SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[ X ] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the quarterly period ended March 31, 1999
[ ] 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)
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)
Issuer's telephone number, including area code: (650) 340-1888
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
Common Stock, $0.001 par value American Stock Exchange
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
--- ---
As of May 13, 1999 the Issuer has 1,606,557 Shares of Common Stock outstanding,
of which 38,100 are held as Treasury Stock.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
AeroCentury Corp.
Balance Sheet
<S> <C>
ASSETS
March 31,
1999
Cash and cash equivalents $ 1,431,340
Deposits 2,740,820
Accounts receivable 315,550
Aircraft and aircraft engines on operating leases,
net of accumulated depreciation of $16,018,220 30,106,000
Prepaid expenses and other 174,180
Deferred taxes 219,240
---------------
Total assets $ 34,987,130
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 484,240
Notes payable and accrued interest 12,885,420
Maintenance deposits and accrued costs 2,503,130
Security deposits 699,600
Prepaid rent 82,440
Deferred taxes 3,421,400
Taxes payable 141,800
---------------
Total liabilities 20,218,030
---------------
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 shares issued and outstanding 1,610
Paid in capital 13,821,200
Retained earnings 1,107,510
---------------
14,930,320
Treasury stock at cost, 17,800 shares (161,220)
---------------
Total shareholders' equity 14,769,100
---------------
Total liabilities and shareholders' equity $ 34,987,130
===============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
<TABLE>
<CAPTION>
AeroCentury Corp.
Statements of Operations
For the Three Months Ended March 31,
<S> <C> <C>
1999 1998
Revenues:
Rent income $ 1,395,330 $ 809,920
Other income 25,190 12,000
--------------- ----------------
1,420,520 821,920
--------------- ----------------
Expenses:
Management fees 241,290 141,110
Depreciation 306,970 162,820
Interest 209,430 8,090
Professional fees and general and administrative 116,040 81,420
-------------- ----------------
873,730 393,440
-------------- ----------------
Income before taxes 546,790 428,480
Tax provision 206,470 170,440
-------------- ----------------
Net income $ 340,320 $ 258,040
============== ================
Weighted average common
shares outstanding 1,592,811 1,606,557
============== ================
Basic earnings per share $ 0.21 $ 0.16
============== ================
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
<TABLE>
<CAPTION>
AeroCentury Corp.
Statements of Cash Flows
For the Three Months Ended March 31,
<S> <C> <C>
1999 1998
Net cash provided by operating activities $ 862,360 $ 1,062,670
Investing activities:
Purchase of aircraft (7,600,000) (1,124,480)
-------------- ---------------
Net cash used by investing activities (7,600,000) (1,124,480)
Financing activities:
Issuance of notes payable 6,400,000 -
Purchase of treasury stock (83,030) -
Issuance of secured note - 866,670
-------------- ---------------
Net cash provided by financing activities 6,316,970 866,670
Net change from consolidation of partnerships - 22,860
-------------- ---------------
Net (decrease)/increase in cash and cash equivalents (420,670) 827,720
Cash and cash equivalents, beginning of period 1,852,010 7,980
-------------- ---------------
Cash and cash equivalents, end of period $ 1,431,340 $ 835,700
============== ===============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
March 31, 1999
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"), which 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 sheet at March 31, 1999 and statements of
operations and cash flows for the three months ended March 31, 1999 and 1998
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 period are not necessarily
indicative of results of operations for a full year.
Organization and Capitalization
At December 31, 1997, all 150,000 of the Company's outstanding shares
were owned by JetFleet Holding Corp. ("JHC"), a California corporation. On
January 1, 1998, 1,456,557 additional common shares were issued as a result of
the Consolidation.
JetFleet Management Corp. ("JMC"), a wholly owned subsidiary of JHC, 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.
On October 23, 1998, the Company's Board of Directors adopted a stock
repurchase plan, granting management the authority to purchase up to 100,000
shares of the Company's common stock, in privately negotiated transactions or on
the market, at such price and on such terms and conditions deemed satisfactory
to management. During the quarter ended March 31, 1999, the Company purchased
8,600 shares of its common stock and, since the adoption of the plan, has
purchased 17,800 shares.
Revenue Recognition
Revenue from leasing of aircraft assets is recognized as operating
lease revenue on a straight-line basis over the terms of the applicable lease
agreements. Interest income includes interest earned from two finance leases
which expired in December 1997 and June 1998.
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
March 31, 1999
1. Basis of Presentation (continued)
Aircraft and Aircraft Engines On Operating Leases
The Company's interests in aircraft and aircraft engines are recorded
at cost, which includes acquisition costs. Depreciation is computed using the
straight-line method over the aircraft's estimated economic life (generally
assumed to be twelve years), to an estimated residual value. The depreciable
base of the assets acquired by the Company in the Consolidation was equal to the
net book value of the assets at December 31, 1997.
Loan Commitment and Related Fees
To the extent that the Company is required to pay loan commitment fees
and legal fees in order to secure debt, such fees are amortized over the life of
the related loan.
Maintenance Deposits and Accrued Costs
Maintenance costs under the Company's triple net leases are generally
the responsibility of the lessees. Maintenance deposits and accrued costs in the
accompanying balance sheet include refundable and non-refundable maintenance
payments received from lessees as well as amounts accrued by the Company for
future work to be performed on one of its aircraft.
Income Taxes
The Company follows the liability method of accounting for income taxes
as required by the provisions of SFAS No. 109 Accounting for Income Taxes. Under
the liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
effect on deferred taxes of a change in the tax rates is recognized in income in
the period that includes the enactment date.
Cash and Cash Equivalents/Deposits
The Company considers highly liquid investments readily convertible
into known amounts of cash, with original maturities of 90 days or less, as cash
equivalents. Deposits represent cash balances held related to maintenance and
security deposits and are subject to withdrawal restrictions.
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. Aircraft and Aircraft Engines On Operating
Leases
At March 31, 1999, the Company owned four de Havilland DHC-7, three de
Havilland DHC-6, two Fairchild Metro III, one Shorts SD 3-60 and two Fokker 50
aircraft, and 24 turboprop engines. During the first quarter of 1999, the
Company purchased one of the Fairchild Metro III and one of the Fokker 50
aircraft, leased to carriers in North America and Brazil, respectively, for a
total of $7,600,000, including acquisition costs.
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
March 31, 1999
3. Notes Payable and Accrued Interest
On June 30, 1998 the Company obtained a $15 million revolving credit
facility to acquire turboprop aircraft and engines under lease. The facility,
which expires on June 30, 2000 and which may be renewed annually thereafter,
bears interest, payable monthly, at either prime or LIBOR plus 200 basis points,
at the Company's option. The facility may be expanded to $30 million with
participation of additional banks, and, on April 1, 1999, the Company signed an
agreement increasing its facility to $22.5 million. The Company's aircraft and
aircraft engines serve as collateral under the facility and, in accordance with
the credit agreement, the Company must maintain compliance with certain
financial covenants. As of March 31, 1999, the Company was in compliance with
all such covenants. As of March 31, 1999, $12.8 million was outstanding under
the credit facility and interest of $85,420 was accrued, using a prime rate of
7.75%.
4. Income Taxes
The items comprising income tax expense are as follows:
For the Quarters Ended March 31,
1999 1998
Current tax provision:
Federal 122,020 $ -
State 33,470 -
Current tax provision 155,490 -
Deferred tax provision:
Federal 41,850 145,480
State 9,130 24,960
Deferred tax provision 50,980 170,440
Total provision for income taxes 206,470 $ 170,440
Total income tax expense differs from the amount which would be
provided by applying the statutory federal income tax rate to pretax earnings as
illustrated below:
Income tax expense at
statutory federal income tax rate $ 185,910 $ 145,680
State taxes net of federal benefit 31,900 25,000
Tax rate differences (11,340) (240)
Total income tax expense $ 206,470 $ 170,440
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
March 31, 1999
4. Income Taxes (continued)
Temporary differences and carryforwards which gave rise to a
significant portion of deferred tax assets and liabilities as of March 31, 1999
are as follows:
March 31,
1999
Deferred tax assets:
Amortization of organizational costs $ 66,200
State taxes 11,360
Maintenance reserves 108,840
Prepaid rent 32,840
Net deferred tax assets 219,240
Deferred tax liabilities:
Depreciation on aircraft and engines (3,421,400)
Net deferred tax liability $ 3,202,160
5. Supplementary Disclosures of Cash Flow Information
During the quarters ended March 31, 1999 and 1998, the Company paid
interest totaling $163,780 and $8,090, respectively.
6. Related Party Transactions
Since the Company has no employees, the Company's portfolio of leased
aircraft assets is managed and administered under the terms of a management
agreement with JMC. Under this agreement, JMC receives a monthly management fee
based on the net asset value of the assets under management. During the first
quarter of 1999, the Company paid JMC $221,920 of management fees. In addition,
JMC may receive a brokerage fee for locating assets for the Company, provided
that the aggregate purchase price including chargeable acquisition costs and any
brokerage fee does not exceed the fair market value of the asset based on
appraisal, and a remarketing fee in connection with the sale or re-lease of the
Company's assets. The management fees, brokerage fees and remarketing fees may
not exceed the customary and usual fees that would be paid to an unaffiliated
party for such services.
In March 1998, the Company acquired an aircraft on lease using cash and
a loan in the amount of $866,700 from an affiliate. The Company paid $8,090 of
interest during the first quarter of 1998. The loan was repaid during August
1998.
Certain employees of JMC participate in an employee stock incentive
plan which granted options to purchase shares of the Company held by JHC. As of
March 31, 1999, 2,833 such options had been exercised.
<PAGE>
7. Subsequent Events
Stock Repurchases
During April and May 1999, the Company repurchased 20,300 shares of its
common stock.
Expansion of Credit Facility
On April 1, 1999, the Company signed an agreement, increasing its $15
million revolving credit facility to $22.5 million.
S/N 72 Lease Expiration
The lease for S/N 72 expired on April 25, 1999. The Company has been
seeking re-lease opportunities for S/N 72 and is discussing lease terms with
interested parties.
Raytheon Lease Renewal
Raytheon has exercised its two-year renewal option for the three Dash-7
aircraft. At December 31, 1998, Raytheon had received government funding for the
full two year term on two of the aircraft, and government funding through March
31, 1999 on the third aircraft. During April 1999, Raytheon received government
funding for the full renewal term of the third aircraft.
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
Forward-Looking Statements
Certain statements contained in this report, and, in particular, the discussion
regarding the Company's beliefs, plans, objectives, expectations and intentions
regarding: the adequacy of the Company's cash flow to meet increases in its
credit line interest rate; the company's ability to meet its ongoing operational
cash flow needs; the Company's intention to repay revolving loan indebtedness
from future equity or debt financings; the Company's ability to reduce the
"off-lease" time for an asset by monitoring and immediate marketing responses;
the Company's intention and ability to increase its credit facility; the
Company's intention to use proceeds of its credit line to acquire additional
assets; the stability of the air transport industry and asset sale and lease
prices; the supply of suitable transaction opportunities for the Company; the
Company's ability to reduce the impact of an industry downturn through proper
asset and lessee selection; the Company's competitiveness in the regional
aircraft market; and the Company's ability to obtain credit enhancement for its
lessees, such as letters of credit or third party guaranties, 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,
general portfolio ownership risks, and the availability of financing for the
Company's turboprop equipment, 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 in the section
entitled "Factors that May Affect Future Results."
Results of Operations
The Company had revenues of $1,420,520 and $821,920 and net income of $340,320
and $258,040 for the quarters ended March 31, 1999 and 1998, respectively.
Rent income is approximately $585,000 higher in 1999 versus 1998 due to the
purchases of additional aircraft on lease during the fourth quarter of 1998 and
first quarter of 1999.
Management fees and depreciation are approximately $100,000 and $144,000 higher,
respectively, in 1999 versus 1998 because of the 1998 and 1999 aircraft
acquisitions. Interest expense is approximately $201,000 higher in 1999 than in
1998 because the Company's credit facility was not used until the fourth quarter
of 1998. Professional fees and general administrative expense are approximately
$35,000 higher in 1999 primarily due to an increase in legal expenses associated
with using the Company's credit facility.
Liquidity and Capital Resources
The Company is currently financing its asset growth through borrowings secured
by its lease portfolio and excess cash flow. The Company has a $22.5 million
credit facility which expires on June 30, 2000 and which is renewable annually
thereafter. The facility bears interest at either prime or LIBOR plus 200 basis
points, at the Company's option. The facility may be expanded to $30 million
with participation of additional banks. As of March 31, 1999, $12.8 million was
outstanding under the credit facility and interest of $85,420 was accrued, using
a prime rate of 7.75%.
The prime rate has been stable since November 1998. The Company believes it has
adequate cash flow to meet increases in the interest rate applicable to its
credit line obligations. Any increase in such interest rates is likely to be the
result of increased prevailing interest rates. Increased prevailing interest
rates generally result in higher lease rates as well, and so an increase in
credit line payments may be offset at least partially by higher revenues on new
leases and renewals of leases entered into by the Company. The Company is
studying whether it is advisable to enter into an interest rate hedge
transaction, which for a fee would act to lock in current interest rates on its
credit line obligations. In making its decision, the Company is analyzing
interest rate trends, the ongoing costs of maintaining the hedge and the
magnitude of the impact of any interest rate swing.
<PAGE>
It is the Company's policy to monitor lessee's needs in periods before leases
are due to expire. If it appears that a lessee will not be renewing its lease,
the Company immediately initiates marketing efforts to locate a potential new
lessee or purchaser for the aircraft. This procedure helps the Company reduce
any potential that an asset will be "off-lease" for a significant time. The
lease for S/N 72 expired on April 25, 1999. The Company has been seeking
re-lease opportunities for S/N 72 since the lessee provided notice that it would
not renew the lease, and the Company is discussing lease terms with interested
parties. Management anticipates that such discussions will minimize the amount
of time that S/N 72 is off lease. The Company's other aircraft are subject to
leases with varying expiration dates between July 1, 1999 and November 23, 2003.
Given the varying lease terms and expiration dates for the aircraft in the
Company's portfolio, management believes that the Company will have adequate
cash flow to meet any on-going operational needs, even if S/N 72 remains
off-lease for an extended period of time.
Factors that May Affect Future Results
Risks of Debt Financing. The Company's use of acquisition financing under its
revolving credit agreement will subject the Company to increased risks of
leveraging. The revolving loans are 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. The Company anticipates that it will request an increase in its credit
facility to the full $30 million limit. Funding of the remaining amount
requested is dependent upon the ability of the original 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 expiring in June
2000, and is 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.
All of the Company's current credit line indebtedness carries a floating
interest rate based on the lender's prime rate. The Company has the ability to
convert the prime rate loans to loans based on a floating LIBOR rate. If the
applicable index rate increases, then the Company's payment obligations under
the line of credit would increase and could result in lower net revenues for the
Company.
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.
General Economic Conditions. The market for used aircraft has been cyclical, and
usually reflects economic conditions and the strength of the travel and
transportation industry. The Company believes that the air transport industry is
currently stable, with demand for aircraft, asset prices and lease rates level,
and in some cases, increasing. Nonetheless at any time, the market for used
aircraft may be adversely affected by such factors as airline financial
difficulties, higher fuel costs, and improved availability and economics of new
replacement aircraft.
<PAGE>
The Company believes that the current aircraft market provides a good supply of
suitable transaction opportunities for the Company, primarily in overseas
markets, but domestically as well. There are currently some disparities between
geographic regions with respect to the condition of the air transport industry,
with the Pacific Rim, in particular, not currently experiencing the growth that
is taking place in the U.S. and other foreign markets. This economic slowdown
has not had a significant effect on the Company's business, as it does not
currently have any assets placed with Pacific Rim lessees. There have also been
disruptions in the currency markets in certain geographic areas. To the extent
that such disruptions adversely affect a region's economic growth, suitable
transactions may be more difficult for the Company to find in that region and
the Company's lessees in that area may be adversely affected.
An adverse change in the global air travel industry, however, could result in
reduced carrier revenue and excess capacity and increase the risk of failure of
some weaker regional air carriers. While the Company believes that with proper
asset and lessee selection in the current climate, as well as during such
downturns, the impact of such changes on the Company can be reduced, there is no
assurance that the Company's business will escape the effects of such a global
downturn, or a regional downturn in an area where the Company has placed a
significant amount of its assets.
Reliance on JMC. All management of the Company is 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 is not a fiduciary to the
Company or its stockholders. The Board of Directors does, however, have ultimate
control and supervisory responsibility over all aspects of the Company and does
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, certain officers of JMC are also officers of the Company, and in that
capacity owe fiduciary duties to the Company and the stockholders by virtue of
holding such offices with the Company.
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. Although the Company has taken steps to prevent conflicts of
interest arising from such dual roles, such conflicts may still occur.
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
profitably 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 serviceable 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.
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. The Company may focus in the near term on leases in
overseas markets, which markets are currently dynamic and which the Company
believes present attractive opportunities. Leases with foreign lessees, however,
may present somewhat different credit risks than those with domestic lessees.
Foreign laws, regulations and judicial procedures may be more or less protective
of lessor rights as those which apply in the United States. The Company could
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 central
registration or recording system with which to locally establish the Company's
interest in equipment and related leases. This could add difficulty in
recovering equipment in the event that a foreign lessee defaults.
Leases with foreign lessees are subject to risks related to the economy of the
country or region that such lessee is located even if the U.S. economy remains
strong. On the other hand, a foreign economy may remain strong even though the
domestic U.S. economy is not. A foreign economic downturn may occur and impact a
foreign lessee's ability to make lease payments, even though the U.S. and other
economies remain stable. Furthermore, foreign lessees are subject to risks
related currency conversion fluctuations. Although the Company's current leases
are all payable in U.S. dollars, in the future, the Company may agree to leases
that permit payment in foreign currency, which would subject such lease revenue
to monetary risk due to currency fluctuations. Even with dollar-denominated
lease payment provisions, the Company could still be affected by a devaluation
of the lessee's local currency which makes it more difficult for a lessee to
meet its dollar-denominated lease payments, increasing the risk of default of
that lessee, particularly if that carrier's revenue is primarily derived in the
local currency.
Government Regulation. There are a number of areas in which government
regulation may result in costs to the Company. These include aircraft
registration, safety requirements, required equipment modifications, and
aircraft noise requirements. Although it is contemplated that the burden 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 is competitive because of its experience and operational efficiency in
financing the transaction types desired by the 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 or 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. The Company has notified
all lessees of the Year 2000 problem and has requested information on the status
of each lessee's study and remediation plans. The Company believes that there
should not be any material costs in connection with such a study. The Company
has been 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.
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 Company is
monitoring the Year 2000 readiness of such providers. Management believes that a
temporary interruption 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.
<PAGE>
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 May 13, 1999.
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
May 13, 1999.
Signature Title
/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 Secty.
- ------------------------------- of the Registrant (Principal Financial and
Toni M. Perazzo Accounting Officer)
/s/ Marc J. Anderson Director, Chief Operating Officer, Senior
- ------------------------------- Vice President
Marc J. Anderson
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