FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 001-13387
AeroCentury Corp.
(Exact name of Registrant as specified in its charter)
Delaware 94-3263974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1440 Chapin Avenue, Suite 310
Burlingame, California 94010
(Address of principal executive offices) (Zip code)
650-340-1888
(Registrant's telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year, if
changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No ____
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the registrant has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title Outstanding
Common Stock 1,606,557
Rights to Purchase Series A Preferred Stock 0
Transitional Small Business Disclosure Format (check one);
Yes___ No X
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
AeroCentury Corp.
Balance Sheets
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,672,200 $ 8,000
Deposits 919,600 -
Accounts receivable 53,800 -
Aircraft and aircraft engines under operating leases
and aircraft held for operating leases, net of
accumulated depreciation of $15,548,400 in 1998 16,607,200 -
Prepaid expenses and other assets 109,400 5,400
Deferred tax asset 268,100 87,800
--------------- ---------------
Total assets $ 19,630,300 $ 101,200
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 177,000 $ 207,700
Payable to affiliates 41,900 157,100
Accrued maintenance costs 1,556,000 -
Security deposits 143,100 -
Prepaid rent received 116,100 -
Deferred taxes 3,197,900 -
Taxes payable 82,500 900
--------------- ---------------
Total liabilities 5,314,500 365,700
Shareholders' Equity:
Preferred stock, $.001 par value, 2,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, $.001 par value, 3,000,000 shares
authorized, 1,606,557 and 150,000 shares issued
and outstanding in 1998 and 1997, respectively 1,600 100
Paid in capital 13,821,200 149,900
Retained earnings/(accumulated deficit) 493,000 (414,500)
--------------- ----------------
Total shareholders' equity 14,315,800 (264,500)
--------------- ----------------
Total liabilities and shareholders' equity $ 19,630,300 $ 101,200
=============== ================
See accompanying notes.
</TABLE>
<PAGE>
AeroCentury Corp.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Period
For the from Inception
Nine Months (February 28, 1997) For the Three Months
Ended September 30, to September 30, Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Rent income $ 2,539,900 $ - $ 865,000 $ -
Gain on disposal of engine 183,200 - 183,200 -
Other income 34,700 1,500 13,300 600
--------------- ------------- ------------- ---------------
2,757,800 1,500 1,061,500 600
Expenses:
Management fees 433,300 - 145,400 -
Depreciation 513,400 - 175,300 -
Interest 62,800 - 28,700 -
Professional fees and
general and administrative 228,800 - 68,700 -
Consolidation offering costs - 240,600 - 109,600
--------------- ------------- ------------- ---------------
1,238,300 240,600 418,100 109,600
--------------- ------------- ------------- ---------------
Income before taxes 1,519,500 (239,100) 643,400 (109,000)
Tax provision 612,100 - 263,000 -
--------------- ------------- ------------- ---------------
Net income/(loss) $ 907,400 $ (239,100) $ 380,400 $ (109,000)
=============== ============= ============= ===============
Weighted average common
shares outstanding 1,606,557 150,000 1,606,557 150,000
=============== ============= ============= ===============
Earnings/(loss) per share $ 0.57 $ (1.59) $ 0.24 $ (0.73)
=============== ============= ============= ===============
See accompanying notes.
</TABLE>
<PAGE>
AeroCentury Corp.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Period
from Inception
For the Nine Months (February 28, 1997) to
Ended September 30, 1998 September 30, 1997
<S> <C> <C>
Net cash provided by operating activities $ 2,440,800 $ (22,300)
Investing activities:
Proceeds from disposal of engine 325,000
Purchase of aircraft (1,124,400) -
---------------- ----------------
Net cash used in investing activities (799,400) -
Financing activities:
Issuance of secured note 866,670 -
Repayment of secured note (866,670) -
Sale of common stock - 150,000
Organization costs - (500)
---------------- -----------------
Net cash provided by investing activities - 149,500
Net change from consolidation of partnerships 22,800 -
Net increase in cash and cash equivalents 1,664,200 127,200
Cash and cash equivalents, beginning of period 8,000 -
---------------- -----------------
Cash and cash equivalents, end of period $ 1,672,200 $ 127,200
================ =================
See accompanying notes.
</TABLE>
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
September 30, 1998
(Unaudited)
1. Basis of presentation
AeroCentury Corp. (the "Company") was incorporated in the state of Delaware
on February 28, 1997. The Company was formed solely for the purpose of acquiring
JetFleet Aircraft, L.P. and JetFleet Aircraft II, L.P., partnerships formed
under California law for the purpose of investing in leased aircraft equipment,
(collectively, the "Partnerships") in a statutory merger (the "Consolidation").
A Registration Statement on Form S-4 for the proposed Consolidation became
effective on September 23, 1997 and the Consolidation was effective January 1,
1998. The Company is continuing in the aircraft leasing business in which the
Partnerships engaged and plans to use leveraged financing to acquire additional
aircraft assets on lease.
Because greater than 90% of the limited partnership units of each of the
Partnerships agreed to the Consolidation, it has been treated as a
pooling-of-interests under generally accepted accounting principles with the
assets and liabilities of the combining entities recorded at historical cost on
the Consolidation date. On January 16, 1998, the Company was listed on the
American Stock Exchange under the symbol ACY.
The accompanying balance sheets at September 30, 1998 and December 31, 1997
and statements of operations and cash flows for the nine months ended September
30, 1998 and the period from inception (February 28, 1997) to September 30, 1997
and the quarters ended September 30, 1998 and 1997 reflect all adjustments
(consisting of only normal recurring accruals) which are, in the opinion of the
Company, necessary for a fair presentation of the financial results. The results
of operations of such periods are not necessarily indicative of results of
operations for a full year.
Organization and capitalization
At December 31, 1997, all of the Company's outstanding stock was owned by
JetFleet Management Corp. ("JMC"), a California corporation formed in January
1994. On January 1, 1998, 1,456,557 additional common shares were issued as a
result of the Consolidation.
JMC is an integrated aircraft management, marketing and financing business.
Prior to the Consolidation, JMC managed the aircraft assets of the Partnerships
on behalf of their general partners and limited partners. JMC also manages the
aircraft assets of JetFleet III and AeroCentury IV, Inc., California
corporations which are affiliates of JMC.
On April 17, 1998, in connection with the adoption of a shareholder rights
plan, the Company filed a Certificate of Designation designating the rights,
preferences and privileges of a new Series A Preferred Stock. Pursuant to the
plan, the Company issued rights to its shareholders of record as of April 23,
1998, entitling each shareholder to the right to purchase one one-hundredth of a
share of Series A Preferred Stock for each share of Common Stock held by the
shareholder. Such rights are exercisable only under certain circumstances
concerning a proposed acquisition or merger of the Company.
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
September 30, 1998
(Unaudited)
1. Basis of presentation (continued)
Aircraft and aircraft engines under operating leases and aircraft held for
operating leases
The Company's interests in aircraft and aircraft engines are recorded at
cost, which includes acquisition costs and loan fees. Depreciation is computed
using the straight-line method over the aircraft's estimated economic life
(generally assumed to be twelve years), to an estimated residual value. The
depreciable base of the assets acquired by the Company in the Consolidation is
equal to the net book value of the assets at December 31, 1997.
Income taxes
The Company follows the liability method of accounting for income taxes as
required by the provisions of Statement of Financial Accounting Standards No.
109 - Accounting for Income Taxes.
Cash and cash equivalents
The Company considers highly liquid investments readily convertible into
known amounts of cash, with original maturities of 90 days or less, as cash
equivalents.
Deposits
As of September 30, 1998 the Company held deposits which represent
maintenance reserves collected from lessees and interest earned on those funds,
as applicable. This amount is not included in the cash balance for statement of
cash flow purposes.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Maintenance reserves
All aircraft are operated pursuant to triple net leases under which the
lessee is responsible for maintenance and overhaul, insurance, and operating
costs. In some cases, reserves are collected from the lessee based on estimated
maintenance cost. Annually, management reviews the level of maintenance reserves
collected from lessees for each asset, as applicable, in order to determine
whether reserves collected in the future should be adjusted based on changes in
estimated costs.
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
September 30, 1998
(Unaudited)
2. Aircraft and aircraft engines under operating leases and aircraft held
for operating leases
Aircraft acquisitions and dispositions
There were no asset acquisitions during the quarter ended September 30,
1998.
During July 1998, one of the aircraft engines owned by the Company failed
during testing at a maintenance facility. The Company received proceeds,
representing the fair market value of the engine, from the maintenance
facility's insurance provider. The Company replaced the failed engine with a
spare engine held in inventory and intends to acquire a replacement spare
engine.
3. Notes payable
In connection with its purchase of the Shorts SD-360 during March 1998 the
Company borrowed $866,670 from an affiliate and issued a secured promissory note
bearing interest at the rate of 12% per annum, payable monthly in arrears, with
a maturity date of March 31, 1999. Pursuant to the note's provision for the
Company to repay the note at anytime without penalty, the Company repaid the
note in full during August 1998.
4. Credit facility
On June 30, 1998 the Company obtained a $15 million revolving credit
facility to acquire turboprop aircraft and engines for lease. The facility,
which expires on June 30, 2000, bears interest at either prime or LIBOR plus 200
basis points and may be renewed annually. The facility may be expanded to $30
million with participation of additional banks. As of September 30, 1998, no
amounts were outstanding under the credit facility.
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
September 30, 1998
(Unaudited)
5. Income taxes
The items comprising income tax expense are as follows:
Current tax provision:
Federal $ 64,700
State 17,800
---------------
Current tax provision 82,500
---------------
Deferred tax provision:
Federal 452,000
State 77,600
---------------
Deferred tax provision 529,600
---------------
Total provision for income taxes $ 612,100
===============
Total income tax expense differs from the amount which would be provided by
applying the statutory federal income tax rate
to pretax earnings as illustrated below:
Income tax expense at
statutory federal income tax rate $ 516,600
State taxes net of federal benefit 88,600
Gain on disposition of aircraft 6,900
---------------
Total income tax expense $ 612,100
===============
Temporary differences and carryforwards which gave rise to a significant
portion of deferred tax assets and liabilities as of September 30, 1998 are as
follows:
Deferred tax assets:
Amortization of organizational costs $ 76,100
Maintenance reserves 145,700
Prepaid rent 46,300
---------------
Net deferred tax assets 268,100
Deferred tax liabilities:
Depreciation on aircraft and engines (3,197,900)
---------------
Net deferred tax liability $ (2,929,800)
===============
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.
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
September 30, 1998
(Unaudited)
6. Related party transactions
The Company's portfolio of leased aircraft assets is managed and
administered under the terms of a management agreement with JMC. Under this
agreement, JMC receives a monthly management fee based on the net asset value of
the assets under management. In addition, JMC may receive a brokerage fee for
locating assets for the Company, provided that such fee is not more than the
customary and usual brokerage fee that would be paid to an unaffiliated party
for such a transaction, and provided further that the aggregate purchase price
including chargeable acquisition costs and any brokerage fee shall not exceed
the fair market value of the asset based on appraisal.
In March 1998, the Company acquired an aircraft on lease using cash and a
loan of $866,670 from an affiliate. The loan was repaid during August 1998.
7. Pro forma selected financial information for 1997
Following is pro forma condensed information giving effect to the January
1, 1998 Consolidation as if it had been completed on January 1, 1997.
<TABLE>
<CAPTION>
Nine months ended Quarter ended
Summary of Operations: September 30, 1997 September 30, 1997
------------------ ------------------
<S> <C> <C>
Revenues $2,501,000 $820,400
Net income $884,400 $274,200
Earnings per share $0.55 $0.17
Number of common shares outstanding 1,606,557 1,606,557
Summary Balance Sheet: September 30, 1997
------------------
Total assets $18,242,400
Total liabilities 4,568,400
-----------
Shareholders' equity $13,674,000
===========
The above results include pro forma adjustments for management fees and for
depreciation expense.
</TABLE>
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
September 30, 1998
(Unaudited)
8. Subsequent events
Sale of aircraft
On October 6, 1998 the Company sold its 50.00% interest in a Metro II
SA-226 aircraft to the lessee. The Company recognized a gain in connection with
the sale of the aircraft.
Renewal of leases
The aircraft lease to a subsidiary of Raytheon Service Company for three of
the Company's Dash-7 aircraft expired in September 1998, but Raytheon has a
two-year renewal option, exercisable on or before the later of (i) July 30, 1998
or (ii) notice to Raytheon of renewal of Raytheon's prime contract with the U.S.
Army. Raytheon has exercised its two-year renewal option for two of the Dash-7
aircraft and renewed the lease for the third aircraft for a period of six
months. The lease terms for the three aircraft are substantially the same as
those in the lease which expired during September. If the third aircraft is
returned after the six-month renewal period, then the Company will be required
to remarket it.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Liquidity and Capital Resources
During the nine months ended September 30, 1998, the Company's primary
source of liquidity was cash flow from operating leases. In connection with the
purchase of an aircraft in March 1998, the Company borrowed $866,670 and issued
a 12% note due March 31, 1999. During August 1998, the Company repaid the note,
without penalty, from its net cash flow.
On June 30, 1998, the Company obtained a $15 million revolving credit
facility to finance the acquisition of turboprop aircraft and engines for lease.
The facility may be expanded to $30 million with participation of additional
banks. As of September 30, 1998, no amounts were outstanding under the credit
facility.
Results of Operations
The Company had no significant operations during the first nine months of
1997 other than incurring costs in connection with the proposed Consolidation.
On a pro forma basis, giving effect to the January 1, 1998 Consolidation as
if it had been completed on January 1, 1997, the Company would have had revenues
of $2,501,000 and $820,400 and net income of $884,400 ($0.55 per share) and
$274,200 ($0.17) for the nine months and quarter ended September 30, 1997,
respectively, versus revenues of $2,757,800 and $1,061,500 and net income of
$907,400 ($0.57 per share) and $380,400 ($0.24 per share) for the nine months
and quarter ended September 30, 1998, respectively.
Pro forma interest income for the nine month and three month periods ended
September 30, 1997, is higher by approximately $63,000 and $10,000,
respectively, versus 1998 because of two finance leases which expired in
December 1997 and June 1998. Rent income is approximately $137,000 higher in
1998 versus 1997 due to the March 1998 purchase of an additional aircraft on
lease. Depreciation and management fees combined are approximately $61,000
higher in 1998 versus pro forma amounts for 1997 also because of the 1998
aircraft acquisition. The Company also recorded a gain during 1998 in connection
with insurance proceeds received for one of its aircraft engines, which failed
during testing at a maintenance facility.
Factors that May Affect Future Results
Certain statements contained in this report and, in particular, the
discussion regarding the Company's beliefs, plans, objectives, expectations and
intentions regarding the Company's ability to meet cash flow requirements,
obtain additional acquisition or term indebtedness, and acquire additional
assets in the "Management's Discussion and Analysis or Plan of Operation" are
forward-looking statements. While the Company believes that such statements are
accurate, the Company's business is dependent upon general economic conditions,
particularly those that affect the demand for turboprop aircraft and engines,
including competition for turboprop and other aircraft, and future trends and
results cannot be predicted with certainty. The Company's actual results could
differ materially from those discussed in such forward looking statements. The
cautionary statements made in this Report should be read as being applicable to
all related forward-looking statements wherever they appear in this Report.
Factors that could cause or contribute to such differences include those
discussed below.
Risks of Debt Financing. The Company's use of acquisition financing under
its newly-obtained revolving credit agreement for a maximum of $15 million will
subject the Company to increased risks of leveraging. The revolving loans will
be secured by the Company's existing assets as well as the assets to be acquired
with the financing. Any default under the revolving credit agreement could
result in foreclosure upon not only the asset acquired using such financing, but
also the existing assets of the Company securing the revolving loan.
In order to achieve optimal benefit from the revolving credit facility, the
Company intends to repay the revolving loans from proceeds of subsequent term
debt or equity financings. Such replacement financing would provide the Company
with more favorable long-term repayment terms and also would permit the Company
to make further draws under the revolving credit line equal to the amount of
revolving debt refinanced. There can be no assurance that the Company will be
able to obtain the necessary amount of replacement term debt or equity financing
on favorable terms so as to permit multiple draws on the revolving line of
credit. While the Company intends to request an increase in the revolving credit
facility to $30 million upon reaching the current maximum $15 million revolving
credit limit, such an increase is dependent upon the ability of the current
revolving credit lender ("Lender") to find additional loan participants, and
there is no assurance that such participants will be located by the Lender.
The revolving line of credit has an initial term of two years, renewable at
the sole discretion of Lender and its participants, if any. There is no
assurance that the line of credit will be renewed. If the revolving loan is not
renewed by the Lender and its participants, then all indebtedness under the
revolving loan agreement will become immediately due and payable. There is no
assurance that the Company will have adequate replacement financing in place in
order to meet such accelerated repayment obligations.
Acquisition of Additional Assets. The Company intends to use the proceeds
of its revolving credit facility to acquire additional assets for the purpose of
generating income for the Company. The Company anticipates that 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 for acquisition of any assets, and there is no assurance that the
Company will be able to purchase assets or lease such 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 worldwide economic conditions, general aircraft market
conditions, regulatory changes that may make an asset's use more expensive or
preclude use unless the asset is modified, changes in the supply or cost of
aircraft equipment and technological developments which cause the asset to
become obsolete. In addition, a successful investment in an asset subject to an
operating lease depends in part upon having the asset returned by the lessee in
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. Raytheon has exercised its two-year renewal option
for two of the Dash-7 aircraft and renewed the lease for the third aircraft for
a period of six months. If the third aircraft is returned after the six-month
renewal period, then the Company will be required to remarket it. 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 the aircraft is delivered to a
new lessee, the Company may experience a loss of revenue.
Lessee Credit Risk. If a lessee defaults upon his obligations under a
lease, the Company may be limited in its ability to enforce remedies. Most of
the Company's lessees are small domestic and foreign regional passenger
airlines, which may be even more sensitive to airline industry market conditions
than the major airlines. As a result, the Company's inability to collect rent
under a significant lease or to repossess equipment in the event of a default by
a lessee could have a material adverse effect on the Company's revenue. If a
lessee that is a certified U.S. airline is in default under the lease and seeks
protection under Chapter 11 of the United States Bankruptcy Code, under Section
1110 of the Bankruptcy Code, the Company would be automatically prevented from
exercising any remedies for a period of 60 days. By the end of the 60 day
period, the lessee must agree to perform the obligations and cure any defaults,
or the Company would have the right to repossess the equipment. This procedure
under the Bankruptcy Code has been subject to significant recent litigation,
however, and it is possible that the Company's enforcement rights may still be
further adversely affected by a declaration of bankruptcy by a defaulting
lessee.
International Risks. Leases with foreign lessees may present somewhat
greater credit risks because certain foreign laws, regulations and judicial
procedures may not be as protective of lessor rights as those which apply in the
United States. Although the Company's current leases are all payable in U.S.
dollars, in the future, it may agree to leases which permit payment in foreign
currency, which would subject such foreign currency-denominated lease revenue to
monetary risk due to currency fluctuations. The Company could also experience
collection problems related to the enforcement of its lease agreements under
foreign local laws and the attendant remedies in foreign jurisdictions. The
protections potentially offered by Section 1110 of the Bankruptcy Code would not
apply to non-U.S. carriers, and applicable local law may not offer similar
protections. Certain countries do not have a reliable registration or other
recording system with which to locally establish the Company's interest in
equipment, and related leases. This could add difficulty in recovering an engine
in the event that a foreign lessee defaults.
Government Regulation. There are a number of areas in which government
regulation may result in costs to the Company. These include aircraft
registration, safety requirements, required equipment modifications, and
aircraft noise requirements. Although it is contemplated that the burden of
complying with such requirements will fall primarily upon lessees of equipment,
there can be no assurance that the cost of complying with such government
regulations will not fall on the Company. Furthermore, future government
regulations could cause the value of any non-complying equipment owned by the
Company to substantially decline.
Competition. The aircraft leasing industry is highly competitive. The
Company will compete with aircraft manufacturers, distributors, airlines and
other operators, equipment managers, leasing companies, equipment leasing
programs, financial institutions and other parties engaged in leasing, managing
or remarketing aircraft, many of which have significantly greater financial
resources and more experience than the Company. The Company, however, believes
that it has a competitive advantage in its niche market of financing used
turbo-prop aircraft to regional air carriers. This market segment, which is
characterized by transaction sizes of less than $10 million and lessee credits
that are strong, but generally unrated and more speculative than that of the
major air carriers, is not well served by the Company's larger competitors in
the aircraft industry. JMC, the management company for the Company, has
developed a reputation as a global participant in this segment of the market,
and the Company believes this will benefit the Company. There is no assurance
that the lack of significant competition from the larger aircraft leasing
companies will continue or that the reputation of JMC will continue to be strong
in this market segment and benefit the Company.
Casualties, Insurance Coverage. The Company, as owner of transportation
equipment, could be held liable for injuries or damage to property caused by its
assets. Though some protection may be provided by the United States Aviation Act
with respect to its aircraft assets, it is not clear to what extent such
statutory protection would be available to the Company and such act may not
apply to aircraft operated in foreign countries. 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
which is in turn highly sensitive to general economic conditions. Ability to
re-lease or resell equipment at acceptable rates may depend on the demand and
market values at the time of re-lease or resale. The Company anticipates that
the bulk of the equipment it acquires will be used aircraft equipment. The
market for used aircraft is cyclical, and generally, but not always, reflects
economic conditions and the strength of the travel and transportation industry.
The demand for and resale value of many types of older aircraft in the recent
past has been depressed by such factors as airline financial difficulties,
increased fuel costs, the number of new aircraft on order and the number of
older aircraft coming off lease. The Company's expected concentration in a
limited number of airframe and aircraft engine types (generally, turboprop
equipment) subjects the Company to economic risks if those aircraft engine types
should decline in value. The recent introduction of "regional jets" to serve on
short routes previously thought to be economical only for turboprop aircraft
operation could decrease the demand for turboprop aircraft, while at the same
increasing the supply of used turboprop aircraft. This could result in lower
lease rates and values for the Company's existing turboprop aircraft.
Risks Related to Regional Air Carriers. Because the Company has
concentrated its existing leases and intends to concentrate on leases to
regional air carriers, it will be subject to certain risks. First, lessees in
the regional air carrier market include a number of companies that are start-up,
low capital, low margin operations. Often, the success of such carriers is
dependent upon arrangements with major trunk carriers, which may be subject to
termination or cancellation by such major carrier. This market segment is also
characterized by low entry costs, and thus, there is strong competition in this
industry segment from start-ups as well as major airlines. Thus, leasing
transactions with these types of lessees results in a generally higher lease
rate on aircraft, but may entail higher risk of default or lessee bankruptcy.
The Company will evaluate the credit risk of each lessee carefully, and will
attempt to obtain third party guaranties, letters of credit or other credit
enhancements, if it deems such is necessary. There is no assurance, however,
that such enhancements will be available or that even if obtained will fully
protect the Company from losses resulting from a lessee default or bankruptcy.
Second, a significant area of growth of this market is in areas outside of the
United States, where collection and enforcement are often more difficult and
complicated than the United States.
Possible Volatility of Stock Price. The market price of the Company's
Common Stock could be subject to fluctuations in response to operating results
of the Company, changes in general conditions in the economy, the financial
markets, the airline industry, changes in accounting principles or tax laws
applicable to the Company or its lessees, or other developments affecting the
Company, its customers or its competitors, some of which may be unrelated to the
Company's performance. Also, because the Company has a relatively small
capitalization of approximately 1.6 million shares, there is a correspondingly
limited amount of trading of the shares. Consequently, a single or small number
of trades could result in a market fluctuation not related to any business or
financial development relating to the Company.
Year 2000 Considerations. Management of the Company has directed its
information technology ("IT") manager to require any software or hardware
purchased for use by the Company to have a warranty of Year 2000 compliance. It
has also directed its IT manager to study any systems that may require Year 2000
remediation. The IT manager has determined that, because the Company's IT system
is based on a "MacOS" system, the Company's internal technology systems are
ready for Year 2000, and there should not be any material costs associated with
such remediation. Furthermore, the phone and internet systems have been
warranted by their vendors for Year 2000 compliance. The Company's internal and
administrative operations are not highly dependent on any other advanced
technology system, and, consequently, management believes that the Company's
exposure to loss as a result of Year 2000 issues in its internal and
administrative operations is not significant.
Management believes that the electronic systems used in the equipment
leased by the Company to lessees will not be materially affected by the Year
2000 and that any remediation of the technology systems embedded in the aircraft
that it leases will not be a material expense to the Company; however, a formal
study has not yet been undertaken of the aircraft equipment on lease. The
Company believes that there should not be any material costs in connection with
such a study. The Company will be consulting with all the manufacturers of its
leased equipment to confirm Year 2000 compliance. Since the Company's leases
generally place all maintenance and repair obligations on the lessees, to the
extent that the aircraft are on lease when the Year 2000 problem is identified,
it would generally be the lessee's and not the Company's responsibility to
remediate any Year 2000 problem with the leased aircraft.
Of course, to the extent that a lessee has Year 2000 problems that
significantly adversely affect its overall financial status, such material
problems may affect the lessee's operations and increase the risk of default by
a lessee under its lease with the Company. Furthermore, Year 2000 issues may
have a material impact on FAA operations and the operations of certain air
carriers, which in turn would negatively affect the aircraft industry in
general.
The Company's essential functions are not dependent upon any key third
party vendors or service providers related to the leasing or finance business,
and consequently, the interruption of goods and services from any such
industry-specific third party vendor or service provider to the Company is not
likely to cause a material loss to the Company. Of course, the Company's
ordinary business operation is dependent upon vendors that provide basic
services to businesses generally, such as utility companies, phone and long
distance companies, courier services, banking institutions. The state of Year
2000 readiness of these third parties cannot be assessed by the Company;
however, management believes that a temporary interrruption in services to the
Company by these types of service providers caused by Year 2000 problems would
not cause material losses to the Company. An extended loss of these services,
however, could adversely affect the Company's business and financial
performance. The Company has not yet made any contingency plans for the extended
loss of these basic services.
Part II. Other Information
Item 1. Legal Proceedings
No disclosure required.
Item 2. Changes in Securities
No disclosure required.
Item 3. Defaults Upon Senior Securities
No disclosure required.
Item 4. Submission of Matters to a Vote of Security Holders
No disclosure required.
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AeroCentury Corp.
October 26, 1998 By: /s/ Neal D. Crispin
Date ---------------------------------------
Neal D. Crispin, Director, President and
chairman of the Board of Directors of the
Registrant (Principal Executive Officer)
October 26, 1998 By: /s/ Toni M. Perazzo
Date ---------------------------------------
Toni M. Perazzo, Director,
Vice President - Finance and Secretary
of the Registrant (Principal Financial
and Accounting Officer)
October 26, 1998 By: /s/ Marc J. Anderson
Date ---------------------------------------
Marc J. Anderson, Director, Chief
Operating Officer, Senior Vice President
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