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 June 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 August 16, 1999 the Issuer has 1,606,557 Shares of Common Stock
outstanding, of which 55,400 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>
<S> <C>
ASSETS
June 30,
1999
Cash and cash equivalents $ 1,312,740
Deposits 3,151,550
Accounts and notes receivable 598,120
Aircraft and aircraft engines on operating leases,
net of accumulated depreciation of $16,359,470 29,764,750
Prepaid expenses and other 407,740
---------------
Total assets $ 35,234,900
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 354,390
Notes payable and accrued interest 12,879,540
Maintenance reserves and accrued costs 2,833,500
Security deposits 699,600
Prepaid rent 131,800
Deferred taxes 3,218,790
Taxes payable 208,270
---------------
Total liabilities 20,325,890
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 1,504,420
---------------
15,327,230
Treasury stock at cost, 51,400 shares (418,220)
---------------
Total shareholders' equity 14,909,010
---------------
Total liabilities and shareholders' equity $ 35,234,900
===============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
AeroCentury Corp.
Statements of Operations
<TABLE>
<S> <C> <C>
For the Six Months Ended For the Three Months Ended
June 30, June 30,
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Rent income $ 2,835,270 $ 1,674,890 $ 1,439,940 $ 864,970
Gain on disposal of aircraft 98,410 - 98,410 -
Other income 49,910 21,360 24,710 9,360
--------------- ---------------- --------------- ---------------
2,983,590 1,696,250 1,563,060 874,330
--------------- ---------------- --------------- ---------------
Expenses:
Management fees 479,700 287,850 238,400 146,740
Depreciation 648,220 338,080 341,250 175,290
Interest 457,050 34,090 247,630 26,000
Professional fees and
general and administrative 252,860 160,080 136,820 78,630
--------------- ---------------- --------------- ---------------
1,837,830 820,100 964,100 426,660
--------------- ---------------- --------------- ---------------
Income before taxes 1,145,760 876,150 598,960 447,670
Tax provision 408,530 349,100 202,050 178,660
--------------- ---------------- --------------- ---------------
Net income $ 737,230 $ 527,050 $ 396,910 $ 269,010
=============== ================ =============== ===============
Weighted average common
shares outstanding 1,580,956 1,606,557 1,569,232 1,606,557
=============== ================ =============== ===============
Basic earnings per share $ 0.47 $ 0.33 $ 0.25 $ 0.17
=============== ================ =============== ===============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
AeroCentury Corp.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
<S> <C> <C>
1999 1998
Net cash provided by operating activities $ 1,000,760 $ 1,686,680
Investing activity -
Purchase of aircraft (7,600,000) (1,124,470)
--------------- ---------------
Net cash used by investing activities (7,600,000) (1,124,470)
Financing activities:
Issuance of notes payable 6,400,000 -
Purchase of treasury stock (340,030) -
Issuance of secured note - 866,670
--------------- ---------------
Net cash provided by financing activities 6,059,970 866,670
Net change from consolidation of partnerships - 22,860
--------------- ---------------
Net (decrease)/increase in cash and cash equivalents (539,270) 1,451,740
Cash and cash equivalents, beginning of period 1,852,010 7,980
--------------- ---------------
Cash and cash equivalents, end of period $ 1,312,740 $ 1,459,720
=============== ===============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
June 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 June 30, 1999 and statements of
operations and cash flows for the six months and three months ended June 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 period
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 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 June 30, 1999, the Company purchased
33,600 shares of its common stock and, since the adoption of the plan, has
purchased 51,400 shares.
(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. Interest income includes interest earned from a finance lease which
expired in June 1998.
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
June 30, 1999
1. Organization and Summary of Significant Accounting Policies (continued)
(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, the Company may
accrue costs for maintenance in excess of amounts received from lessees. At June
30, 1999, the Company had accrued costs of approximately $304,000 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 are subject to withdrawal restrictions.
At June 30, 1999, the Company held refundable security deposits of
$699,600, refundable maintenance reserves received from lessees of $1,820,940
and non-refundable maintenance reserves of $631,010.
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.
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
June 30, 1999
1. Organization and Summary of Significant Accounting Policies (continued)
(h) Cash and Cash Equivalents/Deposits (continued)
Refundable maintenance reserves 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. Non-refundable maintenance reserves held by the Company are
accounted for as a liability until the aircraft is sold, at which time any
excess funds retained by the Company 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 June 30, 1999, the Company owned four deHavilland DHC-7, three
deHavilland DHC-6, two Fairchild Metro III, one Shorts SD 3-60 and two Fokker 50
aircraft, and 25 turboprop engines. 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. 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.
During the second quarter, the Company purchased an Allied Signal
turboprop engine used on Fairchild Metro III aircraft. The engine is held in
inventory as a spare and is not subject to a lease or to depreciation.
The lease for one of the Company's DHC-7 aircraft, serial number 72
("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.
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 June 30, 1999,
the Company was in compliance with all such covenants. As of June 30, 1999,
$12.8 million was outstanding under the credit facility and interest of $79,540
was accrued, using a combination of prime and LIBOR rates.
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
June 30, 1999
4. Income Taxes
The items comprising income tax expense are as follows:
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
1999 1998
<S> <C> <C>
Federal $ 346,980 $ -
State 16,780 -
------------- -------------
Current tax provision 363,760 -
------------- -------------
Deferred tax provision:
Federal 38,200 297,970
State 6,570 51,130
------------- -------------
Deferred tax provision 44,770 349,100
------------- -------------
Total provision for income taxes $ 408,530 $ 349,100
============= =============
</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:
For the Six Months Ended June 30,
<TABLE>
<S> <C> <C>
1999 1998
Income tax expense at
statutory federal income tax rate $ 389,560 $ 297,970
State taxes net of federal benefit 18,970 51,130
------------- -------------
Total income tax expense $ 408,530 $ 349,100
============= =============
</TABLE>
Temporary differences and carryforwards which gave rise to a
significant portion of deferred tax assets and liabilities are as follows:
June 30,
1999
Deferred tax assets:
Amortization of organizational costs $ 55,200
Maintenance reserves 189,110
Prepaid rent 47,000
-------------
Net deferred tax assets 291,310
Deferred tax liabilities:
Depreciation on aircraft and engines (3,151,000)
Other (359,100)
Net deferred tax liability $ (3,218,790)
=============
<PAGE>
AeroCentury Corp.
Notes to Financial Statements
June 30, 1999
5. Supplementary Disclosures of Cash Flow Information
During the six months ended June 30, 1999 and 1998, the Company paid
interest totaling $417,290 and $34,090, respectively and taxes totaling $135,100
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. During the first
six months of 1999, the Company paid JMC $446,010 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 $34,090 of
interest during the first six months 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
June 30, 1999, 2,833 such options had been exercised.
7. Subsequent Events
Stock Repurchases
In August 1999, the Company repurchased 4,000 shares of its common
stock.
Expansion of Credit Facility
On July 16, 1999, the Company signed an agreement, increasing its $22.5
million revolving credit facility to $30 million.
Purchase of Aircraft
Subsequent to June 30, 1999, the Company purchased two Fokker F50
aircraft, on lease to a regional airline operating in Sweden.
Metro III Lease Extension
The lease for one 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 19, 1999. Management is looking for re-lease
opportunities for this 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 positive effect on net income of the purchase of two additional
aircraft since June 1999; 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 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 exposure to loss as a result of Year
2000 issues; 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, including
competition for turboprop and other aircraft, and future trends and results
cannot be predicted with certainty. The Company's actual results could differ
materially from those discussed in such forward looking statements. The
cautionary statements made in this Report should be read as being applicable to
all related forward-looking statements wherever they appear in this Report.
Factors that could cause or contribute to such differences include those
discussed below in the section entitled "Factors that May Affect Future
Results."
Results of Operations
The Company had revenues of $2,983,590 and $1,696,250 and net income of $737,230
and $527,050 for the six months ended June 30, 1999 and 1998, respectively, and
revenues of $1,563,060 and $874,330 and net income of $396,910 and $269,010 for
the quarters ended June 30, 1999 and 1998, respectively.
Rent income is approximately $1,160,000 and $575,000 higher for the six 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 quarter of 1999,
which increases are only partially offset by the off-lease status of S/N 72
beginning on April 25, 1999.
Management fees are approximately $192,000 and $92,000 higher, respectively, in
the six and three months periods of 1999 versus 1998 because of the aircraft
acquisitions noted above. Such acquisitions had a similar effect on
depreciation, which was approximately $310,000 and $166,000 higher for the six
and three month periods of 1999 versus 1998.
Interest expense is approximately $423,000 and $222,000 higher in the six 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 are approximately $93,000 and $58,000 higher in
six month and three months ended June 30, 1999 primarily due to an increase in
legal expenses associated with increasing the Company's credit facility.
As discussed in Note 7 to the financial statements, the Company signed an
agreement during July 1999 to increase its credit facility to $30 million, which
the Company anticipates using to purchase additional aircraft. Using a portion
of the increased credit facility, the Company has purchased two additional
aircraft since June 30, 1999. The Company anticipates these purchases will have
a positive effect on net income, as long as lease rates and interest rates
remain relatively stable.
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 June 30, 1999, $12.8 million was
outstanding under the credit facility and interest of $79,540 was accrued, using
a combination of prime and LIBOR rates.
The prime rate was stable from November 1998 through June 1999 and, because the
Company did not finance any of its borrowings using the 30-day LIBOR rate until
June 1999, it had experienced no fluctuations in the LIBOR rate through June 30,
1999. 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.
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 on April 25, 1999 and the lease for S/N 576 expires on
August 19, 1999. The Company has been seeking re-lease opportunities for S/N 72
and S/N 576 since the lessees provided notice that they would not renew the
leases, and the Company is discussing lease terms with interested parties. 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 and S/N 576 remain off-lease for an extended
period of time.
The Company's cash flow from operations for the six months ended June 30, 1999
versus the same period in 1998 decreased by $685,920. Although the company
acquired several aircraft during the second half of 1998 and first half of 1999
which resulted in increased net income and higher depreciation expense in 1999,
the positive effect of these changes on cash flow in 1999 were more than offset
by a larger 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 June 30, 1999 includes $205,000 of rent receivable from
one lessee which was received during July 1999 and a note receivable of $100,000
in connection with the sale of an aircraft, discussed in Note 2 to the financial
statements. Prepaid expenses at June 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 six months ended
June 30, 1999 consisted of net income of $737,230 and adjustments consisting
primarily of depreciation of $648,220, increases in accounts receivable, prepaid
expenses and deposits of $432,570, $260,270 and $1,567,290, respectively,
increases in accounts and taxes payable of $105,090 and $208,270, respectively,
an increase in prepaid rent of $71,350, a net increase in deferred taxes of
$58,760 and an increase of $1,392,670 in security deposits and maintenance
reserves collected from lessees.
The Company's cash flow from operations for the six months ended June 30, 1998
consisted of net income of $527,050 and adjustments consisting primarily of
depreciation of $338,130, increases in accounts receivable, prepaid expenses and
deposits of $54,150, $56,020 and $911,310, respectively, a decrease in accounts
payable of $186,360, an increase in prepaid rent of $83,540, a net increase in
deferred taxes of $349,100 an increase of $1,596,700 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.
<PAGE>
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 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.
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.
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 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 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
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 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 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. 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 the Company's 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 (except for
two who have yet to respond) have reported Year 2000 compliance with respect to
the aircraft leased by the Company to the lessee. The Company is following up
with those that have not responded, as well as each new additional lessee.
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 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 August 16, 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
August 16, 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 & 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
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