SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[ X ] Annual Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 2002
OR
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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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 Exchange Act: None
Check whether the Issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: Yes X No ----------
--------
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Revenues for the Issuer's most recent fiscal year: $8,814,030
On March 13, 2003, the aggregate market value of the voting and non-voting
common equity held by non-affiliates (based upon the average of bid and asked
price as of March 13, 2003) was $3,540,462.
As of March 13, 2003, the Issuer had 1,543,257 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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Indicate by check mark whether the Issuer is an accelerated filer (as defined in
Rule 12b-2 of the Act): Yes No X
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Documents Incorporated by Reference: Part III of this Report on Form 10-KSB
incorporates information by reference from the Registrant's Proxy Statement for
its 2003 Annual Meeting to be filed on or about March 21, 2003.
PART I
Forward-Looking Statements
This Annual Report on Form 10-KSB includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. All statements in this Annual Report other than statements of historical
fact are "forward-looking statements" for purposes of these provisions,
including any statements of plans and objectives for future operations and any
statements of assumptions underlying any of the foregoing. Statements that
include the use of terminology such as "may," "will," "expects," "plans,"
"anticipates," "estimates," "potential," or "continue," or the negative thereof,
or other comparable terminology are forward-looking statements.
Forward-looking statements include: (i) in item 1 "Description of Business --
Business of the Company," statements regarding the Company's intent to achieve
its business objective by reinvesting cash flow and obtaining short-term and
long-term debt and/or equity financing; the Company's belief that it can
purchase assets at an appropriate price and maintain a high overall on-lease
rate for the Company's assets; the Company's belief that JMC's industry
knowledge enables it to purchase assets that are likely to retain their value
through and after the end of the initial lease of the asset; the Company's
belief that it is able and willing to enter into transactions with a wider range
of lessees than would be possible for traditional, large lending institutions
and leasing companies; (ii) in item 1 "Description of Business -- Working
Capital Needs," statements regarding the Company's belief that it has sufficient
cash to fund maintenance payments due in 2003; the sufficiency of the Company's
cash flow to cover management fees, professional fees and interest expense, and
provide excess cash flow that can be used with equity or debt financings to
acquire additional assets; the Company's expectation with respect to renewal of
its credit facility; (iii) in item 1 "Description of Business -- Competition,"
statements regarding the Company's belief that it has a competitive advantage
due to its experience and operational efficiency in financing the transaction
sizes that are desired by the regional air carrier market; the Company's belief
that that the Company also has a competitive advantage because JMC has developed
a reputation as a global participant in the aircraft leasing market (iv) in Item
6 "Management's Discussion and Analysis or Plan of Operation -- Business,"
statements regarding the Company's intention to achieve its business objective
by reinvesting cash flow and obtaining short-term and long-term debt and/or
equity financing (v) in Item 6 "Management's Discussion and Analysis or Plan of
Operation -- Liquidity and Capital Resources," statements regarding the
Company's expectation that it will be able to maintain compliance with its
credit facility covenants through the expiration of the credit facility on June
28, 2003; the Company's expectation that it will be able to obtain a new
revolving credit facility at reasonable market terms; the Company's belief that
it has adequate cash flow to fund reasonably expected increases in interest
rates applicable to its credit facility obligations; the Company's belief that
it will be successful in extending the AeroCentury Investments II LLC financing;
the Company's belief that it will have adequate cash flow to meet its on-going
operational needs; the Company's belief that it will have sufficient cash to
fund any necessary payments under its guaranty of certain payments to a third
party vendor by a lessee; (vi) in Item 6 "Management's Discussion and Analysis
or Plan of Operation -- Outlook," statements regarding the Company approaching
its banks regarding a further extension of covenant amendments that expired on
February 28, 2003; the Company's expectation that even if the Company is unable
to successfully negotiate an extension of the changes beyond February 28, 2003,
the Company will nonetheless be able to maintain compliance with its credit
facility covenants through the expiration of the credit facility on June 28,
2003; the Company's expectation that it will be able to obtain a new credit
facility at reasonable market terms; the Company's expectation to have a lease
extension and financing in place in the second quarter of 2003 for an asset held
in a special purpose entity; the Company's belief that it will be able to
purchase and lease such aircraft at prices and lease rates that will have a
positive effect on the Company's earnings; (vii) in Item 6 "Management's
Discussion and Analysis or Plan of Operation -- Factors that May Affect Future
Results," statements regarding the possibility that certain current economic
conditions may favor the Company in that there may be a greater likelihood of
renewals by existing lessees and increased demand for more economically operated
turboprop aircraft, which make up most of the Company's portfolio; the Company
approaching its banks regarding a further extension of covenant amendments that
expired on February 28, 2003; the Company's belief that it will be able to
remain in compliance with its credit facility covenants and would not be
required to make any repayments under the facility due to collateral base
limitations through the expiration of the credit line in June 28, 2003; the
Company's anticipated acquisition of primarily used aircraft; the opportunities
available in overseas markets; JMC's competitiveness due to its experience and
operational efficiency in financing transaction types desired by regional air
carriers and its global reputation, the Company's ability to obtain third party
guaranties, letters of credit or other credit enhancements from future lessees;
and (viii) in Item 7 -- Financial Statements, statements regarding the Company's
approaching its banks regarding a further extension of the revised terms of the
revolving credit facility; the Company's expectation that even if the Company is
unable to successfully negotiate an extension of the changes beyond February 28,
2003, it will be able to maintain compliance with its credit facility covenants
through the expiration of the credit facility on June 28, 2003; and the
Company's anticipation that the Company will generate adequate future taxable
income to realize the benefits of all deferred tax assets on the balance sheet;
and the Company's expectation that it will be able to obtain a new credit
facility upon expiration of the current facility on June 28, 2003.
These forward-looking statements involve risks and uncertainties, and it is
important to note that the Company's actual results could differ materially from
those projected or assumed in such forward-looking statements. Among the factors
that could cause actual results to differ materially are the factors detailed
under the heading "Management's Discussion and Analysis or Plan of Operation --
Factors That May Affect Future Results," including general economic conditions,
particularly those that affect the demand for regional aircraft and engines and
the financial status of the Company's primary customers, regional passenger
airlines; lack of any further disruptions to the air travel industry similar to
that which occurred on September 11, 2001; the success of the Company's
remarketing efforts with respect to aircraft that are returned upon expiration
or termination of leases; the Company's ability to remain in compliance with the
terms of its credit facility agreement or, if necessary, negotiate extensions of
waivers of such compliance; the Company's ability to obtain a new credit
facility on reasonable business terms at or prior to the expiration of its
current credit facility; the financial performance of the Company's lessees and
their compliance with rental, maintenance and return conditions under their
respective leases; the availability of suitable aircraft acquisition
transactions in the regional aircraft market; and future trends and results
which cannot be predicted with certainty. The cautionary statements made in this
Annual Report should be read as being applicable to all related forward-looking
statements wherever they appear herein. All forward-looking statements and risk
factors included in this document are made as of the date hereof, based on
information available to the Company as of the date hereof, and the Company
assumes no obligation to update any forward-looking statement or risk factor.
You should consult the risk factors listed from time to time in the Company's
filings with the Securities and Exchange Commission.
Item 1. Description of Business.
Business of the Company
AeroCentury Corp. ("AeroCentury"), a Delaware corporation, uses leveraged
financing to acquire leased aircraft assets. Financial information for
AeroCentury and its two wholly-owned subsidiaries, AeroCentury Investments LLC
("AeroCentury LLC") and AeroCentury Investments II LLC ("AeroCentury II LLC")
(collectively, the "Company"), is presented on a consolidated basis. All
intercompany balances and transactions have been eliminated in consolidation.
The business of the Company is managed by JetFleet Management Corp. ("JMC"),
pursuant to a management agreement between JMC and the Company, which is an
integrated aircraft management, marketing and financing business and a
subsidiary of JetFleet Holding Corp. ("JHC"). Certain officers of the Company
are also officers of JHC and JMC and hold significant ownership positions in
both JHC and the Company.
The Company is engaged in the business of investing in used regional aircraft
equipment leased to foreign and domestic regional air carriers. The Company's
principal business objective is to increase stockholder value by acquiring
aircraft assets and managing those assets in order to provide a return on
investment through lease revenue and, eventually, sale proceeds. The Company
intends to achieve its business objective by reinvesting cash flow and obtaining
short-term and long-term debt and/or equity financing.
The Company's success in achieving its objective will depend in large part on
its success in three areas: asset selection, lessee selection and obtaining
acquisition financing.
The Company acquires additional assets in one of three ways. The most common
situation is when the Company purchases an asset already subject to a lease and
assumes the rights of the seller, as lessor under the existing lease. In
addition the Company may purchase an asset, usually from an air carrier, and
lease it back to the seller. Finally, the Company may purchase an asset from a
seller and then immediately enter into a new lease for the aircraft with a third
party lessee. In this last case, the Company would not purchase an asset unless
a potential lessee had been identified and had committed to lease the aircraft.
The Company generally targets used regional aircraft and engines with purchase
prices between $1 million and $10 million, and lease terms less than five years.
In determining assets for acquisition, the Company evaluates among other things,
the type of asset, its current price and projected future value, its versatility
or specialized uses, the current and projected future availability of and demand
for that asset, and the type and number of future potential lessees. Because JMC
has extensive experience in purchasing, leasing and selling used regional
aircraft, the Company believes it can purchase these assets at an appropriate
price and maintain a high overall on-lease rate for the Company's assets.
Furthermore, the Company believes that JMC's industry knowledge enables it to
purchase assets that are likely to retain their value through and after the end
of the initial lease of the asset.
In order to improve the remarketability of an aircraft after expiration of the
lease, the Company focuses on having lease provisions for its aircraft that
provide for maintenance and return conditions, such that when the lessee returns
the aircraft, the Company receives the aircraft in a condition which allows it
to expediently re-lease or sell the aircraft, or receives sufficient payments
from the lessee to cover any maintenance or overhaul of the aircraft required to
bring the aircraft to such a state.
When considering whether to accept transactions with a lessee, the Company
examines the creditworthiness of the lessee, its short- and long-term growth
prospects, its financial status and backing, the impact of pending governmental
regulation or de-regulation of the lessee's market, all weighed against the
lease rate that is offered to the lessee. In addition, where applicable, it is
the Company's policy to monitor the lessee's business and financial performance
closely throughout the term of the lease, and if requested, provide assistance
drawn from the experience of the Company's management in many areas of the air
carrier industry. Because of its "hands-on" approach to portfolio management,
the Company believes it is able and willing to enter into transactions with a
wider range of lessees than would be possible for traditional, large lending
institutions and leasing companies.
Working Capital Needs
The Company's portfolio of assets has historically generated revenues which more
than cover the Company's expenses. The Company incurs and pays monthly
management fees, which are based upon the size of the asset pool. The
maintenance expense incurred by the Company during 2002 was either paid in cash
during the year or will be paid during 2003. The Company believes that it has
sufficient cash to fund maintenance payments due in 2003. As the Company has
continued to use acquisition debt financing under its revolving credit facility
which expires June 28, 2003, interest expense has become an increasingly larger
portion of the Company's expenses. However, each advance on the credit facility
funds the acquisition of an asset subject to a lease, and the lease revenue
received with respect to the asset should be greater than the incremental
increase in required interest payments arising from such advance. Professional
fees are paid to third parties for expenses not covered by JMC under the
Management Agreement. So long as the Company succeeds in keeping the majority of
its assets on lease and interest rates do not rise significantly and rapidly,
the Company's cash flow should be sufficient to cover management fees,
professional fees and interest expense, and provide excess cash flow that can be
used with equity or debt financings to acquire additional assets. The Company is
currently discussing the terms of a new credit facility with its agent bank and
expects to be able to obtain such facility at reasonable market terms.
Competition
The Company competes for customers, generally regional commercial aircraft
operators that are seeking to lease aircraft under an operating lease, with
other leasing companies, banks, financial institutions, and aircraft leasing
partnerships. Management believes that competition may increase if competitors
who have traditionally neglected the regional air carrier market begin to focus
on that market. Because competition is largely based on price and lease terms,
the entry of new competitors into the market, particularly those with greater
access to capital markets than the Company, could lead to fewer acquisition
opportunities for the Company and/or lease terms less favorable to the Company
on new acquisitions as well as renewals of existing leases. This could lead to
lower revenues for the Company.
The Company, however, believes that it has a competitive advantage due to its
experience and operational efficiency in financing the transaction sizes that
are desired by the regional air carrier market. Management believes that the
Company also has a competitive advantage because JMC has developed a reputation
as a global participant in the aircraft leasing market.
Dependence on Significant Customers
For the year ended December 31, 2002, the Company had three significant
customers, who accounted for 11%, 11% and 10%, respectively, of lease revenue.
Concentration of credit risk with respect to lease receivables will diminish in
the future, if the Company is able to lease additional assets or re-lease assets
on lease to significant customers to new customers.
Employees
Under the Company's management contract with JMC, JMC is responsible for all
administration and management of the Company. Consequently, the Company does not
have any employees.
Item 2. Description of Property.
As of December 31, 2002, the Company did not own or lease any real property,
plant or materially important physical properties. The Company maintains its
principal office at 1440 Chapin Avenue, Suite 310, Burlingame, California 94010.
However, since the Company has no employees and the Company's portfolio of
leased aircraft assets is managed and administered under the terms of a
management agreement with JMC, all office facilities are provided by JMC.
At December 31, 2002, the Company owned five deHavilland DHC-8s, two deHavilland
DHC-7s, three deHavilland DHC-6s, one Fairchild Metro III, two Shorts SD 3-60s,
six Fokker 50s, two Saab 340As and 26 turboprop engines.
Item 3. Legal Proceedings.
The Company is not involved in any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The shares of the Company's Common Stock are traded on the American Stock
Exchange ("AMEX") under the symbol "ACY."
Market Information
The Company's Common Stock has been traded on the AMEX since January 16, 1998.
The following table sets forth the high and low sales prices reported on the
AMEX for the Company's Common Stock for the periods indicated:
Period High Low
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Fiscal year ended December 31, 2002:
Fourth Quarter ................... $4.05 $3.25
Third Quarter..................... 4.30 3.70
Second Quarter.................... 5.35 3.95
First Quarter..................... 4.97 3.85
Fiscal year ended December 31, 2001:
Fourth Quarter.................... 5.74 4.70
Third Quarter..................... 6.55 4.87
Second Quarter.................... 5.30 4.50
First Quarter..................... 5.75 4.375
On March 13, 2003, the closing stock sale price on the AMEX was $2.90 per share.
Number of Security Holders
According to the Company's transfer agent, the Company had approximately 2,100
stockholders of record as of March 13, 2003. Because many shares are held by
brokers and other institutions on behalf of stockholders, the Company is unable
to estimate the total number of stockholders represented by these record
holders.
Dividends
No dividends have been declared or paid to date. The Company does not intend to
declare or pay dividends in the foreseeable future, and intends to re-invest any
earnings into acquisition of additional revenue generating aircraft equipment.
Stockholder Rights Plan
In April 1998, in connection with the adoption of a stockholder rights plan, the
Company filed a Certificate of Designation detailing the rights, preferences and
privileges of a new Series A Preferred Stock. Pursuant to the plan, the Company
issued rights to its stockholders of record as of April 23, 1998, giving each
stockholder the right to purchase one one-hundredth of a share of Series A
Preferred Stock for each share of Common Stock held by the stockholder. Such
rights are exercisable only under certain circumstances in connection with a
proposed acquisition or merger of the Company.
Stock Repurchase Plan
In October 1998, the Company's Board of Directors adopted a stock repurchase
plan, granting management the authority to repurchase up to 100,000 shares of
the Company's common stock, in privately negotiated transactions or in the
market, at such price and on such terms and conditions deemed satisfactory to
management. As of December 31, 2002, the Company had repurchased 63,300 shares
of its common stock.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Business
The Company invests in used regional aircraft equipment leased to foreign and
domestic regional air carriers. The Company's principal business objective is to
increase stockholder value by acquiring additional aircraft assets and managing
those assets in order to provide a return on investment through lease revenue
and, eventually, sale proceeds. The Company intends to achieve its business
objective by reinvesting cash flow and obtaining short-term and long-term debt
and/or equity financing.
Critical Accounting Policies
In response to the Securities and Exchange Commission's Release No. 33-8040,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies", the
Company has identified the most critical accounting policies upon which its
financial status depends. It determined the critical principles by considering
accounting policies that involve the most complex or subjective decisions or
assessments. The Company identified its most critical accounting policies to be
those related to lease rental revenue recognition, depreciation policies and
valuation of aircraft.
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.
Depreciation Policies
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 based on appraisal.
Valuation of Aircraft
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets," assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the book value of the asset may not be recoverable. Periodically, the
Company reviews its long-lived assets for impairment based on estimated future
nondiscounted cash flows attributable to the assets. In the event such cash
flows are not expected to be sufficient to recover the recorded value of the
assets, the assets are written down to their estimated realizable value.
Results of Operations
Revenues
The Company had revenues of $8,814,030 and net income of $1,009,490 for the year
ended December 31, 2002 versus revenues of $11,231,990 and net income of
$1,698,940 for the year ended December 31, 2001. Operating lease revenue was
approximately $1,459,000 lower in 2002 versus 2001 primarily due to assets which
came off lease during 2001 and 2002, some of which were subsequently re-leased
at lower rates, and some of which remained off lease during a portion of 2002,
and the sale of an aircraft during the fourth quarter of 2001. The negative
effect was only partially offset by the additional lease revenue from aircraft
purchased by the Company during the latter part of 2002. Gain on disposal of
aircraft and aircraft engines was approximately $327,000 lower in 2002 because
the Company did not sell any aircraft during 2002, versus one aircraft sold
during 2001. Other income was lower by approximately $632,000 during 2002 versus
2001 primarily due to the net insurance proceeds received during 2001 as a
result of damage to one of the Company's aircraft and also because of lower
interest rates on lower cash balances during 2002 versus 2001.
Expense Items
Management fees, which are calculated on the net book value of the aircraft
owned by the Company, were approximately $33,000 lower in 2002 versus 2001. Even
though the Company purchased two aircraft during the second half of 2002, the
effect of such purchases only partially offset the effect of the sale of an
asset during the fourth quarter of 2001 and the decreased net book value of the
Company's other aircraft as a result of depreciation recognized during 2002.
Depreciation was approximately $62,000 higher in 2002 versus 2001 because
depreciation recognized with respect to the aircraft purchased during 2002 was
greater than the elimination of depreciation with respect to the aircraft sold
during the fourth quarter of 2001.
Interest expense was approximately $831,000 lower in 2002 versus 2001 because of
lower interest rates and a lower average principal balance during 2002.
Professional fees and general and administrative expenses were approximately
$45,000 higher in 2002 versus 2001, primarily due to additional aircraft
insurance expense which resulted from higher premiums, and due to higher
accounting expense. The effect of such increases was partially offset by
decreases in legal expense and certain other expense categories.
Excluding the reversal of a portion of certain maintenance expenses estimated
and accrued in prior periods, discussed below, maintenance expense was
approximately $672,000 lower in 2002 versus 2001. This was primarily because a
$609,000 estimate, related to compensation to the lessee in accordance with the
return provisions of the leases for two aircraft, had been accrued in the fourth
quarter of 2001. When compensation to the lessee was finalized in 2002, the
Company reversed approximately $214,000 of the $609,000 estimate. During 2001,
the Company reversed a total of $291,000, which was paid by the lessees of two
aircraft subsequent to the accruals which had been made by the Company in the
fourth quarter of 2000.
The Company's effective tax rate in 2002 was approximately 32% versus
approximately 33% in 2001. The Company's tax rate is subject to changes in the
mix of domestic and foreign leased assets, the proportions of revenue generated
within and outside of California and numerous other factors, including changes
in tax laws.
Liquidity and Capital Resources
The Company is currently financing its assets primarily through credit facility
borrowings and excess cash flow. The Company has a revolving credit facility
totaling $50 million. The facility, which expires on June 28, 2003, bore
interest through March 30, 2002, at the Company's option, at either (i) prime or
(ii) LIBOR plus a margin of 200 to 250 basis points depending on certain
financial ratios. The Company's assets, excluding those of AeroCentury LLC and
AeroCentury II LLC, serve as collateral under the revolving credit facility and,
in accordance with the credit agreement, the Company must maintain compliance
with certain financial covenants. The Company made repayments on its facility in
the amount of $1,500,000 during 2002 because of certain collateral borrowing
base limitations.
On March 7, 2002, the Company and its lenders agreed to modify certain financial
covenants contained in the loan agreement for the facility in order to enable
the Company to continue to take advantage of business opportunities in the
industry environment of increased market demand for shorter-term leases. The
changes, originally in effect through December 31, 2002, were extended through
February 28, 2003. In return for granting such changes, the Company's lenders
increased the margin on the interest rates chosen by the Company from a floating
margin to a fixed margin of 275 basis points, effective March 31, 2002. On March
1, 2003, the margin returned to its original floating rate. In order to maintain
the flexibility afforded by the changes, the Company anticipates approaching its
banks regarding a further extension of the revised terms of the revolving credit
facility. Even if the Company is unable to successfully negotiate an extension
of the changes beyond February 28, 2003, the Company expects that it will be
able to maintain compliance with its credit facility covenants through the
expiration of the credit facility on June 28, 2003. The Company is currently
discussing the terms of a new credit facility with its agent bank and expects to
be able to obtain such facility at reasonable market terms.
At December 31, 2002, principal of $41,405,000 was outstanding under the credit
facility and interest of $224,840 was accrued. The Company is currently in
compliance with all covenants of the revolving credit facility. The majority of
the Company's borrowings are currently financed using three- or six-month LIBOR
rates. The Company believes it has adequate cash flow to fund reasonably
expected increases in interest rates applicable to its credit facility
obligations.
The Company's interest expense generally moves up or down with the prevailing
interest rates, as the Company has not entered into any interest rate hedge
transactions. Because aircraft owners seeking financing generally can obtain
financing through either leasing transactions or traditional secured debt
financings, prevailing interest rates are a significant factor in determining
market lease rates, and market lease rates generally move up or down with
prevailing interest rates, assuming supply and demand of the desired equipment
remain constant. However, because lease rates for the Company's assets typically
are fixed under existing leases, the Company usually does not experience any
positive or negative impact in revenue from changes in market lease rates due to
interest rate changes until existing leases have terminated.
In November 1999, AeroCentury LLC acquired two aircraft using cash and bank
financing separate from its credit facility. The financing, which consisted of a
note in the amount of $9,061,000, was collateralized by these aircraft and was
non-recourse to the Company. The note bore fixed interest at 8.04% through
February 15, 2002 and a floating rate thereafter. During 2002, the Company used
funds from its revolving credit facility to repay the outstanding bank financing
related to both aircraft.
A similar special purpose entity financing for AeroCentury II LLC was concluded
in September 2000, consisting of a note in the amount of $3,575,000, due April
18, 2003, which bears fixed interest at 8.36% for the acquisition of one
aircraft. The note is collateralized by this aircraft and is non-recourse to the
Company. Payments due under the note consist of monthly principal and interest
and a balloon principal payment due on the maturity date. The balance of the
note payable at December 31, 2002 was $2,585,450 and interest of $7,920 was
accrued. The Company is in compliance with all covenants of the loan agreement
pertaining to the financing of this aircraft. The lessee of the aircraft has
indicated its willingness to extend the lease. Therefore, the Company is
discussing terms for extending the financing of this aircraft with the lender.
The Company believes it will be successful in extending the financing.
The Company's primary source of revenue is lease rentals collected from lessees
of its aircraft assets. It is the Company's policy to monitor each lessee's
needs in periods before leases are due to expire. If it appears that a lessee
will not be renewing its lease, the Company immediately initiates marketing
efforts to locate a potential new lessee or purchaser for the aircraft. This
procedure helps the Company reduce the time that an asset will be "off-lease."
The Company's aircraft are subject to leases with varying expiration dates
through November 2005. 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 its on-going operational needs.
In connection with the re-lease of two of the Company's aircraft during 2002,
the Company has guaranteed, up to a maximum of $150,000, the lessee's payments
under a contract with a third party vendor for spare parts. The lessee has
agreed to reimburse the Company for any payments made under the guarantee, upon
demand by the Company. If the lessee does not make such reimbursements or does
not comply with any provisions of the parts agreement, the Company may declare
an event of default under the leases. During the fourth quarter of 2002, the
Company and the lessee agreed to lease amendments which deferred certain overdue
rent and reserve payments. The Company is monitoring this lessee's performance
very closely. If the Company does have to perform, the Company believes it will
have sufficient cash to fund any necessary payments.
See "Outlook" below for a discussion of factors which may affect the Company's
cash flow.
The Company's cash flow from operations for the year ended December 31, 2002
versus 2001 increased by approximately $314,000. The increase was due primarily
to the effect of the change in prepaid expenses and other assets, accrued
interest on notes payable, maintenance deposits and accrued costs, and security
deposits. The effect of these changes was only partially offset by the negative
effect of the change in accounts receivable, accounts payable and accrued
expenses, and deferred taxes.
Specifically, the Company's cash flow from operations for the year ended
December 31, 2002 consisted of net income of $1,009,490 and adjustments
consisting primarily of depreciation of $2,851,860, increases in deposits,
accounts receivable, accrued interest on notes payable, maintenance deposits and
accrued costs, security deposits, and deferred taxes of $101,490, $1,204,770,
$211,740, $562,350, $536,680 and $406,740, respectively, and decreases in
prepaid expenses and other assets, accounts payable and accrued expenses, and
prepaid rent of $168,730, $1,112,480 and $27,160, respectively.
Specifically, the Company's cash flow from operations for the year ended
December 31, 2001 consisted of net income of $1,698,940 and adjustments
consisting primarily of depreciation of $2,789,550, increases in deposits,
accounts receivable, prepaid expenses and other assets, and deferred taxes of
$123,290, $24,710, $34,580 and $639,380, respectively, and decreases in accounts
payable and accrued expenses, accrued interest on notes payable, maintenance
reserves and accrued costs, security deposits and prepaid rent of $243,210,
$48,300, $1,101,050, $96,030 and $142,090, respectively.
The increase in cash flow provided by financing activities from year to year was
primarily a result of borrowings on the Company's revolving credit facility to
fund the Company's aircraft purchases during 2002. The increase in cash flow
used for investing activities during 2002 was due to equipment added to aircraft
already owned by the Company and the purchase of aircraft during 2002, versus a
smaller amount of such spending during 2001.
Outlook
In order to maintain the flexibility afforded by the changes to the revolving
credit facility discussed under "Liquidity and Capital Resources", the Company
anticipates approaching its banks regarding a further extension of those
changes. Even if the Company is unable to successfully negotiate an extension of
the changes beyond February 28, 2003, the Company expects that it will be able
to maintain compliance with its credit facility covenants through the expiration
of the credit facility on June 28, 2003. The Company is currently discussing the
terms of a new credit facility with its agent bank and expects to be able to
obtain such facility at reasonable market terms.
The Company has previously used special purpose asset-based financing for the
acquisition of three aircraft and will continue to seek such financing as
circumstances dictate.
The lessee of the Company's one aircraft that is financed with special purpose
asset-based financing has indicated its willingness to extend the lease.
Therefore, the Company is discussing terms for extending the financing of this
aircraft with the lender. The Company expects to have both the lease extension
and the financing in place when the current aircraft lease expires during the
second quarter of 2003.
In order to increase earnings, the Company will need to add aircraft to its
portfolio. Such growth will be possible only with additional financing, such as
an increased credit facility or the issuance of debt and/or equity securities.
The Company and its agent bank have begun discussing the terms of a new credit
facility. The Company is also seeking sources of debt and equity financing.
While the Company's revenues should increase with the purchase of additional
aircraft, management fees, depreciation and interest expense will also increase.
Although it is likely that market lease rates will remain significantly below
prior market levels as a result of downward pressure from low interest rates and
the slowdown in the air carrier industry in particular and the worldwide economy
in general, the Company believes that it will be able to purchase and lease such
aircraft at prices and lease rates that will have a positive effect on the
Company's earnings. Whether the positive effect will lead to an overall increase
in the Company's earnings will depend on the success and timeliness of
remarketing of aircraft that were off lease at December 31, 2002 and those with
leases due to expire during 2003.
The Company continues to review its asset valuations in light of the worldwide
economic downturn. Although the Company did not make any valuation adjustments
during 2002, any future adjustments, if necessary, could negatively affect the
Company's financial results and the collateral available for the Company's
revolving credit facility. In addition, the Company's periodic review of the
adequacy of its maintenance reserves, as well as routine and
manufacturer-required maintenance for off-lease aircraft, may result in changes
to estimated maintenance expense, further reducing earnings.
Factors that May Affect Future Results
General Economic Conditions. The Company's business is dependent upon general
economic conditions and the strength of the travel and transportation industry.
The industry is experiencing a cyclical downturn which began in mid-2001. This
downturn was exacerbated by the terrorist attacks of September 11, 2001 and
their aftermath. As a result, there has been a severe reduction in air travel,
and less revenue and less demand for aircraft capacity by the major air
carriers, particularly those that serve U.S. markets. The duration of the
downturn is uncertain.
The Company's lessees and targeted potential lessees have been primarily outside
the U.S. If those lessees experience financial difficulties, this could, in
turn, affect the Company's financial performance. It appears that the downturn
has had an impact on some non-U.S. regional carriers, but it remains to be seen
how widespread the impact will be and how severely such carriers will be
affected. It is possible that in certain instances, current economic
circumstances may favor the Company, in that planned aircraft replacements for
the Company's leased aircraft by its lessees may be cancelled or postponed,
resulting in greater likelihood of renewals by existing lessees. Further, demand
for more economically operated turboprop aircraft, which make up the Company's
portfolio, relative to the more expensive new regional jets, may increase (see
"Leasing Risks" below). However, there can be no assurance that the Company will
realize any increase in renewals of existing leases or experience an increase in
demand for turboprop aircraft.
Since regional carriers are generally not as well-capitalized as major air
carriers, the downturn may result in the increased possibility of an economic
failure of one or more of the Company's lessees. The combined effect of all or
any decreased air travel, further weakening of the industry as a result of
subsequent threats of attacks similar to the September 11 events, an increase in
the price of jet fuel due to fears of hostilities, and increased costs and
reduced operations by air carriers due to new security directives, depending on
their scope and duration, could allhave a material adverse impact on the
Company's lessees and thus the Company's results.
At this time, in response to lower passenger loads, many carriers have reduced
capacity, and as a result there has been a reduced demand for aircraft. As a
result, market lease rental rates have decreased. This reduced market value for
aircraft could affect the Company's results if the market value of an asset or
assets in the Company's aircraft portfolio falls below book value, and the
Company determines that a writedown of the value on the Company's book is
appropriate.
Another anticipated result of the economic situation is that lessees are likely
to desire shorter-term leases which will give those lessees more flexibility to
deal with the current downturn. The Company's ability to enter into such
short-term leases is somewhat limited by credit facility covenants that govern
to what extent aircraft on short-term leases can be added to the collateral base
that determines how much the Company can draw under the revolving credit
facility and how much debt may be outstanding under the facility (see "Credit
Facility Repayments Based on Collateral Base" below).
Renewal or Replacement of the Credit Facility. As discussed in "Outlook" above,
the Company's credit facility will expire on June 28, 2003. If the company is
not able to renew the credit facility for the full outstanding amount, and
cannot find suitable alternative financing, it may be required to make a
principal repayment of the outstanding balance, or that portion of the balance
for which replacement financing is not obtained. The Company does not have
sufficient cash reserves to make a repayment of a significant portion of the
outstanding credit facility indebtedness and would be forced to sell assets in
order to raise funds to make such repayment. Such sales would likely not be on
favorable terms to the Company as the full market value of the assets sold may
not be realized by the Company in order to expedite the consummation of the
sales.
Even if the Company is able to successfully sell a portion of its assets and use
the proceeds to repay the credit line facility, if a renewed or replacement
facility is not obtained, the Company's future ability to acquire assets would
be significantly impaired, as the credit facility is the Company's primary means
of financing acquisitions and no other sources of acquisition financing are
immediately available. Thus the renewal or replacement of the Company's credit
line facility in an amount equal or greater than the current $50 million limit
will be critical to the Company's asset and revenue growth.
Credit Facility Repayment Obligations. As discussed in "Outlook", above, the
Company's ability to draw on its $50 million credit facility is dependent upon
the status of its collateral base. If a significant portion of the collateral
base is off-lease for an extended period of time (see "Ownership Risks" below),
this could trigger a covenant default and an obligation to repay a portion of
the outstanding indebtedness under the credit facility. The Company anticipates
approaching its banks to renew the loan covenant amendments that expired on
February 28, 2003 in order to maintain its flexibility with respect to financing
of its assets during the remainder of the term of the credit facility. Obtaining
such a renewal would enhance the likelihood that the Company could remain in
compliance with the credit facility through its termination on June 28, 2003. If
renewal of those amendments is not obtained, the Company believes that it,
nonetheless, will be able to remain in compliance with its credit facility
covenants and would not be required to make any repayments under the facility
due to collateral base limitations through the expiration of the credit line in
June 28, 2003. In all events, the Company's beliefs regarding the future
collateral base repayment obligations are based on certain assumptions regarding
renewal of existing leases, a lack of extraordinary interest rate increases, no
lessee defaults or bankruptcies, and certain other matters that the Company
deems reasonable in light of its experience in the industry. There can be no
assurance that these assumptions will turn out to be correct. If the assumptions
do not prove to be true, and the Company has not obtained an applicable waiver
or amendment of applicable covenants from its lenders to deal with the
situation, the Company may have to sell a significant portion of its portfolio
in order to maintain compliance with the covenants, or, if that is not possible,
default on its credit facility.
Risks of Debt Financing. The Company's use of acquisition financing under its
revolving credit facility and its special purpose financings subject the Company
to increased risks of leveraging. If, due to a lessee default, the Company is
unable to repay the debt secured by the aircraft acquired, then the Company
could lose title to the acquired aircraft in a foreclosure proceeding. With
respect to the revolving credit facility, the loans are secured by the Company's
existing assets as well as the assets acquired with each financing. Any default
under the revolving credit facility 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 seek subordinated debt or equity financings. Such financing
would permit the Company to optimize use of its revolving credit facility. There
can be no assurance that the Company will be able to obtain the necessary amount
of supplemental subordinated debt or equity financing on favorable terms so as
to permit optimal use of its revolving credit facility.
All of the Company's current credit facility indebtedness carries a floating
interest rate based upon either the lender's prime rate or a floating LIBOR
rate. Interest rates are currently at historically low levels and this has
partially offset the effect of falling market lease rates. If interest rates
rise, and lease rates do not increase at the same time, the Company would
experience lower net revenues and, if the interest rate increase were great
enough, may not be able to cover its interest expense with lease revenue.
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 involves a number of risks. Demand for lease or purchase of the
assets depends on the economic condition of the airline industry which is, in
turn, 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 reflects economic conditions and the strength of the travel and
transportation industry. The demand for and value of many types of used 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 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. If "regional jets" were to be used on short
routes previously served by turboprops, even though regional jets are more
expensive to operate than turboprops, the demand for turboprops could be
decreased. This could result in lower lease rates and values for the Company's
existing turboprop aircraft.
Reliance on JMC. All management of the Company is performed by JMC under a
management agreement which is in its seventh year of a 20-year term and provides
for an asset-based management fee. JMC is not a fiduciary to the Company or its
stockholders. The Company's Board of Directors, however, has ultimate control
and supervisory responsibility over all aspects of the Company and owes
fiduciary duties to the Company and its stockholders. In addition, while JMC may
not owe any fiduciary duties to the Company by virtue of the management
agreement, the officers of JMC are also officers of the Company, and in that
capacity owe fiduciary duties to the Company and the stockholders by virtue of
holding such offices with the Company. In addition, certain officers of the
Company hold significant ownership positions in JHC and the Company. JMC is also
the management company for two other aircraft portfolio owners, JetFleet III,
which raised approximately $13,000,000 from investors, and AeroCentury IV, Inc.
("AeroCentury IV"), which raised approximately $5,000,000 from investors.
JetFleet III and AeroCentury IV are in the liquidation or wrap-up phase. In the
first quarter of 2002, AeroCentury IV defaulted on certain obligations to
noteholders. The indenture trustee for AeroCentury IV's noteholders has
foreclosed and has taken over management of the remaining two assets. JetFleet
III is in compliance with the terms of its trust indenture.
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. All 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 are less than the entire anticipated
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 its obligations under a lease, the
Company may be limited in its ability to enforce remedies. Most of the Company's
lessees are small 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 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 be further adversely affected by a declaration of
bankruptcy by a defaulting lessee.
International Risks. The Company has focused on leases in overseas markets,
which the Company believes present 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 than 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 aircraft in the event
that a foreign lessee defaults.
A lease with a foreign lessee is subject to risks related to the economy of the
country or region in which such lessee is located, which may be weaker than the
U.S. economy. On the other hand, a foreign economy may remain strong even though
the U.S. economy does not. A foreign economic downturn may 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 to currency conversion fluctuations. Although the Company's current
leases are all payable in U.S. dollars, the Company may agree in the future to
leases that permit payment in foreign currency, which would subject such lease
revenue to monetary risk due to currency fluctuations. Even with U.S.
dollar-denominated lease payment provisions, the Company could still be affected
by a devaluation of the lessee's local currency which would make it more
difficult for a lessee to meet its U.S. dollar-denominated lease payments,
increasing the risk of default of that lessee, particularly if its 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 and
cost of complying with such requirements will fall primarily upon lessees of
equipment, there can be no assurance that the cost will not fall on the Company.
Furthermore, future government regulations could cause the value of any
non-complying equipment owned by the Company to decline substantially.
Competition. The aircraft leasing industry is highly competitive. The Company
competes 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 JMC's experience and operational efficiency in
identifying and obtaining financing for the transaction types desired by
regional air carriers. This market segment, which is characterized by
transaction sizes of less than $10 million and lessee credits that may be
strong, but are generally unrated, is not well served by the Company's larger
competitors in the aircraft industry. JMC 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, however, 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, may be named in a suit claiming damages for injuries or damage to
property caused by its assets. As a triple net lessor, the Company is generally
protected against such claims, since the lessee would be responsible for, insure
against and indemnify the Company for, such claims. Further, some protection may
be provided by the United States Aviation Act with respect to its aircraft
assets. It is, however, 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. Also, although the Company's leases generally require a
lessee to insure against likely risks, there may be certain cases where the loss
is not entirely covered by the lessee or its insurance. Though this is a remote
possibility, 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, as well as
a potential claim directly against the Company.
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 is subject to certain risks. First, some of the lessees in the regional air
carrier market are 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. 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 evaluates the credit risk of each
lessee carefully, and attempts to obtain a third party guaranty, letters of
credit or other credit enhancement, if it deems them 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 in 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.
Item 7. Financial Statements.
(a) Financial Statements and Schedules
(1) Financial statements for the Company:
Report of Independent Public Accountants, PricewaterhouseCoopers LLP
Consolidated Balance Sheet as of December 31, 2002
Consolidated Statements of Income for the Years Ended December 31, 2002
and 2001
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002 and 2001
Notes to Financial Statements
(2) Schedules:
All schedules have been omitted since the required information
is presented in the financial statements or is not applicable.
Report of Independent Accountants
To the Stockholders of AeroCentury Corp.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of AeroCentury Corp.
and subsidiaries at December 31, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The consolidated financial statements of AeroCentury Corp. and subsidiaries as
of December 31, 2001, and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended, were audited by
other independent accountants who have ceased operations. Those independent
accountants expressed an unqualified opinion on those financial statements in
their report dated January 18, 2002, (except with respect to the matters
discussed in Note 9, as to which the date is March 7, 2002).
PricewaterhouseCoopers LLP
/s/PricewaterhouseCoopers LLP
San Francisco, California
January 17, 2003
(except with respect to the matters discussed
in Note 10, as to which the date is March 12, 2003)
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of AeroCentury Corp.:
We have audited the accompanying consolidated balance sheet of AeroCentury Corp.
(a Delaware corporation) and its subsidiaries as of December 31, 2001 and the
related consolidated statements of income, stockholders' investment and cash
flows for the years ended December 31, 2001 and 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AeroCentury Corp. and its
subsidiaries as of December 21, 2001 and the results of their operations and
their cash flows for the years ended December 31, 2001 and 2000 in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
/s/ ARTHUR ANDERSEN LLP
San Francisco, California,
January 18, 2002
(except with respect to the matters discussed in
Note 9, as to which the date is March 7, 2002)
AeroCentury Corp.
Consolidated Balance Sheet
ASSETS
December 31,
2002
Assets:
Cash and cash equivalents $ 1,707,650
Deposits 7,088,350
Accounts receivable 1,800,640
Aircraft and aircraft engines on operating leases,
net of accumulated depreciation of $18,270,690 65,502,010
Note receivable 17,600
Prepaid expenses and other 482,530
---------------
Total assets $ 76,598,780
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 529,650
Notes payable and accrued interest 44,223,210
Maintenance reserves and accrued costs 5,771,490
Security deposits 2,254,450
Prepaid rent 186,030
Deferred taxes 3,762,840
---------------
Total liabilities 56,727,670
---------------
Stockholders' 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 6,552,370
---------------
20,375,180
Treasury stock at cost, 63,300 shares (504,070)
---------------
Total stockholders' equity 19,871,110
---------------
Total liabilities and stockholders' equity $ 76,598,780
===============
The accompanying notes are an integral part of these statements.
AeroCentury Corp.
Consolidated Statements of Income
For the Years Ended December 31,
2002 2001
---- ----
Revenues:
Operating lease revenue $ 8,691,440 $ 10,150,920
Gain on disposal of aircraft and aircraft engines - 326,730
Other income 122,590 754,340
--------------- ----------------
8,814,030 11,231,990
--------------- ----------------
Expenses:
Management fees 1,725,330 1,758,050
Depreciation 2,851,860 2,789,550
Interest 1,969,160 2,800,470
Maintenance 242,060 861,540
Professional fees and general and administrative 542,910 497,710
--------------- ----------------
7,331,320 8,707,320
--------------- ----------------
Income before taxes 1,482,710 2,524,670
Tax provision 473,220 825,730
--------------- ----------------
Net income $ 1,009,490 $ 1,698,940
=============== ================
Weighted average common shares outstanding 1,543,257 1,543,257
=============== ================
Basic earnings per share $ 0.65 $ 1.10
=============== ================
The accompanying notes are an integral part of these statements.
AeroCentury Corp.
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2002 and 2001
Common Paid-in Retained Treasury
Stock Capital Earnings Stock Total
Balance,
December 31, 2000 $ 1,610 $ 13,821,200 $ 3,843,940 $ (504,070) $ 17,162,680
Net income - - 1,698,940 - 1,698,940
------------- -------------- ------------- ------------- -------------
Balance,
December 31, 2001 1,610 13,821,200 5,542,880 (504,070) 18,861,620
Net income - - 1,009,490 - 1,009,490
------------- -------------- ------------- ------------- -------------
Balance,
December 31, 2002 $ 1,610 $ 13,821,200 $ 6,552,370 $ (504,070) $ 19,871,110
============= ============== ============= ============= =============
The accompanying notes are an integral part of these statements.
AeroCentury Corp.
Consolidated Statements of Cash Flows
For the Years Ended December 31,
2002 2001
Operating activities:
Net income $ 1,009,490 $ 1,698,940
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 2,851,860 2,789,550
Gain on disposal of aircraft and aircraft engines - (326,730)
Change in operating assets and liabilities:
Deposits (101,490) (123,290)
Accounts receivable (1,204,770) (24,710)
Prepaid expenses and other 168,730 (34,580)
Accounts payable and accrued expenses (1,112,480) (243,210)
Accrued interest on notes payable 211,740 (48,300)
Maintenance reserves and accrued costs 562,350 (1,101,050)
Security deposits 536,680 (96,030)
Prepaid rent (27,160) (142,090)
Deferred taxes 406,740 639,380
--------------- ----------------
Net cash provided by operating activities 3,301,690 2,987,880
Investing activities:
Proceeds from disposal of aircraft and aircraft engines - 1,406,440
Purchase of aircraft and aircraft engines (11,826,520) (285,420)
--------------- ----------------
Net cash (used)/provided by investing activities (11,826,520) 1,121,020
Financing activities:
Payments received on note receivable 50,970 48,980
Issuance of notes payable 16,480,000 -
Repayment of notes payable (8,978,650) (4,662,190)
--------------- ----------------
Net cash provided/(used) by financing activities 7,552,320 (4,613,210)
Net decrease in cash and cash equivalents (972,510) (504,310)
Cash and cash equivalents, beginning of period 2,680,160 3,184,470
--------------- ----------------
Cash and cash equivalents, end of period $ 1,707,650 $ 2,680,160
=============== ================
During the years ended December 31, 2002 and 2001, the Company paid interest
totaling $1,662,070 and $2,771,610, respectively, and income taxes totaling
$10,000 and $388,270, respectively.
The accompanying notes are an integral part of these statements.
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2002
1. Organization and Summary of Significant Accounting Policies
(a) Basis of Presentation
AeroCentury Corp. ("AeroCentury"), a Delaware corporation, uses
leveraged financing to acquire leased aircraft assets. The Company purchases
used regional aircraft on lease to foreign and domestic regional carriers.
Financial information for AeroCentury and its two wholly-owned subsidiaries,
AeroCentury Investments LLC ("AeroCentury LLC") and AeroCentury Investments II
LLC ("AeroCentury II LLC") (collectively, the "Company"), is presented on a
consolidated basis. All intercompany balances and transactions have been
eliminated in consolidation.
(b) Capitalization
In 1998, in connection with the adoption of a stockholder rights plan,
the Company filed a Certificate of Designation, setting forth the rights,
preferences and privileges of a new Series A Preferred Stock. Pursuant to the
plan, the Company issued rights to its stockholders, giving each stockholder the
right to purchase one one-hundredth of a share of Series A Preferred Stock for
each share of Common Stock held by the stockholder. Such rights are exercisable
only under certain circumstances concerning a proposed acquisition or merger of
the Company.
The Company's Board of Directors adopted a stock repurchase plan in
1998, granting management the authority to repurchase up to 100,000 shares of
the Company's common stock, in privately negotiated transactions or in the
market, at such price and on such terms and conditions deemed satisfactory to
management. The Company has repurchased 63,300 shares in total and has not
repurchased any shares since 1999.
As discussed above, AeroCentury is the sole member and manager of
AeroCentury LLC and AeroCentury II LLC.
(c) 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 December 31, 2002, the Company held security deposits of $2,254,450,
refundable maintenance reserves received from lessees of $1,535,030 and
non-refundable maintenance reserves of $3,298,870.
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2002
1. Organization and Summary of Significant Accounting Policies (continued)
(c) Cash and Cash Equivalents/Deposits (continued)
The Company's leases are typically structured so that if any event of
default occurs under a lease, the Company may apply all or a portion of the
lessee's security deposit to cure such default. If such application of the
security deposit is made, the lessee typically is required to replenish and
maintain the full amount of the deposit during the remaining term of the lease.
All of the security deposits currently held by the Company are refundable to the
lessee at the end of the lease, upon satisfaction of all lease terms.
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.
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. When an aircraft is sold, any excess
non-refundable maintenance reserves are recorded as income.
(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 based on appraisal.
(e) Impairment of Long-lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets,"
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the book value of the asset may not be recoverable. Periodically,
the Company reviews its long-lived assets for impairment based on third party
valuations. In the event such valuations are less than the recorded value of the
assets, the assets are written down to their estimated realizable value.
(f) 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.
(g) 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 December 31, 2002, the Company
had accrued maintenance costs of approximately $354,000 related to several of
its aircraft.
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2002
1. Organization and Summary of Significant Accounting Policies (continued)
(h) Income Taxes
The Company follows the liability method of 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.
(i) 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.
(j) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant estimates with regard to these financial
statements are the residual values of the aircraft, the useful lives of the
aircraft, and the estimated amount and timing of cash flow associated with each
aircraft that are used to evaluate impairment, if any.
(k) Comprehensive Income
The Company does not have any comprehensive income other than the
revenue and expense items included in the consolidated statements of income. As
a result, comprehensive income equals net income for the years ended December
31, 2002 and 2001.
(l) Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-lived Assets," which
supercedes SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and
Long-lived Assets to Be Disposed Of." SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The Company adopted SFAS No. 144 on
January 1, 2002. Because SFAS No. 144 retains the fundamental provisions of SFAS
No. 121 for (a) recognition and measurement of the impairment of long-lived
assets to be held and used and (b) measurement of long-lived assets to be
disposed of by sale, the adoption of SFAS No. 144 has not had a material effect
on the Company's results of operations or financial position.
In November 2002, the Financial Accounting Standards Board issued SFAS
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
FIN 45 is effective for guarantees issued or modified after December 31, 2002.
The Company has one guarantee, which was issued prior to December 31, 2002 (Note
8). The Company has not recorded a liability for the fair value of the
obligations it has assumed under this guarantee.
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2002
2. Aircraft and Aircraft Engines On Operating Leases
At December 31, 2002, the Company owned five deHavilland DHC-8s, two
deHavilland DHC-7s, three deHavilland DHC-6s, one Fairchild Metro III, two
Shorts SD 3-60s, six Fokker 50s, two Saab 340As and 26 turboprop engines. During
the fourth quarter of 2002, the Company acquired two of its deHavilland DHC-8
aircraft, in purchase and leaseback transactions with a new customer for terms
of 38 and 36 months. The Company also capitalized $342,130 of equipment added to
several aircraft during 2002. In addition, an engine which had been held in
inventory was exchanged, along with a cash payment, for another engine which
subsequently was leased to a customer for use on one of the Company's aircraft
while an engine was being repaired. The Company did not sell any aircraft during
the year.
At December 31, 2002, all but two of the Company's aircraft were
subject to operating lease agreements. The Company is seeking re-lease
opportunities for the off-lease aircraft, which were returned by lessees in 2002
after lease expiration.
The following aircraft were subject to leases which expired during
2002, but which remained in effect at December 31, 2002:
The lease for one of the Company's Fokker 50 aircraft expired in
September 2002, but the lessee, which is in financial difficulty, is
required to continue to pay rent until the aircraft is returned and
accepted by the Company, which is expected to occur in the second
quarter of 2003. The Company holds a security deposit from this lessee,
which is in excess of the rent accrued at December 31, 2002. In order
to enforce its ability to use a portion of the security deposit toward
unpaid rent, the Company sent a default notice to the lessee in October
2002. The Company and the lessee are negotiating the final amount of
rent and maintenance payable to the Company when the aircraft is
returned. As discussed in Note 10, the Company has signed a term sheet
for the re-lease of this aircraft.
In December 2002, the lease for another of the Company's Fokker 50
aircraft which had previously been extended to December 31, 2002, was
extended through February 28, 2003. As discussed in Note 10, the lease
has been extended through March 31, 2003.
The leases for one of the Company's Saab 340A aircraft and one of the
Company's turboprop engines remain in effect from their expiration
dates of December 31, 2002 and October 31, 2002, respectively, until
the pre-return inspections of the aircraft and engine are complete.
Both are expected to be returned and accepted by the Company in the
second quarter of 2003 and are being actively remarketed.
Under the terms provided therein, the leases for two of the Company's
other Fokker 50 aircraft remained in effect from their expiration date in
January 2002, until their pre-return inspections were completed in July 2002.
The lessee continued to pay rent through mutually-agreed dates in June. In late
2001, the Company conducted a preliminary inspection of the aircraft and
concluded that, upon return, certain components would likely be in better
condition than required by the return provisions of the leases. In such a
situation, the leases stipulated that the Company was required to compensate the
lessee. As a result, during 2001, the Company accrued an estimate of $609,000 of
compensation related to these two aircraft. Both aircraft were returned to the
Company in July 2002, at which time the Company and the lessee agreed on the
final compensation of $395,310. At that time, the Company recorded a credit to
maintenance expense of $213,690, which represented the amount of the Company's
estimate in excess of the final amount. Both aircraft were re-leased to new
customers in 2002.
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2002
2. Aircraft and Aircraft Engines On Operating Leases (continued)
During November 2002, the Company and the lessee for three of the
Company's aircraft signed lease amendments which cured the lessee's recent
default for rent and reserves due and which provide for the deferral of such
amounts. The arrearages are to be paid over time in installments.
3. Note Receivable
At December 31, 2002, the Company's note receivable consisted of a loan
to one of the Company's long-standing lessees in connection with a
manufacturer-required inspection of the aircraft and repair of certain
components. The Company and the lessee agreed to a cost sharing arrangement
whereby a portion of the cost was funded by maintenance reserves previously paid
by the lessee and the remaining cost was allocated between the Company and the
lessee. The Company recorded a note receivable for the lessee's portion, net of
interest to be received at a rate of 5%, which is being repaid through increased
rent during the remainder of the lease term, which expires on April 30, 2003.
4. Operating Segments
The Company operates in one business segment, leasing of regional
aircraft to regional airlines, primarily foreign, and therefore does not present
separate segment information for lines of business.
Approximately 21% and 22% of the Company's operating lease revenue was
derived from lessees domiciled in the United States during 2002 and 2001,
respectively. All revenues relating to aircraft leased and operated
internationally are denominated and payable in U.S. dollars.
The tables below set forth geographic information about the Company's
operating leased aircraft equipment, grouped by domicile of the lessee:
Operating Lease Revenue for the
Years Ended December 31,
2002 2001
---- ----
Europe and United Kingdom $ 3,465,160 $ 5,419,280
United States 1,809,160 2,236,910
Caribbean 1,563,500 1,185,150
South America 922,320 1,014,580
Asia 931,300 295,000
---------------- ---------------
$ 8,691,440 $ 10,150,920
================ ===============
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2002
4. Operating Segments (continued)
Net Book Value at December 31,
2002 2001
---- ----
Asia $ 18,185,860 $ 2,230,770
Europe and United Kingdom 16,095,620 27,162,220
Caribbean 11,826,550 7,650,210
South America 10,443,360 5,765,290
United States 8,950,620 11,480,290
Other - 2,238,570
---------------- ---------------
$ 65,502,010 $ 56,527,350
================ ===============
For the year ended December 31, 2002, the Company had three significant
customers, which accounted for 11%, 11% and 10%, respectively, of lease revenue.
For the year ended December 31, 2001, the Company had three significant
customers, which accounted for 19%, 13% and 11%, respectively, of lease revenue.
As of December 31, 2002, minimum future operating lease revenue
payments receivable under noncancelable leases were as follows:
Year
2003 $ 6,685,180
2004 4,846,350
2005 3,111,830
2006 -
2007 -
----------------
$ 14,643,360
================
5. Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash deposits and
receivables. The Company places its deposits with financial institutions and
other creditworthy issuers and limits the amount of credit exposure to any one
party.
6. Notes Payable and Accrued Interest
The Company has a revolving credit facility totaling $50 million. The
facility, which expires on June 28, 2003, bore interest through March 30, 2002,
at the Company's option, at either (i) prime or (ii) LIBOR plus a margin of 200
to 250 basis points depending on certain financial ratios. On March 7, 2002, the
Company and its lenders agreed to modify certain financial covenants contained
in the loan agreement for the facility in order to enable the Company to
continue to take advantage of business opportunities in the current industry
environment of increased market demand for shorter-term leases. As discussed in
Note 10, the changes, originally in effect through December 31, 2002, were
extended through February 28, 2003. In return for granting such changes, the
Company's lenders increased the margin on the interest rates chosen by the
Company from a floating margin to a fixed margin of 275 basis points, effective
March 31, 2002. On March 1, 2003, the margin returned to its original floating
rate. In order to maintain the flexibility afforded by such changes, the Company
anticipates approaching its banks regarding a
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2002
6. Notes Payable and Accrued Interest (continued)
further extension of the revised terms of the revolving credit facility. Even if
the Company is unable to successfully negotiate an extension of the changes
beyond February 28, 2003, the Company expects that it will be able to maintain
compliance with its credit facility covenants through the expiration of the
credit facility on June 28, 2003. As discussed in Note 10, the Company is
currently discussing the terms of a new credit facility with its agent bank.
The Company's assets, excluding those of AeroCentury LLC and
AeroCentury II LLC, serve as collateral under the facility and, in accordance
with the credit agreement, the Company must maintain compliance with certain
financial covenants. As of December 31, 2002, the Company was in compliance with
all such covenants, $41,405,000 was outstanding under the credit facility, and
interest of $224,840 was accrued, using a combination of prime and LIBOR rates.
In November 1999 the Company acquired two aircraft using cash and bank
financing separate from its credit facility. The financing consisted of a note
in the amount of $9,061,000. This note, which bore fixed interest at 8.04%
through February 15, 2002 and a floating rate thereafter, was collateralized by
these aircraft and was non-recourse to the Company. During 2002, the Company
used funds from its revolving credit facility to repay the outstanding bank
financing related to both aircraft.
A similar financing was concluded in September 2000, consisting of a
note in the amount of $3,575,000, due April 18, 2003, which bears fixed interest
at 8.36% for the acquisition of one aircraft. The note is collateralized by this
aircraft and is non-recourse to the Company. Payments due under the note consist
of monthly principal and interest and a balloon principal payment due on the
maturity date. The balance of the note payable at December 31, 2002 was
$2,585,450 and interest of $7,920 was accrued. As of December 31, 2002, the
Company was in compliance with all covenants of the loan agreement pertaining to
the financing of this aircraft.
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2002
7. Income Taxes
The items comprising income tax expense are as follows:
For the Years Ended December 31,
2002 2001
---- ----
Current tax provision/(benefit):
Federal $ (17,020) $ 22,780
State 11,380 5,240
Foreign 72,120 158,320
--------------- ---------------
Current tax provision 66,480 186,340
---------------- ---------------
Deferred tax provision/(benefit):
Federal 435,600 670,570
State (28,860) (31,180)
---------------- ---------------
Deferred tax provision 406,740 639,390
---------------- ---------------
Total provision for income taxes $ 473,220 $ 825,730
================ ===============
Total income tax expense differs from the amount that would be provided
by applying the statutory federal income tax rate to pretax earnings as
illustrated below:
For the Years ended December 31,
2002 2001
---- ----
Income tax expense at
statutory federal income tax rate $ 504,120 $ 858,390
State taxes net of federal benefit 10,520 19,250
Tax refunds (19,560) (15,470)
Tax rate differences (21,860) (36,440)
---------------- ---------------
Total income tax expense $ 473,220 $ 825,730
================= ===============
Temporary differences and carryforwards that gave rise to a significant
portion of deferred tax assets and liabilities as of December 31, 2002 are as
follows:
Deferred tax assets:
Maintenance reserves $ 1,105,740
Foreign tax credit carryover 118,640
Deferred maintenance 119,240
Net operating loss carryover 182,260
Prepaid rent and other 65,020
----------------
Deferred tax assets 1,590,900
Deferred tax liabilities:
Depreciation on aircraft and aircraft engines (5,078,800)
Other (274,940)
----------------
Net deferred tax liabilities $ (3,762,840)
================
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2002
7. Income Taxes (continued)
No valuation allowance is deemed necessary, as the Company anticipates
generating adequate future taxable income to realize the benefits of all
deferred tax assets on the balance sheet. The excess foreign tax credits may be
carried back to the two preceding tax years and then forward to the five
succeeding tax years, expiring at the end of 2006. Net operating losses may be
carried back to the five preceding tax years and then forward to the twenty
succeeding tax years, expiring at the end of 2022.
8. Commitments and Contingencies
In connection with the re-lease of two of the Company's aircraft, the
Company has guaranteed, up to a maximum of $150,000, the lessee's payments under
a contract with a third party vendor for spare parts. The term of the guarantee
extends for 90 days after the expiration or termination of the leases in
November 2005. The lessee has agreed to reimburse the Company for any payments
made under the guarantee, upon demand by the Company. If the lessee does not
make such reimbursements or does not comply with any provisions of the parts
agreement, the Company may declare an event of default under the leases.
9. 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 JetFleet Management Corp. ("JMC"), which is an integrated
aircraft management, marketing and financing business and a subsidiary of
JetFleet Holding Corp. ("JHC"). Certain officers of the Company are also
officers of JHC and JMC and hold significant ownership positions in both JHC and
the Company. Under the management agreement, JMC receives a monthly management
fee based on the net asset value of the assets under management. JMC may also
receive an acquisition fee for locating assets for the Company, provided that
the aggregate purchase price including chargeable acquisition costs and any
acquisition 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, acquisition fees and remarketing fees may
not exceed the customary and usual fees that would be paid to an unaffiliated
party for such services. The Company recorded management fees of $1,725,330 and
$1,758,050 during the years ended December 31, 2002 and 2001, respectively.
During the year ended December 31, 2002, the Company paid a total of $325,500 in
acquisition fees, which are included in the capitalized cost of the aircraft.
Because the Company did not acquire any aircraft during 2001, no acquisition
fees were paid to JMC. No remarketing fees were accrued to JMC during 2002.
During 2001, the Company accrued a total of $13,500 in remarketing fees to JMC.
10. Subsequent Events
In February 2003, the Company and one of its customers signed a term
sheet for the lease of one of the Company's Fokker 50 aircraft. Delivery of the
aircraft is anticipated to occur in the second quarter of 2003.
In February 2003, the Company and the lessee for two of the Company's
deHavilland DHC-8 aircraft, the leases for which expire in April 2003, signed
lease amendments providing for a two-year extension of both leases and for the
deferral of certain amounts due under the leases.
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2002
10. Subsequent Events (continued)
In March 2003, the Company and a new customer signed a term sheet for
the lease of the Company's Fairchild Metro III aircraft which was returned by
the original lessee in October 2002. Delivery of the aircraft is anticipated to
occur in the second quarter of 2003.
In March 2003, a lease amendment was signed for the extension of the
term for one of the Company's Fokker 50 aircraft from February 28, 2003 to March
31, 2003.
In March 2002, the Company's banks agreed to changes to certain terms
of the Company's credit facility through December 31, 2002. In early 2003, those
changes were extended through February 28, 2003. In order to maintain the
flexibility afforded by such changes, the Company anticipates approaching its
banks regarding a further extension of the revised terms of the revolving credit
facility. If, however, the Company is unable to successfully negotiate an
extension of the changes beyond February 28, 2003, the Company expects that it
will be able to maintain compliance with its credit facility covenants through
the expiration of the credit facility on June 28, 2003. The Company is currently
discussing the terms of a new credit facility with its agent bank and expects to
be able to obtain such facility at reasonable market terms.
If the company is not able to renew the credit facility for the full
outstanding amount, and cannot find suitable alternative financing, it may be
required to make a principal repayment of the outstanding balance, or that
portion of the balance for which replacement financing is not obtained. The
Company does not have sufficient cash reserves to make a repayment of a
significant portion of the outstanding credit facility indebtedness and would be
forced to sell assets in order to raise funds to make such repayment. Such sales
would likely not be on favorable terms to the Company as the full market value
of the assets sold may not be realized by the Company in order to expedite the
consummation of the sales.
Even if the Company is able to successfully sell a portion of its
assets and use the proceeds to repay the credit line facility, if a renewed or
replacement facility is not obtained, the Company's future ability to acquire
assets would be significantly impaired, as the credit facility is the Company's
primary means of financing acquisitions and no other sources of acquisition
financing are immediately available. Thus the renewal or replacement of the
Company's credit line facility in an amount equal or greater than the current
$50 million limit will be critical to the Company's asset and revenue growth.
Item 8. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Incorporated by reference to the section of the Company's Proxy Statement for
the 2003 Annual Meeting to be filed with the Securities and Exchange Commission
on or about March 21, 2003 (the "2003 Proxy Statement") entitled "Information
Regarding the Company's Directors and Officers."
Item 10. Executive Compensation.
Incorporated by reference to the section of the 2003 Proxy Statement entitled
"Information Regarding the Company's Directors and Officers -- Employment
Contracts."
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Incorporated by reference to the section of the 2003 Proxy Statement entitled
"Security Ownership of Certain Beneficial Owners and Management."
Item 12. Certain Relationships and Related Transactions.
Incorporated by reference to the section of the 2003 Proxy Statement entitled
"Related Party Transactions."
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Certificate of Incorporation of the Company, incorporated by
reference to Exhibit 3.08 to the registration statement on Form S-4/A filed with
the Securities and Exchange Commission on July 24, 1997.
3.2 Form of Certificate of Amendment of Certificate of Incorporation of
the Company, incorporated by reference to Exhibit 3.07 to the registration
statement on Form S-4/A filed with the Securities and Exchange Commission on
June 10, 1997.
3.3 Amended and Restated Bylaws of the Company dated January 22, 1999,
incorporated by reference to Exhibit 3.1 to the Report on Form 10-KSB for the
fiscal year ended December 31, 1998.
3.4 Certificate of Designation of the Company dated April 15, 1998,
incorporated by reference to Exhibit 3.2 to the Report on Form 10-KSB for the
fiscal year ended December 31, 1998.
3.5 Amended and Restated Stockholder Rights Agreement, dated January 22,
1999, incorporated by reference to Exhibit 1 to Form 8-A/A filed with the
Securities and Exchange Commission on February 4, 1999.
4.1 Reference is made to Exhibit 3.5.
10.1 Employment Agreement between the Company and Neal D. Crispin, dated
April 29, 1998, incorporated by reference to Exhibit 10.1 to the Report on Form
10-KSB for the fiscal year ended December 31, 1998.
10.2 Employment Agreement between the Company and Marc J. Anderson, dated
April 28, 1998, incorporated by reference to Exhibit 10.2 to the Report on Form
10-KSB for the fiscal year ended December 31, 1998.
10.3 Credit Agreement between First Union National Bank and the
Company, dated June 30, 1998, incorporated by reference to Exhibit 10.1 to the
Report on Form 8-K filed with the Securities and Exchange Commission on July 2,
1998.
10.4 Form of Indemnity Agreement between the Company and each of its
directors and officers, incorporated by reference to Exhibit 10.03 to the Report
on Form 10-KSB for the fiscal year ended December 31, 1997.
10.5 Amended and Restated Management Agreement, dated April 23, 1998,
between the Company and JetFleet Management Corp., incorporated by reference to
Exhibit 10.5 to the Report on Form 10-KSB for the fiscal year ended December 31,
1999.
10.6 Amendment No. 1 to Credit Agreement, dated March 30, 1999 between
AeroCentury Corp. and First Union National Bank, as agent, and California Bank &
Trust, incorporated by reference to Exhibit 10.6 to the Report on Form 10-KSB
for the fiscal year ended December 31, 1999.
10.7 Amendment No. 2 to Credit Agreement, dated July 16, 1999 between
AeroCentury Corp. and First Union National Bank, as agent, and California Bank &
Trust and Sanwa Bank California, incorporated by reference to Exhibit 10.7 to
the Report on Form 10-KSB for the fiscal year ended December 31, 1999.
10.8 Certificate of Designation of the Company dated April 15, 1998,
incorporated by reference to exhibit 3.2 to Report on Form 10-KSB for the fiscal
year ended December 31, 1998.
10.9 Amended and Restated Shareholder Rights Agreement, dated January 22,
1999, incorporated by reference to Exhibit 1 to Form 8-A/A filed with the
Securities and Exchange Commission on February 4, 1999.
10.10 Amendment No. 3 to Credit Agreement, dated February 22, 2000, between
the Company and First Union National Bank, as agent, and California Bank & Trust
and Sanwa Bank California, incorporated by reference to Exhibit 10.13 to the
Report on Form 10-KSB for the fiscal year ended December 31, 1999.
10.11 Amended and Restated Credit Agreement, dated June 28, 2000, between
the Company and National City Bank, as agent, and California Bank & Trust and
Sanwa Bank California, incorporated by reference to Exhibit 10.1 to the Report
on Form 8-K filed with the Securities and Exchange Commission on July 21, 2000.
10.12 Amendment to Amended and Restated Credit Agreement, between National
City Bank, as agent, and California Bank & Trust and United California Bank,
dated March 7, 2002, incorporated by reference to Exhibit 10.1 to the Report on
Form 8-K filed with the Securities and Exchange Commission on March 12, 2002.
10.13 Second Amendment to Amended and Restated Credit Agreement between
National City Bank, as agent, and California Bank & Trust and Bank of the West,
Successor in Interest to United California Bank, formerly known as Sanwa Bank
California, dated January 1, 2003, incorporated by reference to Exhibit 10.1 to
the Report on Form 8-K filed with the Securities and Exchange Commission on
February 20, 2003.
21. Subsidiaries of the Company.
99.1 Certification of Neal D. Crispin, Chief Executive Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Toni M. Perazzo, Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K Filed in Last Quarter:
None.
Item 14. Controls and Procedures
Quarterly evaluation of the Company's Disclosure Controls and Internal Controls.
Within the 90 days prior to the date of this annual report on Form 10-KSB, the
Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" ("Disclosure Controls"), and its "internal
controls and procedures for financial reporting" ("Internal Controls"). This
evaluation (the "Controls Evaluation") was done under the supervision and with
the participation of management, including the Company's Chief Executive Officer
(CEO) and Chief Financial Officer (CFO). Rules adopted by the SEC require that
in this section of the Annual Report the Company present the conclusions of the
CEO and the CFO about the effectiveness of our Disclosure Controls and Internal
Controls based on and as of the date of the Controls Evaluation.
CEO and CFO Certifications. Appearing immediately following the Signatures
section of this annual report there are two separate forms of "Certifications"
of the CEO and the CFO. The first form of Certification is required in
accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302
Certification). This section of the annual report which you are currently
reading is the information concerning the Controls Evaluation referred to in the
Section 302 Certifications and this information should be read in conjunction
with the Section 302 Certifications for a more complete understanding of the
topics presented.
Disclosure Controls and Internal Controls. Disclosure Controls are procedures
that are designed with the objective of ensuring that information required to be
disclosed in the Company's reports filed under the Securities Exchange Act of
1934 (Exchange Act), such as this annual report, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's (SEC) rules and forms. Disclosure Controls are also
designed with the objective of ensuring that such information is accumulated and
communicated to the Company's management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. Internal
Controls are procedures which are designed with the objective of providing
reasonable assurance that (1) the Company's transactions are properly
authorized; (2) the Company's assets are safeguarded against unauthorized or
improper use; and (3) the Company's transactions are properly recorded and
reported, all to permit the preparation of the Company's financial statements in
conformity with generally accepted accounting principles.
Limitations on the Effectiveness of Controls. The Company's management,
including the CEO and CFO, does not expect that its Disclosure Controls or its
Internal Controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Scope of the Controls Evaluation. The CEO/CFO evaluation of the Company's
Disclosure Controls and the Company's Internal Controls included a review of the
controls objectives and design, the controls implementation by the company and
the effect of the controls on the information generated for use in this annual
report. In the course of the Controls Evaluation, we sought to identify data
errors, controls problems or acts of fraud and to confirm that appropriate
corrective action, including process improvements, were being undertaken. This
type of evaluation will be done on a quarterly basis so that the conclusions
concerning controls effectiveness can be reported in the Company's quarterly
reports on Form 10-QSB and annual report on Form 10-KSB. The Company's Internal
Controls are also evaluated on an ongoing basis by other personnel in the
Company's finance organization and by the Company's independent auditors in
connection with their audit and review activities. The overall goals of these
various evaluation activities are to monitor the Company's Disclosure Controls
and the Company's Internal Controls and to make modifications as necessary; the
Company's intent in this regard is that the Disclosure Controls and the Internal
Controls will be maintained as dynamic systems that change (including with
improvements and corrections) as conditions warrant.
Among other matters, the Company sought in its evaluation to determine whether
there were any "significant deficiencies" or "material weaknesses" in the
Company's Internal Controls, or whether the Company had identified any acts of
fraud involving personnel who have a significant role in the Company's Internal
Controls. This information was important both for the Controls Evaluation
generally and because items 5 and 6 in the Section 302 Certifications of the CEO
and CFO require that the CEO and CFO disclose that information to the Audit
Committee of the Company's Board and to the Company's independent auditors and
to report on related matters in this section of the Annual Report. In the
professional auditing literature, "significant deficiencies" are referred to as
"reportable conditions"; these are control issues that could have a significant
adverse effect on the ability to record, process, summarize and report financial
data in the financial statements. A "material weakness" is defined in the
auditing literature as a particularly serious reportable condition where the
internal control does not reduce to a relatively low level the risk that
misstatements caused by error or fraud may occur in amounts that would be
material in relation to the financial statements and not be detected within a
timely period by employees in the normal course of performing their assigned
functions. The Company also sought to deal with other controls matters in the
Controls Evaluation, and in each case if a problem was identified, the Company
considered what revision, improvement and/or correction to make in accordance
with our on-going procedures.
In accordance with SEC requirements, the CEO and CFO note that, since the date
of the Controls Evaluation to the date of this annual report, there have been no
significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Conclusions. Based upon the Controls Evaluation, the Company's CEO and CFO have
concluded that, subject to the limitations noted above, the Company's Disclosure
Controls are effective to ensure that material information relating to the
Company and its consolidated subsidiaries is made known to management, including
the CEO and CFO, particularly during the period when periodic reports are being
prepared, and that the Company's Internal Controls are effective to provide
reasonable assurance that the Company's financial statements are fairly
presented in conformity with generally accepted accounting principles.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
caused this Report on Form 10-KSB to be signed on its behalf by the undersigned,
thereunto duly authorized on March 14, 2003.
AEROCENTURY CORP.
By: /s/ Toni M. Perazzo
-------------------------------
Toni M. Perazzo
Title: Senior Vice President-Finance and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Neal D. Crispin and Toni M. Perazzo, and each of
them, his or her attorneys-in-fact, each with the power of substitution, for him
or her in any and all capacities, to sign any amendments to this Report on Form
10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his or her
substitute or substitutes, may do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated on
March 14, 2003.
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, Senior Vice President-Finance
------------------------------- and Secretary of the Registrant
Toni M. Perazzo (Principal Financial and Accounting
Officer)
/s/ Marc J. Anderson Director, Chief Operating Officer,
------------------------------- Senior Vice President
Marc J. Anderson
/s/ Maurice J. Averay Director
--------------------------------
Maurice J. Averay
/s/ Thomas W. Orr Director
--------------------------------
Thomas W. Orr
/s/ Evan M. Wallach Director
--------------------------------
Evan M. Wallach
CERTIFICATION
I, Neal D. Crispin, certify that:
1. I have reviewed this annual report on Form 10-KSB of AeroCentury Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 14, 2003 /s/ Neal D. Crispin
---------------------------------
Neal D. Crispin
Chief Executive Officer
CERTIFICATION
I, Toni M. Perazzo, certify that:
1. I have reviewed this annual report on Form 10-KSB of AeroCentury Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 14, 2003 /s/ Toni M. Perazzo
---------------------------------
Toni M. Perazzo
Chief Financial Officer