UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 2005
OR
[ ] Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number: 001-13387
AeroCentury Corp.
(Name of small business issuer in its charter)
Delaware 94-3263974
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1440 Chapin Avenue, Suite 310
Burlingame, California 94010
(Address of principal executive offices) (Zip Code)
Issuer's telephone number:
(650) 340-1888
Securities registered under Section 12(b)
of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $0.001 par value American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act [ ]
Note: Checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Exchange Act from their
obligations under these sections.
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 ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
State Issuer's revenues for its most recent fiscal year: $13,499,320
On March 10, 2006, the aggregate market value of the voting and non-voting
common equity held by non-affiliates (based upon the closing price as of
March 9, 2006) was $4,506,693.
As of March 10, 2006, the Issuer had 1,543,257 shares of Common Stock
outstanding.
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 2006 Annual Meeting to be filed on or about March 22, 2006.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
2
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 an acceptable overall
on-lease rate for the Company's assets; 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 expenses and
provide excess cash flow; (iii) in Item 1 "Description of Business --
Competition," statements regarding the Company's belief that competition may
increase if competitors who have traditionally neglected the regional air
carrier market begin to focus on it; that the Company 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; and 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
5 "Market for Common Equity and Related Stockholder Matters -- Dividends," the
Company's intention to refrain from declaring dividends in the foreseeable
future; (v) in Item 6 "Management's Discussion and Analysis or Plan of Operation
-- Liquidity and Capital Resources," statements regarding the Company's belief
that it will continue to be in compliance with all covenants of its credit
facility; and that the Company will have adequate cash flow to meet its ongoing
operational needs, including required repayments under the credit facility; (vi)
in Item 6 "Management's Discussion and Analysis or Plan of Operation --
Outlook," statements regarding the Company's anticipation that two aircraft will
go back on lease during the second quarter of 2006 and three additional aircraft
coming off lease during the second quarter will have leases renewed; the
Company's belief that an aircraft subject to special purpose financing will have
its lease renewed by the lessee for an additional term; that replacement
financing will be found to repay the current financing on the balloon payment
date; and that if the replacement financing is not found, that the aircraft can
be sold for a price in excess of the financing amount; (vii) in Item 6
"Management's Discussion and Analysis or Plan of Operation -- Factors that May
Affect Future Results," statements regarding the Company's belief that it will
have sufficient cash to fund any required repayments under its credit facility
caused by borrowing base limitations as a result of assets scheduled to come off
lease in the near term; that it will have sufficient funds to pay increased
Sarbanes-Oxley compliance costs; and the Company's anticipated acquisition of
primarily used aircraft; and (viii) in Item 7 "Financial Statements -- Notes to
Consolidated Financial Statements", statements regarding the Company's
anticipation regarding delivery of a DHC-8 to a lessee in March 2006, and the
completion of a sale transaction for a Shorts SD 3-60 aircraft in March 2006.
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 financial status of the Company's customers,
foreign regional passenger airlines; lack of unanticipated increases in interest
rates; further disruptions to the air travel industry due to terrorist attacks;
increasing jet fuel costs; the Company's ability to find additional debt or
equity financing; the compliance of the Company's lessees with obligations under
their respective leases; 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. AeroCentury was formed in 1997.
Financial information for AeroCentury and its wholly-owned subsidiaries,
AeroCentury Investments II LLC ("AeroCentury II LLC"), AeroCentury Investments
IV LLC ("AeroCentury IV LLC") and AeroCentury Investments V LLC ("AeroCentury V
LLC") (collectively, the "Company"), is presented on a consolidated basis. All
intercompany balances and transactions have been eliminated in consolidation.
During the third quarter of 2005, the title to the aircraft which had been owned
by AeroCentury IV LLC was transferred to AeroCentury and AeroCentury IV LLC was
dissolved in the fourth quarter.
The business of the Company is managed by JetFleet Management Corp. ("JMC"),
pursuant to a management agreement between the Company and 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.
The Company is engaged in the business of investing in used regional aircraft
equipment leased to foreign and domestic regional air carriers and has been
engaged in such business since its formation. 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 Company may
purchase an asset already subject to a lease and assume 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 does not purchase an asset unless a potential lessee has been identified
and has 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 an acceptable overall on-lease rate for the
Company's assets.
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 of which are weighed in
determining 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 have
more than covered the Company's cash expenses, which consist mainly of
maintenance expense, financing interest payments, management fees, professional
fees and insurance.
The Company's management fees are based upon the size of the asset pool. Other
than the maintenance expense accrued when two aircraft were returned at lease
end in 2005, the majority of the maintenance expense incurred by the Company
during 2005 was either paid in cash during the year or will be paid during 2006.
As the Company has continued to use acquisition debt financing under its
revolving credit facility, which expires on October 31, 2007, interest expense
has become an increasingly larger portion of the Company's expenses. However,
each advance on the credit facility funds a portion of the acquisition of an
asset subject to a lease, and the lease revenue expected to be received with
respect to the asset is 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.
Insurance expense includes amounts paid for directors and officers insurance, as
well as aircraft insurance for periods when an aircraft is off lease. 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 maintenance expenses, interest expense, management fees,
professional fees and insurance and provide excess cash flow.
Competition
The Company competes for customers, who generally are 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 or new
leases of existing aircraft, all of which 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, 2005, the Company had three significant
customers, which accounted for 34%, 14% and 12%, respectively, of lease revenue.
Concentration of credit risk with respect to lease receivables will diminish in
the future only if the Company is able to lease additional assets or re-lease
assets currently 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, 2005, 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, 2005, the Company owned eleven deHavilland DHC-8s, three
deHavilland DHC-6s, one Shorts SD 3-60, fourteen Fokker 50s, two Saab 340As,
three Saab 340B and one turboprop engine.
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
------------------------------------------ ----------- ----------
Fiscal year ended December 31, 2005:
Fourth Quarter ................... $4.18 $2.90
Third Quarter..................... 4.50 3.26
Second Quarter.................... 4.40 2.87
First Quarter..................... 6.78 2.33
Fiscal year ended December 31, 2004:
Fourth Quarter.................... 3.20 2.41
Third Quarter..................... 2.45 2.05
Second Quarter.................... 3.14 2.32
First Quarter..................... 3.65 3.00
On March 9, 2006, the closing stock sale price on the AMEX was $3.78 per share.
Number of Security Holders
According to the Company's transfer agent, the Company had approximately 1,750
stockholders of record as of March 10, 2006. 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.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Overview
The Company is a lessor of turboprop aircraft and engines which are used by
customers pursuant to triple net operating leases. The acquisition of such
equipment is generally made using debt financing. The Company's profitability
and cash flow are dependent in large part upon its ability to acquire equipment,
obtain and maintain favorable lease rates on such equipment, and re-lease or
sell owned equipment that comes off lease. The Company is subject to the credit
risk of its lessees, both as to collection of rent and to performance by the
lessees of obligations for maintaining the aircraft. Since lease rates for
assets in the Company's portfolio generally decline as the assets age, the
Company's ability to maintain revenue and earnings over the medium and long term
is dependent upon the Company's ability to grow its asset portfolio.
The Company's principal expenditures are for interest costs on its financing,
management fees, and maintenance of its aircraft assets. Maintenance
expenditures are generally incurred only when aircraft are off lease, are being
prepared for re-lease, or require maintenance in excess of lease return
conditions.
The most significant non-cash expenses include accruals of maintenance costs to
be borne by the Company and aircraft depreciation, both of which are the result
of significant estimates. Maintenance expenses are estimated and accrued based
upon utilization of the aircraft. Depreciation is recognized based upon the
estimated residual value of the aircraft at the end of their estimated lives.
Deviation from these estimates could have a substantial effect on the Company's
cash flow and profitability.
Critical Accounting Policies, Judgments and Estimates
The discussion and analysis of the Company's financial condition and results of
operations are based upon the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and the related disclosure of
contingent assets and liabilities at the date of the financial statements.
Actual results may differ from these estimates under different assumptions or
conditions.
The Company's significant accounting policies are described in Note 1 to the
consolidated financial statements. The Company believes its most critical
accounting policies include the following: Impairment of Long-lived Assets;
Depreciation Policy, Maintenance Reserves and Accrued Costs; Revenue Recognition
and Allowance for Doubtful Accounts; and Accounting for Income Taxes.
a. Impairment of Long-lived Assets
The Company periodically reviews its portfolio of assets for impairment in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets." Such review
necessitates estimates of current market values, re-lease rents, residual values
and component values. The estimates are based on currently available market data
and third-party appraisals and are subject to fluctuation from time to time. The
Company initiates its review periodically, whenever events or changes in
circumstances indicate that the carrying amount of a long-lived asset may not be
recoverable. Recoverability of an asset is measured by comparison of its
carrying amount to the expected future undiscounted cash flows (without interest
charges) that the asset is expected to generate. Any impairment to be recognized
is measured by the amount by which the carrying amount of the asset exceeds its
fair market value. Significant management judgment is required in the
forecasting of future operating results which are used in the preparation of
projected undiscounted cash flows and should different conditions prevail,
material write downs may occur.
In 2005, the Company recorded an impairment charge of approximately $12,000 for
one of its aircraft, based on the estimated net sales proceeds pursuant to an
agreement to sell the aircraft. In accordance with its periodic review of its
portfolio of assets for impairment, based on the Company's cash flow analysis
and third party appraisals, the Company recorded no other provisions for
impairment for its aircraft in 2005.
b. Depreciation Policy
The Company's interests in aircraft and aircraft engines are recorded at cost,
which includes acquisition costs. The Company purchases only used aircraft. It
is the Company's policy to hold aircraft for approximately twelve years.
Depreciation is computed using the straight-line method over the twelve year
period to an estimated residual value based on appraisal. Decreases in the
market value of aircraft could not only affect the current value, discussed
above, but could also affect the assumed residual value. The Company
periodically obtains a residual value appraisal for its assets and,
historically, has not written down any estimated residuals.
c. 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 consolidated balance sheet include refundable and non-refundable
maintenance payments received from lessees. The Company periodically reviews
maintenance accruals for each of its aircraft 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 well
as the condition of the aircraft upon return or inspection. As a result of such
review, if it is probable that the Company has incurred costs for maintenance in
excess of amounts accrued, the Company records an expense for the additional
required maintenance.
Significant management judgment is required in determining aircraft condition
and estimating maintenance costs. Absent fixed price maintenance agreements,
these costs cannot be determined until such work is completed. Because of the
potential magnitude of maintenance costs, even slight changes in work scope may
have a material impact on operating results.
With respect to estimated maintenance costs, the Company has found its accruals
to be generally accurate. Nevertheless, the Company has incurred significant
maintenance expense in connection with two aircraft which were returned before
lease end during 2004 in a condition worse than required by the lease.
Specifically, the Company incurred maintenance expense of approximately $442,000
and $363,000 in 2004 and 2005, respectively, in connection with these aircraft.
d. Revenue Recognition and Allowance for Doubtful Accounts
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. The
Company estimates and charges to income a provision for bad debts based on its
experience in the business and with each specific customer, the level of past
due accounts, and its analysis of the lessee's overall financial condition. If
the financial condition of the Company's customers deteriorates, it could result
in actual losses exceeding the estimated allowances.
During 2003, in connection with a lessee's default, the Company recorded an
increase to the allowance for doubtful accounts of $480,000. Based on payment
histories, including this particular lessee's, the Company reversed a portion of
the allowance twelve months later. However, based on subsequent experience and
the Company's revised evaluation of the lessee's intention to make future
payments, the Company increased the allowance back to $480,000 at December 31,
2004. During 2005, the Company obtained a default judgment against the lessee in
the United States but, as a result of its evaluation of the cost/benefit of
enforcing it abroad and determination that collection is unlikely, the Company
wrote off the note on December 31, 2005.
During 2004, the former lessee of one of the Company's aircraft signed a note in
the amount of approximately $625,000, to be paid in 18 monthly installments. The
note was for rent and maintenance in excess of the security deposit held by the
Company. The Company received all payments due through June 30, 2005. The
Company had previously recorded a $250,000 allowance against the amount
receivable. Upon receiving notice that the lessee had filed for reorganization,
the Company recorded additional bad debt expense of approximately $88,000 during
the second quarter of 2005 to fully reserve the balance of the note. The Company
continued to monitor the lessee's reorganization proceedings, but determined
that collection of any amounts due under the note is unlikely and, therefore,
wrote off the note on December 31, 2005.
During 2005, the Company also recorded $79,000 of bad debt expense to fully
reserve the amount of foreign taxes due from a former lessee, which has been
recorded as other income, in 2005.
e. Accounting for Income Taxes
As part of the process of preparing the Company's consolidated financial
statements, management is required to estimate income taxes in each of the
jurisdictions in which the Company operates. This process involves estimating
the Company's current tax exposure under the most recent tax laws and assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in the consolidated balance sheet. Management
must also assess the likelihood that the Company's deferred tax assets will be
recovered from future taxable income, and, to the extent management believes it
is more likely than not that some portion or all of the deferred tax assets will
not be realized, the Company must establish a valuation allowance. To the extent
the Company establishes a valuation allowance or changes the allowance in a
period, the Company must reflect the corresponding increase or decrease within
the tax provision in the consolidated statement of operations.
Significant management judgment is required in determining the Company's future
taxable income for purposes of assessing the Company's ability to realize any
benefit from its deferred taxes. In the event that actual results differ from
these estimates or the Company adjusts these estimates in future periods, the
Company's operating results and financial position could be materially affected.
Results of Operations
a. Revenues
Operating lease revenue was approximately $2,391,000 higher in 2005 versus 2004,
primarily because of increased operating lease revenue from aircraft purchased
beginning in April 2004. This increase, totaling approximately $4,024,000 was
partially offset by decreases totaling $1,633,000, which were due primarily to
the sale of a pool of turboprop engines in December 2004 as well as longer
on-lease periods for certain aircraft in 2004 than 2005 and lower lease rates
for several aircraft in 2005.
Loss on sale of aircraft and aircraft engines was approximately $48,000 for the
year ended December 31, 2005 as a result of the sale of a deHavilland DHC-7 and
a Shorts SD 3-60. The DHC-7 had been written down to its estimated net sale
value at December 31, 2004; however, at the time of sale, the Company recognized
an additional loss of approximately $60,000 incurred subsequent to December 31,
2004. The sale of the Shorts SD 3-60 resulted in a gain of approximately
$12,000. Gain on sale of aircraft and aircraft engines was approximately
$1,748,000 for the year ended December 31, 2004 as a result of the sale of a
pool of twenty-four turboprop engines and the sale of an additional engine,
which resulted in gains of approximately $1,727,000 and $172,000, respectively.
These gains were partially offset by a $151,000 loss on sale of a deHavilland
DHC-7 aircraft.
Other income was approximately $2,001,000 higher in 2005 than in 2004, primarily
as a result of $1,902,000 of non-refundable maintenance reserves retained by the
Company which were recorded as income at lease end. The Company also recorded
income of approximately $79,000 for foreign taxes due from a former lessee. This
receivable was fully reserved at December 31, 2005.
b. Expense items
Depreciation was approximately $476,000 higher in 2005 versus 2004 and
management fees, which are calculated on the net book value of the aircraft
owned by the Company, were approximately $351,000 higher in 2005. These
increases were primarily because of purchases of aircraft beginning in April
2004 and during 2005, the effect of which was partially offset by sales of
assets in the fourth quarter of 2004 and in 2005.
Interest expense was approximately $1,064,000 higher in 2005 versus 2004
primarily as a result of higher market interest rates and a higher average
principal balance in 2005 compared to 2004.
Maintenance expense was approximately $1,452,000 higher in 2005 compared to
2004. In 2005, the Company retained non-refundable maintenance reserves when two
aircraft were returned to the Company at lease end and recorded such amounts as
other income, discussed above. Based on the condition of the aircraft at the
time of return, the Company accrued approximately $1,862,000 of maintenance
expense for which the Company is responsible. In 2005, the Company also accrued
approximately $442,000 of expense primarily to prepare two aircraft for
re-lease. In 2004, the Company accrued $390,000 in connection with the early
return of two aircraft, approximately $161,000 to prepare an aircraft for
re-lease and $296,000 based on its periodic review of the adequacy of its
maintenance accruals.
Professional fees and general and administrative expenses were approximately
$85,000 lower in 2005 versus 2004, primarily because of lower legal fees related
to the Company's leases in 2005.
The Company's insurance expense for off-lease aircraft and aircraft engines
varies depending on the type of aircraft and engines insured during each period
and the length of time each asset is insured. As a result of the combination of
assets insured during each year and the length of time each was insured,
insurance expense was approximately $24,000 higher in 2005 versus 2004.
During 2005, the Company recorded bad debt expense of approximately $88,000, to
fully reserve the balance of a note receivable from the former lessee of one of
the Company's aircraft, based on a notice received from the lessee that it had
filed for reorganization, and $79,000 to fully reserve the amount of foreign
taxes due from a former lessee which has been recorded as other income in 2005.
During 2004, the Company recorded bad debt expense of approximately $147,000 for
rent and reserves written off in connection with a lessee's early return of two
aircraft.
In 2005, the Company recorded an impairment charge of approximately $12,000 for
one of its aircraft, based on the estimated net sales proceeds pursuant to an
agreement to sell the aircraft. During 2004, the Company recorded an impairment
charge of approximately $463,000 for one of its aircraft, based on the Company's
cash flow analysis and third party appraisals, as well as an impairment charge
of approximately $193,000 for another aircraft, based on the estimated net sales
proceeds pursuant to an agreement to sell the aircraft in early 2005.
The Company's effective tax rates for the years ended December 31, 2005 and 2004
were approximately 43% and 34%, respectively. The change in rate was primarily a
result of the recognition of additional tax expense in connection with a
lessee's non-payment of foreign taxes in a prior year. The Company's effective
tax rate also increased as a result of recognition of tax expense related to
adjustments to the tax basis of disposed assets and decreased as a result of
recognition of tax benefits related to the reduced state tax rates.
Liquidity and Capital Resources
The Company is currently financing its assets primarily through credit facility
borrowings, special purpose financing and excess cash flow.
(a) Credit facility
In November 2004, the Company's $50 million credit facility was renewed through
October 31, 2005. In connection with the renewal, the LIBOR margin was set at
375 basis points through March 31, 2005, after which a margin of 275 to 375
basis points was determined by certain financial ratios. In November 2005, the
Company's credit facility was renewed through October 31, 2007. In connection
with the renewal, certain financial covenants were modified, including the
applicable margin, which was revised to 275 to 325 basis points, determined by
certain financial ratios.
During 2005, the Company repaid a total of $13,600,000 of the outstanding
principal under its credit facility. As of December 31, 2005, the Company was in
compliance with all covenants under its credit facility agreement, $49,996,000
was outstanding under the credit facility, and interest of $379,560 was accrued.
The Company is currently in compliance with all covenants and, based on its
current projections, the Company believes it will continue to be in compliance
with all covenants of its credit facility, but there can be no assurance of such
compliance. See "Factors That May Affect Future Results - 'Credit Facility
Obligations' and 'Risks of Debt Financing'," below.
The Company's interest expense in connection with the credit facility generally
moves up or down with prevailing interest rates, as the Company has not entered
into any interest rate hedge transactions for the credit facility indebtedness.
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 normally 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 and new lease rates are set as the aircraft is
re-leased.
(b) Special purpose financing
In September 2000, AeroCentury II LLC acquired a deHavilland DHC-8 aircraft
using cash and bank financing separate from its credit facility. The financing
resulted in a note obligation in the amount of $3,575,000, due April 15, 2006,
which bears interest at the rate of one-month LIBOR plus 3%. The note is
collateralized by the 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 financing also provides for a six month
remarketing period at the expiration or early termination of the lease. Payments
due on the financing are reduced during this remarketing period and the balloon
principal payment is deferred to the end of that period. The balance of the note
payable at December 31, 2005 was $1,630,900 and interest of $1,340 was accrued.
The Company was in compliance with all covenants of this note obligation as of
that date and is currently in compliance.
In November 2005, the Company refinanced two DHC-8 aircraft that were part of
its credit facility collateral base, using bank financing separate from its
credit facility. The aircraft were transferred to AeroCentury V LLC, a special
purpose LLC, which borrowed $6,400,000, due November 10, 2008, which principal
bears fixed interest at the rate 7.87%. The note is collateralized by the
aircraft and the Company's interest in AeroCentury V LLC and is non-recourse to
the Company. Payments due under the note consist of monthly principal and
interest through April 22, 2008, interest only from April 22, 2008 until the
maturity date, and a balloon principal payment due on the maturity date. The
balance of the note payable at December 31, 2005 was $6,316,780 and interest of
$12,430 was accrued. The Company was in compliance with all covenants of this
note obligation as of that date and is currently in compliance.
The availability of special purpose financing in the future will depend on
several factors including (1) the availability of funds to be used for the
equity portion of the financing, (2) the type of asset being financed, (3) the
creditworthiness of the underlying lessee and (4) continued compliance with
certain of the Company's credit facility covenants. The availability of funds
for the equity portion of the financing will be dependent on the Company's cash
flow, as discussed in "Cash Flow," below.
(c) Cash flow
The Company's primary source of revenue is lease rentals 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 customer will not be renewing its
lease, the Company immediately initiates marketing efforts to locate a potential
new lessee or purchaser for the aircraft. The goal of this procedure is to
reduce the time that an asset will be off lease. The Company's aircraft are
subject to leases with varying expiration dates through November 2010.
Management believes that the Company will have adequate cash flow to meet its
ongoing operational needs, including required repayments under its credit
facility, based upon its estimates of future revenues and expenditures. The
Company's expectations concerning such cash flows are based on existing lease
terms and rents, as well as numerous estimates, including (i) rents on assets to
be re-leased, (ii) sale proceeds of certain assets currently under lease, (iii)
the cost and anticipated timing of maintenance to be performed and (iv)
acquisition of additional aircraft and the lease thereof at favorable lease
terms. While the Company believes that the assumptions it has made in
forecasting its cash flow are reasonable in light of experience, actual results
could deviate from such assumptions. Among the more significant external factors
outside the Company's control that could have an impact on the accuracy of cash
flow assumptions are (i) an increase in interest rates that negatively affects
the Company's profitability and causes the Company to violate covenants of its
credit facility, requiring repayment of some or all of the amounts outstanding
under its credit facility, (ii) lessee non-performance or non-compliance with
lease obligations (which may affect credit facility collateral limitations as
well as revenue and expenses) and (iii) an unexpected deterioration of demand
for aircraft equipment.
(i) Operating activities
The Company's cash flow from operations for the year ended December 31, 2005
versus 2004 increased by approximately $6,400,000. The change in cash flow is a
result of changes in several cash flow items during the period, including
principally the following:
Lease rents, maintenance reserves and security deposits
Payments received from lessees for rent were approximately $2,268,000 higher in
the year ended December 31, 2005 versus 2004, due primarily to the effect of
increased lease revenue from aircraft purchased beginning in April 2004 and
during 2005, which was partially offset by the effect of lower lease rates for
several aircraft in 2005. In addition, the Company received approximately
$210,000 more of cash payments for deferred rent during 2005 compared to 2004.
Although increased demand generally in the turboprop market has caused lease
rates to stabilize and, in some cases, rise, it cannot be predicted that rental
rates on aircraft to be re-leased will not decline, so that, absent additional
acquisitions by the Company, aggregate lease revenues for the current portfolio
could decline over the long term.
Payments received from lessees for maintenance reserves increased by
approximately $793,000 in 2005 versus 2004, reflecting principally an increase
in the number of aircraft owned by the Company, an increase in usage by lessees,
and reserves received from the sellers of the aircraft purchased by the Company
during the year.
Security deposits received increased by approximately $1,013,000 in 2005 versus
2004, primarily because of the cash deposits received in connection with
acquisitions of aircraft in 2005, net of deposits refunded to lessees at lease
expiration or applied to past due amounts.
Expenditures for maintenance
Expenditures for maintenance were approximately $1,141,000 lower in 2005 versus
2004 primarily as a result of higher payments during 2004 for maintenance
performed to ready two of the Company's aircraft for remarketing. The amount of
expenditures for maintenance in future periods will be dependent on the amount
and timing of maintenance paid from lessee maintenance reserves held by the
Company and the off-lease status of the Company's aircraft.
Expenditures for interest
Expenditures for interest expense increased by approximately $1,134,000 in the
year ended December 31, 2005 versus 2004, primarily as a result of higher
average interest rates and a higher average principal balance in 2005. Interest
expenditures in future periods will be a product of prevailing interest rates
and the outstanding principal balance on financings, which may be influenced by
future acquisitions and/or required repayments resulting from changes in the
collateral base.
Expenditures for management fees
Expenditures for management fees increased by approximately $260,000 in 2005
versus 2004, as a result of aircraft purchases since April 2004.
Expenditures for professional fees and general and administrative
expenses
Expenditures for professional fees and general and administrative expenses
decreased by approximately $192,000 in 2005 versus 2004, primarily as a result
of lower legal expenses.
Expenditures for prepaid expenses
Expenditures for prepaid expenses increased by approximately $518,000 in 2005
versus 2004 primarily as a result of deposits paid for equipment to be installed
on several of the Company's aircraft.
Income taxes
Income tax payments were approximately $1,864,000 higher in 2005 compared to
2004 as a result of the 2005 payment of the 2004 tax expense. The 2005 higher
tax payment resulted from the gain on sale of a pool of twenty-four turboprop
engines in late 2004.
(ii) Investing activities
The increase in cash flow used by investing activities in 2005 versus 2004 was
primarily due to the purchase of aircraft with a combined higher total purchase
price in 2005 than in 2004, the effect of which was partially offset by the sale
of three aircraft in 2005 and the receipt of sales proceeds in early 2005 from a
sale of a pool of turboprop engines in the fourth quarter of 2004.
(iii) Financing activities
The Company borrowed approximately $8,491,000 more in 2005 versus 2004 for
aircraft financing and repaid approximately $6,613,000 more of its outstanding
debt in 2005. In 2005, the Company's borrowings included $6,400,000 for the
refinancing of two aircraft and repayments included $5,000,000 which was repaid
from the refinancing proceeds.
Outlook
The Company's future growth will depend on the availability of additional
financing for acquisitions of leased assets which, due to rising interest rates,
will need to be leased at increased rental rates to offset the anticipated
decreased lease rates resulting from future re-leases of the Company's current
portfolio. The Company is continuing to pursue additional sources of acquisition
financing.
The Company currently has two aircraft and one turboprop engine off lease. The
Company is seeking remarketing opportunities for the off-lease assets, and
anticipates these aircraft going back on-lease during the second quarter of
2006. Three additional aircraft have lease terms expiring in the second quarter
of 2006, all of which the Company expects will be renewed. If, however, any of
these leases is not renewed, the Company may be required to make principal
repayments under its credit facility due to collateral base covenant
restrictions. See "Factors that May Affect Future Results - Credit Facility
Obligations" below.]
The Company owns one deHavilland DHC-8 aircraft that is held in a special
purpose subsidiary entity and financed by a lender separate from the credit
facility. The financing balloon principal payment is due and payable in full in
April 2006, but the financing provides for a six month remarketing period at the
expiration or early termination of the lease. Payments due on the financing are
reduced during this period and the balloon payment is deferred to the end of the
six month period. The Company anticipates that the aircraft lease will be
renewed for an additional term, and that it will be able to find replacement
financing for the aircraft by the balloon payment due date, so that the aircraft
can continue to be leased and held a special purpose subsidiary. If the Company
is unable to find such replacement financing, the Company anticipates that it
will be able to sell the aircraft for a price in excess of the repayment amount
of the financing.
The Company continually monitors the financial condition of its lessees to
prevent unanticipated creditworthiness issues, and where necessary, works with
lessees to remind them of, and ensure continued compliance with, both monetary
and non-monetary obligations under their respective leases. Currently, the
Company is closely monitoring the performance of two lessees with a total of
three aircraft under lease. The Company continues to work closely with these
lessees to ensure compliance with their current obligations. During 2005, the
Company incurred bad debt expense related to amounts owed by two former lessees.
This expense materially affected the Company's financial performance. If any of
the Company's current lessees are unable to meet their lease obligations, the
Company's future results could be materially impacted. Any weakening in the
aircraft industry may also affect the performance of lessees that currently
appear to the Company to be creditworthy. See "Factors that May Affect Future
Results - General Economic Conditions," below.
Factors that May Affect Future Results
Credit Facility Obligations. The Company is obligated to make repayment of
principal under the credit facility in order to maintain certain debt ratios
with respect to its assets in the borrowing base. Assets that come off lease and
remain off-lease for a period of time are removed from the borrowing base. The
Company believes it will have sufficient cash funds to make any payment that
arises due to borrowing base limitations caused by assets scheduled to come off
lease in the near term. The Company's belief is based on certain assumptions
regarding renewal of existing leases, a lack of extraordinary interest rate
increases, continuing profitability, 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 the Company's
assumptions will prove to be correct. If the assumptions are incorrect (for
example, if an asset in the collateral base unexpectedly goes off lease for an
extended period of time) and the Company has not obtained an applicable waiver
or amendment of applicable covenants from its lenders to mitigate the situation,
the Company may have to sell a significant portion of its portfolio in order to
maintain compliance with covenants or face default on its credit facility.
Concentration of Lessees and Aircraft Type. Currently, the Company's five
largest customers are located in Taiwan, the Caribbean (two customers), Norway
and Sweden, and currently account for approximately 13%, 12%, 10%, 12% and 11%,
respectively, of the Company's monthly lease revenue. A lease default by or
collection problems with one of these customers could have a disproportionate
negative impact on the Company's financial results, and therefore, the Company's
operating results are especially sensitive to any negative developments with
respect to these customers in terms of lease compliance or collection. Such
concentration of lessee credit risk will diminish in the future only if the
Company is able to lease additional assets to new lessees.
The acquisition of eight Fokker 50 aircraft and six DHC-8 aircraft in 2004 and
2005 made these two aircraft types the dominant aircraft types in the portfolio,
constituting 14 and 11, respectively, of the 34 aircraft and representing 38%
and 49%, respectively, based on book value. As a result, a change in the
desirability and availability of either or both of these types of aircraft,
which would in turn affect valuations of such aircraft, would have a
disproportionately large impact on the Company's portfolio value. Such aircraft
type concentration will diminish if the Company acquires additional assets of
other types. Conversely, acquisition of additional Fokker 50 or DHC-8 aircraft
will increase the Company's risks related to its concentration of those aircraft
types.
Risks of Debt Financing. The Company's use of acquisition financing under its
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 credit facility, the loans are secured by the Company's existing
assets as well as the specific assets acquired with each financing. In addition
to payment obligations, the credit facility also requires the Company to comply
with certain financial covenants, including a requirement of positive annual
earnings, interest coverage and net worth ratios. Any default under the credit
facility, if not waived by the lenders, could result in foreclosure upon not
only the asset acquired using such financing, but also the existing assets of
the Company securing the loan. It is possible that subordinated debt may be
issued by the Company to fund acquisitions if the credit facility is not
increased. Such financing may have separate, more restrictive covenants, and may
magnify the adverse consequences of a lessee default.
Interest Rate Risk. The Company's current credit facility and special purpose
subsidiary indebtedness carry a floating interest rate based upon either the
lender's prime rate or a floating LIBOR rate. Lease rates, generally, but not
always, move with interest rates, since market demand for the asset also affects
lease rates. Because lease rates are fixed at the origination of leases,
interest rate increases during the term of a lease have no effect on existing
lease payments. Therefore, if interest rates rise significantly, and there is
relatively little lease origination by the Company following such rate
increases, the Company could experience lower net earnings. Further, even if
significant lease origination occurs following such rate increases, if the
contemporaneous aircraft market forces result in lower or flat rental rates, the
Company could experience lower net earnings as well.
It appears the economy is continuing a period of sustained increasing interest
rates, particularly with respect to the rates for short-term borrowings, upon
which the Company's financing rates are based. The Company has not hedged its
interest rate obligations. Consequently, if an interest rate increase were great
enough, the Company might not be able to generate sufficient lease revenue to
meet its interest payment and other obligations and comply with the net earnings
covenant of its credit facility.
Need for Additional Financing. As the Company's credit facility is fully drawn,
in order to continue increasing its asset base, it will require an increase of
the credit facility and/or additional debt financing. The Company is currently
actively seeking financing, but there is no assurance that it will be able to
obtain such financing on terms that are acceptable to the Company. In the
absence of such financing, the Company will likely be able to meet its
short-term cash flow needs, but over the long term, its revenues will decrease
consistently as assets age and lease rates decrease.
Increased Compliance Costs. Due to new Sarbanes-Oxley Act of 2002 requirements
applicable to the Company for the year ending December 31, 2007 relating to
internal controls and auditors' responsibilities to review and opine on those
controls, the Company anticipates that the fees and expenses in connection with
audit services are likely to significantly increase beginning in the second half
of 2006. The increase will generally arise from increased auditor
responsibilities as well as an increased scope of examination of the Company
which will broaden to include the Company's internal controls. Audit fees are
expected to increase significantly and there may be additional costs arising
from mandated testing of internal controls that will begin to take place in late
2006 and will be required to be performed on a continual basis thereafter. The
exact amount of these costs can only be determined as the Company proceeds
further with its analysis of current internal controls. The Company, however,
anticipates that it will have sufficient funds to pay for the increased
compliance cost.
Lessee Credit Risk. If a customer defaults upon its lease obligations, 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, Section 1110 of the Bankruptcy Code would automatically prevent
the Company from exercising any remedies for a period of 60 days. After the
60-day period has passed, the lessee must agree to perform the obligations and
cure any defaults, or the Company will 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. Most of the Company's lessees are foreign and
not subject to U.S. bankruptcy laws but there may be similar applicable foreign
bankruptcy debtor protection schemes available to foreign carriers.
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. The 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
lessen. This could result in lower lease rates and values for the Company's
existing turboprop aircraft.
Risks Related to Regional Air Carriers. Because the Company has concentrated its
existing leases, and intends to concentrate on future leases, to regional air
carriers, it is subject to additional risks. 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. 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 enhancements,
if it deems them necessary. There is no assurance, however, that such
enhancements will be available or that if obtained they will fully protect the
Company from losses resulting from a lessee default or bankruptcy. Also, 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. During 2005, the Company incurred bad
debt expense related to amounts owed by two former lessees. This expense
materially affected the Company's financial performance. If any of the Company's
current lessees are unable to meet their lease obligations, the Company's future
results could be materially impacted.
Reliance on JMC. All management of the Company is performed by JMC under a
management agreement which is in the ninth 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 has ultimate control and
supervisory responsibility over all aspects of the Company and owes fiduciary
duties to the Company and its stockholders. The Board has no control over the
internal operations of JMC, but the Board does have the ability and
responsibility to manage the Company's relationship with JMC and the performance
of JMC's obligations to the Company under the management agreement, as it would
have for any third party service provider to the Company. 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 the Company and JHC, the parent company of
JMC.
The JMC management agreement may be terminated if JMC defaults on its
obligations to the Company. However, the agreement provides for liquidated
damages in the event of its wrongful termination 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 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.
JMC has acted as 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. In the first quarter of 2002, AeroCentury IV defaulted on
certain obligations to noteholders. In June 2002, the indenture trustee for
AeroCentury IV's noteholders repossessed AeroCentury IV's assets and took over
management of AeroCentury IV's remaining assets. JetFleet III defaulted on its
bond obligation of $11,076,350 in May 2004. The indenture trustee for JetFleet
III bondholders repossessed JetFleet III's unsold assets in late May 2004.
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 leases for such equipment expire, the Company's business, financial
condition, cash flow, ability to service debt and results of operations could be
adversely affected.
Furthermore, an asset impairment charge against the Company's earnings may
result from the occurrence of unexpected adverse changes that impact the
Company's estimates of expected cash flows generated from such asset.. The
Company periodically reviews long-term assets for impairments, in particular,
when events or changes in circumstances indicate the carrying value of an asset
may not be recoverable. An impairment loss is recognized when the carrying
amount of an asset is not recoverable and exceeds its fair value. The Company
may be required to recognize asset impairment charges in the future as a result
of a prolonged weak economic environment, challenging market conditions in the
airline industry or events related to particular lessees, assets or asset types.
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 or repossession 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 do 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 make it more difficult for
the Company to recover an aircraft in the event of a default by a foreign
lessee.
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 that 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. However, the Company 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 that JMC's
reputation 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.
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 the Company's
aircraft assets. It is, however, not clear to what extent such statutory
protection would be available to the Company, and the United States Aviation 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.
General Economic Conditions. The Company's business is dependent upon general
economic conditions and the strength of the travel and transportation industry.
The industry has experienced a severe cyclical downturn which began in 2001.
There are signs that the industry is beginning to recover from the downturn, but
it is unclear whether any recovery will be a sustained one. Any recovery could
be stalled or reversed by any number of events or circumstances, including the
global economy slipping back into recession, or specific events related to the
air travel industry, such as further weakening of the air carrier or travel
industries as a result of terrorist attacks, or an increase in operational or
labor costs. Recent spikes in oil prices, if they persist, may have a negative
effect on airline profits and increase the likelihood of weakening results for
airlines that have not hedged aircraft fuel costs, and in the most extreme
cases, may initiate or accelerate the failure of many already marginal carriers.
Since regional carriers are generally not as well-capitalized as major air
carriers, any economic setback in the industry may result in the increased
possibility of an economic failure of one or more of the Company's lessees,
particularly since many carriers are undertaking expansion of capacity to
accommodate the recovering air passenger traffic. If lessees experience
financial difficulties, this could, in turn, affect the Company's financial
performance.
During any periods of economic contraction, carriers generally reduce capacity,
in response to lower passenger loads, and as a result there is a reduced demand
for aircraft and a corresponding decrease in market lease rental rates and
aircraft values. 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
write-down of the value on the Company's balance sheet is appropriate.
Furthermore, as older leases expire and are replaced by lease renewals or
re-leases at decreasing lease rates, the lease revenue of the Company on its
existing portfolio is likely to decline, with the magnitude of the decline
dependent on the length of the downturn and the depth of the decline in market
rents.
Economic downturns can affect specific regions of the world exclusively. As the
Company's portfolio is not entirely globally diversified, a localized downturn
in one of the key regions in which the Company leases aircraft (e.g., Europe or
Asia) could have a significant adverse impact on the Company.
Possible Volatility of Stock Price. The market price of the Company's common
stock could be subject to fluctuations in response to the Company's operating
results, 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 Company's shares. Consequently, a single or small number of
trades could result in a market fluctuation not related to any business or
financial development concerning the Company.
Item 7. Financial Statements.
(a) Financial Statements and Schedules
(1) Financial statements for the Company:
Report of Independent Registered Accounting Firm,
PricewaterhouseCoopers LLP
Consolidated Balance Sheet as of December 31, 2005
Consolidated Statements of Operations for the Years Ended December 31, 2005
and 2004
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2005 and 2004
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005 and 2004
Notes to Consolidated 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 Registered Accounting Firm
To the Stockholders of AeroCentury Corp.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of AeroCentury
Corp. and subsidiaries at December 31, 2005, and the results of their operations
and their cash flows for the years ended December 31, 2005 and 2004 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 audits. We conducted our audits of these statements in
accordance with auditing standards of the Public Company Accounting Oversight
Board (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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Francisco, California
March 7, 2006
AeroCentury Corp.
Consolidated Balance Sheet
ASSETS
December 31,
2005
Assets:
Cash and cash equivalents $ 618,910
Accounts receivable, net of allowance for doubtful accounts of $79,420 1,128,280
Aircraft and aircraft engines held for lease,
net of accumulated depreciation of $17,422,780 93,763,250
Prepaid expenses and other 1,036,260
-------------
Total assets $ 96,546,700
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 1,174,790
Notes payable and accrued interest 58,337,010
Maintenance reserves and accrued costs 13,367,730
Security deposits 3,124,910
Prepaid rent 447,060
Deferred taxes 1,057,310
Taxes payable 47,800
-------------
Total liabilities 77,556,610
-------------
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 5,671,350
-------------
19,494,160
Treasury stock at cost, 63,300 shares (504,070)
-------------
Total stockholders' equity 18,990,090
-------------
$ 96,546,700
=============
The accompanying notes are an integral part of these statements.
AeroCentury Corp.
Consolidated Statements of Operations
For the Years
Ended December 31,
2005 2004
------ ------
Revenues:
Operating lease revenue $ 11,386,950 $ 8,995,720
(Loss)/gain on sale of aircraft and aircraft engines (48,130) 1,748,140
Other income 2,160,500 159,980
----------------- -----------------
13,499,320 10,903,840
----------------- -----------------
Expenses:
Depreciation 4,030,950 3,554,620
Interest 3,484,970 2,420,580
Management fees 2,339,750 1,988,290
Maintenance 2,298,750 846,660
Professional fees and general and administrative 497,570 582,870
Insurance 328,600 304,450
Bad debt expense 167,520 146,750
Provision for impairment in value of aircraft 12,180 656,650
----------------- -----------------
13,160,290 10,500,870
----------------- -----------------
Income before taxes 339,030 402,970
Tax provision 146,120 136,600
----------------- -----------------
Net income $ 192,910 $ 266,370
================= =================
Weighted average common shares outstanding 1,543,257 1,543,257
================= =================
Earnings per share $ 0.13 $ 0.17
================= =================
The accompanying notes are an integral part of these statements.
AeroCentury Corp.
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2005 and 2004
Common Paid-in Retained Treasury
Stock Capital Earnings Stock Total
--------------- ------------- ------------- --------- ---------------
Balance,
December 31, 2003 $ 1,610 $ 13,821,200 $ 5,212,070 $ (504,070) $ 18,530,810
Net income - - 266,370 - 266,370
------------ ------------- ------------ ------------ ------------
Balance,
December 31, 2004 1,610 13,821,200 5,478,440 (504,070) 18,797,180
Net income - - 192,910 - 192,910
------------ ------------- ------------ ------------ ------------
Balance,
December 31, 2005 $ 1,610 $ 13,821,200 $ 5,671,350 $ (504,070) $ 18,990,090
============ ============= ============ ============ ============
The accompanying notes are an integral part of these statements.
AeroCentury Corp.
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
2005 2004
----- ----
Operating activities:
Net income $ 192,910 $ 266,370
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss/(gain) on sale of aircraft and aircraft engines 48,130 (1,748,140)
Depreciation 4,030,950 3,554,620
Provision for impairment in value of aircraft 12,180 656,650
Deferred taxes (40,270) (1,686,870)
Change in operating assets and liabilities:
Accounts receivable (84,920) (5,095,550)
Reversal of allowance on note receivable (3,610) (10,750)
Prepaid expenses and other (626,390) 289,590
Accounts payable and accrued expenses 511,980 383,730
Accrued interest on notes payable 104,420 131,310
Maintenance reserves and accrued costs 3,075,210 1,556,460
Security deposits 1,349,620 343,740
Prepaid rent 42,130 206,170
Unearned income (2,590) 2,590
Taxes payable (1,655,910) 1,703,710
------------ -----------
Net cash provided by operating activities 6,953,840 553,630
------------ -----------
Investing activities:
Payments received on note receivable 210,080 90,950
Issuance of note receivable - (374,790)
Proceeds from disposal of assets 9,034,650 7,320,660
Purchase of aircraft and aircraft engines (27,226,270) (22,000,550)
------------ -----------
Net cash used by investing activities (17,981,540) (14,963,730)
------------ -----------
Financing activities:
Issuance of notes payable 23,191,000 14,700,000
Repayment of notes payable (13,948,020) (7,334,900)
------------ -----------
Net cash provided by financing activities 9,242,980 7,365,100
------------ -----------
Net decrease in cash and cash equivalents (1,784,720) (7,045,000)
Cash and cash equivalents, beginning of period 2,403,630 9,448,630
------------ -----------
Cash and cash equivalents, end of period $ 618,910 $ 2,403,630
============ ===========
During the years ended December 31, 2005 and 2004, the Company paid interest
totaling $3,423,910 and $2,289,530, respectively, and income taxes totaling
$1,865,380 and $1,080, respectively.
The accompanying notes are an integral part of these statements.
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2005
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 wholly-owned subsidiaries,
AeroCentury Investments II LLC ("AeroCentury II LLC"), AeroCentury Investments
IV LLC ("AeroCentury IV LLC") and AeroCentury Investments V LLC ("AeroCentury V
LLC") (collectively, the "Company"), is presented on a consolidated basis. All
intercompany balances and transactions have been eliminated in consolidation.
During the third quarter of 2005, the title to the aircraft which had been owned
by AeroCentury IV LLC was transferred to AeroCentury and AeroCentury IV LLC was
dissolved in the fourth quarter.
(b) 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 from the
date of acquisition, as cash equivalents.
(c) Aircraft and Aircraft Engines Held For Lease
The Company's interests in aircraft and aircraft engines are recorded
at cost, which includes acquisition costs. The Company purchases only used
aircraft. It is the Company's policy to hold aircraft for approximately twelve
years unless market conditions necessitate earlier disposition. Depreciation is
computed using the straight-line method over the twelve year period to an
estimated residual value based on appraisal. Decreases in the market value of
aircraft could not only affect the current value, but could also affect the
assumed residual value. The Company periodically obtains a residual value
appraisal for its assets and, historically, has not written down any estimated
residuals.
(d) Impairment of Long-lived Assets
The Company periodically reviews its portfolio of assets for impairment
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets." Such review
necessitates estimates of current market values, re-lease rents, residual values
and component values. The estimates are based on currently available market data
and are subject to fluctuation from time to time. The Company initiates its
review periodically, whenever events or changes in circumstances indicate that
the carrying amount of a long-lived asset may not be recoverable. Recoverability
of an asset is measured by comparison of its carrying amount to the expected
future undiscounted cash flows (without interest charges) that the asset is
expected to generate. Any impairment to be recognized is measured by the amount
by which the carrying amount of the asset exceeds its fair market value.
Significant management judgment is required in the forecasting of future
operating results which are used in the preparation of projected undiscounted
cash flows and, should different conditions prevail, material write downs may
occur.
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2005
1. Organization and Summary of Significant Accounting Policies (continued)
(e) Loan Commitment and Related Fees
To the extent that the Company is required to pay loan commitment fees
and legal fees in order to secure debt, such fees are amortized over the life of
the related loan.
(f) Maintenance Reserves and Accrued Costs
Maintenance costs under the Company's triple net leases are generally
the responsibility of the lessees. The accompanying consolidated balance sheet
reflects liabilities for maintenance reserves and accrued costs, which include
refundable and non-refundable maintenance payments received from lessees. At
December 31, 2005, the Company's maintenance accruals consisted of the
following:
Refundable maintenance reserves $ 542,610
Non-refundable maintenance reserves 9,474,690
Accrued costs 3,350,430
------------
$ 13,367,730
============
Maintenance reserves received by the Company are accounted for as a
liability, which is reduced when maintenance work is performed during the lease.
Maintenance reserves which are refundable to the lessee are refunded after all
return conditions specified in the lease and, in some cases, any other payments
due under the lease, are satisfied. Any refundable reserves retained by the
Company to satisfy return conditions are reclassified to the Company's own
maintenance payable account at lease end. Maintenance reserves which are
non-refundable to the lessee are recorded as income at lease end. If an aircraft
is returned early, any collected reserves are reclassified to the Company's own
maintenance payable account.
The Company periodically reviews its maintenance reserves and
maintenance accruals 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 well as the condition of the
aircraft upon return or inspection. As a result of such review, when it is
probable that the Company has incurred costs for maintenance in excess of
amounts accrued, the Company records an expense for the additional work to be
performed. Such costs include maintenance such as engine and propeller
overhauls, structural inspections and work to comply with airworthiness
directives.
When an aircraft is sold, any remaining accrual is reversed and
included in the Company's gain or loss on sale calculation. During the years
ended December 31, 2005 and 2004, $636,540 and $475,010, respectively, of excess
accruals were so included.
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2005
1. Organization and Summary of Significant Accounting Policies (continued)
(f) Maintenance Reserves and Accrued Costs (continued)
Additions to and deductions from the Company's accruals during the
years ended December 31, 2005 and 2004 for maintenance work were as follows:
For the Years Ended December 31,
2005 2004
--------- --------
Additions:
Charged to expense $ 2,303,800 $ 886,670
Charged to other -
Amounts for uncollected maintenance reserves - 52,260
Reclassification of reserves collected from lessees
to the Company's own liability account 100,880 310,030
------------ ------------
2,404,680 1,248,960
------------ ------------
Deductions:
Paid for previously accrued maintenance 680,470 2,101,880
Reversals of over-accrued maintenance 33,760 -
Included in (loss)/gain on sale of aircraft and aircraft engines 636,540 475,010
------------ ------------
1,350,770 2,576,890
------------ ------------
Net increase/(decrease) in accrued maintenance costs,
in excess of amounts received under the leases 1,053,910 (1,327,930)
Balance, beginning of period 2,296,520 3,624,450
------------ ------------
Balance, end of period $ 3,350,430 $ 2,296,520
============ ============
(g) Security deposits
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 received by the Company are refundable to the
lessee at the end of the lease, upon satisfaction of all lease terms.
(h) Income Taxes
As part of the process of preparing the Company's consolidated
financial statements, management is required to estimate income taxes in each of
the jurisdictions in which the Company operates. This process involves
estimating the Company's current tax exposure under the most recent tax laws and
assessing temporary differences resulting from differing treatment of items for
tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in the consolidated balance sheet. Management
must also assess the likelihood that the Company's deferred tax assets will be
recovered from future taxable income, and, to the extent management believes it
is more likely than not that some portion or all of the deferred tax assets will
not be realized, the Company must establish a valuation allowance. To the extent
the Company establishes a valuation allowance
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2005
1. Organization and Summary of Significant Accounting Policies (continued)
(h) Income Taxes (continued)
or changes the allowance in a period, the Company must reflect the corresponding
increase or decrease within the tax provision in the consolidated statement of
operations.
(i) Revenue Recognition and Allowance for Doubtful Accounts
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. The Company estimates and charges to income a provision for bad
debts based on its experience in the business and with each specific customer,
the level of past due accounts, and its analysis of the lessees' overall
financial condition. If the financial condition of the Company's customers
deteriorates, it could result in actual losses exceeding the estimated
allowances.
(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 Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable for making judgments that are not
readily apparent from other sources.
The most significant estimates with regard to these financial
statements are the residual values of the aircraft, the useful lives of the
aircraft, the amount and timing of cash flow associated with each aircraft that
are used to evaluate impairment, if any, accrued maintenance costs in excess of
amounts received from lessees, the amounts recorded as bad debt allowances and
accounting for income taxes.
(k) Comprehensive Income
The Company does not have any comprehensive income other than the
revenue and expense items included in the consolidated statements of operations.
As a result, comprehensive income equals net income for the years ended December
31, 2005 and 2004.
(l) Recent Accounting Pronouncements
In January 2003, the FASB issued interpretation FIN No. 46,
Consolidation of Variable Interest Entities ("FIN 46"), which was subsequently
revised in December 2003 ("FIN 46R"). FIN 46R requires a variable interest
entity to be consolidated by a company if that company is the primary
beneficiary of the entity. A company is a primary beneficiary if it is subject
to a majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns or both.
FIN 46R also requires disclosures about variable interest entities that a
company is not required to consolidate but in which it has a significant
variable interest. FIN 46R was applicable immediately to variable interest
entities created after January 31, 2003, and is effective for all other existing
entities in financial statements for periods ending after December 15, 2004.
Certain of the disclosure requirements apply in all financial statements issued
after December 31, 2003, regardless of when the variable interest entity was
established. The Company has no interest in any variable interest entity and,
therefore, the full adoption of FIN 46R had no effect on the Company's
consolidated financial condition or results of operations.
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2005
1. Organization and Summary of Significant Accounting Policies (continued)
(l) Recent Accounting Pronouncements (continued)
SFAS 146, Accounting for Costs Associated with Exit or Disposal
Activities, was effective for activities that were initiated after December 31,
2002. SFAS 146 addresses significant issues regarding the recognition,
measurement and reporting of costs that are associated with exit and disposal
activities, including restructuring activities that were previously accounted
for under Emerging Issues Task Force ("EITF") No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). The adoption of SFAS 146
had no effect on the Company's consolidated financial condition or results of
operations.
SFAS 153, Exchanges of Nonmonetary Assets, addresses the measurement of
exchanges of nonmonetary assets. It eliminates the exception from fair value
measurement for nonmonetary exchanges of similar productive assets in paragraph
21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and
replaces it with an exception for exchanges that do not have commercial
substance. SFAS 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The provisions of SFAS 153 are
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. The adoption of SFAS 153 had no effect on the Company's
consolidated financial condition or results of operations.
In March 2005, the FASB issued interpretation FIN No. 47, Accounting
for Conditional Asset Retirement Obligations ("FIN 47"). FIN 47 clarifies that
the term conditional asset retirement obligation as used in SFAS 143, Accounting
for Asset Retirement Obligations, refers to a legal obligation to perform an
asset retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. FIN 47 is applicable to fiscal years ending after December 15, 2005.
Because FIN 47 retains the fundamental provisions of SFAS 143, the adoption of
FIN 47 is not expected to have a material effect on the Company's consolidated
financial condition or results of operations.
(m) Reclassifications
Certain prior year amounts within the footnotes have been reclassified
to conform to the current year presentation.
2. Aircraft and Aircraft Engines Held for Lease
At December 31, 2005, the Company owned eleven deHavilland DHC-8s,
three deHavilland DHC-6s, one Shorts SD 3-60, fourteen Fokker 50s, two Saab
340As, three Saab 340B and one turboprop engine which are held for lease. During
2005, the Company acquired three DHC-8 aircraft with lease terms of 36 months, a
Saab 340B aircraft with a lease term of 45 months, two Saab 340B aircraft with
lease terms of 60 months and four Fokker 50 aircraft with lease terms of 48
months. The Company sold a deHavilland DHC-7 aircraft, which resulted in a loss
of approximately $60,000, a Fairchild Metro III aircraft, which had been written
down to its net sale value during the year and, therefore, resulted in no gain
or loss at the time of sale, and a Shorts SD 3-60 aircraft, which resulted in a
gain of approximately $12,000. The Company also extended the leases for several
of its aircraft. Two deHavilland DHC-8 aircraft were returned at lease end in
the fourth quarter of 2005, one of which was re-leased in the same period. As
discussed in Note 10, the second deHavilland DHC-8 aircraft was re-leased in
January 2006 and a sales agreement was signed for the Company's Shorts SD 3-60
aircraft in March 2006.
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2005
2. Aircraft and Aircraft Engines Held for Lease (continued)
At December 31, 2005, the Company's two Saab 340A aircraft and one
spare turboprop engine were off lease. The aircraft are undergoing maintenance
and the Company is seeking re-lease or sale opportunities for the off-lease
assets.
In accordance with its periodic review of its portfolio of assets for
impairment, based on the Company's cash flow analysis and third party
appraisals, the Company recorded no provisions for impairment for its aircraft
in 2005.
3. 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 1% and 10% of the Company's operating lease revenue was
derived from lessees domiciled in the United States during 2005 and 2004,
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,
2005 2004
------ ------
Asia $ 5,593,300 $ 3,703,150
Europe and United Kingdom 3,679,520 2,577,450
Caribbean 1,503,420 1,180,780
South America 495,860 490,510
United States and Canada 71,100 1,043,830
Africa 43,750 -
--------------- --------------
$ 11,386,950 $ 8,995,720
=============== ==============
Net Book Value at
December 31,
2005
----
Europe and United Kingdom $ 34,605,200
Asia 33,837,460
Caribbean 10,910,390
South America 4,306,250
Off lease 4,101,670
United States and Canada 3,119,510
Africa 2,882,770
---------------
$ 93,763,250
===============
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2005
4. 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.
For the year ended December 31, 2005, the Company had three significant
customers, which accounted for 34%, 14% and 12%, respectively, of lease revenue.
For the year ended December 31, 2004, the Company had four significant
customers, which accounted for 24%, 16%, 11% and 10%, respectively, of lease
revenue.
At December 31, 2005, the Company had significant receivables from four
lessees, which accounted for 38%, 17%, 13% and 13%, respectively, of the
Company's total receivables.
During 2005, the Company recorded a receivable of approximately $79,000
for foreign taxes due from a former lessee. This receivable was fully reserved
at December 31, 2005.
As of December 31, 2005, minimum future operating lease revenue
payments receivable under noncancelable leases were as follows:
Year
----
2006 $ 12,340,360
2007 10,810,910
2008 5,720,260
2009 2,863,440
2010 567,000
---------------
$ 32,301,970
===============
5. Notes Receivable
In connection with a lease default during the third quarter of 2003, a
former lessee made all payments due on a $480,000 note through December 31, 2004
but, as a result of a late payment and subsequent non-payment, and the Company's
evaluation of the debtor's intention to make future payments, the Company fully
reserved the note balance of $370,090. During 2005, the Company obtained a
default judgment against the lessee in the United States but, as a result of its
evaluation of the cost/benefit of enforcing it abroad and determination that
collection is unlikely, the Company wrote off the note on December 31, 2005.
During 2004, the former lessee of one of the Company's aircraft signed
a note for rent and maintenance in excess of its security deposit in the amount
of approximately $625,000, to be paid in 18 monthly installments. The Company
received all payments due through June 30, 2005. The Company had previously
recorded a $250,000 allowance against the amount receivable. Upon receiving
notice that the lessee had filed for reorganization, the Company recorded
additional bad debt expense of $88,110 during the second quarter of 2005 to
fully reserve the note balance. The Company continued to monitor the lessee's
reorganization proceedings, but determined that collection of any amounts due
under the note is unlikely and, therefore, wrote off the note on December 31,
2005.
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2005
6. Notes Payable and Accrued Interest
(a) Credit facility
In 2004, the Company's credit facility was renewed through October 31,
2005. In connection with the renewal, the LIBOR margin was set at 375 basis
points through March 2005, after which a margin of 275 to 375 basis points is
determined by certain financial ratios.
In November 2005, the Company's credit facility was renewed through
October 31, 2007. In connection with the renewal, certain financial covenants
were modified, including the applicable margin, which was revised to a range of
275 to 325 basis points, determined by certain financial ratios.
During 2005, the Company repaid a total of $13,600,000 of the
outstanding principal under its credit facility. As of December 31, 2005, the
Company was in compliance with all covenants under its credit facility
agreement, $49,996,000 was outstanding under the credit facility, and interest
of $379,560 was accrued.
(b) Special purpose financing
In September 2000, AeroCentury II LLC acquired a deHavilland DHC-8
aircraft using cash and bank financing separate from its credit facility. The
financing resulted in a note obligation in the amount of $3,575,000, due April
15, 2006, which bears interest at the rate of one-month LIBOR plus 3%. The note
is collateralized by the 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 financing also provides for a
six month remarketing period at the expiration or early termination of the
lease. Payments due on the financing are reduced during this remarketing period
and the balloon principal payment is deferred to the end of that period. The
balance of the note payable at December 31, 2005 was $1,630,900 and interest of
$1,340 was accrued. As of December 31, 2005, the Company was in compliance with
all covenants of this note obligation.
In November 2005, the Company refinanced two DHC-8 aircraft that had
been part of the collateral base for its credit facility. The financing was
provided by a separate bank and was provided to a special purpose subsidiary to
which the aircraft were transferred. The financing resulted in a note obligation
in the amount of $6,400,000, due November 10, 2008, which bears interest at the
rate 7.87%. The note is collateralized by the aircraft and is non-recourse to
the Company. Payments due under the note consist of monthly principal and
interest through April 22, 2008, interest only from April 22, 2008 until the
maturity date, and a balloon principal payment due on the maturity date. The
balance of the note payable at December 31, 2005 was $6,316,780 and interest of
$12,430 was accrued. As of December 31, 2005, the Company was in compliance with
all covenants of this note obligation.
7. Stockholder Rights Plan
On April 8, 1998, the Company's Board of Directors adopted a
stockholder rights plan granting a dividend of one stock purchase right for each
share of the Company's common stock outstanding as of April 23, 1998. The rights
will become exercisable only upon the occurrence of certain events specified in
the plan, including the acquisition of 15% of the Company's outstanding common
stock by a person or group. Each right entitles the holder to purchase one
one-hundredth of a share of Series A Preferred Stock of the Company at an
exercise price of $66.00 per one-one-hundredth of a share. Each right entitles
the holder, other than an "acquiring person," to acquire shares of the Company's
common stock at a 50% discount to the then prevailing market price. The
Company's Board of Directors may redeem outstanding rights at a price of $0.01
per right.
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2005
8. Income Taxes
The items comprising income tax expense are as follows:
For the Years Ended December 31,
2005 2004
------ ------
Current tax provision:
Federal $ 184,030 $ 1,725,900
State 2,360 97,570
--------------- --------------
Current tax provision 186,390 1,823,470
--------------- --------------
Deferred tax benefit:
Federal (9,210) (1,622,060)
State (31,060) (64,810)
--------------- --------------
Deferred tax benefit (40,270) (1,686,870)
--------------- --------------
Total provision for income taxes $ 146,120 $ 136,600
=============== ==============
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,
2005 2004
------ ------
Income tax provision at statutory federal income tax rate $ 115,270 $ 137,010
State tax provision, net of federal benefit 120 4,960
Federal tax adjustment 47,600 -
Tax rate differences (29,230) (5,370)
Other 12,360 -
--------------- --------------
Total income tax provision $ 146,120 $ 136,600
=============== ==============
The tax expense related to the federal tax adjustment resulted from the
recognition of additional tax expense in connection with a former lessee's
non-payment of foreign taxes. As a result of the recognition of additional tax
expense, the Company's effective tax rate increased.
Tax rate differences resulted from a decrease in the Company's
effective state tax rates due to changes in state apportionment percentages.
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2005
8. Income Taxes (continued)
Temporary differences and carry-forwards that give rise to a
significant portion of deferred tax assets and liabilities as of December 31,
2005 are as follows:
Deferred tax assets:
Deferred maintenance $ 1,578,560
Maintenance reserves 2,774,130
Prepaid rent and other 154,160
---------------
Deferred tax assets 4,506,850
Deferred tax liabilities:
Depreciation on aircraft and aircraft engines (5,427,360)
Other (136,800)
---------------
Net deferred tax liabilities $ (1,057,310)
===============
No valuation allowance is deemed necessary, as the Company has
concluded that, based on an assessment of all available evidence, it is more
likely than not that future taxable income will be sufficient to realize the tax
benefits of all the deferred tax assets on the balance sheet.
9. Related Party Transactions
The Company has no employees. Its 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 $2,339,750 and $1,988,290
during the years ended December 31, 2005 and 2004, respectively. The Company
incurred acquisition fees totaling $954,900 and $800,000, payable to JMC, during
2005 and 2004, respectively. The Company recorded remarketing fees totaling
$73,250 and $275,500 to JMC in connection with the sale of aircraft in 2005 and
2004, respectively.
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2005
10. Subsequent Events
In January 2006, pursuant to a lessee extension option, the Company
extended the lease for one of its Fokker 50 aircraft for 18 months.
In January 2006, the Company signed 36-month leases with a regional
carrier in the Caribbean for two of its deHavilland DHC-8 aircraft, one of which
was returned at lease end in December 2005 and the other of which is expected to
be returned at lease end in March 2006. One aircraft was delivered to the lessee
in January 2006 and the other is scheduled for delivery in March 2006.
In February 2006, another of the Company's deHavilland DHC-8 aircraft
was returned at lease end. The Company has a signed term sheet to re-lease the
aircraft to a current customer and delivery is expected to occur in March 2006.
In March 2006, the Company agreed to the early termination of the lease
for its Shorts SD 3-60 aircraft in exchange for the receipt of all amounts due
from the lessee through the termination date. The Company has signed an
agreement to sell the aircraft and expects to complete the transaction in March
2006 at a gain of approximately $350,000.
Item 8. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.
None.
Item 8A. Controls and Procedures.
Quarterly evaluation of the Company's Disclosure Controls and Internal Controls.
As of the end of the period covered by this report, the Company evaluated the
effectiveness of the design and operation of its "disclosure controls and
procedures" ("Disclosure Controls"), and its "internal controls over 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 Securities and Exchange Commission ("SEC")
require that in this section of the 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. Attached as exhibits to this report 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 report 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 (the "Exchange Act"), such as this report, is recorded, processed,
summarized and reported within the time periods specified in the SEC's 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
consolidated 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 errors 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 report.
In the course of the Controls Evaluation, the CEO and CFO 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 item 5 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 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 there has been no
significant change in Internal Controls that occurred during our most recent
fiscal quarter that has materially affected or is reasonably likely to
materially affect our Internal Controls.
Conclusions. Based upon the Controls Evaluation, the Company's CEO and CFO have
concluded that, (i) the Company's Disclosure Controls are effective to ensure
that the information required to be disclosed by the Company in the reports that
it files under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Commission's rules and forms and then
accumulated and communicated to Company management, including the CEO and CFO,
as appropriate to make timely decisions regarding required disclosures, and (ii)
that the Company's Internal Controls are effective to provide reasonable
assurance that the Company's consolidated financial statements are fairly
presented in conformity with generally accepted accounting principles.
Item 8B. Other Information.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Information relating to our board of directors and executive officers, including
the independence of the audit committee and audit committee financial expert,
will be incorporated by reference from the Company's definitive proxy statement
("the "2006 Proxy Statement") for its annual stockholders' meeting to be held on
April 27, 2006 in the section entitled "Information Regarding the Company's
Directors and Officers."
The Company has adopted a code of business conduct and ethics, or code of
conduct. The code of conduct qualifies as a "code of ethics" within the meaning
of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated
thereunder. A copy of the code of conduct is available on the Company's website
at www.aerocentury.com or upon written request to the Investor Relations
Department, 1440 Chapin Avenue, Suite 310, Burlingame, California 94010. To the
extent required by law, any amendments to, or waivers from, any provision of the
code will be promptly disclosed publicly. To the extent permitted by such
requirements, we intend to make such public disclosure on our website in
accordance with SEC rules.
Item 10. Executive Compensation.
Incorporated by reference to the section of the 2006 Proxy Statement entitled
"Information Regarding the Company's Directors and Officers -- Employee
Compensation."
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Incorporated by reference to the section of the 2006 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 2006 Proxy Statement entitled
"Related Party Transactions."
Item 13. Exhibits.
(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 24, 2003, incorporated
by reference to Exhibit 10.1 to the Report on Form
10-KSB for the fiscal year ended December 31, 2003.
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 Certificate of Designation of the Company dated
April 15, 1998, incorporated by reference to exhibit
3.2 toReport on Form 10-KSB for the fiscal year ended
December 31, 1998.
10.7 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.
10.8 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.
10.9 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.
10.10 Third 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 June
28, 2003, incorporated by reference to Exhibit 10.1
to the Report on Form 8-K filed with the Securities
and Exchange Commission on July 1, 2003.
10.11 Fourth Amendment to Amended and Restated Credit
Agreement between National City Bank, as agent, and
California Bank & Trust, dated August 28, 2003,
incorporated by reference to Exhibit 10.1 to the
Report on Form 8-K filed with the Securities and
Exchange Commission on August 28, 2003.
10.12 Fifth 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 as of
August 28, 2003, incorporated by reference to Exhibit
10.1 to the Report on Form 8-K filed with the
Securities and Exchange Commission on October 1,
2003.
10.13 Sixth 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 2, 2004, incorporated by reference to Exhibit
10.1 to the Report on Form 8-K filed with the
Securities and Exchange Commission on January 2,
2004.
10.14 Seventh Amendment to Amended and Restated Credit
Agreement between the Company, National City Bank, as
agent, and National City Bank, California Bank &
Trust California Bank & Trust and First Bank dba
First Bank & Trust, as lenders, dated August 30,
2004, incorporated by reference to Exhibit 10.1 to
the Report on Form 8-K filed with the Securities and
Exchange Commission on August 31, 2004
10.15 Eighth Amendment to Amended and Restated Credit
Agreement between the Company, National City Bank, as
agent, and National City Bank, California Bank &
Trust California Bank & Trust and First Bank dba
First Bank & Trust, as lenders, dated October 28,
2004, incorporated by reference to Exhibit 10.1 to
the Report on Form 8-K filed with the Securities and
Exchange Commission on October 29, 2004.
10.16 Ninth Amendment to Amended and Restated Credit
Agreement between the Company, National City Bank, as
agent, and National City Bank, California Bank &
Trust California Bank & Trust and First Bank dba
First Bank & Trust, as lenders, dated November 4,
2004, incorporated by reference to Exhibit 10.1 to
the Report on Form 8-K filed with the Securities and
Exchange Commission on November 8, 2004.
* 10.18 Form of Employment Agreement between the Company and
Marc J. Anderson dated December 19, 2005.
10.19 Tenth Amendment to Amended and Restated Credit
Agreement between the Company, National City Bank, as
agent, and National City Bank, California Bank &
Trust California Bank & Trust and First Bank dba
First Bank & Trust, as lenders, dated October 31,
2005
10.20 Eleventh Amendment to Amended and Restated Credit
Agreement between the Company, National City Bank, as
agent, and National City Bank, California Bank &
Trust California Bank & Trust and First Bank dba
First Bank & Trust, as lenders, dated November 9,
2005, incorporated by reference to Exhibit 10.1 to
the Report on Form 8-K filed with the Securities and
Exchange Commission on November 9, 2005.
10.21 Twelfth Amendment to Amended and Restated Credit
Agreement between the Company, National City Bank, as
agent, and National City Bank, California Bank &
Trust California Bank & Trust and First Bank dba
First Bank & Trust, as lenders, dated December 19,
2005, incorporated by reference to Exhibit 10.1 to
the Report on Form 8-K filed with the Securities and
Exchange Commission on December 20, 2005.
21 Subsidiaries of the Company.
31.1 Certification of Neal D. Crispin, Chief Executive
Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Toni M. Perazzo, Chief Financial
Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Neal D. Crispin, Chief Executive
Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Toni M. Perazzo, Chief Financial
Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
--------------------
* Indicates management contract or compensatory plan or
arrangement.
Item 14. Principal Accountant Fees and Services.
Incorporated by reference to the section of the 2006 Proxy Statement entitled
"Information Regarding Auditors - Audit Fees."
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 10, 2006.
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-KSB 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 10, 2006.
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 (Principal Financial and Accounting Officer)
Toni M. Perazzo
/s/ Marc J. Anderson Director, Chief Operating Officer, Senior Vice President
-------------------------------
Marc J. Anderson
/s/ Thomas G. Hiniker Director
--------------------------------
Thomas G. Hiniker
/s/ Thomas W. Orr Director
--------------------------------
Thomas W. Orr
/s/ Evan M. Wallach Director
--------------------------------
Evan M. Wallach