<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997, OR
[ ] TRANSITION REPORT UNDER 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.
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3263974
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1440 CHAPIN AVENUE, SUITE 310
BURLINGAME, CALIFORNIA 94010
(Address of principal executive offices) (Zip Code)
</TABLE>
Issuer's telephone number, including area code: (650) 340-1888
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of Each Class Name of Exchange on Which Registered
------------------- ------------------------------------
<S> <C>
Common Stock, $0.001 par value American Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: NONE
Check whether the Issuer: (1) 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
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Revenues for the issuer's most recent fiscal year. $1,672
On March 24, 1998 the aggregate market value of the voting and non-voting Common
equity held by non-affiliates (computed by reference to the price at which the
common equity was sold) was $8,474,628.
As of March 27, 1998 the Issuer has 1,606,557 Shares of Common Stock.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE> 2
PART I
ITEM 1: BUSINESS
Business of the Company
AeroCentury Corp. (the "Company") was incorporated in the state of Delaware on
February 28, 1997 ("Inception"). The Company was formed solely for the purpose
of acquiring JetFleet Aircraft, L.P. ("JetFleet I") and JetFleet Aircraft II,
L.P. ("JetFleet II"), California limited partnerships (collectively, the
"Partnerships") in a statutory merger (the "Consolidation"). JetFleet I and
JetFleet II were organized in October 1989 and October 1991, respectively. Prior
to the Consolidation, the Partnerships engaged in the business of ownership,
management, leasing and acquisition of a portfolio of aircraft equipment. Upon
completion of the Consolidation, which occurred on January 1, 1998, the Company
succeeded to the Partnerships' aircraft leasing business and hopes to use
leveraged financing to acquire additional aircraft assets on lease.
At December 31, 1997 all of the Company's outstanding common stock was owned by
JetFleet Management Corp. ("JMC"), a California corporation formed in January
1994. JMC is an integrated aircraft management, marketing and financing
business. JMC also managed, on behalf of their general partners and limited
partners, the aircraft assets of the Partnerships. JMC is the management company
for the Company pursuant to the Management Agreement between JMC and the
Company.
In connection with the Consolidation, the Company issued 1,456,557 shares of
Common Stock of the Company, $0.001 par value, to the limited and general
partners of the Partnerships in exchange for their respective partnership
interests in the Partnerships. In the Consolidation 99.5% of the total
outstanding limited partnership units outstanding of the Partnerships were
exchanged for Common Stock of the Company. The acquisition of the Partnerships
by the Company was 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.
The business of the Partnerships that the Company intends to continue is
ownership, management, leasing and acquisition of aircraft. The Company intends
to continue the Partnerships' focus on the turboprop aircraft equipment for
lease to domestic and foreign regional air carriers. The principal business
objectives of the Company are to achieve a stable and increasing source of cash
flow which will be available for reinvestment into other revenue-producing
assets in order to raise stockholder value over time.
Working Capital Needs
In order to meet its business objectives, the Company must acquire additional
assets. In order to acquire such additional assets, the Company intends to seek
debt financing to be secured by the existing or to-be-acquired assets of the
Company. The Company is currently in discussions with several financial
institutions regarding financing and hopes to have a loan facility in place by
mid- 1998. The Company may also seek equity financing to obtain additional
working capital, which could dilute the equity holdings of current shareholders.
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Competition
The Company competes for customers, generally commercial aircraft operators,
that are seeking financing for existing aircraft or aircraft to be acquired.
Generally, the Company intends to finance aircraft using sale-leaseback
transactions. Management believes that lease financing customers choose
financing alternatives based largely on price (i.e. lease rates), lease terms
such as return conditions and reserve payment requirements. For this reason,
customer loyalty is often limited.
The Company faces competition from other companies providing financing,
including leasing companies, banks and other financial institutions and aircraft
leasing partnerships. Management believes that competition may increase if
competitors who have traditionally neglected the turbo- prop and regional air
carrier market begin to focus on the growing regional aircraft market. Because
competition is largely based on price and lease terms, the entry of new
competitors into the market, particularly those with greater access to capital
markets than the Company's, could lead to fewer financing opportunities for the
Company and/or financing terms less favorable to the Company on new financing
transactions and renewals of existing leases. This could lead to lower revenues
for the Company.
The Company, however, believes that it currently has a competitive advantage
because of its experience and efficiency in financing the smaller transaction
sizes that are desired by the regional air carrier market. Management believes
that the Company will also have a competitive advantage through its relationship
with JMC, which has developed a reputation as a global participant in the
aircraft leasing market.
Dependence on Significant Customer
Approximately 29% of the assets of the Company (based upon appraised fair market
values as of October 1997), consisting of three de Havilland Dash-7 aircraft are
subject to a lease with Raytheon Corp. Raytheon, in turn, uses the Dash-7
aircraft under a master contract to provide support services to the U.S. Army in
Kwajalein, Marshall Islands. The current aircraft lease between the Company and
Raytheon expires on September 30, 1998, but is subject to a lessee renewal
option exercisable on or before July 30, 1998.
Employees
Pursuant to the Company's management contract with JetFleet Management Corp.
("JMC"), JMC is responsible for all administration and management of the
Company. Consequently, the Company does not have any employees on its payroll.
ITEM 2: PROPERTIES
As of December 31, 1997, the Company did not own or lease any real property,
plant or materially important physical properties. The Company maintains its
principal office at 1440 Chapin Avenue, Suite 310, Burlingame, California,
94010. All office facilities are provided by JMC without reimbursement by the
Company.
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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 II, 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.
The Company also owns a DC-9 Aircraft on a financing lease to
AeroCalifornia. This asset is treated as a financing lease because at the end of
the lease term, the lessee has a bargain purchase option. Therefore, the value
of the asset reflected on the Company's books is based on the present value of
the lease receivable rather than the value of the aircraft subject to the lease.
On March 6, 1998, the Company acquired a Shorts SD-360 turboprop aircraft
on lease to Gill Aviation, Ltd., a regional airline operating in the United
Kingdom under the name "Gill Airways."
ITEM 3: LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings.
ITEM 4: SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5: MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SECURITYHOLDER
MATTERS
The shares of the Company's Common Stock are traded on the American Stock
Exchange ("AMEX") under the symbol "ACY."
Market Information
The Company's Common Stock has been traded on the AMEX since January 16, 1998.
Consequently, price information is not applicable for the period ended December
31, 1997. The following is price information from January 16, 1998 until March
24, 1998:
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
1/16/98 to 3/24/98 9-3/4 5-5/8
</TABLE>
On March 24, 1998, the closing stock sales price on the AMEX was $6.00 per
share.
Number of Security Holders
The approximate number of holders of record of the shares of the Company's
Common Stock was 2,200 as of March 24, 1998.
Dividends
No dividends have been declared or paid to date. The Company does not intend to
declare or pay dividends in the foreseeable future, and intends to re-invest any
earnings into acquisition of additional revenue generating assets.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Liquidity and Capital Resources
At the end of 1997, prior to the Consolidation, the Company had cash balances of
$7,980. At the same time, it had liabilities of $365,666 which were almost all
Consolidation costs.
As a consolidated entity, on January 1, 1998, the Company had $1,227,015 of
unrestricted cash. Approximately $340,000 of the December 31, 1997 liability
balance has been paid in 1998. During January 1998 the Company segregated
$523,851 of its consolidated unrestricted cash balance for current maintenance
on DHC-7-103 S/N 72 for which the Company is responsible. In addition, the
Company plans to segregate $27,600 per month until a total of $303,600 is
reached at December 31, 1998 in order to maintain reserves at the level that
management believes is necessary to meet maintenance requirements for which the
Company will be responsible. All aircraft in the consolidated portfolio are
currently on lease. Under this scenario, management believes that the Company
will have adequate cash flow to meet any on-going operational needs.
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<PAGE> 6
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, 1988. Management
believes that Raytheon will exercise its two-year renewal option. However, if
Raytheon did not exercise the renewal option, management estimates that the
Company could continue to generate positive cash flow for a period in excess of
one year while these three aircraft are being remarketed. All other assets are
under operating leases which expire March 1999 through April 2001.
Results of Operations
The Company had no significant operations during 1997 other than incurring costs
in connection with the proposed Consolidation.
As a result of the Consolidation, the Company will continue the Partnerships'
business. The Company intends to continue the Partnerships' focus on the
turboprop aircraft equipment for lease to domestic and foreign regional air
carriers. The principal business objectives of the Company are to achieve a
stable and increasing source of cash flow available for reinvestment into other
revenue- producing assets in order to raise stockholder value over time.
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; however, the Company believes that
just as general economic conditions have improved over the last few years, the
aircraft industry is improving, with both demand, asset prices and lease rates
strengthening and increasing.
Factors that May Affect Future Results
Certain statements contained in this report and, in particular, the discussion
in the "Management Discussion and Analysis or Plan of Operation" and the
"Business" sections above, are forward- looking statements. These include
statements of the Company's plans, objectives, expectations and intentions
regarding the Company's ability to meet cash flow requirements, increase the
level of cash reserves, obtain acquisition indebtedness, and acquire additional
assets; the likelihood of renewal of the Raytheon leases; the Company's
objective of achieving a stable and increasing source of cash flow and increased
stockholder value over time; and the market for used aircraft and its continued
improvement. While the Company believes that such statements are accurate, the
Company's business is dependent upon general economic conditions 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 o 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 a number of 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
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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. Additional equity financing may dilute the equity holdings of the
Investors. 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 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
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<PAGE> 8
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 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 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. 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
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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.
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 of 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
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performance. Also, because the Company has a relatively small capitalization of
approximately 1.6 million shares, there is a correspondingly limited amount of
float. 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.
Because the Company was listed immediately after its creation by the merger of
two pre-existing partnerships, there is no actual historical earnings or other
financial information on the Company. The Company believes that as a result of
this, the Company's Common Stock does not yet have any significant following by
research analysts or investment bankers, and is not likely to have such
following until two or more fiscal quarters have passed and the Company has
published its actual financial results for those quarters. There is, however, no
assurance that the Company will ever generate significant followings among
analysts. The lack of financial analysts following the Company's Common Stock
makes it unlikely that there will be any strong buying demand for the Company's
stock in the near term. The Company's shareholders are still primarily composed
of former limited partners, some of whom have already sold and may continue to
sell their shares of the Company's Common Stock to achieve liquidity of their
initial investment in the predecessor partnerships of the Company. This
circumstance combined with the lack of actual historical information about the
Company and lack of a strong buyer's demand has resulted in downward pressure on
the price of the Company's stock, unrelated to the Company's business and
financial performance.
ITEM 7: FINANCIAL STATEMENTS
(a) Financial Statements and Schedules
(1) Financial statements for AeroCentury Corp.:
Report of Independent Auditors, Vocker Kristofferson and Co.
Balance Sheet as of December 31, 1997
Statement of Operations for the Period from Inception
(February 28, 1997) to December 31, 1997
Statement of Changes in Shareholder's Equity for the
Period from Inception (February 28, 1997) to
December 31, 1997
Statement of Cash Flows for the Period from Inception
(February 28, 1997) to December 31, 1997
Notes to Financial Statements
(2) Schedules:
All schedules have been omitted since the required information
is presented in the financial statements or is not applicable.
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REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholder
of AeroCentury Corp.
We have audited the accompanying balance sheets of AeroCentury Corp., a
development stage Delaware corporation, as of December 31, 1997 and the related
statements of operations, shareholder's equity and cash flow for the period from
Inception (February 28, 1997) through December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AeroCentury Corp. at December
31, 1997 and the related statements of operations, shareholder's equity and cash
flow for the period from Inception (February 28, 1997) through December 31, 1997
in conformity with generally accepted accounting principles.
VOCKER KRISTOFFERSON AND CO.
March 16, 1998
San Mateo, California
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AEROCENTURY CORP.
(A Development Stage Delaware Corporation)
Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash $ 7,980
Organization costs 453
Prepaid expenses 5,000
Deferred tax asset 87,766
---------
Total Assets $ 101,199
=========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities -
Accounts payable $ 207,689
Payable to affiliates 157,099
Taxes payable 878
---------
Total liabilities 365,666
---------
Shareholder's 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, 150,000 shares issued and outstanding 150
Paid in capital 149,850
Accumulated deficit (414,467)
---------
Total shareholder's equity (264,467)
---------
Total liabilities and shareholder's equity $ 101,199
=========
</TABLE>
See accompanying notes.
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AeroCentury Corp.
(A Development Stage Delaware Corporation)
Statement of Operations
For the Period From Inception (February 28, 1997)
to December 31, 1997
<TABLE>
<S> <C>
Revenues -
Interest income $ 1,672
Expenses:
Consolidation offering costs 502,383
Delaware franchise tax 576
Other 68
---------
503,027
---------
Loss before taxes (501,355)
Tax benefit 86,888
---------
Net loss $(414,467)
=========
</TABLE>
See accompanying notes.
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AeroCentury Corp.
(A Development Stage Delaware Corporation)
Statement of Changes in Shareholder's Equity
For the Period From Inception (February 28, 1997)
to December 31, 1997
<TABLE>
<CAPTION>
Preferred Common Paid-in Accumulated
Stock Stock Capital Deficit Total
--------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Issued on March 5, 1997
150,000 shares at par value $-- $ 150 $ 149,850 $ -- $ 150,000
of $.001
Net loss, Inception (February 28,
1997) to December 31, 1997 -- -- -- (414,467) (414,467)
--------- ---------- --------- ----------- ---------
Total, December 31, 1997 $-- $ 150 $ 149,850 $(414,467) $(264,467)
========= ========== ========= =========== =========
</TABLE>
See accompanying notes.
13
<PAGE> 15
AeroCentury Corp.
(A Development Stage Delaware Corporation)
Statement of Cash Flows
For the Period From Inception (February 28, 1997)
to December 31, 1997
<TABLE>
<S> <C>
Operating activities:
Net loss $(414,467)
Change in operating assets and liabilities:
Organization costs (453)
Prepaid expenses (5,000)
Deferred tax asset (87,766)
Accounts payable 207,689
Payable to affiliates 157,099
Taxes payable 878
---------
Net cash used by operating activities (142,020)
Financing activity - issuance of common stock 150,000
---------
Cash, December 31, 1997 $ 7,980
=========
</TABLE>
See accompanying notes.
14
<PAGE> 16
AeroCentury Corp.
(A Development Stage Delaware Corporation)
Notes to Financial Statements
December 31, 1997
1. Basis of Presentation
AeroCentury Corp. (the "Company") was incorporated in the state of Delaware
on February 28, 1997. 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. JMC is an integrated aircraft management, marketing and
financing business and also manages, on behalf of their general partners and
limited partners, respectively, the aircraft assets of JetFleet Aircraft, L.P.
and JetFleet Aircraft II, L.P. (collectively, the "Partnerships"), and JetFleet
III and AeroCentury IV, Inc., California corporations which are subsidiaries of
JMC.
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.
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.
2. Organization and Capitalization
The Company was formed solely for the purpose of acquiring the Partnerships
in a statutory merger (the "Consolidation"). The Partnerships, formed under
California law, invest in leased aircraft equipment. 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 (Note 7). Upon completion of
the Consolidation, the Company will continue in the aircraft leasing business
and plans to use leveraged financing to acquire additional aircraft assets on
lease.
3. Accounts payable and Payable to affiliates
Accounts payable and payable to affiliates primarily consist of
Consolidation costs incurred in connection with the proposed business
combination.
4. Consolidation offering costs
As discussed in Note 7, the Consolidation on January 1, 1998 as been
treated as a pooling-of-interests. Under this method of accounting, the
Consolidation offering costs have been expensed. Those expenses were comprised
of the following:
15
<PAGE> 17
AeroCentury Corp.
(A Development Stage Delaware Corporation)
Notes to Financial Statements
December 31, 1997
4. Consolidation offering costs (continued)
<TABLE>
<S> <C>
Legal $184,784
Investment banking fee 125,000
Printing and electronic filing 61,793
Accounting 16,745
American Stock Exchange 15,000
Postage and delivery 14,012
Consulting 11,950
SEC and blue sky fees 8,024
Investor services 6,701
Other 58,374
--------
$502,383
========
</TABLE>
5. Income taxes
The items comprising income tax expense are as follows:
<TABLE>
<S> <C>
Current tax provision:
Federal $ 78
State 800
--------
Current tax provision $ 878
Deferred tax provision:
Federal $(74,912)
State (12,854)
--------
Deferred tax provision $(87,766)
--------
Total provision for income taxes $(86,888)
========
</TABLE>
The Company has recorded the future benefit of the loss carryforward and 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.
16
<PAGE> 18
AeroCentury Corp.
(A Development Stage Delaware Corporation)
Notes to Financial Statements
December 31, 1997
5. Income taxes (continued)
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:
<TABLE>
<S> <C>
Income tax expense at
statutory federal income tax rate $(170,733)
State taxes net of federal benefit (29,298)
Non-deductible consolidation costs 112,355
California Minimum Franchise Tax 800
Other (12)
---------
Total income tax expense $ (86,888)
==========
</TABLE>
6. Related party transactions
At December 31, 1997, JMC had incurred $157,099 of Consolidation costs on
behalf of the Company.
Upon completion of the Consolidation (see Note 2), the Company's portfolio
of leased aircraft assets will be managed and administered under the terms of a
management agreement with JMC. Under this agreement, JMC will receive 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.
7. Subsequent events
As discussed in Notes 2, 4 and 6, the Consolidation was effective
January 1, 1998, having been approved by 99.5% of the total limited partnership
units outstanding. 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 1, 1998, 1,456,557 additional common shares
were issued as a result of the Consolidation. On January 16, 1998, the Company
was listed on the American Stock Exchange under the symbol ACY.
Assuming that the Consolidation had been effective on January 1, 1995,
following are results of operations of the consolidated entity on a pro forma
basis in accordance with Accounting Principles Board Opinion No. 16:
17
<PAGE> 19
AeroCentury Corp.
(A Development Stage Delaware Corporation)
Notes to Financial Statements
December 31, 1997
7. Subsequent events (continued)
<TABLE>
<CAPTION>
(Unaudited)
December 31,
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues $ 3,312,000 $ 3,677,000 $ 3,427,000
Consolidation costs $ -- $ -- $ 502,000
Net income (loss) $ 163,000 $ 663,000 $ (80,000)
Earnings (loss) per share $ 0.10 $ 0.41 $ (0.05)
Number of common shares outstanding 1,606,557 1,606,557 1,606,557
</TABLE>
The above results include pro forma adjustments for management fees and
for depreciation expense. During December 1997 the maintenance reserves for one
of the aircraft were increased by $826,000 and a related expense recognized.
Balance sheet information of the consolidated entity at January 1, 1998 is
as follows:
<TABLE>
<CAPTION>
(Unaudited)
<S> <C>
Total assets $ 18,556,000
Total liabilities (including a deferred tax liability) (4,914,000)
------------
Shareholders' equity $ 13,642,000
============
</TABLE>
On March 6, 1998, the Company purchased a Shorts SD-360 aircraft on lease
to a British regional airline using cash and a loan of $866,667 from AeroCentury
IV, Inc. The secured promissory note bears interest at the rate of 12% per
annum. It is due on March 31, 1999, but may be prepaid without penalty at any
time.
18
<PAGE> 20
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
None
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Board of Directors
The Company's Board of Directors currently consists of the following persons:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY TERM EXPIRES
---- --- ------------------------- ------------
<S> <C> <C> <C>
Neal D. Crispin 52 President, Chairman 2001
Marc J. Anderson 61 Chief Operating Officer
and Senior Vice President 2000
Toni M. Perazzo 51 Vice President - Finance & Secretary 1999
Maurice J. Averay 67 Director 1999
Thomas W. Orr 63 Director 2000
Evan M. Wallach 43 Director 2001
</TABLE>
The business experience during the past five years of each of the
current directors is as follows:
MR. NEAL D. CRISPIN, age 52. Mr. Crispin is also President and a
Director of CMA Consolidated, Inc. ("CMA") and JetFleet Management Corp. Prior
to forming CMA in 1983, Mr. Crispin was vice president-finance of an oil and gas
company. Previously, Mr. Crispin had been associated with Arthur Young & Co.,
Certified Public Accountants. Prior to joining Arthur Young & Co., Mr. Crispin
served as a management consultant, specializing in financial consulting. Mr.
Crispin is the husband of Toni M. Perazzo, a Director and Officer of JMC and the
Company. He received a Bachelors Degree in Economics from the University of
California at Santa Barbara and a Masters Degree in Business Administration
(specializing in Finance) from the University of California at Berkeley. Mr.
Crispin, a certified public accountant, is a member of the American Institute of
Certified Public Accountants ("AICPA") and the California Society of Certified
Public Accountants.
MR. MARC J. ANDERSON, age 61. Mr. Anderson is in charge of portfolio
management and aircraft marketing and financing for JMC as its Chief Operating
Officer. Prior to joining the Company in 1994, Mr. Anderson spent seven years as
Senior Vice President Marketing for PLM International, a transportation
equipment leasing company which is also the sponsor of syndicated investment
programs. While at PLM, he established the company's first aircraft marketing
group, closing in excess of 150 aircraft transactions representing over $400
million. He was responsible for the acquisition, modification, leasing and
remarketing of all aircraft. During his tenure,
19
<PAGE> 21
Mr. Anderson had an average aircraft on-lease record of 96%. From 1983 until
1985, Mr. Anderson served as Contract Administrator for Fairchild Aircraft
Corp., and from 1981 to 1983, he served as Director of Aircraft Sales for
Fairchild SAAB Joint Venture. From 1979 until 1981, Mr Anderson was Vice
President, Contracts for SHORTS Aircraft USA, Inc. In these positions, he was
responsible for customer contracting, negotiation and documentation of sales
agreements and leases and obtaining debt and lease financing. Prior to that, Mr.
Anderson was with several airlines in various roles of increasing
responsibility.
MS. TONI M. PERAZZO, age 51. Ms. Perazzo is also Vice President -
Finance and Secretary of JMC. Prior to joining CMA in 1990, she was Assistant
Vice President for a savings and loan, controller of an oil and gas syndicator
and a senior auditor with Arthur Young & Co., Certified Public Accountants. Ms.
Perazzo is the wife of Neal D. Crispin, a director and officer of JMC and the
Company. She received her Bachelor's Degree from the University of California at
Berkeley, and her MBA from the University of Southern California. Ms. Perazzo, a
CPA, is a member of the California Society of CPAs and the AICPA.
MR. MAURICE J. AVERAY, age 67. Mr. Averay is an aircraft industry
consultant. Mr. Averay has spent the last ten years at various vice president
levels in the technical sales and support and market development positions with
Saab Aircraft of America, beginning in 1986 - 1996. From 1990 - 1995, he was
Senior Vice President of the Sales and Marketing team responsible for North and
South American turboprop airliner sales. From 1995 to 1996 he was a full-time
consultant to Saab Aircraft of America and its parent with respect to marketing
and new aircraft development. From 1983 to 1986, Mr. Averay was Vice President
of Sales Support for Saab Aircraft International, Ltd., Windsor, U.K. From 1982
to 1983, he was Sales Engineering Manager for Fairchild Aircraft, Inc., San
Antonio, Texas. From 1980 to 1981, he acted as Vice President, Planning, for
Chataqua Airlines, Jamestown, New York, responsible for aircraft technical
management and economic planning for this U.S. Airways commuter associate. From
1977 to 1980, he was Vice President of Shorts Aircraft USA, Inc., responsible
for establishment of the Shorts USA organization and in that capacity managed
the East Coast sales office for Shorts 330 for turboprop aircraft. Mr. Averay
holds a Bachelor of Science in Aero Engineering from the University of Bristol,
United Kingdom.
MR. THOMAS W. ORR, age 63. Mr. Orr is currently a partner at the
accounting firm of Bregante & Company LLP, where he has been a partner since
joining in 1992. Prior to that, beginning in 1986, Mr. Orr was Vice President,
Finance, at Scripps League Newspapers, Inc. Beginning in 1958, Mr. Orr was in
the audit department of Arthur Young & Company, where he retired as a partner in
1986. Mr. Orr received his Bachelor's degree in Business Administration, with
distinction, (Accounting major) from the University of Minnesota in 1957. He is
a member of the AICPA, the California Society of CPAs, and a former member of
the California State Board of Accountancy.
MR. EVAN M. WALLACH, age 43. Evan M. Wallach, President of Global
Airfinance Corporation. Mr. Wallach has been President of Global Airfinance
Corporation since March 1996. From 1994 to 1996, Mr. Wallach was Vice
President-Aircraft Financing for The CIT Group. He was Vice President-Leasing
Group from 1992 to 1994 for Bankers Trust Company. Mr. Wallach has specialized
in aircraft and airline financing over the past fifteen years, having previously
held senior-level positions with Kendall Capital Partners, Drexel Burnham
Lambert and American Express Aircraft Leasing. In his positions with these firms
Mr. Wallach has completed over 100 transactions in excess of $3 billion in the
capacities of advisor, underwriter, lender, and lessor/investor. Mr. Wallach
received his MBA from the University of Michigan in 1981.
20
<PAGE> 22
Executive Officers
Officers of the Company are elected by and serve at the discretion of
the Board of Directors. The following persons were appointed as executive
officers of the Company after the Consolidation. Each person listed below
currently serves in a substantially similar capacity as an executive officer of
JMC.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Neal D. Crispin 52 President, Chairman
Marc J. Anderson 61 Chief Operating Officer
Frank Duckstein 44 Vice President
Toni M. Perazzo 51 Vice President, Finance & Secretary
</TABLE>
For information regarding Mr. Anderson, Mr. Crispin and Ms. Perazzo, see "Board
of Directors," above.
MR. FRANK DUCKSTEIN, VICE PRESIDENT, age 44. Mr. Duckstein is responsible for
market development and remarketing of aircraft portfolios. Prior to joining the
Company in 1995, Mr. Duckstein spent five years as Director of Marketing for PLM
International, a transportation equipment leasing company. While at PLM, he was
responsible for sales and remarketing, market research and development, both
domestically and internationally, of PLM's corporate and commuter aircraft, as
well as their helicopter fleet. Previously, he was with the following
international and regional airlines operating within Europe and the U.S. with
responsibility for operation, market development and sales: Aeroamerica (Berlin,
Germany) 1976-1979; Air Berlin (Berlin, Germany) 1980-1983; Direct Air (Berlin,
Germany) 1983-1985; and Pacific Air Express (Millbrae, CA) 1986-1996. Mr.
Duckstein attended the Technical University of Berlin, majoring in Economics.
It is anticipated that the foregoing officers will serve a one-year term and
until their successors are elected and qualified or until their earlier
resignation or removal. There are no arrangements or understandings between or
among any of the officers or directors and any other person pursuant to which
any officer or director was selected as such.
Section 16 Filings
Form 3's for each of Neal D. Crispin, Toni M. Perazzo and Marc J. Anderson, each
a director and executive officer of the Company, were inadvertently not filed
within the prescribed time period after declaration of the effectiveness of the
S-4 Registration Statement (September 23, 1997) and corresponding Section 12(g)
registration under the Securities Act of 1934. Such Form 3's were subsequently
filed immediately upon learning of the error, upon advice of SEC staff, on
December 31, 1997, before the consummation of the Consolidation.
ITEM 10: EXECUTIVE COMPENSATION
No compensation was paid to any executive officers for services rendered during
1997. The officers of the Company are officers of JetFleet Management Corp.
("JMC"), and receive compensation from JMC in their capacity as officers of JMC.
Pursuant to a Management Agreement, the Company pays a monthly management fee to
JMC equal to 0.25% of the net book value of the Company's assets as of the end
of the month for which the fee is due. No management fees were paid by the
Company to JMC during 1997, since the Consolidation was not consummated until
January 1, 1998.
21
<PAGE> 23
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This table indicates how much common stock the officers and directors owned as
of March 27, 1998. Information regarding 5% owners is based on filings with the
Securities and Exchange Commission as of December 31, 1997.
<TABLE>
<CAPTION>
Aggregate No.
Name of Shares Percent
Beneficially Right to of
Owned Acquire(2) Shares
------------- ----------- ----------
<S> <C> <C> <C>
JetFleet Management Corp., 150,000 0 9.3%
Principal Shareholder
Neal D. Crispin, 202,894(1) 6,666(2) 12.6%(3)
Director, Officer and Principal
Shareholder (1)
Marc J. Anderson, 0 3,333(2) 2.1%
Director and Officer
Toni M. Perazzo, 202,894(1) 0 12.6%(3)
Director and Officer (1)
</TABLE>
(1) Neal D. Crispin and Toni M. Perazzo, as husband and wife, beneficially own
as community property a total of 202,894 shares of Common Stock of the Company.
Includes the following: (i) 150,000 shares held by JetFleet Management Corp.
("JMC") of which Mr. Crispin and Ms. Perazzo are directors, officers and
principal shareholders; (ii) 44,119 and 2,600 shares held by two corporations,
respectively, each of which Mr. Crispin is an officer, director and indirect
100% owner, and of which Ms. Perazzo is an officer.
(2) Shares the officers and directors have a right to acquire within 60 days of
March 27, 1998, pursuant to a JMC equity incentive plan, under which JMC granted
certain JMC employees options to purchase common stock of the Company owned by
JetFleet Management Corp.
(3) Percentage represents the amount beneficially owned shown in the second
column of the table only, since the 6,666 shares of Common Stock that Mr.
Crispin has a right to acquire are already counted in the 150,000 shares
beneficially owned by Mr. Crispin through JMC.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and JMC have entered into a Management Agreement under which JMC
will be responsible for management and administration of the Company's portfolio
of leased aircraft assets. JMC's directors are also members of the Company's
Board of Directors, and the Company's officers are also officers of JMC. Two
directors of the Company, Mr. Crispin and Ms. Perazzo, are principal
shareholders of JMC. Under the Management Agreement, which has a 20-year term,
JMC receives a monthly management fee equal to 0.25% of the net book value of
the Company's assets under management. In addition, the agreement also grants
the Company an option to acquire
22
<PAGE> 24
JMC at any time on before December 31, 2000, subject to respective shareholder
approval, for a purchase price based on the earnings of JMC.
JMC may also receive reimbursement for accountable general administrative
expenses paid to third parties by JMC in connection with the sale or re-lease of
the Company's assets. In addition, JMC may receive a brokerage fee for locating
assets for the Company. In no event, will any brokerage or remarketing fee be
greater than the usual and customary brokerage fee that would have been payable
to an unrelated third party broker.
On February 3, 1998, the Company's Board of Directors, including its three
outside directors, ratified, approved and confirmed the terms of the Management
Agreement which had been previously approved by the Board of Directors in 1997.
The Company maintains its principal office at the offices of JMC at 1440 Chapin
Avenue, Suite 310, Burlingame, California, without reimbursement to JMC.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits contained in the Company's S-4 Registration Statement (333-24743),
declared effective on September 23, 1997, are incorporated herein by reference.
<TABLE>
<CAPTION>
Exhibit No. Name
- - ----------- ----
<S> <C>
10.03 Form of Indemnity Agreement between the Company and each of
its directors and officers
10.04 JetFleet Management Corp. 1997-ACY Equity Incentive Plan
99.01 Audited Financial Statements for JetFleet Aircraft, L.P.
for the year ended December 31, 1997.
99.02 Audited Financial Statements for JetFleet Aircraft II, L.P.
for the year ended December 31, 1997.
</TABLE>
23
<PAGE> 25
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on March 27, 1998.
AEROCENTURY CORP.
By: /s/ Neal D. Crispin
------------------------
Neal D. Crispin
Title: President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated on
March 27, 1998.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Neal D. Crispin Director, President and Chairman of the
----------------------------------- Board of Directors of the Registrant
Neal D. Crispin (Principal Executive Officer)
/s/ Toni M. Perazzo Director, Vice President - Finance and Secretary
----------------------------------- of the Registrant (Principal Financial and Accounting
Toni M. Perazzo Officer)
/s/ Marc J. Anderson Director, Chief Operating Officer, Senior Vice President
-----------------------------------
Marc J. Anderson
/s/ Thomas W. Orr Director
-----------------------------------
Thomas W. Orr
/s/ Evan M. Wallach Director
-----------------------------------
Evan M. Wallach
</TABLE>
24
<PAGE> 26
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
- - ----------- -----------
<S> <C>
10.03 Form of Indemnity Agreement
10.04 JetFleet Management Corp.
99.01 Audited Financial Statements for JetFleet Aircraft
December 31, 1997.
99.02 Audited Financial Statements for JetFleet Aircraft II
December 31, 1997.
</TABLE>
<PAGE> 1
EXHIBIT 10.03
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is entered into, effective as of __________,
1998, by and between AeroCentury Corp., a Delaware corporation (the "Company"),
and Neal Crispin ("Indemnitee").
WHEREAS, it is essential to the Company to retain and attract
as directors and officers the most capable persons available;
WHEREAS, Indemnitee is a director and/or officer of the
Company;
WHEREAS, both the Company and Indemnitee recognize the
increased risk of litigation and other claims currently being asserted against
directors and officers of corporations;
WHEREAS, the Certificate of Incorporation and Bylaws of the
Company require the Company to indemnify and advance expenses to its directors
and officers to the fullest extent permitted under Delaware law, and the
Indemnitee has been serving and continues to serve as a director and/or officer
of the Company in part in reliance on the Company's Certificate of
Incorporation and Bylaws; and
WHEREAS, in recognition of Indemnitee's need for (i)
substantial protection against personal liability based on Indemnitee's
reliance on the aforesaid Certificate of Incorporation and Bylaws, (ii)
specific contractual assurance that the protection promised by the Certificate
of Incorporation and Bylaws will be available to Indemnitee (regardless of,
among other things, any amendment to or revocation of the Certificate of
Incorporation and Bylaws or any change in the composition of the Company's
Board of Directors or acquisition transaction relating to the Company), and
(iii) an inducement to provide effective services to the Company as a director
and/or officer, the Company wishes to provide in this Agreement for the
indemnification of and the advancing of expenses to Indemnitee to the fullest
extent (whether partial or complete) permitted under Delaware law and as set
forth in this Agreement, and, to the extent insurance is maintained, to provide
for the continued coverage of Indemnitee under the Company's directors' and
officers' liability insurance policies.
NOW, THEREFORE, in consideration of the above premises and of
Indemnitee continuing to serve the Company directly or, at its request, with
another enterprise, and intending to be legally bound hereby, the parties agree
as follows:
<PAGE> 2
1. Certain Definitions:
(a) Board: the Board of Directors of the Company.
(b) Affiliate: any corporation or other person or entity
that directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the person specified.
(c) Change in Control: shall be deemed to have occurred
if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"))(other than a
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or a corporation owned directly or indirectly by the stockholders
of the Company in substantially the same proportions as their ownership of
stock of the Company), is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 30% or more of the total voting power represented by the
Company's then outstanding Voting Securities, or (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board and any new director whose election by the Board or nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to constitute a
majority of the Board, or (iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation, other than a
merger or consolidation that would result in the Voting Securities of the
Company outstanding immediately prior thereto continuing to represent (either
by remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (iv) the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company (in one transaction or a series of
transactions) of all or substantially all of the Company's assets.
(d) Expenses: any expense, liability, or loss, including
attorneys' fees, judgments, fines, ERISA excise taxes and penalties, amounts
paid or to be paid in settlement, any interest, assessments, or other charges
imposed thereon, any federal, state, local, or foreign taxes imposed as a
result of the actual or deemed receipt of any payments under this Agreement,
and all other costs and obligations, paid or incurred in connection with
investigating, defending, being a witness in, participating in (including on
appeal), or preparing for any of the foregoing in, any Proceeding relating to
any Indemnifiable Event.
(e) Indemnifiable Event: any event or occurrence that
takes place either prior to or after the execution of this Agreement, related
to the fact that Indemnitee is or was a director or officer of the Company, or
while a director or officer is or was serving at the request of the
2
<PAGE> 3
Company as a director, officer, employee, trustee, agent, or fiduciary of
another foreign or domestic corporation, partnership, joint venture, employee
benefit plan, trust, or other enterprise, or was a director, officer, employee,
or agent of a foreign or domestic corporation that was a predecessor
corporation of the Company or of another enterprise at the request of such
predecessor corporation, or related to anything done or not done by Indemnitee
in any such capacity, whether or not the basis of the Proceeding is alleged
action in an official capacity as a director, officer, employee, or agent or in
any other capacity while serving as a director, officer, employee, or agent of
the Company, as described above.
(f) Independent Counsel: the person or body appointed in
connection with Section 3.
(g) Proceeding: any threatened, pending, or completed
action, suit, or proceeding (including an action by or in the right of the
Company), or any inquiry, hearing, or investigation, whether conducted by the
Company or any other party, that Indemnitee in good faith believes might lead
to the institution of any such action, suit, or proceeding, whether civil,
criminal, administrative, investigative, or other.
(h) Reviewing Party: the person or body appointed in
accordance with Section 3.
(i) Voting Securities: any securities of the Company
that vote generally in the election of directors.
2. Agreement to Indemnify.
(a) General Agreement. In the event Indemnitee was, is,
or becomes a party to or witness or other participant in, or is threatened to
be made a party to or witness or other participant in, a Proceeding by reason
of (or arising in part out of) an Indemnifiable Event, the Company shall
indemnify Indemnitee from and against any and all Expenses to the fullest
extent permitted by law, as the same exists or may hereafter be amended or
interpreted (but in the case of any such amendment or interpretation, only to
the extent that such amendment or interpretation permits the Company to provide
broader indemnification rights than were permitted prior thereto). The parties
hereto intend that this Agreement shall provide for indemnification in excess
of that expressly permitted by statute, including, without limitation, any
indemnification provided by the Company's Certificate of Incorporation, its
Bylaws, vote of its shareholders or disinterested directors, or applicable law.
The parties intend that this Agreement cover any and all expenses incurred by
Indemnitee in any action including attorneys' fees, judgments, (including
punitive and compensatory damages) fines and amounts paid in settlement (if
such settlement is approved in advance by the Company, which approval shall not
be unreasonably withheld) (collectively, "Indemnified Amounts") actually and
reasonably incurred by Indemnitee in connection with such action or proceeding
if Indemnitee acted in good
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<PAGE> 4
faith and in a manner Indemnitee believed to be in the best interest of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful. The termination
of any action or proceeding by judgment or fine, conviction, or upon a please
of nolo contendere or its equivalent, shall not, of itself, create a
presumption that (i) Indemnitee did not act in good faith and in a manner which
Indemnitee reasonably believed to be in the best interests of the Company, or
(ii) with respect to any criminal action or proceeding, Indemnitee had
reasonable cause to believe that Indemnitee's conduct was unlawful.
(b) Initiation of Proceeding. Notwithstanding anything
in this Agreement to the contrary, Indemnitee shall not be entitled to
indemnification pursuant to this Agreement in connection with any Proceeding
initiated by Indemnitee against the Company or any director or officer of the
Company unless (i) the Company has joined in or the Board has consented to the
initiation of such Proceeding; (ii) the Proceeding is one to enforce
indemnification rights under Section 5; or (iii) the Proceeding is instituted
after a Change in Control (other than a Change in Control approved by a
majority of the directors on the Board who were directors immediately prior to
such Change in Control) and Independent Counsel has approved its initiation.
(c) Expense Advances. If so requested by Indemnitee, the
Company shall advance (within ten business days of such request) any and all
Expenses to Indemnitee (an "Expense Advance"); provided that, (i) such an
Expense Advance shall be made only upon delivery to the Company of an
undertaking by or on behalf of the Indemnitee to repay the amount thereof if it
is ultimately determined that Indemnitee is not entitled to be indemnified by
the Company, and (ii) if and to the extent that the Reviewing Party determines
that Indemnitee would not be permitted to be so indemnified under applicable
law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby
agrees to reimburse the Company) for all such amounts theretofore paid. If
Indemnitee has commenced or commences legal proceedings in a court of competent
jurisdiction to secure a determination that Indemnitee should be indemnified
under applicable law, as provided in Section 4, any determination made by the
Reviewing Party that Indemnitee would not be permitted to be indemnified under
applicable law shall not be binding, and Indemnitee shall not be required to
reimburse the Company for any Expense Advance until a final judicial
determination is made with respect thereto (as to which all rights of appeal
therefrom have been exhausted or have lapsed). Indemnitee's obligation to
reimburse the Company for Expense Advances shall be unsecured and no interest
shall be charged thereon.
(d) Mandatory Indemnification. Notwithstanding any other
provision of this Agreement, to the extent that Indemnitee has been successful
on the merits or otherwise in defense of any Proceeding relating in whole or in
part to an Indemnifiable Event or in defense of any issue or matter therein,
Indemnitee shall be indemnified against all Expenses incurred in connection
therewith.
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<PAGE> 5
(e) Partial Indemnification. If Indemnitee is entitled
under any provision of this Agreement to indemnification by the Company for
some or a portion of Expenses, but not, however, for the total amount thereof,
the Company shall nevertheless indemnify Indemnitee for the portion thereof to
which Indemnitee is entitled.
(f) Prohibited Indemnification. No indemnification
pursuant to this Agreement shall be paid by the Company on account of any
Proceeding in which judgment is rendered against Indemnitee for an accounting
of profits made from the purchase or sale by Indemnitee of securities of the
Company pursuant to the provisions of Section 16(b) of the Securities Exchange
Act of 1934, as amended, or similar provisions of any federal, state, or local
laws.
3. Reviewing Party. Prior to any Change in Control, the
Reviewing Party shall be any appropriate person or body consisting of a member
or members of the Board or any other person or body appointed by the Board who
is not a party to the particular Proceeding with respect to which Indemnitee is
seeking indemnification; after a Change in Control, the Independent Counsel
referred to below shall become the Reviewing Party. With respect to all
matters arising after a Change in Control (other than a Change in Control
approved by a majority of the directors on the Board who were directors
immediately prior to such Change in Control) concerning the rights of
Indemnitee to indemnity payments and Expense Advances under this Agreement or
any other agreement or under applicable law or the Company's Certificate of
Incorporation or Bylaws now or hereafter in effect relating to indemnification
for Indemnifiable Events, the Company shall seek legal advice only from
Independent Counsel selected by Indemnitee and approved by the Company (which
approval shall not be unreasonably withheld), and who has not otherwise
performed services for the Company or the Indemnitee (other than in connection
with indemnification matters) within the last five years. The Independent
Counsel shall not include any person who, under the applicable standards of
professional conduct then prevailing, would have a conflict of interest in
representing either the Company or Indemnitee in an action to determine
Indemnitee's rights under this Agreement. Such counsel, among other things,
shall render its written opinion to the Company and Indemnitee as to whether
and to what extent the Indemnitee should be permitted to be indemnified under
applicable law. The Company agrees to pay the reasonable fees of the
Independent Counsel and to indemnify fully such counsel against any and all
expenses (including attorneys' fees), claims, liabilities, loss, and damages
arising out of or relating to this Agreement or the engagement of Independent
Counsel pursuant hereto.
4. Indemnification Process and Appeal.
(a) Indemnification Payment. Indemnitee shall be
entitled to indemnification of Expenses, and shall receive payment thereof,
from the Company in accordance with this Agreement as soon as practicable after
Indemnitee has made written demand on the Company for
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<PAGE> 6
indemnification, unless the Reviewing Party has given a written opinion to the
Company that Indemnitee is not entitled to indemnification under applicable
law.
(b) Suit to Enforce Rights. Regardless of any action by
the Reviewing Party, if Indemnitee has not received full indemnification within
thirty days after making a demand in accordance with Section 4(a), Indemnitee
shall have the right to enforce its indemnification rights under this Agreement
by commencing litigation in any court in the State of California or the State
of Delaware having subject matter jurisdiction thereof seeking an initial
determination by the court or challenging any determination by the Reviewing
Party or any aspect thereof. The Company hereby consents to service of process
and to appear in any such proceeding. Any determination by the Reviewing Party
not challenged by the Indemnitee shall be binding on the Company and
Indemnitee. The remedy provided for in this Section 4 shall be in addition to
any other remedies available to Indemnitee at law or in equity.
(c) Defense to Indemnification, Burden of Proof, and
Presumptions. It shall be a defense to any action brought by Indemnitee
against the Company to enforce this Agreement (other than an action brought to
enforce a claim for Expenses incurred in defending a Proceeding in advance of
its final disposition where the required undertaking has been tendered to the
Company) that it is not permissible under applicable law for the Company to
indemnify Indemnitee for the amount claimed. In connection with any such
action or any determination by the Reviewing Party or otherwise as to whether
Indemnitee is entitled to be indemnified hereunder, the burden of proving such
a defense or determination shall be on the Company. Neither the failure of the
Reviewing Party or the Company (including its Board, independent legal counsel,
or its stockholders) to have made a determination prior to the commencement of
such action by Indemnitee that indemnification of the claimant is proper under
the circumstances because Indemnitee has met the standard of conduct set forth
in applicable law, nor an actual determination by the Reviewing Party or
Company (including its Board, independent legal counsel, or its stockholders)
that the Indemnitee had not met such applicable standard of conduct, shall be a
defense to the action or create a presumption that the Indemnitee has not met
the applicable standard of conduct. For purposes of this Agreement, the
termination of any claim, action, suit, or proceeding, by judgment, order,
settlement (whether with or without court approval), conviction, or upon a plea
of nolo contendere, or its equivalent, shall not create a presumption that
Indemnitee did not meet any particular standard of conduct or have any
particular belief or that a court has determined that indemnification is not
permitted by applicable law.
5. Indemnification for Expenses Incurred in Enforcing Rights.
The Company shall indemnify Indemnitee against any and all Expenses that are
incurred by Indemnitee in connection with any action brought by Indemnitee for
(i) indemnification or advance payment of Expenses by the Company
under this Agreement or any other agreement or under
applicable law or the Company's
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<PAGE> 7
Certificate of Incorporation or Bylaws now or hereafter in
effect relating to indemnification for Indemnifiable Events,
and/or
(ii) recovery under directors' and officers' liability insurance
policies maintained by the Company, but only in the event that
Indemnitee ultimately is determined to be entitled to such
indemnification or insurance recovery, as the case may be. In
addition, the Company shall, if so requested by Indemnitee,
advance the foregoing Expenses to Indemnitee, subject to and
in accordance with Section 2(c).
6. Notification and Defense of Proceeding.
(a) Notice. Promptly after receipt by Indemnitee of notice
of the commencement of any Proceeding, Indemnitee shall, if a claim in respect
thereof is to be made against the Company under this Agreement, notify the
Company of the commencement thereof; but the omission so to notify the Company
will not relieve the Company from any liability that it may have to Indemnitee,
except as provided in Section 6(c).
(b) Defense. With respect to any Proceeding as to which
Indemnitee notifies the Company of the commencement thereof, the Company will
be entitled to participate in the Proceeding at its own expense and except as
otherwise provided below, to the extent the Company so wishes, it may assume
the defense thereof with counsel reasonably satisfactory to Indemnitee. After
notice from the Company to Indemnitee of its election to assume the defense of
any Proceeding, the Company shall not be liable to Indemnitee under this
Agreement or otherwise for any Expenses subsequently incurred by Indemnitee in
connection with the defense of such Proceeding other than reasonable costs of
investigation or as otherwise provided below. Indemnitee shall have the right
to employ legal counsel in such Proceeding, but all Expenses related thereto
incurred after notice from the Company of its assumption of the defense shall
be at Indemnitee's expense unless: (i) the employment of legal counsel by
Indemnitee has been authorized by the Company, (ii) Indemnitee has reasonably
determined that there may be a conflict of interest between Indemnitee and the
Company in the defense of the Proceeding, (iii) after a Change in Control
(other than a Change in Control approved by a majority of the directors on the
Board who were directors immediately prior to such Change in Control), the
employment of counsel by Indemnitee has been approved by the Independent
Counsel, or (iv) the Company shall not in fact have employed counsel to assume
the defense of such Proceeding, in each of which cases all Expenses of the
Proceeding shall be borne by the Company. The Company shall not be entitled to
assume the defense of any Proceeding brought by or on behalf of the Company or
as to which Indemnitee shall have made the determination provided for in (ii),
(iii) and (iv) above.
(c) Settlement of Claims. The Company shall not be liable
to indemnify Indemnitee under this Agreement or otherwise for any amounts paid
in settlement of any Proceeding effected without the Company's written consent,
such consent not to be unreasonably
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withheld; provided, however, that if a Change in Control has occurred (other
than a Change in Control approved by a majority of the directors on the Board
who were directors immediately prior to such Change in Control), the Company
shall be liable for indemnification of Indemnitee for amounts paid in
settlement if the Independent Counsel has approved the settlement. The Company
shall not settle any Proceeding in any manner that would impose any penalty or
limitation on Indemnitee without Indemnitee's written consent. The Company
shall not be liable to indemnify the Indemnitee under this Agreement with
regard to any judicial award if the Company was not given a reasonable and
timely opportunity, at its expense, to participate in the defense of such
action; the Company's liability hereunder shall not be excused if participation
in the Proceeding by the Company was barred by this Agreement.
7. Establishment of Trust. In the event of a Change in Control
(other than a Change in Control approved by a majority of the directors on the
Board who were directors immediately prior to such Change in Control) the
Company shall, upon written request by Indemnitee, create a Trust for the
benefit of the Indemnitee and from time to time upon written request of
Indemnitee shall fund the Trust in an amount sufficient to satisfy any and all
Expenses reasonably anticipated at the time of each such request to be incurred
in connection with investigating, preparing for, participating in, and/or
defending any Proceeding relating to an Indemnifiable Event. The amount or
amounts to be deposited in the Trust pursuant to the foregoing funding
obligation shall be determined by the Independent Counsel. The terms of the
Trust shall provide that (i) the Trust shall not be revoked or the principal
thereof invaded without the written consent of the Indemnitee, (ii) the Trustee
shall advance, within ten business days of a request by the Indemnitee, any and
all Expenses to the Indemnitee (and the Indemnitee hereby agrees to reimburse
the Trust under the same circumstances for which the Indemnitee would be
required to reimburse the Company under Section 2(c) of this Agreement), (iii)
the Trust shall continue to be funded by the Company in accordance with the
funding obligation set forth above, (iv) the Trustee shall promptly pay to the
Indemnitee all amounts for which the Indemnitee shall be entitled to
indemnification pursuant to this Agreement or otherwise, and (v) all unexpended
funds in the Trust shall revert to the Company upon a final determination by
the Independent Counsel or a court of competent jurisdiction, as the case may
be, that the Indemnitee has been fully indemnified under the terms of this
Agreement. The Trustee shall be chosen by the Indemnitee. Nothing in this
Section 7 shall relieve the Company of any of its obligations under this
Agreement. All income earned on the assets held in the Trust shall be reported
as income by the Company for federal, state, local, and foreign tax purposes.
The Company shall pay all costs of establishing and maintaining the Trust and
shall indemnify the Trustee against any and all expenses (including attorneys'
fees), claims, liabilities, loss, and damages arising out of or relating to
this Agreement or the establishment and maintenance of the Trust.
8. Non-Exclusivity. The rights of Indemnitee hereunder shall be
in addition to any other rights Indemnitee may have under the Company's
Certificate of Incorporation, Bylaws, applicable law, or otherwise; provided,
however, that this Agreement shall supersede any prior indemnification
agreement between the Company and the Indemnitee. To the extent that a
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<PAGE> 9
change in applicable law (whether by statute or judicial decision) permits
greater indemnification than would be afforded currently under the Company's
Certificate of Incorporation, Bylaws, applicable law, or this Agreement, it is
the intent of the parties that Indemnitee enjoy by this Agreement the greater
benefits so afforded by such change.
9. Liability Insurance. To the extent the Company maintains an
insurance policy or policies providing general and/or directors' and officers'
liability insurance, Indemnitee shall be covered by such policy or policies, in
accordance with its or their terms, to the maximum extent of the coverage
available for any Company director or officer.
10. Period of Limitations. No legal action shall be brought and
no cause of action shall be asserted by or on behalf of the Company or any
Affiliate of the Company against Indemnitee, Indemnitee's spouse, heirs,
executors, or personal or legal representatives after the expiration of two
years from the date of accrual of such cause of action, or such longer period
as may be required by state law under the circumstances. Any claim or cause of
action of the Company or its Affiliate shall be extinguished and deemed
released unless asserted by the timely filing and notice of a legal action
within such period; provided, however, that if any shorter period of
limitations is otherwise applicable to any such cause of action, the shorter
period shall govern.
11. Attorneys' Fees. In the event that any action is instituted
by Indemnitee under this Agreement to enforce or interpret any of the terms
hereof, Indemnitee shall be entitled to be paid all costs and expenses,
including reasonable attorneys' fees, incurred by Indemnitee with respect to
such action, unless as a part of such action, a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee as a basis
for such action were not made in good faith or were frivolous. In the event of
an action instituted by or in the name of the Company under this Agreement or
to enforce or interpret any of the terms of this Agreement, Indemnitee shall be
entitled to be paid all costs and expenses, including reasonable attorneys'
fees, incurred by Indemnitee in defense of such action (including with respect
to Indemnitee's counterclaims and cross-claims made in such action), unless as
a part of such action were made in bad faith or were frivolous.
12. Amendment of this Agreement. No supplement, modification, or
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement
shall be binding unless in the form of a writing signed by the party against
whom enforcement of the waiver is sought, and no such waiver shall operate as a
waiver of any other provisions hereof (whether or not similar), nor shall such
waiver constitute a continuing waiver. Except as specifically provided herein,
no failure to exercise or any delay in exercising any right or remedy hereunder
shall constitute a waiver thereof.
13. Subrogation. In the event of payment under this Agreement,
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who
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<PAGE> 10
shall execute all papers required and shall do everything that may be necessary
to secure such rights, including the execution of such documents necessary to
enable the Company effectively to bring suit to enforce such rights.
14. No Duplication of Payments. The Company shall not be liable
under this Agreement to make any payment in connection with any claim made
against Indemnitee to the extent Indemnitee has otherwise received payment
(under any insurance policy, Bylaw, or otherwise) of the amounts otherwise
indemnifiable hereunder.
15. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors (including any direct or indirect successor by purchase,
merger, consolidation, or otherwise to all or substantially all of the business
and/or assets of the Company), assigns, spouses, heirs, and personal and legal
representatives. The Company shall require and cause any successor (whether
direct or indirect by purchase, merger, consolidation, or otherwise) to all,
substantially all, or a substantial part, of the business and/or assets of the
Company, by written agreement in form and substance satisfactory to Indemnitee,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that the Company would be required to perform if no such
succession had taken place. The indemnification provided under this Agreement
shall continue as to Indemnitee for any action taken or not taken while serving
in an indemnified capacity pertaining to an Indemnifiable Event even though he
may have ceased to serve in such capacity at the time of any Proceeding.
16. Severability. If any provision (or portion thereof) of this
Agreement shall be held by a court of competent jurisdiction to be invalid,
void, or otherwise unenforceable, the remaining provisions shall remain
enforceable to the fullest extent permitted by law. Furthermore, to the
fullest extent possible, the provisions of this Agreement (including, without
limitation, each portion of this Agreement containing any provision held to be
invalid, void, or otherwise unenforceable, that is not itself invalid, void, or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid, void, or unenforceable.
17. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware
applicable to contracts made and to be performed in such State without giving
effect to its principles of conflicts of laws.
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18. Notices. All notices, demands, and other communications
required or permitted hereunder shall be made in writing and shall be deemed to
have been duly given if delivered by hand, against receipt, or mailed, postage
prepaid, certified or registered mail, return receipt requested, and addressed
to the Company at:
AeroCentury Corp.
1440 Chapin Avenue
Burlingame California 94010
Attention: President
and to Indemnitee at:
Neal Crispin
--------------------------
--------------------------
--------------------------
Notice of change of address shall be effective only when given in accordance
with this Section. All notices complying with this Section shall be deemed to
have been received on the date of hand delivery or on the third business day
after mailing.
19. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement as of the day specified above.
AeroCentury Corp.,
a Delaware corporation
By:
----------------------------------------
Name:
Title: Chief Executive Officer
INDEMNITEE
-------------------------------------------
Neal Crispin
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<PAGE> 1
Exhibit 10.04
JETFLEET MANAGEMENT CORP.
1997 - ACY EQUITY INCENTIVE PLAN
As Adopted April 1, 1997
1. PURPOSE. The purpose of this Plan is to provide incentives to attract,
retain and motivate eligible persons whose present and potential contributions
are important to the success of the Company, its Parent and Subsidiaries, by
offering them an opportunity to participate in the future performance of the
Company and its subsidiaries through awards of Options and Restricted Stock.
Capitalized terms not defined in the text are defined in Section 22 hereof.
2. SHARES SUBJECT TO THE PLAN.
2.1 Number of Shares Available. Subject to Sections 2.2 hereof,
43,500 shares of common stock of AeroCentury Corp. ("ACY"), a wholly owned
subsidiary of the Company ("Shares") shall be reserved and available for
exercise pursuant to this Plan. Subject to Sections 2.2 hereof, Shares will
again be available for grant and issuance in connection with future Awards under
this Plan that: (a) are subject to issuance upon exercise of an Option but cease
to be subject to such Option for any reason other than exercise of such Option
or (b) are subject to a Restricted Stock Award that otherwise terminates without
Shares being issued. At all times the Company will keep available a sufficient
number of Shares as will be required to satisfy the requirements of all Awards
granted under this Plan.
2.2 Adjustment of Shares. In the event that the number of outstanding
shares of the ACY' Common Stock is changed by a stock dividend,
recapitalization, stock split, reverse stock split, subdivision, combination,
reclassification or similar change in the capital structure of the ACY without
consideration, then (a) the number of Shares reserved for issuance under this
Plan, (b) the Exercise Prices of and number of Shares subject to outstanding
Options and (c) the Purchase Prices of and number of Shares subject to other
outstanding Awards will be proportionately adjusted, subject to any required
action by the Board or the shareholders of the Company and compliance with
applicable securities laws; provided, however, that fractions of a Share will
not be issued but will either be paid in cash at Fair Market Value of such
fraction of a Share or will be rounded down to the nearest whole Share, as
determined by the Committee.
3. ELIGIBILITY. ISOs (as defined in Section 5 hereof) may be granted only
to employees (including officers and directors who are also employees) of the
Company or of a Parent or Subsidiary of the Company. NQSOs (as defined in
Section 5 hereto) and Restricted Stock Awards may be granted to employees,
officers, directors and consultants of the Company or any Parent or Subsidiary
of the Company; provided such consultants render bona fide services not in
connection with the offer and sale of securities in a capital-raising
transaction. A person may be granted more than one Award under this Plan.
4. ADMINISTRATION.
4.1 Committee Authority. This Plan will be administered by the
Committee or the Board acting as the Committee. Subject to the general purposes,
terms and conditions of this Plan, and to the direction of the Board, the
Committee will have full power to implement and carry out this Plan. Without
limitation, the Committee will have the authority to:
(a) construe and interpret this Plan, any Award Agreement and any
other agreement or document executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to
this Plan;
(c) select persons to receive Awards;
<PAGE> 2
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject to
Awards;
(f) determine whether Awards will be granted singly, in combination
with, in tandem with, in replacement of, or as alternatives to,
other Awards under this Plan or awards under any other incentive
or compensation plan of the Company or any Parent or Subsidiary
of the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission, or reconcile any
inconsistency in this Plan, any Award, any Award Agreement, any
Exercise Agreement or any Restricted Stock Purchase Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of this Plan.
4.2 Committee Discretion. Any determination made by the Committee
with respect to any Award will be made in its sole discretion at the time of
grant of the Award or, unless in contravention of any express term of this Plan
or Award, and subject to Section 5.9 hereof, at any later time, and such
determination will be final and binding on the Company and on all persons having
an interest in any Award under this Plan. The Committee may delegate to one or
more officers of the Company the authority to grant an Award under this Plan.
5. OPTIONS. The Committee may grant Options to eligible persons and will
determine whether such Options will be Incentive Stock Options within the
meaning of the Code ("ISOs") or Nonqualified Stock Options ("NQSOs"), the number
of Shares subject to the Option, the Exercise Price of the Option, the period
during which the Option may be exercised, and all other terms and conditions of
the Option, subject to the following:
5.1 Form of Option Grant. Each Option granted under this Plan will be
evidenced by an Award Agreement which will expressly identify the Option as an
ISO or an NQSO ("Stock Option Agreement"), and will be in such form and contain
such provisions (which need not be the same for each Participant) as the
Committee may from time to time approve, and which will comply with and be
subject to the terms and conditions of this Plan.
5.2 Date of Grant. The date of grant of an Option will be the date on
which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy of
this Plan will be delivered to the Participant within a reasonable time after
the granting of the Option.
5.3 Exercise Period. Options may be exercisable immediately (subject
to repurchase pursuant to Section 11 hereof) or may be exercisable within the
times or upon the events determined by the Committee as set forth in the Stock
Option Agreement governing such Option; provided, however, that no Option will
be exercisable after the expiration of ten (10) years from the date the Option
is granted; and provided further that no ISO granted to a person who directly or
by attribution owns more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or of any Parent or Subsidiary of
the Company ("Ten Percent Shareholder") will be exercisable after the expiration
of five (5) years from the date the ISO is granted. The Committee also may
provide for Options to become exercisable at one time or from time to time,
periodically or otherwise, in such number of Shares or percentage of Shares as
the Committee determines. Subject to earlier termination of the Option as
provided herein, each Participant who is not an officer, director or consultant
of the Company or of a Parent or Subsidiary of the Company shall have the right
to exercise an Option granted hereunder at the rate of at least twenty percent
(20%) per year over five (5) years from the date such Option is granted.
5.4 Exercise Price. The Exercise Price of an Option will be
determined by the Committee when the Option is granted and may not be less than
eighty-five percent (85%) of the Fair Market Value of the Shares on the date of
grant; provided that (a) the Exercise Price of an ISO will not be less than one
hundred percent
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(100%) of the Fair Market Value of the Shares on the date of grant and (b) the
Exercise Price of any Option granted to a Ten Percent Shareholder will not be
less than one hundred ten percent (110%) of the Fair Market Value of the Shares
on the date of grant. Payment for the Shares purchased must be made in
accordance with Section 7 hereof.
5.5 Method of Exercise. Options may be exercised only by delivery to
the Company of a written stock option exercise agreement (the "Exercise
Agreement") in a form approved by the Committee (which need not be the same for
each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares purchased under such Exercise Agreement, if
any, and such representations and agreements regarding Participant's investment
intent and access to information and other matters, if any, as may be required
or desirable by the Company to comply with applicable securities laws, together
with payment in full of the Exercise Price, and any applicable taxes, for the
number of Shares being purchased.
5.6 Termination. Subject to earlier termination pursuant to Sections
17 and 18 hereof and notwithstanding the exercise periods set forth in the Stock
Option Agreement, exercise of an Option will always be subject to the following:
(a) If the Participant is Terminated for any reason except death,
Disability or for Cause, then the Participant may exercise such
Participant's Options only to the extent that such Options are
exercisable upon the Termination Date and such Options must be
exercised by the Participant, if at all, as to all or some of the
Vested Shares calculated as of the Termination Date, within three
(3) months after the Termination Date (or within such shorter
time period, not less than thirty (30) days, or within such
longer time period, not exceeding five (5) years, after the
Termination Date as may be determined by the Committee, with any
exercise beyond three (3) months after the Termination Date
deemed to be an NQSO) but in any event, non later than the
expiration date of the Options.
(b) If the Participant is Terminated because of Participant's death
or Disability (or the Participant dies within three (3) months
after a Termination other than for Cause), then Participant's
Options may be exercised only to the extent that such Options are
exercisable by Participant on the Termination Date and must be
exercised by Participant (or Participant's legal representative
or authorized assignee), if at all, as to all or some of the
Vested Shares calculated as of the Termination Date, within
twelve (12) months after the Termination Date (or within such
shorter time period, not less than six (6) months, or within such
longer time period, not exceeding five (5) years, after the
Termination Date as may be determined by the Committee, with any
exercise beyond (i) three (3) months after the Termination Date
when the Termination is for any reason other than the
Participant's death or disability, within the meaning of Section
22(e)(3) of the Code, or (ii) twelve (12) months after the
Termination Date when the Termination is for Participant's
disability, within the meaning of Section 22(e)(3) of the Code,
deemed to be an NQSO) but in any event no later than the
expiration date of the Options.
(c) If the Participant is terminated for Cause, then Participant's
Options shall expire on such Participant's Termination Date, or
at such later time and on such conditions as are determined by
the Committee.
5.7 Limitations on Exercise. The Committee may specify a reasonable
minimum number of Shares that may be purchased on any exercise of an Option,
provided that such minimum number will not prevent Participant from exercising
the Option for the full number of Shares for which it is then exercisable.
5.8 Limitations on ISOs. The aggregate Fair Market Value (determined
as of the date of grant) of Shares with respect to which ISOs are exercisable
for the first time by a Participant during any calendar year (under this Plan or
under any other incentive stock option plan of the Company or any Parent or
Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value of
Shares on the date of grant with respect to which ISOs are exercisable for the
first time by a Participant during any calendar year exceeds $100,000, then the
Options for the first $100,000 worth of Shares to become exercisable in such
calendar year will be ISOs and the Options for the amount in excess of $100,000
that become exercisable in that calendar year will be NQSOs. In the event that
the Code or the regulations promulgated thereunder are amended after the
Effective Date (as defined in Section 18 hereof) to provide for a different
limit on the Fair Market Value of Shares permitted to be subject to ISOs, then
such
3
<PAGE> 4
different limit will be automatically incorporated herein and will apply to any
Options granted after the effective date of such amendment.
5.9 Modification Extension or Removal. The Committee may modify,
extended or renew outstanding Options in substitution therefor, provided that
any such action may not, without the written consent of a Participant, impair
any of such Participant's rights under any Option previously granted. Any
outstanding ISO that is modified, extended, renewed or otherwise altered will be
treated in accordance with Section 424(h) of the Code. Subject to Section 5.10
hereof, the Committee may reduce the Exercise Price of outstanding Options
without the consent of Participants affected by a written notice to them;
provided, however, that the Exercise Price may not be reduced below the minimum
Exercise Price that would be permitted under Section 5.4 hereof for Options
granted on the date the action is taken to reduce the Exercise Price.
5.10 No Disqualification. Notwithstanding any other provision in this
Plan, no term of this Plan relating to ISOs will be interpreted, amended or
altered, nor will any discretion or authority granted under this Plan be
exercised, so as to disqualify this Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company
to sell to an eligible person Shares that are subject to restrictions. The
Committee will determine to whom an offer will be made, the number of Shares the
person may purchase, the Purchase Price, the restrictions to which the Shares
will be subject, and all other terms and conditions of the Restricted Stock
Award, subject to the following:
6.1 Form of Restricted Stock Award. All purchases under a Restricted
Stock Award made pursuant to this Plan will be evidenced by an Award Agreement
("Restricted Stock Purchase Agreement") that will be in such form (which need
not be the same for each Participant) as the Committee will from time to time
approve, and will comply with and be subject to the terms and conditions of this
Plan. The Restricted Stock Award will be accepted by the Participant's execution
and delivery of the Restricted Stock Purchase Agreement and full payment for the
Shares to the Company within thirty (30) days from the date the Restricted Stock
Purchase Agreement is delivered to the person. If such person does not execute
and deliver the Restricted Stock Purchase Agreement along with full payment for
the Shares to the Company within such thirty (30) days , then the offer will
terminate, unless otherwise determined by the Committee.
6.2 Purchase Price. The Purchase Price of Shares sold pursuant to a
Restricted Stock Award will be determined by the Committee and will be at least
eighty-five percent (85%) of the Fair Market Value of the Shares on the date the
Restricted Stock Award is granted or at the time the purchase is consummated,
except in the case of a sale to a Ten Percent Shareholder, in which case the
Purchase Price will be one hundred percent (100%) of the Fair Market Value on
the date the Restricted Stock Award is granted or at the time the purchase is
consummated. Payment of the Purchase Price must be made in accordance with
Section 7 hereof.
6.3 Restrictions. Restricted Stock Awards may be subject to the
restrictions set forth in Section 11 hereof.
7. PAYMENT FOR SHARE PURCHASES.
7.1 Payment. Payment for Shares purchased pursuant to this Plan may
be made in cash (by check) or, where expressly approved for the Participant by
the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of shares that: (i) either (A) have been owned by
Participant for more than six (6) months and have been paid for
within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of a promissory note, such note
has been fully paid with respect to such shares) or (B) were
obtained by Participant in the public market and (ii) are clear
of all liens, claims, encumbrances or security interests.
(c) by tender of a full recourse promissory note having such terms as
may be approved by the Committee and bearing interest at a rate
sufficient to avoid imputation of income under Sections 483 and
1274 of the Code; provided, however, that Participants who are
4
<PAGE> 5
not employees or directors of the Company will not be entitled to
purchase Shares with a promissory note unless the note is
adequately secured by collateral other than the Shares.
(d) by waiver of compensation due or accrued to the Participant for
services rendered;
(e) with respect only to purchases upon exercise of an Option, and
provided that a public market for the Shares exists:
(1) through a "same day sale" commitment from the Participant
and a broker-dealer that is a member of the National
Association of Securities Dealers (an "NASD Dealer") whereby
the Participant irrevocably elects to exercise the Option
and to sell a portion of the Shares so purchased to pay for
the Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise
Price directly to the Company; or
(2) through a "margin" commitment from the Participant and an
NASD Dealer whereby the Participant irrevocably elects to
exercise the Option and to pledge the Shares so purchased to
the NASD Dealer in a margin account as security for a loan
from the NASD Dealer in the amount of the Exercise Price,
and whereby the NASD Dealer irrevocably commits upon receipt
of such Shares to forward the Exercise Price directly to the
Company; or
(f) by any combination of the foregoing.
7.2 Loan Guarantees. The Committee may help the Participant pay for
Shares purchased under this Plan by authorizing a guarantee by the Company of a
third-party loan to the Participant.
8. WITHHOLDING TAXES.
8.1 Withholding Generally. Whenever Shares are to be issued in
satisfaction of Awards granted under this Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under this Plan, payments
in satisfaction of Awards are to be made in cash, such payment will be net of an
amount sufficient to satisfy federal, state, and local withholding tax
requirements.
8.2 Stock Withholding. When, under applicable tax laws, a Participant
incurs tax liability in connection with the exercise or vesting of any Award
that is subject to tax withholding and the Participant is obligated to pay the
Company the amount required to be withheld, the Committee may in its sole
discretion allow the Participant to satisfy the minimum withholding tax
obligation by electing to have the Company withhold from the Shares to be issued
that number of Shares having a Fair Market Value equal to the minimum amount
required to be withheld, determined on the date that the amount of tax to be
withheld is to be determined. All elections by a Participant to have Shares
withheld for this purpose will be made in accordance with the requirements
established by the Committee for such elections and be in writing in a form
acceptable to the Committee.
9. PRIVILEGES OF STOCK OWNERSHIP.
9.1 Voting and Dividends. No Participant will have any of the rights
of a shareholder with respect to any Shares until the Shares are issued to the
Participant. After Shares are issued to the Participant, the Participant will be
a shareholder and have all the rights of a shareholder with respect to such
Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares; provided, that if such
Shares are Restricted Stock, then any new, additional or different securities
the Participant may become entitled to receive with respect to such Shares by
virtue of a stock dividend, stock split or any other change in the corporate or
capital structure of ACY will be subject to the same restrictions as the
Restricted Stock; provided, further, that the Participant will have no right to
retain such stock dividends or stock distributions with respect to Unvested
Shares that are repurchased pursuant to Section 11 hereof. The Company will
comply with Section 260.140.1 of Title 10 of the California Code of Regulations
with respect to the voting rights of Common Stock.
9.2 Financial Statements. The company will provide financial
statements to each Participant prior to such Participant's purchase of Shares
under this Plan, and to each Participant annually during the period
5
<PAGE> 6
such Participant has Awards outstanding, or as otherwise required under Section
260.140.46 of Title 10 of the California Code of Regulations. Notwithstanding
the foregoing, the Company will not be required to provide such financial
statements to Participants when issuance is limited to key employees whose
services in connection with the Company assure them access to equivalent
information.
10. TRANSFERABILITY. Awards granted under this Plan, and any interest
therein, will not be transferable or assignable by Participant, and may not be
made subject to execution, attachment or similar process, otherwise than by will
or by the laws of descent and distribution. During the lifetime of the
Participant an Award will be exercisable only by the Participant or
Participant's legal representative and any elections with respect to an Award,
may be made only by the Participant or Participant's legal representative.
11. RESTRICTIONS OF SHARES.
11.1 Right of First Refusal. At the discretion of the Committee, the
Company may reserve to itself and/or its assignee(s) in the Award Agreement a
right of first refusal to purchase all Shares that a Participant (or a
subsequent transferee) may propose to transfer to a third party, provided, that
such right of first refusal terminates upon the Company's initial public
offering of Common Stock pursuant to an effective registration statement filed
under the Securities Act.
11.2 Right of Repurchase. At the discretion of the Committee, the
Company reserve to itself and/or its assignee(s) in the Award Agreement a right
to repurchase Unvested Shares held by a Participant for cash and/or cancellation
of purchase money indebtedness following such Participant's Termination at any
time within the later of ninety (90) days after the Participant's Termination
Date and the date the Participant purchases Shares under the Plan at the
Participant's Exercise Price or Purchase Price, as the case may be, provided,
that unless the Participant is an officer, director or consultant of the Company
or of a Parent or Subsidiary of the Company, such right of repurchase lapses at
the rate of at least twenty percent (20%) per year over five (5) years from: (a)
the date of grant of the Option or (b) in the case of Restricted Stock, the date
the Participant purchases the Shares.
12. CERTIFICATES. All certificates for Shares or other securities
delivered under this Plan will be subject to such stock transfer orders, legends
and other restrictions as the Committee may deem necessary or advisable,
including restrictions under any applicable federal, state or foreign securities
law, or any rules,, regulations and other requirements of the SEC or any stock
exchange or automated quotation system upon which the Shares may be listed or
quoted.
13. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
Participant's Shares, the Committee may require the Participant to deposit all
certificates representing Shares, together with stock powers or other
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in escrow
until such restrictions have lapsed or terminated, and the Committee may cause a
Legend or legends referencing such restrictions to be placed on the
certificates. Any Participant who is permitted to execute a promissory note as
partial or full consideration for the purchase of Shares under this Plan will be
required to pledge and deposit with the Company all or part of the Shares so
purchased as collateral to secure the payment of Participant's obligation to the
Company under the promissory note; provided, however, that the Committee may
require or accept other or additional forms of collateral to secure the payment
of such obligation and, in any event, the Company will have full recourse
against the Participant under the promissory note notwithstanding any pledge of
the Participant's Shares or other collateral. In connection with any pledge of
the Shares, Participant will be required to execute and deliver a written pledge
agreement in such form as the Committee will from time to time approve. The
Shares purchased with the promissory note may be released from the pledge on a
pro rata basis as the promissory note is paid.
14. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from
time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and cancellation
of any or all outstanding Awards. The Committee may at any time buy from a
Participant an Award previously granted with payment in cash, shares of Common
Stock of the Company (including Restricted Stock) or other consideration, based
on such terms and conditions as the Committee and the Participant may agree.
15. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be
effective unless such Award is in compliance with all applicable federal and
state securities laws, rules and
6
<PAGE> 7
regulations of any governmental body, and the requirements of any stock exchange
or automated quotation system upon which the Shares may then be listed or
quoted, as they are in effect on the date of grant of the Award and also on the
date of exercise or other issuance. Notwithstanding any other provision in this
Plan, the Company will have no obligation to issue or deliver certificates for
Shares under this Plan prior to (a) obtaining any approvals from governmental
agencies that the Company determines are necessary or advisable, and/or (b)
compliance with any exemption, completion of any registration or other
qualification of such Shares under any state or federal law or ruling of any
governmental body that the Company determines to be necessary or advisable. The
Company will be under no obligation to register the Shares with the SEC or to
effect compliance with the exemption, registration, qualification or listing
requirements of any state securities laws, stock exchange or automated quotation
system, and the Company will have no liability for any inability or failure to
do so.
16. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted
under this Plan will confer or be deemed to confer on any Participant any right
to continue in the employ of, or to continue any other relationship with, the
Company or any Parent or Subsidiary of the Company or limit in any way the right
of the Company or any Parent or Subsidiary of the Company to terminate
Participant's employment or other relationship at any time, with or without
Cause.
17. [RESERVED]
18. ADOPTION AND SHAREHOLDER APPROVAL. This Plan will become effective on
the date that it is adopted by the Board (the "Effective Date"). This Plan will
be approved by the shareholders of the Company (excluding Shares issued pursuant
to this Plan), consistent with applicable laws, within twelve (12) months before
or after the Effective Date. Upon the effective Date, the Board may grant Awards
pursuant to this Plan; provided, however, that: (a) no Option may be exercised
prior to initial shareholder approval of this Plan; (b) no Option granted
pursuant to an increase in the number of Shares approved by the Board shall be
exercised prior to the time such increase has been approved by the shareholders
of the Company; (c) in the event that initial shareholder approval is not
obtained within the time period provided herein, all Awards granted hereunder
shall be canceled, any Shares issued pursuant to any Award shall be canceled and
any purchase of Shares issued hereunder shall be rescinded; and (d) Awards
granted pursuant to an increase in the number of Shares approved by the Board
which increase is not timely approved by shareholders shall be canceled, any
Shares issued pursuant to any such Awards shall be canceled, and any purchase of
Shares subject to any such Award shall be rescinded.
19. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided
herein, this Plan will terminate ten (10) years from the Effective Date or, if
earlier, the date of shareholder approval. This Plan and all agreements
hereunder shall be governed by and construed in accordance with the laws of the
State of California.
20. AMENDMENT OR TERMINATION OF PLAN. Subject to Section 5.9 hereof, the
Board may at any time terminate or amend this Plan in any respect, including
without limitation amendment of any form of Award Agreement or instrument to be
executed pursuant to this Plan.
21. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the
Board, the submission of this Plan to the shareholders of the Company for
approval, nor any provision of this Plan will be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and other equity awards otherwise than under this
Plan, and such arrangements may be either generally applicable or applicable
only in specific cases.
22. DEFINITIONS. As used in this Plan, the following terms will have the
following meanings:
"Award" means any award under this Plan, including any Option or
Restricted Stock Award.
"Award Agreement" means, with respect to each Award, the signed
written agreement between the Company and the Participant setting forth the
terms and conditions of the Award.
"Board" means the Board of Directors of the Company.
"Cause" means Termination because of (i) any willful material
violation by the Participant of any law or regulation applicable to the business
of the Company or a Parent or Subsidiary of the Company, the Participant's
conviction for, or guilty plea to, a felony or a crime involving moral
turpitude, any willful perpetration
7
<PAGE> 8
by the Participant of a common law fraud, (ii) the Participant's commission of
an act of personal dishonesty which involves personal profit in connection with
the Company or any other entity having a business relationship with the Company,
(iii) any material breach by the Participant of any provision of any agreement
or understanding between the Company or any Parent or Subsidiary of the Company
and the Participant regarding the terms of the Participant's service as an
employee, director or consultant to the Company or a Parent or Subsidiary of the
Company, including without limitation, the willful and continued failure or
refusal of the Participant to perform the material duties required of such
Participant as an employee, director or consultant of the Company or a Parent or
Subsidiary of the Company, other than as a result of having a Disability, or a
breach of any applicable invention assignment and confidentiality agreement or
similar agreement between the Company and the Participant, (iv) Participant's
disregard of the policies of the Company or any Parent or Subsidiary of the
Company so as to cause loss, damage or injury to the property, reputation or
employees of the Company or a Parent or Subsidiary of the Company, or (v) any
other misconduct by the Participant which is materially injurious to the
financial condition or business reputation of, or is otherwise materially
injurious to, the Company or a Parent or Subsidiary of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the committee appointed by the Board to administer
this Plan, or if no committee is appointed, the Board.
"Company" means JetFleet Management Corp., or any successor
corporation.
"Disability" means a disability, whether temporary or permanent,
partial or total, as determined by the Committee.
"Exercise Price" means the price at which a holder of an Option may
purchase the Shares issuable upon exercise of the Option.
"Fair Market Value" means, as of any date, the value of a share of
ACYOs Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National
Market, its closing price on the Nasdaq National Market on the
date of determination as reported in The Wall Street Journal;
(b) if such Common Stock is publicly traded and is then listed on a
national securities exchange, its closing price on the date of
determination on the principal national securities exchange on
which the Common Stock is listed or admitted to trading as
reported in The Wall Street Journal;
(c) if such Common Stock is publicly traded but is not quoted on the
Nasdaq National Market nor listed or admitted to trading on a
national securities exchange, the average of the closing bid and
asked prices on the date of determination as reported by The Wall
Street Journal (or, if not so reported, as otherwise reported by
any newspaper or other source as the Board may determine); or
(d) if none of the foregoing is applicable, by the Committee in good
faith.
"Option" means an award of an option to purchase Shares pursuant to
Section 5 hereof.
"Parent" means any corporation (other than the Company) in an unbroken
chain of corporations ending with the Company if each of such corporations other
than the Company owns stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain
"Participant" means a person who receives an Award under this Plan
"Plan" means this JetFleet Management Corp. 1997 - ACY Equity
Incentive Plan, as amended from time to time.
8
<PAGE> 9
"Purchase Price" means the price at which a Participant may purchase
Restricted Stock
"Restricted Stock" means Shares purchased pursuant to a Restricted
Stock Award.
"Restricted Stock Award" means an award of Shares pursuant to
Section 6 hereof.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means shares of ACYOs Common Stock reserved for issuance
under this Plan, as adjusted pursuant to Sections 2 and 17 hereof, and any
successor security.
"Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
"Termination" or "Terminated" means, for purposes of this Plan with
respect to a Participant, that the Participant has for any reason ceased to
provide services as an employee, officer, director or consultant to the Company
or a Parent or Subsidiary of the Company. A Participant will not be deemed to
have ceased to provide services in the case of (i) sick leave, (ii) military
leave, or (iii) any other leave of absence approved by the Committee, provided
that such leave is for a period of not more than ninety (90) days unless
reinstatement (or, in the case of an employee with an ISO, reemployment) upon
the expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to formal policy adopted from time to time by the
Company and issued and promulgated in writing. In the case of any Participant on
(i) sick leave, (ii) military leave or (iii) an approved leave of absence, the
Committee may make such provisions respecting suspension of vesting of the Award
while on leave from the Company or a Parent or Subsidiary of the Company as it
may deem appropriate, except that in no event may an Option be exercised after
the expiration of the term set forth in the Stock Option Agreement. The
Committee will have sole discretion to determine whether a Participant has
ceased to provide services and the effective date on which the Participant
ceased to provide services (the "Termination Date").
"Unvested Shares" means "Unvested Shares" as defined in the Award
Agreement.
"Vested Shares" means "Vested Shares" as defined in the Award
Agreement.
9
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> FEB-28-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,980
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,980
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 101,199
<CURRENT-LIABILITIES> 365,666
<BONDS> 0
0
0
<COMMON> 150
<OTHER-SE> 149,850
<TOTAL-LIABILITY-AND-EQUITY> 101,199
<SALES> 0
<TOTAL-REVENUES> 1,672
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 503,027
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (501,355)
<INCOME-TAX> (86,888)
<INCOME-CONTINUING> (414,467)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (414,467)
<EPS-PRIMARY> (2.76)
<EPS-DILUTED> (2.76)
</TABLE>
<PAGE> 1
Exhibit 99.01
REPORT OF INDEPENDENT AUDITORS
The Partners
JetFleet Aircraft, L.P.
We have audited the accompanying balance sheets of JetFleet Aircraft, L.P., a
California Limited Partnership, as of December 31, 1997 and December 31, 1996,
and the related statements of operations, partners' capital and cash flows for
the years ended December 31, 1997, December 31, 1996 and December 31, 1995.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of JetFleet Aircraft, L.P., at
December 31, 1997 and December 31, 1996, and the results of its operations and
its cash flows for the years ended December 31, 1997, December 31, 1996 and
December 31, 1995, in conformity with generally accepted accounting principles.
VOCKER KRISTOFFERSON AND CO.
February 27, 1998
San Mateo, California
<PAGE> 2
JetFleet Aircraft, L.P.
Balance Sheets
<TABLE>
<CAPTION>
ASSETS
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash $ 262,256 $ 5,451
Restricted cash 78,756 25,277
Lease payments receivable -- 180,000
Reserves receivable from lessee 671 4,688
----------- -----------
Total current assets 341,683 215,416
----------- -----------
Aircraft under operating leases and aircraft
held for operating leases,
net of accumulated depreciation of
$4,148,895 in 1997 and $4,055,292 in 1996 2,234,742 2,328,345
----------- -----------
$ 2,576,425 $ 2,543,761
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 60,615 $ 16,000
Accrued maintenance costs 264,920 25,277
Payable to affiliates 4,500 743
Prepaid rents 43,586 8,890
Unearned interest income -- 14,674
----------- -----------
Total liabilities 373,621 65,584
Partners' capital
General partners (54,723) (51,970)
Limited partners (1,100,000 authorized
Units, 296,069 issued Units
in 1997 and 1996) 2,257,527 2,530,147
----------- -----------
$ 2,576,425 $ 2,543,761
=========== ===========
</TABLE>
See accompanying notes
2
<PAGE> 3
JetFleet Aircraft, L.P.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rental income, net $ 551,951 $ 578,602 $ 561,254
Interest income 14,506 45,705 73,827
----------- ----------- -----------
566,457 624,307 635,081
----------- ----------- -----------
Costs and expenses:
Amortization of
organization costs -- 1,649 8,404
Professional fees 29,805 22,272 26,240
General and administrative 88,097 112,097 75,286
Maintenance costs 180,894 35,517 43,464
Depreciation of aircraft 93,603 1,041,290 1,041,292
----------- ----------- -----------
392,399 1,212,825 1,194,686
----------- ----------- -----------
Net income (loss) $ 174,058 $ (588,518) $ (559,605)
=========== =========== ===========
Allocation of net income (loss):
General partners $ 1,741 $ (5,885) $ (5,596)
Limited partners 172,317 (582,633) (554,009)
----------- ----------- -----------
$ 174,058 $ (588,518) $ (559,605)
=========== =========== ===========
Per Limited Partnership Unit $ 0.58 $ (1.97) $ (1.87)
=========== =========== ===========
Limited Partnership Units outstanding 296,069 296,069 296,069
=========== =========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 4
JetFleet Aircraft, L.P.
Statements of Partners' Capital
For the Years Ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Limited
Partner Limited General
Units Partners Partners Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 296,069 $ 4,804,442 $ (28,998) $ 4,775,444
Distributions ($1.84 per
Limited Partner Unit) -- (544,202) (5,497) (549,699)
Net loss -- (554,009) (5,596) (559,605)
----------- ----------- ----------- -----------
Balance, December 31, 1995 296,069 3,706,231 (40,091) 3,666,140
Distributions ($2.00 per
Limited Partner Unit) -- (593,451) (5,994) (599,445)
Net loss -- (582,633) (5,885) (588,518)
----------- ----------- ----------- -----------
Balance, December 31, 1996 296,069 2,530,147 (51,970) 2,478,177
Distributions ($1.50 per
Limited Partner Unit) -- (444,937) (4,494) (449,431)
Net income -- 172,317 1,741 174,058
----------- ----------- ----------- -----------
Balance, December 31, 1997 296,069 $ 2,257,527 $ (54,723) $ 2,202,804
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE> 5
JetFleet Aircraft, L.P.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 174,058 $ (588,518) $ (559,605)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation of aircraft 93,603 1,041,290 1,041,292
Amortization of organization costs -- 1,649 8,404
Change in operating assets and liabilities:
Restricted cash (53,479) (25,277) --
Reserves receivable from lessee 4,017 (4,688) --
Accounts payable 44,615 (12,109) (12,591)
Accrued maintenance costs 239,643 (33,707) (14,847)
Prepaid rents 34,696 8,890 --
Unearned interest income (14,674) (45,417) (70,019)
Receivable from affiliates -- 45,856 (45,856)
Payable to affiliates 3,757 (44,257) 32,078
----------- ----------- -----------
Net cash provided by
operating activities 526,236 343,712 378,856
Investing activities:
Payments received on capital lease 180,000 165,000 150,000
----------- ----------- -----------
Net cash provided by investing activities 180,000 165,000 150,000
Financing activities -
Distributions (449,431) (599,445) (549,699)
----------- ----------- -----------
Net increase (decrease) in cash 256,805 (90,733) (20,843)
Cash, beginning of period 5,451 96,184 117,027
----------- ----------- -----------
Cash, end of period $ 262,256 $ 5,451 $ 96,184
=========== =========== ===========
</TABLE>
See accompanying notes.
5
<PAGE> 6
JetFleet Aircraft, L.P.
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Basis of presentation
JetFleet Aircraft, L.P. ("JetFleet") is a California limited
partnership formed on February 16, 1989 for the purpose of acquiring, on a
world-wide cash basis, a portfolio of commercial aircraft which are already in
service pursuant to triple net leases. The corporate general partner of JetFleet
is CMA Capital Group ("Group"), a California corporation formed in February
1989. The individual general partners, Neal D. Crispin and Richard D. Koehler,
are the founding principals of Group. Group is exclusively entitled to manage
and control JetFleet's business. Capital Management Associates ("CMA"), an
affiliated California corporation owned by Mr. Crispin, provides certain
accounting and investor-related services for Group. JetFleet Management Corp.
("JMC") an affiliated California corporation formed in January 1994, and owned
by the individual general partners and an officer of CMA, has been authorized to
perform remarketing duties on behalf of JetFleet. Crispin Koehler Securities, an
affiliated California corporation owned by Messrs. Crispin and Koehler, provided
certain administrative and investor-related services for Group. JetFleet owns
interests in certain aircraft in which JetFleet Aircraft II, L.P. ("JetFleet
II"), an affiliated California limited partnership, also owns interests.
JetFleet has had significant transactions with these affiliates as well as Range
Systems Engineering, Aviation Enterprises 1988, Inc. ("AEI"), National Airline
Commission of Papua New Guinea (trading as Air Niugini) ("Air Niugini") and Air
Tindi Limited ("Air Tindi").
Aircraft under operating leases and aircraft held for operating leases
The aircraft are recorded at cost. Depreciation is computed using the
straight line method over the estimated economic lives of the aircraft.
Beginning in 1995, the estimated economic life for the purpose of calculating
depreciation of deHavilland Dash-7 aircraft was lowered from 12 to 8 years to
reflect technological change. This change had the effect of increasing
depreciation and the net loss by $506,592, or $1.71 per Limited Partnership Unit
outstanding in 1995.
In early 1997, a future value appraisal of the aircraft assets was
obtained. It indicated that the depreciation method described above was overly
conservative in that the future value as well as the estimated useful life of
used aircraft had both increased. Accordingly, JetFleet began depreciating its
aircraft on a straight-line basis over its estimated useful life, generally
twelve years, to its estimated residual value at that time. This change had the
effect of decreasing depreciation and increasing net income by $947,688 or $3.20
per Limited Partnership Unit outstanding during 1997.
Investment in capital lease
JetFleet's investment in the McDonnell Douglas DC-9-32 is recorded as
an investment in a capital lease. The gross investment is recorded as lease
payments receivable while the difference between the gross investment and the
acquisition cost of the DC-9-32 is recorded as unearned interest income (see
Note 4).
6
<PAGE> 7
JetFleet Aircraft, L.P.
Notes to Financial Statements
1. Summary of Significant Accounting Policies (continued)
Organization and offering costs
Pursuant to the terms of the Partnership Agreement, a non-accountable
organizational and offering expense allowance, in an amount equal to 3% of
limited partner capital contributions, was paid to Group for reimbursement of
certain organizational and offering expenses incurred in connection with the
formation and offering of units in JetFleet. A portion of the allowance was
capitalized as organization costs and was amortized using the straight-line
method over 60 months.
The remaining amount, along with sales commissions, investment banking
fees, and due diligence reimbursements, was reflected as a direct reduction of
partners' capital contributions.
Income taxes
Income taxes are the liability of the individual partners; accordingly,
the financial statements do not include any provision for income taxes. At
December 31, 1997, assets and liabilities on a tax basis were approximately $2.0
million lower than on a book basis due to accelerated depreciation methods used
for tax purposes.
Cash balances, including restricted cash
As of December 31, 1997, JetFleet maintained cash balances of $78,756
in a large open- end money fund, which is not federally insured. JetFleet also
maintained a cash balance of $262,256 in a regional bank headquartered in San
Francisco, $162,255 of which is not federally insured.
Restricted cash
As of December 31, 1997 and December 31, 1996, JetFleet held restricted
cash in the amount of $78,756 and $25,277, respectively, which represents
maintenance reserves collected from lessees and interest earned on those funds,
as applicable.
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 under 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.
7
<PAGE> 8
JetFleet Aircraft, L.P.
Notes to Financial Statements
2. Allocation of Income, Losses and Distributions
Pursuant to the Partnership Agreement, all revenues and expenses and
income and losses are generally allocated 99% to the limited partners and 1% to
the general partners. Cash distributions from JetFleet's operations are made 99%
to the limited partners and 1% to the general partners.
3. Aircraft Under Operating Leases and Aircraft Held for Operating Leases
deHavilland aircraft
JetFleet owns 95.9% undivided interests in a deHavilland DHC-7-102
aircraft, serial number 57 ("S/N 57") purchased in 1991. JetFleet II and the
seller own the remaining 4.0% and 0.1% undivided interests, respectively.
S/N 57 was subject to a triple net lease with Johnson Controls World
Services, Inc. ("JCWS") under an eight year contract, which commenced in 1986,
with the United States Army for use in the Marshall Islands at the site of the
Army's deep space research center where missile guidance systems are tested.
During 1994 the lease was extended, at reduced rent, through September 30, 1995.
A new contract with the United States Army commenced on February 15, 1995 for a
term of two years with three two- year renewal options. The contract was awarded
to Range Systems Engineering, a subsidiary of Raytheon Service Company. During
1995 the lease was extended through September 30, 1996. During 1996 the lease
was extended, at reduced rent, through September 30, 1998.
JetFleet purchased a 24.37% undivided interest in a deHavilland
DHC-7-103, serial number 72 ("S/N 72"), in 1991. JetFleet purchased its
undivided interest from CMA at CMA's cost. CMA had purchased a 100% undivided
interest in S/N 72 for the purpose of reselling undivided interests to JetFleet
and JetFleet II. JetFleet II purchased CMA's undivided interests, as funds were
raised in the offering of limited partnership units in JetFleet II. JetFleet II
and AEI own the remaining 75.53% and 0.10% undivided interests, respectively, at
December 31, 1997.
At the time the undivided interest in S/N 72 was purchased, S/N 72 was
subject to the same United States Army contract as S/N 57.
Under the terms of the sales agreements for S/Ns 57 and 72, AEI, the
seller of both aircraft, receives 4% of monthly lease revenues during the first
eight years of the lease in return for providing remarketing and certain other
services in connection with the lease, re-lease and re-sale of the aircraft.
Upon the return of S/N 72 by JCWS, during the second quarter of 1993, a
collision- avoidance radar system ("TCAS") was installed on the aircraft in
order to comply with FAA regulations regarding commercial airline operations. In
connection with the TCAS installation, JetFleet paid and capitalized its pro
rata share of the cost which is being depreciated over the remaining useful life
of the aircraft.
8
<PAGE> 9
JetFleet Aircraft, L.P.
Notes to Financial Statements
3. Aircraft Under Operating Leases and Aircraft Held for Operating Leases
(continued)
deHavilland aircraft (continued)
After having been re-leased to Eclipse Airlines, Inc. and the AGES
Group, L.P., S/N 72 was re-leased in March 1995 to Air Niugini for a term of six
months. The lease was subsequently extended until October 31, 1995. In addition,
Air Niugini paid JetFleet its pro-rata share of maintenance costs. Upon its
return by Air Niugini and at the direction of JetFleet management, S/N 72 again
underwent certain scheduled maintenance and other repair work.
In April 1996, S/N 72 was leased to Air Tindi for a term of thirty-six
months. Air Tindi has provided a letter of credit which serves as a security
deposit under the lease. In addition, Air Tindi pays JetFleet its pro-rata share
of estimated maintenance costs per hour of usage, which amount is to be applied
for scheduled overhauls and inspections. Air Tindi is a regional airline
headquartered in Yellowknife, Northwest Territories, Canada and provides charter
and regularly scheduled flights throughout the Northwest Territories. During
December 1997 the maintenance reserves were increased by $201,596 and a related
expense recognized.
Future minimum rents
The following is a schedule of future minimum rental income by year
under the existing leases:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $459,505
1999 31,803
--------
Total $491,308
========
</TABLE>
Detail of investment
The following schedule provides an analysis of JetFleet's investment in
aircraft under operating leases and aircraft held for operating leases as of
December 31, 1996, additions during 1997 and as of December 31, 1997:
<TABLE>
<CAPTION>
December 31, December 31,
1996 Additions 1997
----------- ----------- -----------
<S> <C> <C> <C>
S/N 57 $ 4,790,106 $ -- $ 4,790,106
S/N 72 1,593,531 -- 1,593,531
----------- ----------- -----------
6,383,637 -- 6,383,637
Less accumulated
depreciation (4,055,292) (93,603) (4,148,895)
----------- ----------- -----------
$ 2,328,345 $ (93,603) $ 2,234,742
=========== =========== ===========
</TABLE>
9
<PAGE> 10
JetFleet Aircraft, L.P.
Notes to Financial Statements
3. Aircraft Under Operating Leases and Aircraft Held for Operating Leases
(continued)
Detail of investment
The following schedule provides an analysis of JetFleet's investment in
aircraft under operating leases and aircraft held for operating leases and the
related accumulated depreciation for the years ended December 31, 1995, 1996 and
1997:
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation Net
---- ------------ ---
<S> <C> <C> <C>
Balance,
December 31, 1994 $ 6,383,637 $(1,972,710) $ 4,410,927
Additions -- (1,041,292) (1,041,292)
----------- ----------- -----------
Balance,
December 31, 1995 6,383,637 (3,014,002) 3,369,635
Additions -- (1,041,290) (1,041,290)
----------- ----------- -----------
Balance,
December 31, 1996 6,383,637 (4,055,292) 2,328,345
Additions -- (93,603) (93,603)
----------- ----------- -----------
Balance,
December 31, 1997 $ 6,383,637 $(4,148,895) $ 2,234,742
=========== =========== ===========
</TABLE>
4. Investment in Capital Lease
McDonnell Douglas DC-9-32
In December 1994, JetFleet purchased a 50.00% undivided interest in a
McDonnell Douglas DC-9-32, serial number 47236 (the "DC-9"). JetFleet II
purchased the remaining 50.00% interest at the same time. The DC-9 had been
leased back to the seller, Interglobal, Inc. for thirty- six months (the "DC-9
lease"). The DC-9 had been sub-leased to and operated by Aero California S.A. de
CV. As part of the sale and leaseback described above, Interglobal, Inc.
assigned its rights under the sublease to Aero California S.A. de CV. As
discussed in Note 1 above, JetFleet's investment in the DC-9 is being accounted
for as a capital lease. The investment was essentially a financing in which
JetFleet recovered its investment over the term of the lease. Interglobal, Inc.
exercised its purchase option upon expiration of the DC-9 lease in December
1997.
10
<PAGE> 11
JetFleet Aircraft, L.P.
Notes to Financial Statements
5. Related Party Transactions
Group is entitled to receive base management, incentive management and
re-lease fees in any year in which the annualized rate of distributions is equal
to or greater than the Preferred Return. There was no accrual or payment of the
base management, incentive management or re- lease fees for 1995, 1996 and 1997
since the annualized rate of distributions in those years did not meet the
Preferred Return.
JetFleet pays for all direct, indirect, administrative and overhead
expenses incurred on its behalf by Group and its affiliates. In 1997, 1996 and
1995, $81,686, $93,794 and $63,826, respectively, was reimbursable by JetFleet
to Group or its affiliates in connection with the administration and management
of JetFleet.
All of the above fees payable by JetFleet to Group were paid to Group
which in turn reimbursed CMA or its affiliates, which have incurred all costs in
connection with the organization and offering of units in, and the
administration and management of, JetFleet.
6. Subsequent Events
On April 8, 1997 a Registration Statement on Form S-4 was filed with
the Securities and Exchange Commission disclosing a proposed consolidation of
JetFleet and JetFleet II into a newly incorporated Delaware corporation,
AeroCentury Corp. The Registration Statement was declared effective on September
23, 1997 and the consolidation was effective January 1, 1998, with 99.5% of the
total Limited Partnership Units outstanding exchanged for common shares of
AeroCentury. Therefore, as of that date, JetFleet and JetFleet II have ceased to
exist as independent entities.
The January 1, 1998 consolidation was treated as a pooling-of-interests
and, accordingly, the consolidation costs of $502,383 were expensed on the books
of AeroCentury Corp. as incurred.
On January 16, 1998, AeroCentury Corp. was listed on the American Stock
Exchange under the symbol ACY.
11
<PAGE> 1
EXHIBIT 99.02
REPORT OF INDEPENDENT AUDITORS
The Partners
JetFleet Aircraft II, L.P.
We have audited the accompanying balance sheets of JetFleet Aircraft II, L.P., a
California Limited Partnership, as of December 31, 1997 and December 31, 1996,
and the related statements of operations, partners' capital and cash flows for
the years ended December 31, 1997, December 31, 1996 and December 31, 1995.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of JetFleet Aircraft II, L.P., at
December 31, 1997 and December 31, 1996, and the results of its operations and
its cash flows for the years ended December 31, 1997, December 31, 1996 and
December 31, 1995 in conformity with generally accepted accounting principles.
VOCKER KRISTOFFERSON AND CO.
February 27, 1998
San Mateo, California
<PAGE> 2
JetFleet Aircraft II, L.P.
Balance Sheets
<TABLE>
<CAPTION>
ASSETS
December 31,
1997 1996
---- ----
Current assets
<S> <C> <C>
Cash $ 964,759 $ 690,842
Restricted cash 827,000 501,072
Reserves receivable from lessees 27,338 29,781
Lease payments receivable 150,000 540,000
----------- -----------
Total current assets 1,969,097 1,761,695
Aircraft and aircraft engines under operating
leases and aircraft held for operating leases,
net of accumulated depreciation of
$10,957,424 in 1997 and $10,425,030 in 1996 13,903,219 14,435,613
Lease payments receivable -- 180,000
Organization and offering costs, net of
accumulated amortization of $145,036 in 1997
and $123,141 in 1996 11,000 32,895
----------- -----------
$15,883,316 $16,410,203
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 48,911 $ 112,519
Accrued maintenance costs 1,457,979 501,072
Payable to affiliates 14,689 10,933
Security deposits 143,101 143,101
Unearned interest income 8,781 79,186
Prepaid rent received 191,948 27,553
----------- -----------
Total current liabilities 1,865,409 874,364
Unearned interest income -- 8,793
----------- -----------
Total liabilities 1,865,409 883,157
Partners' capital
(Limited partners 1,100,000 authorized
Units, 693,505 issued Units in 1997 and 1996) 14,017,907 15,527,046
----------- -----------
$15,883,316 $16,410,203
=========== ===========
</TABLE>
See accompanying notes.
2
<PAGE> 3
JetFleet Aircraft II, L.P.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
----------- ----------- -----------
Revenues:
<S> <C> <C> <C>
Rental income $ 2,646,252 $ 2,658,450 $ 2,601,541
Gain on sale of aircraft -- 94,081 --
Gain/(Loss) on sale of
aircraft engines -- 34,860 (46,090)
Interest income 97,485 265,359 236,631
----------- ----------- -----------
2,743,737 3,052,750 2,792,082
----------- ----------- -----------
Costs and expenses:
Management fees 96,519 113,657 102,440
Depreciation of aircraft
and aircraft engines 532,394 3,260,014 3,372,163
Amortization of organization
and offering costs 21,895 31,927 31,927
Professional fees 42,492 36,511 50,438
Maintenance costs 561,387 119,252 153,096
General and administrative 260,606 347,971 242,779
----------- ----------- -----------
1,515,293 3,909,332 3,952,843
----------- ----------- -----------
Net income (loss) $ 1,228,444 $ (856,582) $(1,160,761)
=========== =========== ===========
Allocation of net income (loss):
General partners $ 136,879 $ 182,511 $ 167,240
Limited partners 1,091,565 (1,039,093) (1,328,001)
----------- ----------- -----------
$ 1,228,444 $ (856,582) $(1,160,761)
=========== =========== ===========
Per Limited Partner Unit $ 1.57 $ (1.50) $ (1.91)
=========== =========== ===========
Weighted average Limited
Partner Units outstanding 693,505 693,505 693,505
=========== =========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 4
JetFleet Aircraft II, L.P.
Statements of Partners' Capital
For the Years Ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Limited
Partner Limited General
Units Partners Partners Total
------- -------- -------- -----
<S> <C> <C> <C> <C>
Balance, December 31, 1994 693,505 $ 24,539,410 $ -- $ 24,539,410
Distributions ($4.58 per
Limited Partner Unit) -- (3,177,553) (167,240) (3,344,793)
Net loss -- (1,328,001) 167,240 (1,160,761)
------- ------------ ------------ ------------
Balance, December 31, 1995 693,505 20,033,856 -- 20,033,856
Distributions ($5.00 per
Limited Partner Unit) -- (3,467,715) (182,511) (3,650,226)
Net loss -- (1,039,093) 182,511 (856,582)
------- ------------ ------------ ------------
Balance, December 31, 1996 693,505 15,527,046 -- 15,527,046
Distributions ($3.75 per
Limited Partner Unit) -- (2,600,704) (136,879) (2,737,583)
Net income -- 1,091,565 136,879 1,228,444
------- ------------ ------------ ------------
Balance, December 31, 1997 693,505 $ 14,017,907 $ -- $ 14,017,907
======= ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
JetFleet Aircraft II, L.P.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
--------- --------- ---------
Operating activities:
<S> <C> <C> <C>
Net income (loss) $ 1,228,444 $ (856,582) $ (1,160,761)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
(Gain) / loss on sale of aircraft engines -- (34,860) 46,090
Gain on sale of aircraft -- 94,081 --
Depreciation of aircraft and aircraft engines 532,394 3,260,014 3,372,163
Amortization of organization
and offering costs 21,895 31,927 31,927
Change in operating assets and liabilities:
Restricted cash (325,928) (501,072) --
Receivable from affiliates -- 45,000 (32,558)
Rent receivable -- -- 75,000
Reserves receivable from lessees 2,443 (29,781) --
Accounts payable (63,608) (6,735) 78,572
Accrued maintenance costs 956,907 90,370 181,575
Unearned interest income (79,198) (279,345) (185,430)
Payable to affiliates 3,756 (38,142) 37,500
Security deposits -- 2,686 66,800
Prepaid rent received 164,395 12,553 15,000
----------- ----------- ------------
Net cash provided by operating activities 2,441,500 1,601,952 2,525,878
Investing activities:
Proceeds from sale of aircraft engines -- 211,000 5,089,344
Proceeds from sale of aircraft -- 735,000 --
Purchase of interests in
aircraft and aircraft engines -- (351,477) (3,696,146)
Payments received on capital lease 570,000 780,000 420,000
----------- ----------- ------------
Net cash provided by investing activities 570,000 1,374,523 1,813,198
Financing activities:
Distributions (2,737,583) (3,650,226) (3,344,793)
----------- ----------- ------------
Net cash used in financing activities (2,737,583) (4,151,298) (3,344,793)
Net (decrease) increase in cash (227,155) (673,751) 994,283
Cash, beginning of period 690,842 1,364,593 370,310
----------- ----------- ------------
Cash, end of period $ 964,759 $ 690,842 $ 1,364,593
=========== =========== ============
</TABLE>
Supplemental schedule of noncash investing and financing activities:
JetFleet II entered into capital leases for its interests in two DC-9 aircraft
during 1995. In conjunction with the leases, a liability for unearned interest
income was recorded at the beginning of the lease as follows:
<TABLE>
1995
----
<S> <C>
Minimum lease payments receivable $ 2,160,000
Cost of interest of aircraft leased (1,637,300)
---------------
Unearned interest income $ 522,700
===============
</TABLE>
See accompanying notes.
5
<PAGE> 6
JetFleet Aircraft II, L.P.
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Basis of presentation
JetFleet Aircraft II, L.P. ("JetFleet II") is a California limited
partnership formed on June 24, 1991 for the purpose of acquiring, on a
world-wide basis, a portfolio of aircraft and aircraft engines, or interests
therein, which are subject to triple net leases. The corporate general partner
of JetFleet II (the "Corporate General Partner") is CMA Capital Group ("Group"),
a California corporation formed in February 1989. The individual general
partners, Neal D. Crispin and Richard D. Koehler (the "Individual General
Partners"), are the founding principals of the Corporate General Partner. Group
is exclusively entitled to manage JetFleet II's business. Capital Management
Associates ("CMA"), a subsidiary of CMA Consolidated, Inc., an affiliated
California corporation owned by Mr. Crispin, provides certain accounting and
investor-related services for Group. JetFleet Management Corp. ("JMC") an
affiliated California corporation formed in January 1994 owned by the individual
general partners and an officer of CMA has been authorized to perform
remarketing duties on behalf of JetFleet II. Crispin Koehler Securities, an
affiliated California corporation owned by Messrs. Crispin and Koehler, provided
certain administrative and investor-related services for Group. JetFleet II owns
interests in certain aircraft in which JetFleet Aircraft, L.P. ("JetFleet"), an
affiliated California limited partnership, also owns interests. JetFleet II has
had significant transactions with these affiliates as well as Range Systems
Engineering, Airwork Corporation ("Airwork"), and Air Tindi Limited ("Air
Tindi"). The Corporate General Partner contributed $750 to the capital of
JetFleet II.
Aircraft and aircraft engines under operating leases and aircraft held
for operating leases
JetFleet II's interests in aircraft and aircraft engines are recorded
at cost, which includes acquisition costs and loan fees. JetFleet II also pays
and capitalizes an acquisition fee equal to 1.5% of the adjusted purchase price
of each asset. The capitalization of each asset is discussed in detail in Note
3. Depreciation is computed using the straight-line method over the aircraft's
estimated economic life to a zero residual value. Beginning in 1995, JetFleet II
reduced the estimated economic life of the Dash-7 aircraft from 12 to 8 years to
reflect technological change. This change had the effect of increasing
depreciation by $1,068,972 and increasing the net loss by $1,068,972, or $1.54
per Limited Partnership Unit outstanding in 1995. At the same time, JetFleet II
began using an 8-year estimated economic life for depreciating any newly
acquired aircraft to an estimated residual value.
In early 1997, a future value appraisal of the aircraft assets was
obtained. It indicated that the depreciation method described above was overly
conservative in that the future value as well as the estimated useful life of
used aircraft had both increased. Accordingly, JetFleet II began depreciating
its aircraft on a straight-line basis over its estimated useful life, generally
twelve years, to its estimated residual value at that time. This change had the
effect of decreasing depreciation and increasing net income by $2,734,583 or
$3.94 per Limited Partnership Unit outstanding during 1997.
6
<PAGE> 7
JetFleet Aircraft II, L.P.
Notes to Financial Statements
1. Summary of Significant Accounting Policies (continued)
Organization and offering costs
Pursuant to the terms of the Partnership Agreement, a non-accountable
organizational and offering expense allowance, in an amount equal to 3% of
limited partner capital contributions, was paid to Group for reimbursement of
certain organizational and offering expenses incurred in connection with the
formation and offering of units in JetFleet II. A portion of the allowance is
capitalized as organization and offering costs and is being amortized using the
straight-line method over 60 months. The remaining amount, along with sales
commissions, investment banking fees, and due diligence reimbursements, is
reflected as a direct reduction of partners' capital contributions.
Investments in capital leases
JetFleet II's investments in the three McDonnell Douglas DC-9 aircraft
are recorded as investments in capital leases. The gross investment in each is
recorded as lease payments receivable while the difference between the gross
investment and the acquisition cost of each respective DC-9 is recorded as
unearned interest income (see Note 4).
Income taxes
Income taxes are the liability of the individual partners; accordingly,
the financial statements do not include any provision for income taxes. At
December 31, 1997, assets and liabilities on a tax basis were approximately $4.7
million lower than on a book basis due to accelerated depreciation used for tax
purposes.
Cash balances, including restricted cash
As of December 31, 1997, JetFleet II maintained cash balances of
$743,326, $419,506, $241,636 and $206,413 in four large open-end money funds,
which are not federally insured. JetFleet II also maintained a cash balance of
$180,878 in a regional bank headquartered in San Francisco, $80,878 of which is
not federally insured. JetFleet II has accumulated cash in excess of the
federally insured amount in anticipation of a proposed merger with JetFleet (see
Note 6). JetFleet II is also accumulating maintenance reserves collected from
various lessees which will be used to fund certain scheduled maintenance and
repairs required for certain aircraft.
Restricted cash
As of December 31, 1997 and December 31, 1996, JetFleet II held
restricted cash in the amount of $827,000 and $501,072, respectively, which
represents 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.
7
<PAGE> 8
JetFleet Aircraft II, L.P.
Notes to Financial Statements
1. Summary of Significant Accounting Policies (continued)
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 under 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.
2. Allocation of Income, Losses and Distributions
Pursuant to the Partnership Agreement, all revenues and expenses and
income and losses are generally allocated 95% to the limited partners and 5% to
the general partners. In accordance with the Partnership Agreement, during 1995,
1996 and 1997, additional revenues were specially allocated to the general
partners to bring their capital account to a zero balance. Cash distributions
from JetFleet II's operations are made 95% to the limited partners and 5% to the
general partners.
3. Aircraft and Aircraft Engines Under Operating Leases and Aircraft Held
for Operating Leases
Aircraft
deHavilland DHC-103, serial number 72 ("S/N 72")
CMA purchased a 100% undivided interest in S/N 72 in November 1991
for the purpose of reselling the undivided interests to JetFleet II and
JetFleet.
JetFleet II agreed to purchase CMA's undivided interest in S/N 72 at a
price equal to CMA's cost, including chargeable acquisition costs and loan fees,
in one or more installments as funds were raised in the JetFleet II offering and
became available for investment. As a result, JetFleet II holds an undivided
interest of 75.53% at December 31, 1997. JetFleet and the seller, AEI, own the
remaining 24.37% and 0.10% undivided interests, respectively, at December 31,
1997.
Upon the return of S/N 72 by Johnson Controls World Services, Inc.
("JCWS") during the second quarter of 1993, a collision-avoidance radar system
("TCAS") was installed on the aircraft in order to comply with FAA regulations
regarding commercial airline operations. In connection with the TCAS
installation, JetFleet II paid and capitalized its pro rata share of the cost.
This amount is being depreciated over the remaining depreciable life of the
aircraft.
8
<PAGE> 9
JetFleet Aircraft II, L.P.
Notes to Financial Statements
3. Aircraft and Aircraft Engines Under Operating Leases and Aircraft Held
for Operating Leases (continued)
Aircraft (continued)
deHavilland DHC-7-102, serial number 57 ("S/N 57")
During 1992, JetFleet II purchased a 4.00% undivided interest in S/N
57. The remaining undivided interests in S/N 57 are held 95.90% by JetFleet and
0.10% by the seller, AEI, at December 31, 1997.
deHavilland DHC-7-102, serial number 44 ("S/N 44")
During 1992, JetFleet II purchased undivided interests totaling
100.00% in S/N 44 in a series of monthly installments.
deHavilland DHC-7-103, serial number 11 ("S/N 11")
CMA purchased a 100% undivided interest in S/N 11 in October 1992 for
the purpose of reselling the undivided interests to JetFleet II. JetFleet II
purchased CMA's undivided interest in S/N 11 at a price equal to CMA's cost,
plus chargeable acquisition costs, loan fees and acquisition fees in
installments as funds were raised in the JetFleet II offering and became
available for investment. As a result, JetFleet II holds an undivided interest
of 100.00% at December 31, 1997.
deHavilland DHC-6-310, serial number 666 ("S/N 666")
JMC purchased a 100% undivided interest in S/N 666 in January 1995 for
the purpose of reselling the undivided interest to JetFleet II. In April 1995,
JetFleet II purchased JMC's undivided interest in S/N 666 at a price equal to
JMC's cost plus chargeable acquisition costs, loan fees and acquisition fees.
Fairchild Metro III SA-227-AC, serial number AC-576 ("S/N 576")
JetFleet II purchased a 100% undivided interest in S/N 576 in June
1995.
Fairchild Metro II SA-226-TC, serial number TC-370 ("S/N 370")
In February 1996, JetFleet II purchased a 50% undivided interest in a
Fairchild SA226-TC aircraft, serial number TC-370 ("S/N TC-370"). CMA Capital
Management, Inc., a subsidiary of CMA Consolidated, Inc., purchased the
remaining 50% interest at the same time. CMA Capital Management's sole purpose
for purchasing S/N 370 was to re-sell it, at cost, to JetFleet III, an affiliate
of JetFleet II, as JetFleet III raised funds.
9
<PAGE> 10
JetFleet Aircraft II, L.P.
Notes to Financial Statements
3. Aircraft and Aircraft Engines Under Operating Leases and Aircraft Held
for Operating Leases (continued)
Aircraft engines
In March 1993, JetFleet II purchased, in monthly installments
twenty-five used aircraft engines (the "Airwork Engines"). At December 31, 1997
JetFleet II held 100.00% undivided interests in the Airwork engines, comprised
of four Pratt & Whitney PT6A-42 aircraft engines, thirteen Pratt & Whitney
PT6A-41 aircraft engines, two Pratt & Whitney PT6A-28 aircraft engines, one
Pratt & Whitney PT6A-65 aircraft engine, one Pratt & Whitney PT6A-45 aircraft
engine, one Pratt & Whitney PT6A-65R aircraft engine, and two Allison A-250-C30P
aircraft engines.
During January 1996, Airwork notified JetFleet II of an event of loss
concerning one of the Airwork Engines (the "Lost Airwork Engine"). Rather than
replace the Lost Airwork Engine, Airwork chose to pay to JetFleet II the
stipulated loss value as stated in the lease agreement for the Airwork Engines.
JetFleet II recognized a gain of $34,860 on the disposition of the Lost Airwork
Engine.
During June 1996, Airwork notified JetFleet II of the loss of another
one of the Airwork Engines (the "Second Lost Airwork Engine"). Airwork replaced
the Second Lost Airwork Engine with an engine of equal value, utility and
operating condition.
During December 1993, JetFleet II purchased two Pratt & Whitney PT6A-50
aircraft engines (the "AEI Engines"). In December 1994, JetFleet II sold one of
the AEI Engines to deHavilland, Inc. JetFleet II recognized a loss of $6,868 in
connection with this transaction.
In December 1993 and during the first quarter of 1994, JetFleet II
purchased three Pratt & Whitney JT8D-217A aircraft engines (the "AGES Engines")
from AGES. The total cost of the three engines included reimbursement of
acquisition costs and acquisition fees. During the first quarter of 1995,
JetFleet II and AGES agreed to rescind the AGES Engines purchase transaction.
JetFleet II received a total of $5,089,344 in proceeds from the rescission
during the first and second quarters of 1995.
The Dash-7 leases
At the time of purchase, all four Dash-7's were subject to triple net
leases with JCWS under an eight year contract, which commenced in 1986, with the
United States Army for use in the Marshall Islands at the site of the Army's
deep space research center where missile guidance systems are tested.
Under the terms of the sales agreements for the aircraft, AEI receives
4% of monthly lease revenues during the first eight years of the lease in return
for providing remarketing and certain other services in connection with the
lease, re-lease and re-sale of the aircraft.
After having been re-leased to Eclipse Airlines, Inc. and The AGES
Group, L.P., S/N 72 was re-leased in March 1995 to Air Niugini for a term of six
months. The lease was subsequently extended to October 31, 1995. In addition,
Air Niugini paid JetFleet II its share of maintenance
10
<PAGE> 11
JetFleet Aircraft II, L.P.
Notes to Financial Statements
3. Aircraft and Aircraft Engines Under Operating Leases and Aircraft Held
for Operating Leases (continued)
The Dash-7 leases (continued)
costs. Upon its return from Air Niugini and at the direction of JetFleet II
management, S/N 72 underwent certain scheduled maintenance and other repair
work.
On April 25, 1996, S/N 72 was leased to Air Tindi Limited ("Air Tindi")
for a term of thirty-six months. Air Tindi has provided a letter of credit which
serves as a security deposit under the lease. In addition, Air Tindi pays
JetFleet II its pro-rata share of estimated maintenance costs per hour of usage,
which amount is to be applied for scheduled overhauls and inspections. Air Tindi
is a regional airline headquartered in Yellowknife, Northwest Territories,
Canada and provides charter and regularly scheduled flights throughout the
Northwest Territories. During December 1997 the maintenance reserves were
increased by $624,808 and a related expense recognized.
During 1994 the current leases for S/N 57, S/N 44 and S/N 11 were
extended, at reduced rent, through September 30, 1995. A new contract with the
United States Army commenced on February 15, 1995 for a term of two years with
three two-year renewal options. During 1995, the leases for all three aircraft
were extended through September 30, 1996. During 1996, the current leases for
all three aircraft were extended, at reduced rent, through September 30, 1998.
Other aircraft leases
S/N 666 is leased to Loganair Limited, a British Airways franchisee
("Loganair"), for a term expiring on January 30, 1998 (the "Loganair Lease"). As
part of the purchase of S/N 666 from JMC, JMC assigned the Loganair Lease to
JetFleet II. Loganair also pays, on a monthly basis, maintenance costs based on
usage. JetFleet II holds a security deposit from Loganair in an interest-bearing
account (which interest accrues for the benefit of Loganair). In January 1998,
Loganair exercised its option to extend the lease for an additional 39 months,
through April 2001.
S/N 576 is subject to a lease with Merlin Express, Inc., a subsidiary
of Fairchild Aircraft Incorporated ("Merlin"), for a term expiring on July 18,
1999 (the "Merlin Lease"). The Merlin Lease contains a guaranty by Fairchild
Aircraft Incorporated for the equivalent of six months of rent. As part of the
purchase of S/N 576, the seller assigned the Merlin Lease to JetFleet II. Merlin
also pays, on a monthly basis, maintenance costs based on usage. JetFleet II
holds a security deposit from Merlin in an interest-bearing account (which
interest accrues for the benefit of Merlin).
S/N TC-370 is subject to a lease with Sunbird Air Services, Ltd. for a
term expiring September 30, 2000 (the "Sunbird Lease"). The Sunbird Lease
contains a guaranty by the seller for basic rent in an amount not to exceed a
total aggregate amount of $29,250 (which guaranty is shared equally by JetFleet
II and JetFleet III). As part of the purchase of S/N TC-370, the seller assigned
its interests and obligations under the Sunbird Lease to JetFleet II.
11
<PAGE> 12
JetFleet Aircraft II, L.P.
Notes to Financial Statements
3. Aircraft and Aircraft Engines Under Operating Leases and Aircraft Held
for Operating Leases (continued)
The aircraft engine leases
The Airwork Engines acquired by JetFleet II are leased back to Airwork
pursuant to a master lease (the "Airwork Lease") between Airwork and JetFleet
II. The Airwork Lease is a triple net lease, has an initial seven-year term
(which expires on April 30, 2000), and Airwork has two two-year renewal options.
UNC Incorporated, the parent of Airwork, guaranteed the obligations of Airwork
under the Airwork Lease. Upon the purchase of each engine by JetFleet II,
Airwork was required to pay a security deposit equal to one month of rent.
The remaining AEI Engine is currently off lease and is being maintained
as a spare.
The AGES Engines were leased to GPA Group plc and subleased to Aerovias
de Mexico, S.A. de C.V. As mentioned above, JetFleet II and AGES agreed during
the first quarter of 1995 to rescind the AGES Engines purchase by JetFleet II.
JetFleet II received a total of $150,000 in rental payments during 1995 for the
AGES Engines.
Future minimum rents
The following is a schedule of future minimum rental income by year
under the existing leases:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $ 2,388,727
1999 1,258,668
2000 738,086
2001 60,000
-------------------
$ 4,445,480
===================
</TABLE>
12
<PAGE> 13
JetFleet Aircraft II, L.P.
Notes to Financial Statements
3. Aircraft and Aircraft Engines Under Operating Leases and Aircraft Held
for Operating Leases (continued)
Detail of investment
The following schedule provides an analysis of JetFleet II's investment
in aircraft under operating leases and aircraft held for operating leases as of
December 31, 1996, additions during 1997, and as of December 31, 1997:
<TABLE>
<CAPTION>
December 31, December 31,
1996 Additions 1997
---- --------- ----
<S> <C> <C> <C>
S/N 72 $ 5,328,677 $ -- $ 5,328,677
S/N 57 199,752 -- 199,752
S/N 44 5,208,656 -- 5,208,656
S/N 11 6,225,556 -- 6,225,556
Airwork Engines 5,274,529 -- 5,274,529
AEI Engine 213,150 -- 213,150
S/N 370 351,477 -- 351,477
S/N 666 893,096 -- 893,096
S/N 576 1,165,750 -- 1,165,750
24,860,643 -- 24,860,643
------------ ------------- ----------------
Less accumulated
depreciation (10,425,030) (532,394) (10,957,424)
------------ ------------- ----------------
$ 14,435,613 $ (532,394) $ 13,903,219
============ ============= ================
</TABLE>
The following schedule provides an analysis of JetFleet II's investment
in aircraft under operating leases and aircraft held for operating leases and
the related accumulated depreciation for the years ended December 31, 1995, 1996
and 1997:
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation Net
<S> <C> <C> <C>
Balance,
December 31, 1994 $ 28,468,404 $ (4,499,361) $ 23,969,043
Additions 3,696,146 (3,372,163) 323,983
------------ ------------ ------------
Disposals (7,430,920) 658,185 (6,772,735)
Balance,
December 31, 1995 $ 24,733,630 $ (7,213,339) $ 17,520,291
Additions 351,477 (3,260,014) (2,908,537)
Disposals (224,464) 48,323 (176,141)
------------ ------------ ------------
Balance,
December 31, 1996 $ 24,860,643 $(10,425,030) $ 14,435,613
Additions -- (532,394) (532,394)
------------ ------------ ------------
Balance,
December 31, 1997 $ 24,860,643 $(10,957,424) $ 13,903,219
============ ============ ============
</TABLE>
13
<PAGE> 14
JetFleet Aircraft II, L.P.
Notes to Financial Statements
4. Investments in Capital Leases
McDonnell Douglas DC-9-32, serial number 47236 ("First DC-9")
On December 16, 1994, JetFleet II purchased a 50.00% undivided interest
in the First DC-9. JetFleet purchased the remaining 50% interest at the same
time. The First DC-9 was leased back to the seller, Interglobal, Inc. for
thirty-six months (the "First DC-9 Lease"). The First DC-9 was sub-leased to and
operated by Aero California S.A. de CV. As discussed in Note 1 above, JetFleet
II's investment in the First DC-9 was accounted for as a capital lease. The
investment was essentially a financing in which JetFleet II recovered its
investment over the term of the lease. Interglobal, Inc. exercised its purchase
option upon expiration of the First DC-9 Lease.
McDonnell Douglas DC-9-14, serial number 45702 ("Second DC-9")
On July 10, 1995, JetFleet II purchased a 100% undivided interest in
the Second DC-9. The Second DC-9 is subject to similar lease terms as the First
DC-9 and is accounted for in the same manner.
McDonnell Douglas DC-9-32, serial number 47553 ("Third DC-9")
On August 31, 1995, JetFleet II purchased a 100% undivided interest in
the Third DC-9. The Third DC-9 was also subject to similar lease terms as the
First DC-9 and was accounted for in the same manner. During 1996, JetFleet II
agreed to resell the Third DC-9 and reassign the sublease to the original
seller, Interglobal, Inc.
Future minimum lease payments
The following is a schedule of maturities of lease payments receivable
and recognition of unearned interest income:
<TABLE>
<CAPTION>
Collection Interest
on Income
Year Receivable Recognition
---- ---------- -----------
<S> <C> <C>
1998 $ 150,000 $ 8,781
</TABLE>
14
<PAGE> 15
JetFleet Aircraft II, L.P.
Notes to Financial Statements
5. Related Party Transactions
As discussed in Note 3, JetFleet II's investment in aircraft and
aircraft engines includes reimbursements to CMA and Group for chargeable
acquisition costs. These amounts, which totaled $4,533 and $41,097 in 1996 and
1995, respectively, included legal and consulting costs in connection with the
acquisition of the aircraft, as well as appraisal and title insurance costs.
JetFleet II also reimbursed JMC for loan fees incurred of $16,251 in 1995 and
paid Group acquisition fees of $5,194 and $54,376 in 1996 and 1995,
respectively.
Group receives an equipment management fee ($41,366, $43,249 and
$48,857 in 1997, 1996 and 1995, respectively) equal to 3% of gross rentals
received by JetFleet II from operating leases and 2% of gross rentals from full
payout leases.
JetFleet II did not pay a resale fee (normally 3% of the contract sales
price of each asset sold) to Group or any third-party in connection with the
sale of the AEI Engine or the rescission of the AGES Engines purchase. JetFleet
II paid a resale fee of to Group in connection with the Third DC-9 transaction
in the amount of $13,700 in 1995.
JetFleet II pays for all direct, indirect, administrative and overhead
expenses incurred on its behalf by Group and its affiliates. In 1997, 1996 and
1995, $264,494, $301,407, and $220,361, respectively, was reimbursable by
JetFleet II to Group or its affiliates in connection with the administration and
management of JetFleet II.
All of the above fees payable by JetFleet II to Group were paid to
Group which in turn reimbursed CMA or its affiliates which had incurred costs in
connection with the organization and offering of units in, and the
administration and management of, JetFleet II.
6. Subsequent Events
On April 8, 1997 a Registration Statement on Form S-4 was filed with
the Securities and Exchange Commission disclosing a proposed consolidation of
JetFleet and JetFleet II into a newly incorporated Delaware corporation,
AeroCentury Corp. The Registration Statement was declared effective on September
23, 1997 and the consolidation was effective January 1, 1998, with 99.5% of the
total Limited Partnership Units outstanding exchanged for common shares of
AeroCentury. Therefore, as of that date, JetFleet and JetFleet II have ceased to
exist as independent entities.
The January 1, 1998 consolidation was treated as a pooling-of-interests
and, accordingly, the consolidation costs of $502,383 were expensed on the books
of AeroCentury Corp. as incurred.
On January 16, 1998, AeroCentury Corp. was listed on the American Stock
Exchange under the symbol ACY.
15
