financing may dilute the equity holdings of the shareholders. In any event, due to the cyclical nature of the aircraft industry, there is no assurance that assets acquired by the Company will retain their anticipated resale value or will generate the income anticipated over their useful life. Acquisition of Additional Assets by the Company. The Company intends to seek debt financing which may be secured by the existing and/or to-be-acquired assets of the Company. The Company intends to use the proceeds of any such financing to acquire additional assets for the purpose of generating income for the Company. The Company anticipates it will be able to expend the entire net financing proceeds on the acquisition of additional assets on terms favorable to the Company, but the Company has not entered into any contracts and there is no assurance that the Company will be able to purchase assets and sell or lease assets on favorable terms. Reliance on JMC. All management of the Company will be performed by JMC pursuant to a Management Agreement between JMC and the Company which has a 20-year term and provides for an asset-based management fee. JMC will not be a fiduciary to the Company or its stockholders. The Board of Directors will, however, have ultimate control and supervisory responsibility over all aspects of the Company and will owe fiduciary duties to the Company and its stockholders. In addition, while JMC may not owe any fiduciary duties to the Company by virtue of the Management Agreement, 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. There may, however, be conflicts of interest arising from such dual roles. The Management Agreement may be terminated upon a default in the obligations of JMC to the Company, and provides for liquidated damages in the event of a wrongful termination of the agreement by the Company. Many of the officers of JMC are also officers of the Company, and certain directors of the Company are also directors of JMC. Consequently, the directors and officers of JMC may have a conflict of interest in the event of a dispute over obligations between the Company and JMC. Ownership Risks. Most of the Company's portfolio is leased under operating leases, where the terms of the leases do not take up the entire useful life of an asset. The Company's ability to recover its purchase investment in an asset subject to an operating lease is dependent upon the Company's ability to re-lease or resell the asset after the expiration of the initial lease term. Some of the factors that have an impact on the Company's ability to release or re-sell include general 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 marketable condition as required under the lease. If the Company is unable to remarket or sell its aircraft equipment on favorable terms when the operating lease for such equipment expires, the Company's business, financial condition, cash flow, ability to service debt and results of operation could be adversely affected. Raytheon Lease Renewal. Three of the four Dash-7 aircraft in the Company's portfolio are leased to a subsidiary of Raytheon Service Company and used by Raytheon to provide transportation and support services to the U.S. Army under a government contract. This aircraft lease expires in September 1998, but Raytheon has a two-year renewal option, exercisable on or before July 30, 1998. If the contract is not renewed, then the Company will be required to remarket those aircraft. Any re-lease may require some refurbishment, which may be at the Company's expense even if the aircraft is returned by lessee in complete compliance with the lease. While such refurbishment is being performed and until an aircraft is delivered to a new lessee, the Company may experience a loss of revenue. The Company believes that in the event of non-renewal with respect to any of the leases, the notice period will provide the Company with sufficient time to locate a new lessee on favorable lease terms. There can be no assurance, however, that the Company will not experience some adverse effect on its revenue and expenses as a result of the non-renewal of the Raytheon lease. Lessee Credit Risk. If a lessee defaults upon his obligations under a lease, the Company may be limited in its ability to enforce remedies. Most of the Company's lessees are small domestic and foreign regional passenger airlines, which may be even more sensitive to airline industry market conditions than the major airlines. As a result, the Company's inability to collect rent under a significant lease or to repossess equipment in the event of a default by a lessee could have a material adverse effect on the Company's revenue. If a lessee that is a certified U.S. airline is in default under the lease and seeks protection under Chapter 11 of the United States Bankruptcy Code, under Section 1110 of the Bankruptcy Code, the Company would be automatically prevented from exercising any remedies for a period of 60 days. By the end of the 60 day period, the lessee must agree to perform the obligations and cure any defaults, or the Company would have the right to repossess the equipment. This procedure under the Bankruptcy Code has been subject to significant recent litigation, however, and it is possible that the Company's enforcement rights may still be further adversely affected by a declaration of bankruptcy by a defaulting lessee. International Risks. Leases with foreign lessees may present somewhat greater credit risks because certain foreign laws, regulations and judicial procedures may not be as protective of lessor rights as those which apply in the United States. Although the Company's current leases are all payable in U.S. dollars, in the future, it may agree to leases which permit payment in foreign currency. The Company could also experience collection problems related to the enforcement of its lease agreements under foreign local laws and the attendant remedies in foreign jurisdictions. The protections potentially offered by Section 1110 of the Bankruptcy Code would not apply to non-U.S. carriers, and applicable local law may not offer similar protections. Certain countries do not have a reliable registration or other recording system with which to locally establish the Company's interest in equipment, and related leases. This could add difficulty in recovering an engine in the event that a foreign lessee defaults. Government Regulation. There are a number of areas in which government regulation may result in costs to the Company. These include aircraft registration, safety requirements, required equipment modifications, and aircraft noise requirements. Although it is contemplated that the burden of complying with such requirements will fall primarily upon lessees of equipment, there can be no assurance that the cost of complying with such government regulations will not fall on the Company. Furthermore, future government regulations could cause the value of any non-complying equipment owned by the Company to substantially decline. Competition. The aircraft leasing industry is highly competitive. The Company will compete with aircraft manufacturers, distributors, airlines and other operators, equipment managers, leasing companies, equipment leasing programs, financial institutions and other parties engaged in leasing, managing or remarketing aircraft, many of which have significantly greater financial resources and more experience than the Company. The Company, however, believes that it has a competitive advantage in its niche market of financing used turbo-prop aircraft to regional air carriers. This market segment, which is characterized by transaction sizes of less than $10 million and lessee credits that are strong, but generally unrated and more speculative than that of the major air carriers, is not well served by the Company's larger competitors in the aircraft industry. JMC, the management company for the Company, has developed a reputation as a global participant in this segment of the market, and the Company believes this will benefit the Company. There is no assurance that the lack of significant competition from the larger aircraft leasing companies will continue or that the reputation of JMC will continue to be strong in this market segment and benefit the Company. Casualties, Insurance Coverage. The Company, as owner of transportation equipment could be held liable for injuries or damage to property caused by its assets. Though some protection may be provided by the United States Aviation Act with respect to its aircraft assets, it is not clear to what extent such statutory protection would be available to the Company. Though the Company may carry insurance or require a lessee to insure against a risk, some risks of loss may not be insurable. An uninsured loss with respect to the Equipment or an insured loss for which insurance proceeds are inadequate, would result in a possible loss of invested capital in and any profits anticipated from such equipment. Leasing Risks. The Company's successful negotiation of lease extensions, re-leases and sales may be critical to its ability to achieve its financial objectives, and will involve a number of substantial risks. Demand for lease or purchase of the assets depends on the economic condition of the airline industry. Ability to re-lease or resell equipment at acceptable rates may depend on the demand and market values at the time of re-lease or resale. The Company anticipates that the bulk of the equipment it acquires will be used aircraft equipment. The market for used aircraft is cyclical, and generally, but not always, reflects economic conditions and the strength of the travel and transportation industry. The demand for and resale value of many types of older aircraft in the recent past has been depressed by such factors as airline financial difficulties, increased fuel costs, the number of new aircraft on order and the number of older aircraft coming off lease. The Company's expected concentration in a limited number of airframe and aircraft engine types (generally, turboprop equipment) subjects the Company to economic risks if those aircraft engine types should decline in value. The recent introduction of "regional jets" to serve on short routes previously thought to be economical only for turboprop aircraft operation could decrease the demand for turboprop aircraft, while at the same increasing the supply of used turboprop aircraft. This could result in lower lease rates and values for the Company's existing turboprop aircraft. Risks Related to Regional Air Carriers. Because the Company has concentrated its existing leases and intends to concentrate on leases to regional air carriers, it will be subject to certain risks. First, lessees in the regional air carrier market include a number of companies that are start-up, low capital, low margin operations. Often, the success of such carriers is dependent upon arrangements with major trunk carriers, which may be subject to termination or cancellation by such major carrier. This market segment is also characterized by low entry costs, and thus, there is strong competition in this industry segment from start-ups as well as major airlines. Thus, leasing transactions with these types of lessees results in a generally higher lease rate on aircraft, but may entail higher risk of default or lessee bankruptcy. The Company will evaluate the credit risk of each lessee carefully, and will attempt to obtain third party guaranties, letters of credit or other credit enhancements, if it deems such is necessary. There is no assurance, however, that such enhancements will be available or that even if obtained will fully protect the Company from losses resulting from a lessee default or bankruptcy. Second, a significant area of growth of this market is in areas outside of the United States, where collection and enforcement are often more difficult and complicated than the United States. Possible Volatility of Stock Price. The market price of the Company's Common Stock could be subject to fluctuations in response to operating results of the Company, changes in general conditions in the economy, the financial markets, the airline industry, changes in accounting principles or tax laws applicable to the Company or its lessees, or other developments affecting the Company, its customers or its competitors, some of which may be unrelated to the Company's performance. Also, because the Company has a relatively small capitalization of approximately 1.6 million shares, there is a correspondingly limited amount of trading of the shares. Consequently, a single or small number of trades could result in a market fluctuation not related to any business or financial development relating to the Company. Year 2000 Considerations. The Company's internal and administrative operations are not highly dependent on advanced technological computer or other electronic systems, and, consequently, management believes that the Company's exposure to loss as a result of Year 2000 issues is not significant. Further, management believes that the electronic systems used in the equipment leased by the Company to lessees will not be affected by the Year 2000 issue, and, therefore, this issue should not directly affect the Company's financial performance or the lessees' ability to comply with their respective lease obligations. Of course, to the extent that a lessee has Year 2000 problems that significantly adversely affect its overall financial status, such material problems may affect the lessee's operations and increase the risk of default by a lessee under its lease with the Company. Furthermore, Year 2000 issues may have a material impact on FAA operations and the operations of certain air carriers, which in turn would negatively affect the aircraft industry in general. Part II. Other Information Item 1. Legal Proceedings No disclosure required. Item 2. Changes in Securities On April 17, 1998, in connection with the adoption of a shareholder rights plan, the Company filed a Certificate of Designation designating the rights, preferences and privileges of a new Series A Preferred Stock. The Certificate of Designation created a series of 100,000 shares of Series A Preferred Stock, $.001 par value, out of the total class of 2,000,000 shares of Preferred Stock. Pursuant to the shareholder rights plan, the Company issued rights to its shareholders of record as of April 23, 1998, entitling each shareholder to the right to purchase one one-hundredth of a share (a "Unit") of Series A Preferred Stock for each share of Common Stock held by the shareholder. The purchase price of $66.00 per Unit is subject to adjustment and is exercisable only upon the occurrence of certain events. Item 3. Defaults Upon Senior Securities No disclosure required. Item 4. Submission of Matters to a Vote of Security Holders No disclosure required. Item 5. Other Information No disclosure required. Item 6. Exhibits and Reports on Form 8-K a. Exhibits
Exhibit Index Description 3.9 Certificate of Designation for AeroCentury Corp. 10.5 Rights Agreement between AeroCentury Corp. and Continental Stock Transfer & Trust Company, as rights agent dated as of April 8, 1998. Incorporated by reference to Exhibit 1 of the Company's Registration Statement on Form 8-A12B (Commission File No. 001-13387), filed with the Securities and Exchange Commission on April 17, 1998. 27 Financial Data Schedule.
b. Reports Filed on Form 8-K On January 16, 1998, the Company filed a Report on Form 8-K with the Securities and Exchange Commission disclosing the consummation of the merger of the Company with JetFleet Aircraft, L.P. and JetFleet Aircraft II, L.P. The Report on Form 8-K was amended on March 16, 1998 to incorporate by reference the financial statements of JetFleet Aircraft, L.P. and JetFleet Aircraft II, L.P. and the pro forma financial statements of the Company contained in the Company's S-4 Registration Statement for the merger. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AeroCentury Corp. May 11, 1998 By: /s/ Neal D. Crispin Date ----------------------------------- Neal D. Crispin, Director, President and Chairman of the Board of Directors of the Registrant (Principal Executive Officer) May 11, 1998 By: /s/ Toni M. Perazzo Date ----------------------------------- Toni M. Perazzo, Director, Vice President - Finance and Secretary of the Registrant(Principal Financial and Accounting Officer) May 11, 1998 By:/s/ Marc J. Anderson Date ----------------------------------- Marc J. Anderson, Director, Chief Operating Officer, Senior Vice President EX-3.9 2 CERTIFICATE OF DESIGNATION FOR AEROCENTURY CORP. 1. Exhibit 3.9. Certificate of Designation for AeroCentury Corp. AEROCENTURY CORP. CERTIFICATE OF DESIGNATION OF THE SERIES A PREFERRED STOCK ------------------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware ------------------------------------- The undersigned officers of AeroCentury Corp., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), in accordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY: That, pursuant to the authority conferred upon the Board of Directors of the Corporation by its Restated Certificate of Incorporation (the "Certificate"), the said Board of Directors, at a duly called meeting held on April 8, 1998, at which a quorum was present and acted throughout, adopted the following resolution, which resolution remains in full force and effect on the date hereof creating a series of 100,000 shares of Preferred Stock having a par value of $.001 per share, designated as Series A Preferred Stock (the "Series A Preferred Stock") out of the class of 2,000,000 shares of preferred stock of the par value of $.001 per share (the "Preferred Stock"): RESOLVED, that pursuant to the authority vested in the Board of Directors in accordance with the provisions of its Certificate, the Board of Directors does hereby create, authorize and provide for 100,000 shares of its authorized Preferred Stock to be designated and issued as the Series A Preferred Stock, having the voting powers, designation, relative, participating, optional and other special rights, preferences and qualifications, limitations and restrictions that are set forth as follows: 1. Dividends and Distributions. (A) Subject to the prior and superior rights of the holders of any shares of any other series of Preferred Stock or any other shares of stock of the Corporation ranking prior and superior to the shares of Series A Preferred Stock with respect to dividends, each holder of one one-hundredth (1/100) of a share (a "Unit") of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for that purpose, (i) quarterly dividends payable in cash on the last day of March, June, September and December in each year (each such date being a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of such Unit of Series A Preferred Stock, in an amount per Unit (rounded to the nearest cent) equal to the greater of (a) $.01 or (b) subject to the provision for adjustment hereinafter set forth, the aggregate per share amount of all cash dividends declared on shares of the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of a Unit of Series A Preferred Stock, and (ii) subject to the provision for adjustment hereinafter set forth, quarterly distributions (payable in kind) on each Quarterly Dividend Payment Date in an amount per Unit equal to the aggregate per share amount of all non-cash dividends or other distributions (other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock, by reclassification or otherwise) declared on shares of Common Stock since the immediately preceding Quarterly Dividend Payment Date, or with respect to the first Quarterly Dividend Payment Date, since the first issuance of a Unit of Series A Preferred Stock. In the event that the Corporation shall at any time after April 8, 1998 (the "Rights Declaration Date") (i) declare any dividend on outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock or (iii) combine outstanding shares of Common Stock into a smaller number of shares, then in each such case the amount to which the holder of a Unit of Series A Preferred Stock was entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which shall be the number of shares of Common Stock that are outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on Units of Series A Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the shares of Common Stock (other than a dividend payable in shares of Common Stock); provided, however, that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $.01 per Unit on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and shall be cumulative on each outstanding Unit of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issuance of such Unit of Series A Preferred Stock, unless the date of issuance of such Unit is prior to the record date for the first Quarterly Dividend Payment Date, in which case, dividends on such Unit shall begin to accrue from the date of issuance of such Unit, or unless the date of issuance is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of Units of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on Units of Series A Preferred Stock in an amount less than the aggregate amount of all such dividends at the time accrued and payable on such Units shall be allocated pro rata on a unit-by-unit basis among all Units of Series A Preferred Stock at the time outstanding. The Board of Directors may fix a record date for the determination of holders of Units of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. 2. Voting Rights. The holders of Units of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each Unit of Series A Preferred Stock shall entitle the holder thereof to one vote on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, then in each such case the number of votes per Unit to which holders of Units of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which shall be the number of shares of Common Stock outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event; and (B) Except as otherwise provided herein, in the Certificate or the Bylaws of the Corporation or as required by law, the holders of Units of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation, and such holders shall have no special voting rights and their consents shall not be required for taking any corporate action. 3. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on Units of Series A Preferred Stock as provided herein are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on outstanding Units of Series A Preferred Stock shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of junior stock; (ii) declare or pay dividends on or make any other distributions on any shares of parity stock, except dividends paid ratably on Units of Series A Preferred Stock and shares of all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of such Units and all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any parity stock, provided, however, that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any junior stock; (iv) purchase or otherwise acquire for consideration any Units of Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such Units. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 3, purchase or otherwise acquire such shares at such time and in such manner. 4. Reacquired Shares. Any Units of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such Units shall, upon their cancellation, become authorized but unissued shares (or fractions of shares) of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. 5. Liquidation, Dissolution or Winding Up. (A) Upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, no distribution shall be made (i) to the holders of shares of junior stock unless the holders of Units of Series A Preferred Stock shall have received, subject to adjustment as hereinafter provided in paragraph (B), the greater of either (a) $.01 per Unit plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not earned or declared, to the date of such payment, or (b) the amount equal to the aggregate per share amount to be distributed to holders of shares of Common Stock, or (ii) to the holders of shares of parity stock, unless simultaneously therewith distributions are made ratably on Units of Series A Preferred Stock and all other shares of such parity stock in proportion to the total amounts to which the holders of Units of Series A Preferred Stock are entitled under clause (i)(a) of this sentence and to which the holders of shares of such parity stock are entitled, in each case upon such liquidation, dissolution or winding up. (B) In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, then in each such case the aggregate amount to which holders of Units of Series A Preferred Stock were entitled immediately prior to such event pursuant to clause (i)(b) of paragraph (A) of this Section 5 shall be adjusted by multiplying such amount by a fraction the numerator of which shall be the number of shares of Common Stock that are outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event. 6. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or converted into other stock or securities, cash and/or any other property, then in any such case Units of Series A Preferred Stock shall at the same time be similarly exchanged for or converted into an amount per Unit (subject to the provision for adjustment hereinafter set forth) equal to the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is converted or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock, or (iii) combine outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the immediately preceding sentence with respect to the exchange or conversion of Units of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which shall be the number of shares of Common Stock that are outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event. 7. Redemption. The Units of Series A Preferred Stock and shares of Series A Preferred Stock shall not be redeemable. 8. Ranking. The Units of Series A Preferred Stock and shares of Series A Preferred Stock shall rank junior to all other series of the Preferred Stock and to any other class of Preferred Stock that hereafter may be issued by the Corporation as to the payment of dividends and the distribution of assets, unless the terms of any such series or class shall provide otherwise. 9. Fractional Shares. The Series A Preferred Stock may be issued in Units or other fractions of a share, which Units or fractions shall entitle the holder, in proportion to such holder's units or fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Preferred Stock. 10. Certain Definitions. As used in this resolution with respect to the Series A Preferred Stock, the following terms shall have the following meanings: (A) The term "Common Stock" shall mean the class of stock designated as the common stock, par value $.001 per share, of the Corporation at the date hereof or any other class of stock resulting from successive changes or reclassification of the common stock. (B) The term "junior stock" (i) as used in Section 3 shall mean the Common Stock and any other class or series of capital stock of the Corporation hereafter authorized or issued over which the Series A Preferred Stock has preference or priority as to the payment of dividends and (ii) as used in Section 5, shall mean the Common Stock and any other class or series of capital stock of the Corporation over which the Series A Preferred Stock has preference or priority in the distribution of assets on any liquidation, dissolution or winding up of the Corporation. (C) The term "parity stock" (i) as used in Section 3 shall mean any class or series of stock of the Corporation hereafter authorized or issued ranking pari passu with the Series A Preferred Stock as to dividends and (ii) as used in Section 5, shall mean any class or series of capital stock ranking pari passu with the Series A Preferred Stock in the distribution of assets on any liquidation, dissolution or winding up. IN WITNESS WHEREOF, AeroCentury Corp. has caused this Certificate to be signed by its President and its Secretary this 15th day of April, 1998. AEROCENTURY CORPORATION By: /s/ Neal D. Crispin Neal D. Crispin President By: /s/ Toni M. Perazzo Toni M. Perazzo Secretary EX-10.5 3 RIGHTS AGREEMENT 2. Exhibit 10.5. Rights Agreement between AeroCentury Corp. and Continental Stock Transfer & Trust Company, as rights agent dated as of April 8, 1998. Incorporated by reference to Exhibit 1 of the Company's Registration Statement on Form 8-A12B (Commission File No. 001-13387), filed with the Securities and Exchange Commission on April 17, 1998. EX-27 4 FDS --
5 1 U.S. Dollars 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 1 1,817,840 0 122,620 0 0 1,974,020 32,368,750 15,269,110 19,276,300 4,814,260 866,670 0 0 1,610 13,593,760 19,276,300 0 821,920 0 0 385,350 0 8,090 428,480 170,440 258,040 0 0 0 258,040 0.16 0.16
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