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 ____ 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
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
AeroCentury Corp.
Balance Sheets
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
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.
</TABLE>
<PAGE>
AeroCentury Corp.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Period
from Inception
For the Quarter (February 28, 1997) to
Ended March 31, 1998 March 31, 1997
-------------------- --------------
<S> <C> <C>
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)
=============== ==============
</TABLE>
See accompanying notes.
<PAGE>
AeroCentury Corp.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Period
from Inception
For the Quarter (February 28, 1997) to
Ended March 31, 1998 March 31, 1997
-------------------- --------------
<S> <C> <C>
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
============= ==============
</TABLE>
See accompanying notes.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
Asset % Interest Year Acquired
<S> <C> <C>
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
</TABLE>
(*) 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.
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
5. Income Taxes
The items comprising income tax expense are as follows:
<S> <C>
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.
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
Quarter ended
Summary of Operations: March 31, 1997
<S> <C>
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.
</TABLE>
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
<TABLE>
<CAPTION>
Exhibit Index Description
<S> <C>
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.
</TABLE>
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 12, 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 12, 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 12, 1998 By:/s/ Marc J. Anderson
Date -----------------------------------
Marc J. Anderson, Director, Chief
Operating Officer, Senior Vice President
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.
<PAGE>
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
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.
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,817,840
<SECURITIES> 0
<RECEIVABLES> 122,620
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<CURRENT-ASSETS> 1,974,020
<PP&E> 32,368,750
<DEPRECIATION> 15,269,110
<TOTAL-ASSETS> 19,276,300
<CURRENT-LIABILITIES> 4,814,260
<BONDS> 866,670
0
0
<COMMON> 1,610
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<TOTAL-LIABILITY-AND-EQUITY> 19,276,300
<SALES> 0
<TOTAL-REVENUES> 821,920
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<INCOME-PRETAX> 428,480
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