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 September 30, 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 November 12, 1999 the Issuer has 1,606,557 Shares of Common Stock
outstanding, of which 63,300 are held as Treasury Stock.
Transitional Small Business Disclosure Format (check one): Yes No x
-------- ------
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
AeroCentury Corp.
Balance Sheet
<TABLE>
ASSETS
<S> <C>
September 30,
1999
Cash and cash equivalents $ 1,952,300
Deposits 3,467,710
Accounts receivable 313,010
Aircraft and aircraft engines on operating leases,
net of accumulated depreciation of $16,825,020 45,261,200
Prepaid expenses and other 418,490
---------------
Total assets $ 51,412,710
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 533,220
Notes payable and accrued interest 28,089,460
Maintenance reserves and accrued costs 2,284,860
Security deposits 1,508,750
Prepaid rent 174,120
Deferred taxes 3,313,680
Taxes payable 321,790
---------------
Total liabilities 36,225,880
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 1,868,090
---------------
15,690,900
Treasury stock at cost, 63,300 shares (504,070)
---------------
Total shareholders' equity 15,186,830
---------------
Total liabilities and shareholders' equity $ 51,412,710
===============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
AeroCentury Corp.
Statements of Operations
<TABLE>
<S> <C> <C>
For the Nine Months Ended For the Three Months Ended
September 30, September 30,
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Rent income $ 4,709,870 $ 2,539,900 $ 1,874,600 $ 865,000
Gain on disposal of aircraft 98,410 183,200 - 183,200
Other income 96,400 34,700 46,490 13,300
--------------- ---------------- --------------- ---------------
4,904,680 2,757,800 1,921,090 1,061,500
--------------- ---------------- --------------- ---------------
Expenses:
Management fees 801,820 433,300 322,120 145,400
Depreciation 1,113,770 513,400 465,550 175,300
Interest 893,890 62,800 436,840 28,700
Professional fees and
general and administrative 397,610 228,800 144,750 68,700
--------------- ---------------- --------------- ---------------
3,207,090 1,238,300 1,369,260 418,100
--------------- ---------------- --------------- ---------------
Income before taxes 1,697,590 1,519,500 551,830 643,400
Tax provision 596,680 612,100 188,150 263,000
--------------- ---------------- --------------- ---------------
Net income $ 1,100,910 $ 907,400 $ 363,680 $ 380,400
=============== ================ =============== ===============
Weighted average common
shares outstanding 1,570,444 1,606,557 1,549,761 1,606,557
=============== ================ =============== ===============
Basic earnings per share $ 0.70 $ 0.57 $ 0.23 $ 0.24
=============== ================ =============== ===============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
AeroCentury Corp.
Statements of Cash Flows
<TABLE>
For the Nine Months Ended September 30,
<S> <C> <C>
1999 1998
Net cash provided by operating activities $ 2,498,170 $ 2,440,800
Investing activities:
Proceeds from disposal of engine - 325,000
Purchase of aircraft (23,562,000) (1,124,400)
--------------- ---------------
Net cash used by investing activities (23,562,000) (799,400)
Financing activities:
Issuance of notes payable 21,590,000 -
Purchase of treasury stock (425,880) -
Issuance of secured note - 866,670
Repayment of secured note (866,670)
--------------- ---------------
Net cash provided by financing activities 21,164,120 -
Net change from consolidation of partnerships - 22,800
--------------- ---------------
Net increase in cash and cash equivalents 100,290 1,664,200
Cash and cash equivalents, beginning of period 1,852,010 8,000
--------------- ---------------
Cash and cash equivalents, end of period $ 1,952,300 $ 1,672,200
=============== ===============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
September 30, 1999
1. Organization and Summary of Significant Accounting Policies
(a) 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 September 30, 1999 and statements of
operations and cash flows for the nine months and three months ended September
30, 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 periods
are not necessarily indicative of results of operations for a full year.
(b) 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 now manages the aircraft
assets of the Company and 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 September 30, 1999, the Company
purchased 11,900 shares of its common stock and, since the adoption of the plan,
has purchased 63,300 shares.
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
September 30, 1999
1. Organization and Summary of Significant Accounting Policies (continued)
(c) 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. Other income includes interest earned from a finance lease which
expired in June 1998.
(d) 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.
(e) 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.
(f) Maintenance Reserves and Accrued Costs
Maintenance costs under the Company's triple net leases are generally
the responsibility of the lessees. Maintenance reserves and accrued costs in the
accompanying balance sheet include refundable and non-refundable maintenance
payments received from lessees. The Company periodically reviews maintenance
reserves for adequacy in light of the number of hours flown, airworthiness
directives issued by the manufacturer or government authority, and the return
conditions specified in the lease. As a result of such review, when it is
probable that the Company has incurred costs for maintenance in excess of
amounts received from lessees, the Company accrues its share of costs for work
to be performed as a result of hours flown. At September 30, 1999, the Company
had accrued costs of approximately $289,000 related to one of its aircraft.
(g) 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.
(h) 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
reserves and security deposits and generally are subject to withdrawal
restrictions.
At September 30, 1999, the Company held refundable security deposits of
$1,508,750, refundable maintenance reserves received from lessees of $1,117,300
and non-refundable maintenance reserves of $841,660.
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
September 30, 1999
1. Organization and Summary of Significant Accounting Policies (continued)
(h) Cash and Cash Equivalents/Deposits (continued)
The Company's leases are typically structured so that if any event of
default occurs under the lease, the Company may apply all or a portion of the
lessee's refundable security deposit to cure such default. If such an
application of the security deposit is made, the lessee typically is required to
replenish and maintain the full amount of the security deposit during the
remaining term of the lease.
Maintenance reserves which are refundable to the lessee at the end of
the lease may be retained by the Company if such amounts are necessary to meet
the return conditions specified in the lease and, in some cases, to satisfy any
other payments due under the lease.
All of the security deposits currently held by the Company are
refundable to the lessee at the end of the lease.
Non-refundable maintenance reserves held by the Company are accounted
for as a liability until the aircraft has been returned at the end of the lease,
at which time the Company evaluates the adequacy of the remaining reserves in
light of maintenance to be performed as a result of hours flown. At that time,
any excess is recorded as income and any deficiency is recorded as expense. When
an aircraft is sold, any excess non-refundable maintenance reserves are recorded
as income.
(i) 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 September 30, 1999, the Company owned four deHavilland DHC-7, three
deHavilland DHC-6, two Fairchild Metro III, three Shorts SD 3-60 and four Fokker
50 aircraft, two Saab 340A aircraft and 26 turboprop engines, one of which is
held in inventory as a spare and is not subject to a lease or to depreciation.
During the third quarter of 1999, the Company acquired two of the Shorts SD
3-60, two of the Fokker 50 and the two Saab 340A aircraft and one turboprop
engine, leased to regional carriers in Germany, Sweden and North America,
respectively, for a total of $15,962,000, including acquisition costs.
During the second quarter of 1999, the Company acquired a 50% interest
in a deHavilland DHC-7 aircraft which was not subject to a lease. During the
same quarter, the Company subsequently sold its interest in the aircraft to the
owner of the other 50% interest. The Company recognized a gain in connection
with the sale and received cash and a note due September 30, 1999. The Company
received payment of the note in full, including accrued interest, during
September 1999.
The lease for one of the Company's DHC-7 aircraft, serial number 72
("S/N 72") expired in April 1999. The Company has been seeking re-lease
opportunities for S/N 72 and is discussing lease terms with interested parties.
The lease for another of the Company's Metro III aircraft, serial number 576,
("S/N 576") has been extended by the lessee from its original expiration date on
July 19, 1999 to August 31, 2000.
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
September 30, 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 Company signed agreements increasing its facility
to $22.5 million, then $30 million, on April 1, 1999 and July 16, 1999,
respectively. 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 September 30,
1999, the Company was in compliance with all such covenants. As of September 30,
1999, $27,990,000 was outstanding under the credit facility, and interest of
$99,460 was accrued, using a combination of prime and LIBOR rates.
4. Income Taxes
The items comprising income tax expense are as follows:
<TABLE>
For the Nine Months Ended September 30,
<S> <C> <C>
1999 1998
Current tax provision:
Federal $ 435,950 $ 64,700
State 21,080 17,800
------------- -------------
Current tax provision 457,030 82,500
------------- -------------
Deferred tax provision:
Federal 136,870 452,000
State 2,770 77,600
------------- -------------
Deferred tax provision 139,640 529,600
------------- -------------
Total provision for income taxes $ 596,670 $ 612,100
============= =============
</TABLE>
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>
For the Nine Months Ended September 30,
<S> <C> <C>
1999 1998
Income tax expense at
statutory federal income tax rate $ 577,330 $ 516,600
State taxes net of federal benefit 27,890 88,600
Tax rate differences (8,550) 6,900
------------- -------------
Total income tax expense $ 596,670 $ 612,100
============= =============
</TABLE>
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
September 30, 1999
4. Income Taxes (continued)
Temporary differences and carryforwards which gave rise to a
significant portion of deferred tax assets and liabilities are as follows:
September 30,
1999
Deferred tax assets:
Amortization of organizational costs $ 51,220
Maintenance reserves 261,160
Prepaid rent 62,060
-------------
Net deferred tax assets 374,440
Deferred tax liabilities:
Depreciation on aircraft and engines 3,337,560
Other 350,560
-------------
Net deferred tax liability $ 3,313,680
=============
5. Supplementary Disclosures of Cash Flow Information
During the nine months ended September 30, 1999 and 1998, the Company paid
interest totaling $834,210 and $42,760, respectively and taxes totaling
$148,300 and $2,400, 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. JMC may also
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. During the first nine months of 1999, the Company
recognized as expense $756,290 of management fees payable to JMC. In connection
with the purchases of aircraft during the first nine months of 1999, the Company
paid JMC a total of $780,100 in brokerage fees. No remarketing fees have been
paid to JMC during 1999.
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 $42,760 of
interest through August 1998, when the loan was repaid.
Certain employees of JMC participate in an employee stock incentive
plan which granted options to purchase shares of the Company held by JMC's
parent, JHC. As of September 30, 1999, 2,833 such options had been exercised.
<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 positive effect on net income of the purchase of additional
aircraft; 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 ability to reduce the "off-lease" time for an
asset by monitoring and immediate marketing responses; the Company's intention
to use proceeds of its credit line to acquire additional assets; the Company's
intention and ability to increase its credit facility; 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 ability to obtain credit enhancement for its lessees, such as letters
of credit or third party guaranties; and the Company's exposure to loss as a
result of Year 2000 issues are forward looking statements. While the Company
believes that such statements are accurate, the Company's business is dependent
upon many factors, including general economic conditions, particularly those
that affect the demand for the lease and/or purchase of turboprop aircraft and
engines, and future trends and results cannot be predicted with certainty. The
Company's actual results could differ materially from those discussed in such
forward looking statements. The cautionary statements made in this Report should
be read as being applicable to all related forward-looking statements wherever
they appear in this Report. Factors that could cause or contribute to such
differences include those discussed below in the section entitled "Factors that
May Affect Future Results."
Results of Operations
The Company had revenues of $4,904,680 and $2,757,800 and net income of
$1,100,910 and $907,400 for the nine months ended September 30, 1999 and 1998,
respectively, and revenues of $1,921,090 and $1,061,500 and net income of
$363,680 and $380,400 for the quarters ended September 30, 1999 and 1998,
respectively.
Rent income was approximately $2,170,000 and $1,010,000 higher for the nine
month and three month periods in 1999 versus 1998 due to the purchases of
additional aircraft on lease during the second half of 1998 and first nine
months of 1999, which increases are only partially offset by the off-lease
status of S/N 72 beginning in April 1999.
Management fees were approximately $369,000 and $177,000 higher, respectively,
in the nine month and three month periods of 1999 versus 1998 because of the
aircraft acquisitions noted above. Such acquisitions had a similar effect on
depreciation, which was approximately $600,000 and $290,000 higher for the nine
and three month periods of 1999 versus 1998.
Interest expense was approximately $831,000 and $408,000 higher, respectively,
in the nine month and three month periods of 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 were approximately $169,000
and $76,000 higher in the nine months and three months ended September 30, 1999
primarily due to an increase in legal expenses associated with increasing the
Company's credit facility.
The Company signed an agreement during July 1999 to increase its credit facility
to $30 million. Using a portion of the increased credit facility, the Company
purchased six additional aircraft and one turboprop engine during the third
quarter of 1999. The Company anticipates the impact of these acquisitions on
earnings will be fully reflected in the fourth quarter of 1999. The magnitude of
the impact from these acquisitions on future results will depend on interest
rate fluctuations and lease rates obtained after expiration of the current
leases.
<PAGE>
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 $30 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. As of September 30, 1999, $27,990,000 was
outstanding under the credit facility and interest of $99,460 was accrued, using
a combination of prime and LIBOR rates.
The prime rate was stable from November 1998 through June 1999 and increased by
25 basis points in mid-July and again in late August 1999. The majority of the
Company's borrowings are financed using one-month or six-month LIBOR rates, both
of which have increased modestly since the Company began financing pursuant to
such rates during June 1999. The Company believes it has adequate cash flow to
meet increases in the interest rates 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. The Company has studied whether it is advisable to enter into an
interest rate hedge transaction, which would act to lock in current interest
rates on its credit line obligations. In making its decision, the Company
analyzed interest rate trends, the ongoing costs of maintaining the hedge and
the magnitude of the impact of any interest rate swing. The Company has elected
not to enter into an interest rate hedge transaction at this time.
It is the Company's policy to monitor lessees' 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 in April 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. The lease for S/N 576 has been extended through August 31, 2000. The
Company's other aircraft are subject to leases with varying expiration dates
between April 30, 2000 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.
The Company's cash flow from operations for the nine months ended September 30,
1999 versus the same period in 1998 increased by approximately $57,000. Although
the Company acquired several aircraft during the second half of 1998 and first
nine months of 1999 which resulted in increased net income and higher
depreciation expense in 1999, the positive effect of these changes on cash flow
were almost entirely offset by an increase in accounts receivable and prepaid
expenses and a decrease in the amount of maintenance reserves and accrued costs
during 1999 versus 1998. Accounts receivable at September 30, 1999 includes
maintenance reserves for August and September 1999 for aircraft which the
Company purchased subsequent to September 30, 1998. Prepaid expenses at
September 30, 1999 include amounts paid in connection with the Company's credit
facility which did not exist until June 30, 1998.
Specifically, the Company's cash flow from operations for the nine months ended
September 30, 1999 consisted of net income of $1,100,910 and adjustments
consisting primarily of depreciation of $1,113,770, increases in accounts
receivable, prepaid expenses and deposits of $147,460, $271,390 and $1,883,450,
respectively, increases in accounts and taxes payable of $283,820 and $321,790,
respectively, an increase in prepaid rent of $113,670, a net increase in
deferred taxes of $153,650, an increase of $1,029,650 in security deposits and
an increase of $623,530 in maintenance reserves collected from lessees.
The Company's cash flow from operations for the nine months ended September 30,
1998 consisted of net income of $907,400 and adjustments consisting primarily of
depreciation of $513,400, increases in accounts receivable, prepaid expenses and
deposits of $53,800, $104,000 and $919,600, respectively, a decrease in accounts
payable of $146,800, an increase in prepaid rent of $116,100, a net increase in
deferred taxes of $349,100, and an increase of $1,699,100 in security deposits
and maintenance reserves collected from lessees.
The increase in cash flow provided by financing activities and the decrease in
cash flow used by investing activities were both a result of the Company's
borrowings on its credit facility to purchase additional aircraft. As mentioned
above, the Company did not use its credit facility until the fourth quarter of
1998.
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 revolving line of credit has an initial term of two years expiring in June
2000, and is renewable at the sole discretion of the 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 due and payable on June 30, 2000. 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 upon either the lender's prime rate or a floating LIBOR
rate. If the applicable index rate increases, and the Company has not entered
into a mitigating hedge transaction, then the Company's payment obligations
under the line of credit would increase and could result in lower net revenues
for the Company.
Expansion or Repayment of Credit Line. The Company has used nearly all of its
revolving credit facility to acquire additional assets for the purpose of
generating income for the Company. The Company is seeking, and its banks have
expressed an interest in, an increase in its credit facility. There is no
assurance such increase will be received. If such increase is not received, the
Company will need to refinance a portion of its existing revolving credit line
debt before it can make further draws on the line; however, the Company has not
yet entered into any such arrangement. Even if an increase in the credit line is
received, there is no assurance that the Company will be able to expend the
entire net financing proceeds on the acquisition of additional assets on terms
favorable to the Company.
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
generally 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.
The Company believes that the current aircraft market provides a good supply of
suitable transaction opportunities for the Company, primarily in overseas
markets, as well as domestically. There are currently some disparities between
geographic regions with respect to the condition of the air transport industry,
with certain areas of South America and the Pacific Rim, in particular,
experiencing economic difficulties. 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 sell the asset after the expiration of the initial lease
term. Some of the factors that have an impact on the Company's ability to
re-lease or 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 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 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 an engine 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 in which 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
remarket equipment at acceptable rates may depend on the demand and market
values at the time of remarketing. 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 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 airframe 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 result 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 1.5 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. Because all administrative and management functions of
the Company are carried out by its management company, JMC, JMC's readiness for
Year 2000 will determine the Company's status. JMC has reported to the Company
that it has directed its information technology ("IT") manager to require any
software or hardware purchased for use by management 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 JMC's IT system is based on a
"MacOS" system, JMC'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. To date, all lessees have reported
Year 2000 compliance with respect to the aircraft leased by the Company to the
lessee. The Company will request Year 2000 compliance information from any new
additional lessees, if any.
The Company has also been consulting with all the manufacturers of its leased
equipment to confirm Year 2000 compliance, who have all indicated that they have
already notified or will shortly notify all lessee operators of their respective
Year 2000 issues. Generally, the type of used turboprop aircraft owned by the
Company are not highly dependent upon date-sensitive electronics, unless the
lessee has added upgraded electronics to the aircraft. In any event, 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 or
additional upgraded electronics.
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. The Company has also inquired with its lessees regarding Year
2000 compliance of its administrative and operational activities. It appears
responding lessees are generally aware of the Year 2000 issue and have either
completed a plan or are in progress toward Year 2000 compliance. There is no
assurance that their compliance plans will be successful, however, and the
Company is not independently verifying any information provided by its lessees.
The Company continues to monitor its current lessees and each additional lessee.
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. This, of course, may affect the business of the Company's
existing and potential lessees, and in turn, the Company.
The essential functions of JMC and the Company 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 JMC or 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 and banking institutions. The Company,
through its management and JMC, 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 made any contingency plans for the extended
loss of these basic services.
The Company has not incurred and does not anticipate any significant costs
related to the Year 2000 issue.
<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 November 12, 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
November 12, 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 Secretary
- -------------------------- 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
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001036848
<NAME> AeroCentury Corp.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 5,420,010
<SECURITIES> 0
<RECEIVABLES> 313,010
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,151,510
<PP&E> 62,086,220
<DEPRECIATION> 16,825,020
<TOTAL-ASSETS> 56,412,710
<CURRENT-LIABILITIES> 29,118,590
<BONDS> 0
0
0
<COMMON> 1,610
<OTHER-SE> 15,185,220
<TOTAL-LIABILITY-AND-EQUITY> 51,412,710
<SALES> 0
<TOTAL-REVENUES> 4,904,680
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,313,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 893,890
<INCOME-PRETAX> 1,697,590
<INCOME-TAX> 596,680
<INCOME-CONTINUING> 1,100,910
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,100,910
<EPS-BASIC> 0.70
<EPS-DILUTED> 0.70
</TABLE>
