-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NQo5N7ac2WnxlXlM2f3cFvcZhUYEfa7pp3mzcopEIXyc1cM9Jy7FCRTlwiK9SCnI /86Q5vtv106peeDrOud9Bw== 0001036848-00-000008.txt : 20000329 0001036848-00-000008.hdr.sgml : 20000329 ACCESSION NUMBER: 0001036848-00-000008 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AEROCENTURY CORP CENTRAL INDEX KEY: 0001036848 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 943263974 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: SEC FILE NUMBER: 001-13387 FILM NUMBER: 580637 BUSINESS ADDRESS: STREET 1: 1440 CHAPIN AVE STE 310 CITY: BURLINGAME STATE: CA ZIP: 94010 BUSINESS PHONE: 6503401888 MAIL ADDRESS: STREET 1: 1440 CHAPIN AVENUE SUITE 310 CITY: BURLINGAME STATE: CA ZIP: 94010 FORMER COMPANY: FORMER CONFORMED NAME: AEROMAX INC DATE OF NAME CHANGE: 19970331 DEF 14A 1 PROXY STATEMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 14A (Rule 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14 INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. *) Filed by the Registrant /X/ Filed by a Party other than the Registrant / / Check the appropriate box: / / Preliminary Proxy Statement / / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) / x / Definitive Proxy Statement / / Definitive Additional Materials / / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12 AEROCENTURY CORP. ------------------------------------------------------------------- (Name of Registrant as Specified in Its Charter) ------------------------------------------------------------------- Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): /X/ No fee required. / / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: - -------------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: - --------------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): N/A - - ------------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: N/A ------------------------------------------------------------------------- (5) Total Fee Paid: - --------------------------------------------------------------------------- / / Fee paid previously with preliminary materials. / / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount previously paid: - -------------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: - - ------------------------------------------------------------------------- (3) Filing Party: - - ------------------------------------------------------------------------- (4) Date Filed: - - ------------------------------------------------------------------------- AEROCENTURY CORP. NOTICE OF 2000 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 28, 2000 TO OUR STOCKHOLDERS: You are cordially invited to attend the 2000 Annual Meeting of Stockholders of AeroCentury Corp. (the "Company"), which will be held at the Hiller Aviation Museum, 601 SkyWay Road, San Carlos, California at 6:00 p.m. on April 28, 2000, for the following purposes: 1. To elect two directors to the Board of Directors; 2. To consider and vote upon a proposal to ratify the selection of Arthur Andersen LLP as independent public accountants for the Company for the fiscal year ending December 31, 2000; and 3. To act upon such other business as may properly come before the meeting or any adjournment or postponement thereof. These matters are more fully described in the Proxy Statement accompanying this Notice. The Board of Directors has fixed the close of business on March 1, 2000, as the record date for determining those stockholders who will be entitled to vote at the meeting. The stock transfer books will not be closed between the record date and the date of the meeting. A quorum comprising the holders of the majority of the outstanding shares of Common Stock of the Company on the record date must be present or represented for the transaction of business at the Annual Meeting. Accordingly, it is important that your shares be represented at the meeting. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE. Your proxy may be revoked at any time prior to the time it is voted. If you plan to attend the meeting, please call the Company's Investor Relations Department at 650-340-1888, so that your name can be placed on the guest list at the Hiller Aviation Museum entrance. Please read the proxy material carefully. Your vote is important and the Company appreciates your cooperation in considering and acting on the matters presented. Sincerely yours, /s/ Neal D. Crispin Neal D. Crispin CHAIRMAN OF THE BOARD March 28, 2000 Burlingame, California PROXY STATEMENT FOR 2000 ANNUAL MEETING OF STOCKHOLDERS OF AEROCENTURY CORP. TO BE HELD ON APRIL 28, 2000 This Proxy Statement is furnished in connection with the solicitation by the Board of Directors of AEROCENTURY CORP. (the "Company") of proxies to be voted at the 2000 Annual Meeting of Stockholders, which will be held at 6:00 p.m. on April 28, 2000 at the Hiller Aviation Museum, 601 SkyWay Road, San Carlos, California, or at any adjournments or postponements thereof, for the purposes set forth in the accompanying Notice of 2000 Annual Meeting of Stockholders. This Proxy Statement and the proxy card were first mailed to stockholders on or about March 28, 2000. The Company's 2000 Annual Report is being mailed to stockholders concurrently with this Proxy Statement. The 2000 Annual Report is not to be regarded as proxy soliciting material or as a communication by means of which any solicitation of proxies is to be made. VOTING RIGHTS AND SOLICITATION The close of business on March 1, 2000 was the record date for stockholders entitled to notice of and to vote at the 2000 Annual Meeting of Stockholders. As of that date, the Company had 1,606,557 shares of Common Stock, $0.001 par value (the "Common Stock"), issued and outstanding, of which 63,300 are held by the Company as treasury stock. All of the shares of the Company's Common Stock outstanding on the record date, except for treasury stock, are entitled to vote at the 2000 Annual Meeting of Stockholders, and stockholders of record entitled to vote at the meeting will have one vote for each share of Common Stock so held with regard to each matter to be voted upon. If your shares are registered directly in your name with the Company's transfer agent, Continental Stock Transfer & Trust Company, you are considered, with respect to those shares, the "stockholder of record" and these proxy materials are being sent directly to you by the Company. As the stockholder of record, you have the right to grant your voting proxy directly to the Company or to vote in person at the meeting. The Company has enclosed a proxy card for your use which should be returned to the Company. If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the "beneficial owner" of shares held "in street name" and these proxy materials were forwarded to you by your broker or nominee who is considered, with respect to those shares, the stockholder of record. As the beneficial owner, you have the right to direct your broker on how to vote and are also invited to attend the meeting. However, since you are not the stockholder of record, you may not vote those shares in person at the meeting. Your broker or nominees has enclosed a voting instruction card for your use, which must be returned to your broker or nominee. Shares of the Company's Common Stock represented by proxies in the accompanying form which are properly executed and returned to the Company will be voted at the 2000 Annual Meeting of Stockholders in accordance with the instructions of the stockholder of record contained therein. In the absence of contrary instructions, shares represented by such proxies will be voted FOR the election of each of the directors as described herein under "Proposal 1: Election of Directors" and FOR ratification of the selection of accountants as described herein under "Proposal 2: Ratification of Selection of Independent Public Accountants." Management does not know of any matters to be presented at this Annual Meeting other than those set forth in this Proxy Statement and in the Notice accompanying this Proxy Statement. If other matters should properly come before the meeting, the proxy holders will vote on such matters in accordance with their best judgment. Any stockholder of record has the right to revoke his or her proxy at any time before it is voted at the meeting. Election of directors by stockholders shall be determined by a plurality of the votes cast by the stockholders of record entitled to vote at the election present in person or represented by proxy. Abstentions and broker non-votes are each included in the determination of the number of shares present for quorum purposes. Abstentions are counted in tabulations of the votes cast on proposals presented to stockholders, whereas broker non-votes are not counted for purposes of determining whether a proposal has been approved. The entire cost of soliciting proxies will be borne by the Company. Proxies will be solicited principally through the use of the mails, but, if deemed desirable, may be solicited personally or by telephone, telegraph or special letter by officers and regular Company employees for no additional compensation. Arrangements may be made with brokerage houses and other custodians, nominees and fiduciaries to send proxies and proxy material to the beneficial owners of the Company's Common Stock, and such persons may be reimbursed for their expenses. PROPOSAL 1 ELECTION OF DIRECTORS Two of the Company's six directors will be elected at the 2000 Annual Meeting of Stockholders. The nominees for the Board of Directors are set forth below. The proxy holders intend to vote all proxies received by them in the accompanying form for the nominees for director listed below, unless instructions to the contrary are marked on the proxy. In the event that a nominee is unable or declines to serve as a director at the time of the 2000 Annual Meeting of Stockholders, the proxies will be voted for any nominee who shall be designated by the present Board of Directors to fill the vacancy. In the event that additional persons are nominated for election as directors, the proxy holders intend to vote all proxies received by them for the nominees listed below. As of the date of this Proxy Statement, the Board of Directors is not aware of any nominee who is unable or will decline to serve as a director. The term of office of each person elected as a director will continue until the 2003 Annual Meeting of Stockholders or until the director's successor has been elected. Nominees To Board Of Directors Mr. Marc J. Anderson, age 63. Mr. Anderson has been a member of the Company's Board of Directors since its inception in 1997. Mr. Anderson is the Company's Chief Operating Officer and Senior Vice President. He holds the same officer positions with JetFleet Management Corp. ("JMC"). Prior to joining JMC in 1994, Mr. Anderson was an aviation consultant (1992 to 1994) and prior to that spent seven years (1985 to 1992) as Senior Vice President-Marketing for PLM International, a transportation equipment leasing company. He was responsible for the acquisition, modification, leasing and remarketing of all aircraft. Prior to PLM, Mr. Anderson served as Director-Contracts for Fairchild Aircraft Corp.; Director of Aircraft Sales for Fairchild SAAB Joint Venture; and Vice President, Contracts for SHORTS Aircraft USA, Inc. Prior to that, Mr. Anderson was employed with several airlines in various roles of increasing responsibility beginning in 1959. Mr. Thomas W. Orr, age 66. Mr. Orr has served on the Company's Board of Directors since 1997, and was also, during that time, a member of the Audit Committee of the Board of Directors. Mr. Orr is currently a partner at the accounting firm of Bregante + Company LLP, where he has been a partner since joining that firm in 1992. Prior to that, beginning in 1986, Mr. Orr was Vice President, Finance, at Scripps League Newspapers, Inc. Beginning in 1958, Mr. Orr was in the audit department of Arthur Young & Company, where he retired as a partner in 1986. Mr. Orr received his Bachelor's degree in Business Administration, with distinction, (Accounting major) from the University of Minnesota. He is a member of the American Institute of Certified Public Accountants, the California Society of Certified Public Accountants, and a former member of the California State Board of Accountancy. THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ELECTION OF ALL OF THE ABOVE NOMINEES FOR ELECTION AS DIRECTORS. PROPOSAL 2 RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS The firm of Arthur Andersen LLP served as independent public accountants for the Company for the fiscal year ended December 31, 1999. The Board of Directors desires the firm to continue in this capacity for the current fiscal year. Accordingly, a resolution will be presented at the meeting to ratify the selection of Arthur Andersen LLP by the Board of Directors as independent public accountants to audit the accounts and records of the Company for the fiscal year ending December 31, 2000, and to perform other appropriate services. In the event that stockholders fail to ratify the selection of Arthur Andersen LLP, the Board of Directors would reconsider such selection. A representative of Arthur Andersen LLP will be present at the Annual Meeting to respond to appropriate questions and to make a statement if such representative desires to do so. THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS INDEPENDENT PUBLIC ACCOUNTANTS. INFORMATION REGARDING THE COMPANY'S DIRECTORS AND OFFICERS Current Board Of Directors The following directors have terms expiring at the Company's 2000 Annual Stockholder Meeting: Marc J. Anderson and Thomas W. Orr. They have been nominated for election to the Board of Directors. For their biographical information, see "PROPOSAL 1: ELECTION OF DIRECTORS," above. The following directors have terms expiring at the Company's 2001 Annual Stockholder Meeting: Mr. Neal D. Crispin, age 54. Mr. Crispin is Chairman of the Board and President of the Company. He is a member of the Executive committee of the Board and has served on the Board since its inception in 1997. He is also President and Chairman of CMA Consolidated, Inc. ("CMA") and JMC. Prior to forming CMA in 1983, Mr. Crispin spent 2 years as Vice President-Finance of an oil and gas company. Previously, Mr. Crispin was a manager with Arthur Young & Co., Certified Public Accountants. Prior to joining Arthur Young & Co., Mr. Crispin served as a management consultant, specializing in financial consulting. Mr. Crispin is the husband of Toni M. Perazzo, a director and officer of JMC and the Company. He received a Bachelor's Degree in Economics from the University of California at Santa Barbara and a Master's Degree in Business Administration (specializing in Finance) from the University of California at Berkeley. Mr. Crispin, a CPA, is a member of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants. Mr. Evan J. Wallach, age 45. Mr. Wallach is Vice President, Finance of C-S Aviation. He is a member of the Audit Committee and has served on the Board since 1997. From 1996 to 1998, he was President and Chief Executive Officer of Global Airfinance Corporation. He has specialized in aircraft and airline financing over the past seventeen years, having held senior level positions with The CIT Group (1994 to 1996), Bankers Trust Company (1992 to 1994), Kendall Capital Partners (1990 to 1992), Drexel Burnham Lambert (1987 to 1990) and American Express Aircraft Leasing (1985 to 1987). Mr. Wallach received a Bachelor's Degree in Political Science from State University of New York at Stony Brook and a Master's Degree in Business Administration from the University of Michigan. The following directors have terms expiring at the Company's 2002 Annual Stockholder Meeting: Mr. Maurice J. Averay, age 69. Mr. Averay has been an aviation consultant since 1996 and has served on the Board since 1997. From 1995 to 1996 he was a full-time consultant to Saab Aircraft of America and its parent with respect to marketing and new aircraft development. From 1990 to 1995, he was Senior Vice President of the Sales and Marketing team of Saab Aircraft of America responsible for North and South American turboprop airliner sales. Prior to that Mr. Averay was Vice President of Sales Support for Saab Aircraft International, Ltd.; Sales Engineering Manager for Fairchild Aircraft, Inc., San Antonio, Texas; Vice President, Planning, for Chautauqua Airlines, Jamestown, New York, a U.S. Airways commuter associate; and Vice President of Shorts Aircraft USA, Inc. Mr. Averay holds a Bachelor of Science in Aero Engineering from the University of Bristol, United Kingdom. Ms. Toni M. Perazzo, age 53. Ms. Perazzo is a member of the Audit and Executive Committees of the Board of Directors and has served on the Board since its inception in 1997. She is the Company's Vice President-Finance and Secretary and has held these same positions with JMC since 1994, and CMA since 1990. Prior to joining CMA in 1990, she was Assistant Vice President for a savings and loan, controller of an oil and gas syndicator and a senior auditor with Arthur Young & Co., Certified Public Accountants. Ms. Perazzo is the wife of Neal D. Crispin, a director and officer of JMC and the Company. She received her Bachelor's Degree from the University of California at Berkeley, and her Master's Degree in Business Administration from the University of Southern California. Ms. Perazzo, a CPA, is a member of the California Society of Certified Public Accountants and the American Institute of Certified Public Accountants. Board Meetings And Committees The Board of Directors of the Company held a total of four meetings during the fiscal year ended December 31, 1999. Each director attended every meeting of the Board and every meeting held by all committees of the Board on which the director served. The Company has an Audit Committee and an Executive Committee of the Board of Directors. There is no compensation or nominating committee or committee performing the functions of such committees. The Audit Committee was formed pursuant to a written charter approved by the Board of Directors. The Audit Committee meets with the Company's financial management and its independent public accountants to review internal financial information, audit plans and results, and financial reporting procedures. This committee currently consists of Thomas W. Orr, Chairman, Evan J. Wallach and Toni M. Perazzo. Of the three directors on the Audit Committee, only one, Toni M. Perazzo, is not "independent" as defined under the American Stock Exchange Company Guide. The Audit Committee held two meetings during the 1999 fiscal year, and has held one meeting in the 2000 fiscal year to date. The Executive Committee has the authority to acquire, dispose of and finance investments for the Company and execute contracts and agreements, including those related to the borrowing of money by the Company, and generally exercise all other powers of the Board of Directors except for those which require action by all the directors or the independent directors under the Certificate of Incorporation or the Bylaws of the Company, or under applicable law. The Executive Committee currently consists of three directors, which include Neal D. Crispin, Chairman, Toni M. Perazzo, and Marc J. Anderson. Director Compensation Non-employee members of the Board are each paid an annual fee of $14,000 and are reimbursed for all reasonable out-of-pocket costs incurred in connection with their attendance at such meetings. Non-employee members also receive $1,000 annually for each committee membership. Board members who are officers of the Company do not receive any compensation for Board or committee membership. Officers And Key Employees For biographies of Neal D. Crispin, President & Chairman of the Board, Marc J. Anderson, Chief Operating Officer & Senior Vice President, and Toni M. Perazzo, Vice President-Finance & Secretary, see " Board of Directors" above. Listed below are officers and key employees of JetFleet Management Corp., the Company's management company, who in their capacity as officers and/or employees of JMC are responsible for the management of various aspects of the Company's business: Mr. Andre Berenfeld, Vice President, Contracts, age 46. Mr. Berenfeld is responsible for the administration of aircraft leases, marketing agreements and vendor agreements for the Company and JMC. Mr. Berenfeld has 19 years of aviation industry experience in a variety of assignments in the engineering, technical management and finance fields. Prior to joining the Company, he held various positions of increasing responsibility with Citicorp (1992 to 1995), and before that, with PLM International, United Airlines, and the General Electric Company. Mr. Berenfeld has Bachelor of Science degrees in Electrical Engineering and Mechanical Engineering from the University of Brussels, and a Master's Degree in Business Administration from the University of Pennsylvania, Wharton School of Business. Mr. Frank Duckstein, Vice President, Remarketing, age 45. Mr. Duckstein has been in charge of remarketing for JMC since joining JMC in 1995. From 1989 to 1995, Mr. Duckstein served as Director of Marketing for PLM International, a transportation equipment leasing company. While at PLM, he was responsible for sales and remarketing, market research and development, both domestically and internationally, of PLM's corporate and commuter aircraft, as well as its helicopter fleet. Previously, he was with the following international and regional airlines operating within Europe and the U.S. with responsibility for operation, market development and sales: Direct Air (Berlin, Germany); Air Berlin (Berlin, Germany); and Aeroamerica (Berlin, Germany). Mr. Duckstein attended the Technical University of Berlin, majoring in Economics. Ms. Polly Prelinger, Vice President, Marketing, age 42. Ms. Prelinger is in charge of research and market development for the Company and JMC. Prior to joining JMC in 1998, Ms. Prelinger was Vice President-Sales and Marketing for two years with Fairchild Aircraft Incorporated, a major commuter aircraft manufacturer. During the period 1987 to 1996, Ms. Prelinger was at PLM International, a diversified equipment leasing company, where she held positions of Director, Research and Market Development and Vice President, Aircraft Marketing. Ms. Prelinger holds a Bachelor of Arts degree in Russian Studies from the University of Michigan. Christopher B. Tigno, General Counsel, age 38. Mr. Tigno is responsible for all legal matters of the Company and JMC and its related companies, including supervision of outside counsel, documentation of aircraft asset acquisition transactions, and corporate and securities matters. He is also General Counsel for CMA. He joined JMC and CMA in 1996. He was most recently employed as Senior Counsel with the firm of Wilson, Ryan & Campilongo (1992 to 1996), and prior to that was associated with Fenwick & West and Morrison & Foerster. Mr. Tigno received his Juris Doctor degree from the University of California, Boalt Hall School of Law and was admitted to the California Bar in 1986. He also holds a Bachelor's Degree in Chemical Engineering from Stanford University. Employment Contracts No compensation was paid by the Company to its officers in 1999, as the Company had engaged JetFleet Management Corp. as the management company under the Management Agreement in effect since 1997. The officers of the Company are officers of JMC, and received their compensation from JMC. The cash compensation received by Neal Crispin from JMC including bonuses, for 1999 was $63,000 and is expected to be $100,000 in 2000. The cash compensation received by Ms. Perazzo from JMC including bonuses for 1999 was $32,000 and is expected to be $85,000 in 2000. The only executive officer of JMC whose compensation exceeds $100,000 is Marc J. Anderson, Sr. Vice President & Chief Operating Officer, whose salary and bonus was $155,000 in 1999 and is expected to be $192,600 in 2000. On April 23, 1998, the Company entered into an Employment Agreement with Neal D. Crispin which will become effective in the event that either (i) the Company terminates the Management Agreement with JMC or (ii) there is a change in control of the voting securities of the Company. In either of those events, the Company would employ Mr. Crispin for a five year term as President of the Company. Mr. Crispin would receive a signing bonus of $500,000 plus 5% of the outstanding capitalization of the Company, and receive an annual salary of $250,000. Mr. Crispin would be eligible for an annual minimum performance bonus of twice his annual salary. The agreement also provides for severance payments if the Company terminates his employment for reasons other than "for cause" or disability, or the Company terminates employment for enumerated "good reasons." Following a change in control of the Company, severance payments will be payable by the Company in the event of termination of employment for any reason. On April 28, 1998, the Company entered into an Employment Agreement with Marc J. Anderson which will become effective in the event that either (i) the Company terminates the Management Agreement with JMC or (ii) there is a change in control of the voting securities of the Company. In either of those events, the Company would employ Mr. Anderson for a five year term as Chief Operating Officer and Senior Vice President of the Company at a base salary of $120,000, and he would receive a signing bonus of $50,000. The agreement also provides for severance payments if the Company terminates his employment for reasons other than "for cause" or disability, or the Company terminates employment for enumerated "good reasons." Following a change in control of the Company, severance payments would be payable by the Company in the event of termination of employment for any reason. Compensation Committee Interlocks And Insider Participation Neal D. Crispin and Toni M. Perazzo are both executive officers and directors of the Company and JetFleet Management Corp. Marc Anderson is an executive officer and director of the Company and an executive officer of JetFleet Management Corp. As described above under "Employment Contracts," the Company has no employees and does not pay any compensation to its executive officers. Other than that, no executive officers of the Company currently serve on the compensation committee (or any other committee of the board of directors performing similar functions) of another entity. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information regarding the beneficial ownership of the Company's Common Stock as of March 1, 2000 by: (i) each person who is known to the Company to own beneficially more than five percent of the outstanding shares of the Company's Common Stock; (ii) each director; and (iii) all directors and executive officers as a group. Name, Position, & Address No of. Shares(1) Percentage of Ownership of Common Stock(2) Neal D. Crispin 256,661 16.20% Chairman of the Board, President and Principal Shareholder (3)(4) Toni M. Perazzo 256,661 16.20% Director, Vice President-Finance, Secretary and Principal Shareholder (3)(4)(5) Marc J. Anderson 6,392 * Director, Senior Vice President and Chief Operating Officer (1)(3)(6) Maurice J. Averay 300 * Director (3) Thomas W. Orr 600 * Director (3) Evan J. Wallach 175 * Director (3) Pine Capital Management, Incorporated; 183,300 11.8% Hoefer & Arnett (7) JetFleet Holding Corp. 199,267 11.3% Principal Shareholder (3)(8) All directors and executive officers as a group (6 persons)(9) 259,628 16.82% ------------------------------------------------ * Less than 1%
(1) Except as indicated in the footnotes to this table, the stockholders named in the table are known to the Company to have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable. The number of shares beneficially owned includes Common Stock of which such individual has the right to acquire beneficial ownership either currently or within 60 days after March 1, 2000, including, but not limited to, upon the exercise of an option. (2) For purposes of calculating percentages, total outstanding shares consists of 1,543,257 shares of outstanding Common Stock, which excludes shares held by the Company as treasury stock. (3) The mailing address is c/o AeroCentury Corp., 1440 Chapin Avenue Suite 310, Burlingame, California 94010. (4) Includes 250,661 shares owned by corporations of which Mr. Crispin is an officer, director and/or principal shareholder. To avoid double counting the same shares, does not include 20,000 shares issuable upon exercise of options granted to Mr. Crispin by JetFleet Holding Corp. ("JHC") to purchase AeroCentury Common Stock owned by JHC. (The shares issuable upon exercise of these options would come from the 199,267 shares already counted as beneficially owned by Mr. Crispin and Ms. Perazzo indirectly through JHC.) (5) Includes 250,661 shares owned by corporations, of which Ms. Perazzo is an officer, director and/or principal shareholder, plus all other shares owned beneficially by Mr. Crispin, spouse of Ms. Perazzo. (6) Includes shares issuable upon exercise of options to purchase 4,500 shares issuable upon exercise of options granted by JHC to purchase AeroCentury Common Stock owned by JHC. (7) Disclosure based on a copy of a form 13-G received by the Company. Shares are held for the account of clients of Pine Capital Management, Incorporated ("Pine"), a registered investment adviser, and Hoefer & Arnett, a registered broker-dealer. The address of both is 353 Sacramento Street, 10th Floor, San Francisco, CA 94111. Pine holds the shares in a fiduciary capacity and Hoefer & Arnett holds the shares pursuant to discretionary authority. The Company is informed that no client is known by Pine and Hoefer & Arnett to have the right or power with respect to more than 5% of the outstanding shares. Hoefer & Arnett does not have power to vote or to direct the voting of the shares held in its capacity as broker. (8) In May 1998, the original holder of the shares of the Company, JetFleet Management Corp., was renamed "JetFleet Holding Corp." The rights and obligations under the Management Agreement were then assigned by JetFleet Holding Corp. to a newly-created wholly-owned subsidiary named "JetFleet Management Corp." (9) Consists of shares beneficially owned by officers and directors, but excludes option shares described in footnotes (4) and (6), since the shares issuable upon exercise of these options are already counted in the 199,267 shares beneficially owned by Mr. Crispin and Ms. Perazzo indirectly through JHC, and therefore included in the shares counted as beneficially owned by officers and directors. RELATED PARTY TRANSACTIONS Management Agreement. JMC acts as the management company for the Company under the Management Agreement, dated December 31, 1997, as amended on February 3, 1998, between JMC and the Company. The officers of the Company are also officers of JMC and two members of the JMC's Board of Directors are on the Board of Directors of the Company. Under the Management Agreement, the Company pays a monthly management fee to JMC equal to 0.25% of the net book value of the Company's assets as of the end of the month for which the fee is due. In addition, JMC may 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 paid JMC $1,148,800 of management fees and $1,080,100 in acquisition fees during 1999 and $520,280 and $397,280 in management fees and acquisition fees, respectively, in 1998. In the event of any breach by the Company which terminates the Management Agreement, the Company will be liable for liquidated damages of $12 million (adjusted for inflation) from 1997 until 2007, then declining $1 million per year each year thereafter. A sale or disposition by the Company of over 25% of the assets of the Company in a single transaction or series of transactions not recommended by JMC is considered one event of termination by the Company in breach of the Management Agreement. The agreement also grants the Company an option to acquire all of the outstanding stock of JMC at any time on or before December 31, 2003, subject to such stockholder approval as required by applicable law, for a purchase price based on the earnings of JMC, in the form of freely tradeable registered stock of the Company. The purchase price would be set at 90% of the product of (i) the earnings of JMC as of the most recent 12-month period prior to the acquisition, multiplied by (ii) the average price to earnings ratio of the Company over the same 12-month period, each as determined according to generally accepted accounting principles; provided, however, that if the purchase price is less than $12 million, JMC would have the right to decline the acquisition. On February 3, 1998, the Company's Board of Directors, including its three outside directors, ratified, approved and confirmed the terms of the Management Agreement, as amended to its current form. The original Management Agreement had been previously approved by the Board of Directors in its original form in 1997. Office Space. The Company maintains its principal office at the offices of JMC at 1440 Chapin Avenue, Suite 310, Burlingame, California, without reimbursement to JMC. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent stockholders are required by Securities and Exchange Commission regulation to furnish the Company with copies of all Section 16(a) reports they file. Based solely upon review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that there was compliance for the fiscal year ended December 31, 1999 with all Section 16(a) filing requirements applicable to the Company's officers, directors and greater than ten percent beneficial owners. STOCKHOLDER PROPOSALS Stockholder proposals intended to be considered at the 2001 Annual Meeting of Stockholders must be received by the Company no later than January 11, 2001. Proposals submitted after that date will be considered untimely, and will not be considered at the 2001 Annual Meeting. The proposal must be mailed to the Company's principal executive offices, 1440 Chapin Avenue, Suite 310, Burlingame, California 94010. Such proposals may be included in next year's proxy statement if they comply with certain rules and regulations promulgated by the Securities and Exchange Commission. OTHER MATTERS Management does not know of any matters to be presented at this Annual Meeting other than those set forth herein and in the Notice accompanying this Proxy Statement. It is important that your shares be represented at the meeting, regardless of the number of shares which you hold. YOU ARE, THEREFORE, URGED TO EXECUTE PROMPTLY AND RETURN THE ACCOMPANYING PROXY IN THE ENVELOPE WHICH HAS BEEN ENCLOSED FOR YOUR CONVENIENCE. Stockholders who are present at the meeting may revoke their proxies and vote in person or, if they prefer, may abstain from voting in person and allow their proxies to be voted. By Order of the Board of Directors, /s/ Neal D. Crispin Neal D. Crispin, President March 28, 2000 Burlingame, California EX-20 2 ANNUAL REPORT ACCOMPANYING PROXY STATEMENT Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Certain statements contained in this Annual Report and, in particular, the discussion regarding the Company's beliefs, plans, objectives, expectations and intentions regarding: the continuation of the Company's global efforts with respect to growth in the coming year; positioning of the Company for future growth; continued expansion of the Company's portfolio and broader diversification of its customer base; the Company's pursuit of a variety of financing activities to fund its growth; the Company's objective of increasing shareholder value by acquiring additional assets; reinvesting cash flow and obtaining financing for acquisitions; the Company's ability to purchase assets at appropriate prices, keep such assets on lease, and have those assets retain value through and after the initial lease term; the Company's ability to obtain lease provisions for maintenance and return that permit remarketing of the aircraft; the Company's acquisition of assets using credit facility financing that produce revenue greater than the financing costs for such assets; the Company's ability to maintain cash flow in excess of management and professional fees and interest expenses; the Company's competitive advantage through its experience and operational efficiency and its relationship with JMC; the Company's reduction of credit risk concentration of lease receivables through broadening of customer base and geographic dispersion; the Company's ability to finalize a replacement credit facility; the Company's achieving cash flow adequate to meet increases in the interest rate applicable to the credit facility and ongoing operational needs; the Company's intention to monitor lessees to reduce the potential that an asset will be off-lease following expiration of a lease; the Company's belief that it has adequate cash flow to meet ongoing operational needs, even if S/N 72 remains off-lease and notwithstanding certain events related to a U.K. lessee in reorganization; the Company's intention to repay the revolving credit loans from subsequent financings; the Company's belief that the current market provides a good supply of suitable transactions; and the Company's ability to reduce the impact of regional or global economic downturns; and the Company's belief that JMC's global reputation will benefit the Company; contained are forward- looking statements. While the Company believes that such statements are accurate, the Company's business is dependent upon general economic conditions, particularly those that affect the demand for regional aircraft and engines, including competition for regional and other aircraft, and future trends and results cannot be predicted with certainty. The Company's actual results could differ materially from those discussed in such forward-looking statements. The cautionary statements made in this Report should be read as being applicable to all related forward-looking statements wherever they appear in this Report. Factors that could cause or contribute to such differences include those discussed below in the section entitled "Factors that May Affect Future Results." TO OUR SHAREHOLDERS During 1999, AeroCentury successfully executed the key elements of our growth strategy and enhanced our presence in the regional aircraft leasing market. We doubled the number of aircraft in our portfolio. These transactions, combined with our acquisitions in late 1998, contributed to revenues of $7.4 million - a nearly 100 percent increase over 1998 revenues - as well as increased earnings and improved cash flow from operations. In 1999, we invested approximately $35 million to acquire ten aircraft - all of which are leased to regional airlines. We ended 1999 with a portfolio of 20 aircraft and 26 turboprop engines. As a result of our growth strategy, our balance sheet shows aircraft assets of approximately $56 million versus approximately $23 million a year ago. We also realized another key element of our growth strategy by diversifying AeroCentury's customer base. During 1999, 41 percent of the Company's revenues were generated in the U.S., versus 71 percent a year ago. We now have strong customer relationships throughout Europe and Latin America and will continue to further our global efforts during the coming year. Our target market of regional airlines continues to expand worldwide. This market contains many opportunities. Our diversity of aircraft and customer base, backed by a strong market presence, technical knowledge and access to capital, positions us for future growth. Our goals in 2000 include continued expansion of our portfolio and broader diversification of our customer base. We are currently pursuing a variety of financing activities to fund this growth, including further expansion of our credit facilities, opportunities for seller financing and the potential to raise capital through the sale of equity. We remain focused on enhancing the value of your investment and appreciate your interest and support. We look forward to reporting on our continued growth during 2000. /s/ Neal D. Crispin Neal D. Crispin President and Chairman of the Board MANAGEMENT'S DISCUSSION AND ANALYSIS AeroCentury Corp. ("AeroCentury") was incorporated in the state of Delaware on February 28, 1997 ("Inception"). AeroCentury was formed solely for the purpose of acquiring JetFleet Aircraft, L.P. ("JetFleet I") and JetFleet Aircraft II, L.P. ("JetFleet II"), California limited partnerships (collectively, the "Partnerships") in a statutory merger (the "Consolidation"). JetFleet I and JetFleet II were organized in October 1989 and October 1991, respectively. Prior to the Consolidation, the Partnerships engaged in the business of ownership, management, leasing and acquisition of a portfolio of aircraft equipment. Upon completion of the Consolidation, which occurred on January 1, 1998, AeroCentury succeeded to the Partnerships' business. During November 1999, AeroCentury Corp. formed a wholly-owned subsidiary, AeroCentury Investments LLC ("AeroCentury LLC"), for the purpose of acquiring two aircraft using a combination of cash and bank financing separate from its credit facility. Financial information for 1999 for AeroCentury and AeroCentury LLC (collectively, the "Company") is presented on a consolidated basis. The Company is engaged in the business of investing in primarily used regional aircraft equipment leased to domestic and foreign regional air carriers. By assuming the business of the Partnerships in January 1998, the Company became owner of a portfolio of unleveraged aircraft and engines on lease and generating positive cash flow. The Company's principal business objective is to increase shareholder value by acquiring additional aircraft assets that will provide a return on investment through lease revenue from creditworthy lessees, and eventually resale proceeds. The Company intends to achieve its business objective by reinvesting cash flow and obtaining short-term and long-term financing and/or equity financing. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Year Ended December 31, 1999 1998 Amount % Amount % Operating lease revenue $7,128,690 96.6 $3,494,330 92.5 Gain on disposal of assets 98,400 1.3 228,230 6.0 Other income 153,050 2.1 55,020 1.5 Total $7,380,140 100.0 $3,777,580 100.0
The Company had revenues of $7,380,140 and net income of $1,405,420 for the year ended December 31, 1999 versus revenues of $3,777,580 and net income of $1,181,650 for the year ended December 31, 1998. Rent income is approximately $3,634,000 higher in 1999 versus 1998 due to the purchases of additional aircraft on lease during 1999 and the effect of a full year of rent from aircraft purchased throughout 1998. Other income for the year ended December 31, 1999 is higher by approximately $98,000 versus 1998 because of interest earned on higher cash balances maintained during 1999. Management fees are approximately $629,000 higher in 1999 versus 1998 because the Management Agreement, entered into in January 1998, stipulates that management fees are based on the net book value of the aircraft owned by the Company and because the Company purchased additional aircraft during 1999. Depreciation is approximately $986,000 higher in 1999 versus 1998 because of the aircraft acquisitions during both years. Interest expense is approximately $1,451,000 higher in 1999 versus 1998 because of the Company's use of its credit facility beginning in November 1998 and throughout 1999. Professional fees and general administrative expense are approximately $158,000 higher in 1999 primarily due to an increase in legal expenses associated with increasing the Company's credit facility. During 1999, the Company increased maintenance reserves and accrued costs and recognized a related one-time charge of approximately $365,000 for estimated maintenance expense related to an off-lease aircraft. The Company's effective tax rate in 1999 was approximately 31% versus approximately 42% in 1998. The lower rate in 1999 is due to an adjustment related to state taxes. The Company's tax rate is subject to change based on changes in the mix of domestic and foreign leased assets, the proportions of revenue generated within and outside of California and numerous other factors, including changes in tax laws. Liquidity and Capital Resources The Company is currently financing its asset growth through credit facility borrowings and excess cash flow. On June 30, 1998 the Company obtained a $15 million revolving credit facility to acquire regional aircraft and engines under lease. The facility bears interest, payable monthly, at either prime or LIBOR plus 200 basis points, at the Company's option. The Company signed agreements increasing its facility to $22.5 million, to $30 million, then to $35 million on April 1, 1999, July 16, 1999 and February 22, 2000, respectively. The Company's aircraft and aircraft engines serve as collateral under the facility and, in accordance with the credit agreement, the Company must maintain compliance with certain financial covenants. As of December 31, 1999, the Company was in compliance with all such covenants. As of December 31, 1999, $27,990,000 was outstanding under the credit facility, and interest of $223,740 was accrued, using a combination of prime and LIBOR rates. The facility expires on June 30, 2000. The Company is currently negotiating for a replacement for this credit facility and anticipates such will be finalized on or before June 30, 2000. See "Factors that May Affect Future Results - Replacement of Credit Facility", below. The prime rate was stable from November 1998 through June 1999. It increased by 25 basis points in each of July, late August and mid-November 1999. The prime rate increased another 25 basis points in February 2000. The majority of the Company's borrowings are financed using one-month or six-month LIBOR rates, both of which have increased modestly since the Company began financing pursuant to such rates during June 1999. The Company believes it has adequate cash flow to meet increases in the interest rate applicable to its credit facility obligations. Increased prevailing interest rates generally result in higher lease rates as well, and so an increase in credit facility payments may be offset at least partially by higher revenues on new leases and renewals of leases entered into by the Company. The Company has evaluated whether it is advisable to enter into an interest rate hedge transaction, which, for a fee, would act to lock in current interest rates on its credit facility obligations. The Company has determined that such a transaction is not advisable at this time. In making its decision, the Company analyzed interest rate trends, the ongoing costs of maintaining the hedge and the magnitude of the impact of any interest rate swing. During November 1999, the Company acquired two aircraft using cash and bank financing separate from its credit facility. The financing consists of a note in the amount of $9,061,000, due February 15, 2002 and which bears fixed interest at 8.04%. Payments due under the note consist of monthly principal and interest and a balloon principal payment due on the maturity date. It is the Company's policy to monitor lessee's needs in periods before leases are due to expire. If it appears that a lessee will not be renewing its lease, the Company immediately initiates marketing efforts to locate a potential new lessee or purchaser for the aircraft. This procedure helps the Company reduce any potential that an asset will be "off-lease" for a significant time. The lease for the Company's deHavilland Dash-7, serial number 72 ("S/N 72"), expired in April 1999. The Company has been seeking re-lease opportunities for S/N 72 since the lessee provided notice that it would not renew the lease, and the Company is discussing lease terms with interested parties. The Company's other aircraft are subject to leases with varying expiration dates between April 30, 2000 and November 23, 2003. Given the varying lease terms and expiration dates for the aircraft in the Company's portfolio, management believes that the Company will have adequate cash flow to meet any on-going operational needs, even if S/N 72 remains off-lease for an extended period of time. The Company has received notice that one of its lessees, which has leased one aircraft, has filed for reorganization in the United Kingdom courts under the U.K.'s "administration" statutes. The lessee is continuing to operate, but the status of the aircraft in the reorganization has yet to be determined. If the aircraft is returned, or the Company and the administrator for the lessee agree to a reduced rental, the Company's revenues could be adversely affected. In any event, the Company believes that it will have adequate cash flow to meet any ongoing operational needs notwithstanding any rental reduction or off-lease period if the aircraft is returned. The Company's cash flow from operations for the year ended December 31, 1999 versus 1998 increased by approximately $2,644,000. The increase from year to year was partially due to the Company's acquisition of several aircraft during 1999 and the second half of 1998 which resulted in increased net income and higher depreciation expense in 1999. The change in cash flow from operations from year to year also included the positive effect of the change in accounts payable and accrued expenses, accrued interest on notes payable, prepaid rent, security deposits and maintenance deposits and accrued costs during 1999 versus 1998, which changes were only partially offset by the change in deposits, accounts receivable, prepaid expenses and other assets, and deferred taxes. Specifically, the Company's cash flow from operations for the year ended December 31, 1999 consisted of net income of $1,405,420 and adjustments consisting primarily of depreciation of $1,700,000, increases in deposits, accounts receivable, and prepaid expenses and other assets of $3,834,900, $142,210 and $211,660, respectively, an increase in accounts payable and accrued expenses of $657,570, an increase in accrued interest on notes payable of $184,700, and increases in prepaid rent, security deposits, maintenance reserves, and deferred taxes of $235,330, $1,306,040, $2,728,370 and $67,840, respectively. The Company's cash flow from operations for the year ended December 31, 1998 consisted of net income of $1,181,650 and adjustments consisting primarily of depreciation of $713,930, increases in deposits, accounts receivable, and prepaid expenses and other assets of $678,500, $137,540 and $142,020, respectively, a decrease in accounts payable and accrued expenses of $253,870, an increase in accrued interest on notes payable of $39,780, a decrease in prepaid rent of $175,080, an increase of $336,000 in security deposits, a decrease of $61,570 in maintenance reserves and accrued costs and a net increase in deferred taxes of $759,790. During 1999, the increase in cash flow provided by financing activities and the decrease in cash flow used by investing activities were both a result of the Company's borrowings on its credit facility, which borrowings were used to purchase additional aircraft. The Company did not use its credit facility until the fourth quarter of 1998. Factors that May Affect Future Results Replacement of Credit Facility. The revolving credit facility has an initial term of two years expiring in June 2000, and is renewable at the sole discretion of First Union National Bank (the "Agent Bank") and its participants, if any. Although the other two participating banks indicated their willingness to renew the credit facility, the Agent Bank has informed the Company that it will not be continuing as agent and, therefore, the credit facility will not be renewed on June 30, 2000. Although the Company has always been and continues to be in compliance with all covenants under its credit facility, the Agent Bank has decided that the Company's financing needs are not consistent with the Agent Bank's revised business focus. The Company is currently in negotiations regarding a replacement credit facility. Although the Company anticipates that a replacement credit facility will be found, if none is found, then all indebtedness under the revolving credit facility will become due and payable on June 30, 2000. There is no assurance that the Company will have adequate replacement financing in place in order to meet such repayment obligations. If the Company is unable to find replacement financing, the Company may have to liquidate a significant portion of its assets in order to repay the credit facility. Risks of Debt Financing. The Company's use of acquisition financing under its revolving credit facility subjects the Company to increased risks of leveraging. The revolving loans are secured by the Company's existing assets as well as the assets acquired with each financing. Any default under the revolving credit facility could result in foreclosure upon not only the asset acquired using such financing, but also the existing assets of the Company securing the revolving loan. In order to achieve optimal benefit from the revolving credit facility, the Company intends to repay the revolving loans from proceeds of subsequent term debt or equity financings. Such replacement financing would likely provide the Company with more favorable long-term repayment terms and also would permit the Company to make further draws under the revolving credit facility equal to the amount of revolving debt refinanced. There can be no assurance that the Company will be able to obtain the necessary amount of replacement term debt or equity financing on favorable terms so as to permit multiple draws on the revolving credit facility. All of the Company's current credit facility indebtedness carries a floating interest rate based upon either the lender's prime rate or a floating LIBOR rate. If the applicable index rate increases, and the Company has not entered into a mitigating hedge transaction, then the Company's payment obligations under the credit facility would increase and could result in lower net revenues for the Company. Expansion or Repayment of Credit Facility. The Company has used nearly all of its revolving credit facility to acquire additional assets for the purpose of generating income for the Company. When negotiating a replacement credit facility, the Company will also be seeking, and certain banks have expressed an interest in, an increase in its credit facility. There is no assurance such increase will be received. If such increase is not received, the Company will need to refinance a portion of its existing revolving credit facility debt before it can make further draws on the line; however, the Company has not yet entered into any such arrangement. Even if an increase in the credit facility is received, there is no assurance that the Company will be able to expend the entire net financing proceeds on the acquisition of additional assets on terms favorable to the Company. General Economic Conditions. The market for used aircraft has been cyclical, and usually reflects economic conditions and the strength of the travel and transportation industry. The Company believes that the air transport industry is currently stable, with demand for aircraft, asset prices and lease rates generally level, and in some cases, increasing. Nonetheless, at any time, the market for used aircraft may be adversely affected by such factors as airline financial difficulties, higher fuel costs, and improved availability and economics of new replacement aircraft. The Company believes that the current aircraft market provides a good supply of suitable transaction opportunities for the Company, primarily in overseas markets, as well as domestically. There are currently some disparities between geographic regions with respect to the condition of the air transport industry, with certain areas of South America and the Pacific Rim, in particular, experiencing economic difficulties. There have also been disruptions in the currency markets in certain geographic areas. To the extent that such disruptions adversely affect a region's economic growth, suitable transactions may be more difficult for the Company to find in that region and the Company's lessees in that area may be adversely affected. An adverse change in the global air travel industry could result in reduced carrier revenue and excess capacity and increase the risk of failure of some weaker regional air carriers. While the Company believes that with proper asset and lessee selection in the current climate, as well as during such downturns, the impact of such changes on the Company can be reduced, there is no assurance that the Company's business will escape the effects of such a global downturn, or a regional downturn in an area where the Company has placed a significant amount of its assets. Reliance on JMC. All management of the Company is performed by JMC under a Management Agreement which has a 20-year term and provides for an asset-based management fee. JMC is not a fiduciary to the Company or its stockholders. The Board of Directors, however, has ultimate control and supervisory responsibility over all aspects of the Company and owes fiduciary duties to the Company and its stockholders. In addition, while JMC may not owe any fiduciary duties to the Company by virtue of the Management Agreement, certain officers of JMC are also officers of the Company, and in that capacity owe fiduciary duties to the Company and the stockholders by virtue of holding such offices with the Company. The Management Agreement may be terminated upon a default in the obligations of JMC to the Company, and provides for liquidated damages in the event of a wrongful termination of the agreement by the Company. Many of the officers of JMC are also officers of the Company, and certain directors of the Company are also directors of JMC. Consequently, the directors and officers of JMC may have a conflict of interest in the event of a dispute over obligations between the Company and JMC. Although the Company has taken steps to prevent conflicts of interest arising from such dual roles, such conflicts may still occur. Ownership Risks. Most of the Company's portfolio is leased under operating leases, where the terms of the leases do not take up the entire useful life of an asset. The Company's ability to recover its purchase investment in an asset subject to an operating lease is dependent upon the Company's ability to profitably re-lease or sell the asset after the expiration of the initial lease term. Some of the factors that have an impact on the Company's ability to release or sell include worldwide economic conditions, general aircraft market conditions, regulatory changes that may make an asset's use more expensive or preclude use unless the asset is modified, changes in the supply or cost of aircraft equipment and technological developments which cause the asset to become obsolete. In addition, a successful investment in an asset subject to an operating lease depends in part upon having the asset returned by the lessee in serviceable condition as required under the lease. If the Company is unable to remarket its aircraft equipment on favorable terms when the operating lease for such equipment expires, the Company's business, financial condition, cash flow, ability to service debt and results of operation could be adversely affected. Lessee Credit Risk. If a lessee defaults upon its obligations under a lease, the Company may be limited in its ability to enforce remedies. Most of the Company's lessees are small regional passenger airlines, which may be even more sensitive to airline industry market conditions than the major airlines. As a result, the Company's inability to collect rent under a significant lease or to repossess equipment in the event of a default by a lessee could have a material adverse effect on the Company's revenue. If a lessee that is a certified U.S. airline is in default under the lease and seeks protection under Chapter 11 of the United States Bankruptcy Code, under Section 1110 of the Bankruptcy Code, the Company would be automatically prevented from exercising any remedies for a period of 60 days. By the end of the 60 day period, the lessee must agree to perform the obligations and cure any defaults, or the Company would have the right to repossess the equipment. This procedure under the Bankruptcy Code has been subject to significant recent litigation, however, and it is possible that the Company's enforcement rights may still be further adversely affected by a declaration of bankruptcy by a defaulting lessee. International Risks. During 1999, the Company focused on leases in overseas markets, which markets are currently dynamic and which the Company believes present attractive opportunities. Leases with foreign lessees, however, may present somewhat different credit risks than those with domestic lessees. Foreign laws, regulations and judicial procedures may be more or less protective of lessor rights as those which apply in the United States. The Company could experience collection problems related to the enforcement of its lease agreements under foreign local laws and the remedies in foreign jurisdictions. The protections potentially offered by Section 1110 of the Bankruptcy Code would not apply to non-U.S. carriers, and applicable local law may not offer similar protections. Certain countries do not have a central registration or recording system with which to locally establish the Company's interest in equipment and related leases. This could add difficulty in recovering an aircraft in the event that a foreign lessee defaults. Leases with foreign lessees are subject to risks related to the economy of the country or region in which such lessee is located, even if the U.S. economy remains strong. On the other hand, a foreign economy may remain strong even though the 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, in the future, the Company may agree to leases that permit payment in foreign currency, which would subject such lease revenue to monetary risk due to currency fluctuations. Even with dollar-denominated lease payment provisions, the Company could still be affected by a devaluation of the lessee's local currency which would make it more difficult for a lessee to meet its dollar-denominated lease payments, increasing the risk of default of that lessee, particularly if that carrier's revenue is primarily derived in the local currency. Government Regulation. There are a number of areas in which government regulation may result in costs to the Company. These include aircraft registration, safety requirements, required equipment modifications, and aircraft noise requirements. Although it is contemplated that the burden of complying with such requirements will fall primarily upon lessees of equipment, there can be no assurance that the cost of complying with such government regulations will not fall on the Company. Furthermore, future government regulations could cause the value of any non-complying equipment owned by the Company to decline substantially. Competition. The aircraft leasing industry is highly competitive. The Company competes with aircraft manufacturers, distributors, airlines and other operators, equipment managers, leasing companies, equipment leasing programs, financial institutions and other parties engaged in leasing, managing or remarketing aircraft, many of which have significantly greater financial resources and more experience than the Company. The Company, however, believes that it is competitive because of JMC's experience and operational efficiency in financing the transaction types desired by the regional air carriers. This market segment, which is characterized by transaction sizes of less than $10 million and lessee credits that are strong, but generally unrated and more speculative than the major air carriers, is not well served by the Company's larger competitors in the aircraft industry. JMC has developed a reputation as a global participant in this segment of the market, and the Company believes this will benefit the Company. There is no assurance that the lack of significant competition from the larger aircraft leasing companies will continue or that the reputation of JMC will continue to be strong in this market segment and benefit the Company. Casualties, Insurance Coverage. The Company, as owner of transportation equipment, could be held liable for injuries or damage to property caused by its assets. Though some protection may be provided by the United States Aviation Act with respect to its aircraft assets, it is not clear to what extent such statutory protection would be available to the Company and such act may not apply to aircraft operated in foreign countries. Though the Company may carry insurance or require a lessee to insure against a risk, some risks of loss may not be insurable. An uninsured loss with respect to the equipment or an insured loss for which insurance proceeds are inadequate, would result in a possible loss of invested capital in and any profits anticipated from such equipment. Leasing Risks. The Company's successful negotiation of lease extensions, re-leases and sales may be critical to its ability to achieve its financial objectives, and involves a number of substantial risks. Demand for lease or purchase of the assets depends on the economic condition of the airline industry which is, in turn, highly sensitive to general economic conditions. Ability to remarket equipment at acceptable rates may depend on the demand and market values at the time of remarketing. The Company anticipates that the bulk of the equipment it acquires will be used aircraft equipment. The market for used aircraft is cyclical, and generally, but not always, reflects economic conditions and the strength of the travel and transportation industry. The demand for and value of many types of older aircraft in the recent past has been depressed by such factors as airline financial difficulties, increased fuel costs, the number of new aircraft on order and the number of older aircraft coming off lease. The Company's expected concentration in a limited number of airframe and aircraft engine types (generally, turboprop equipment) subjects the Company to economic risks if those airframe or engine types should decline in value. If "regional jets" were to be used on short routes previously served by turboprops, even though regional jets are more expensive to operate than turboprops, the demand for turboprops could be decreased. This could result in lower lease rates and values for the Company's existing turboprop aircraft. Risks Related to Regional Air Carriers. Because the Company has concentrated its existing leases and intends to concentrate on leases to regional air carriers, it is subject to certain risks. First, lessees in the regional air carrier market include a number of companies that are start-up, low capital, low margin operations. Often, the success of such carriers is dependent upon arrangements with major trunk carriers, which may be subject to termination or cancellation by such major carrier. Leasing transactions with these types of lessees result in a generally higher lease rate on aircraft, but may entail higher risk of default or lessee bankruptcy. The Company evaluates the credit risk of each lessee carefully, and attempts to obtain third party guaranties, letters of credit or other credit enhancements, if it deems such is necessary. There is no assurance, however, that such enhancements will be available or that even if obtained will fully protect the Company from losses resulting from a lessee default or bankruptcy. Second, a significant area of growth of this market is in areas outside of the United States, where collection and enforcement are often more difficult and complicated than in the United States. Possible Volatility of Stock Price. The market price of the Company's Common Stock could be subject to fluctuations in response to operating results of the Company, changes in general conditions in the economy, the financial markets, the airline industry, changes in accounting principles or tax laws applicable to the Company or its lessees, or other developments affecting the Company, its customers or its competitors, some of which may be unrelated to the Company's performance. Also, because the Company has a relatively small capitalization of approximately 1.5 million shares, there is a correspondingly limited amount of trading of the shares. Consequently, a single or small number of trades could result in a market fluctuation not related to any business or financial development relating to the Company. Year 2000 Considerations. Because all administrative and management functions of the Company are carried out by its management company, JMC, JMC's readiness for Year 2000 has determined the Company's status. JMC has reported to the Company that it did not experience any problems with the Year 2000 event, and does not anticipate any in the coming year. Lessees of the Company have not appeared to be materially affected by the Year 2000, and, to date, the Company's business with all lessees appears unaffected by Year 2000. The Company has not incurred and does not anticipate any costs related to the Year 2000 issue. CONSOLIDATED BALANCE SHEET December 31, 1999 ASSETS Assets: Cash and cash equivalents $ 1,251,730 Deposits 5,419,160 Accounts receivable 307,760 Aircraft and aircraft engines on operating leases, net of accumulated depreciation of $17,411,620 55,853,940 Prepaid expenses and other 359,130 ---------- Total assets $ 63,191,720 ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses $ 906,970 Notes payable and accrued interest 37,094,920 Maintenance reserves and accrued costs 4,389,700 Security deposits 1,785,140 Prepaid rent 295,780 Deferred taxes 3,227,870 ---------- Total liabilities 47,700,380 ---------- Shareholders' equity: Preferred stock, $.001 par value, 2,000,000 shares authorized, no shares issued and outstanding - Common stock, $.001 par value, 3,000,000 shares authorized, 1,606,557 shares issued 1,610 Paid in capital 13,821,200 Retained earnings 2,172,600 ---------- 15,995,410 Treasury stock at cost, 63,300 shares (504,070) ---------- Total shareholders' equity 15,491,340 ---------- Total liabilities and shareholders' equity $63,191,720 ==========
The accompanying notes are an integral part of this statement. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1999 1998 REVENUES: Rent income $ 7,128,690 $ 3,494,330 Gain on disposal of aircraft and aircraft engines 98,400 228,230 Other income 153,050 55,020 ------------------------------------- 7,380,140 3,777,580 ------------------------------------- EXPENSES: Management fees 1,148,800 520,280 Depreciation 1,700,000 713,930 Interest 1,534,310 83,690 Professional fees and general and administrative 581,690 423,610 Maintenance 374,240 - ------------------------------------- 5,339,040 1,741,510 ------------------------------------- Income before taxes 2,041,100 2,036,070 Tax provision 635,680 854,420 ------------------------------------- Net income $ 1,405,420 $ 1,181,650 ===================================== Weighted average common shares outstanding 1,563,591 1,605,505 ===================================== Basic earnings per share $ 0.90 $ 0.74 =====================================
The accompanying notes are an integral part of this statement. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Partnership Common Paid-in Retained Treasury Interests Stock Capital Earnings Stock Total Balance, December 31, 1997 $ 16,220,720 $ 150 $ 149,850 $ (414,470) $ - $ 15,956,250 Dissolution of partnerships on January 1, 1998 (16,220,720) - - - - (16,220,720) Issued on January 1, 1998 1,456,557 shares at par value of $.001 - 1,460 13,671,350 - - 13,672,810 Purchase of treasury stock, 9,200 shares - - - - (78,190) (78,190) Net income - - - 1,181,650 - 1,181,650 ------------------------------------------------------------------------------------------ Balance, December 31, 1998 - 1,610 13,821,200 767,180 (78,190) 14,511,800 Purchase of treasury stock, 54,100 shares - - - - (425,880) (425,880) Net income - - - 1,405,420 - 1,405,420 ------------------------------------------------------------------------------------------ Balance, December 31, 1999 $ - $ 1,610 $ 13,821,200 $ 2,172,600 $ (504,070) $ 15,491,340 ==========================================================================================
The accompanying notes are an integral part of this statement. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999 1998 Operating activities: Net income $ 1,405,420 $ 1,181,650 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,700,000 713,930 Gain on disposal of aircraft and aircraft engines (98,400) (228,230) Change in operating assets and liabilities: Deposits (3,834,900) (678,500) Accounts receivable (142,210) (137,540) Prepaid expenses and other (211,660) (142,020) Accounts payable and accrued expenses 657,570 (253,870) Accrued interest on notes payable 184,700 39,780 Prepaid rent 235,330 (175,080) Security deposits 1,306,040 336,000 Maintenance reserves and accrued costs 2,728,370 (61,570) Deferred taxes 67,840 759,790 --------------------------------------- Net cash provided by operating activities 3,998,100 1,354,340 Investing activities: Proceeds from disposal of assets 98,400 684,320 Purchase of aircraft and aircraft engines (25,680,340) (7,844,570) Payments received on capital leases - 150,000 --------------------------------------- Net cash used by investing activities (25,581,940) (7,010,250) Financing activities: Issuance of secured note - 866,700 Repayment of secured note - (866,700) Issuance of notes payable 21,409,440 6,400,000 Purchase of treasury stock (425,880) (78,190) Limited partner distributions - (48,890) --------------------------------------- Net cash provided by financing activities 20,983,560 6,272,920 Net (decrease)/increase in cash and cash equivalents (600,280) 617,010 Cash and cash equivalents, beginning of period 1,852,010 1,235,000 --------------------------------------- Cash and cash equivalents, end of period $ 1,251,730 $ 1,852,010 =======================================
Note: During 1999, $9,061,000 of the purchase price of two aircraft acquired by the Company was financed by a note payable to the seller. During the years ended December 31, 1999 and 1998, the Company paid interest totaling $1,349,600 and $43,910, respectively, and income taxes totaling $148,920 and $111,430, respectively. The accompanying notes are an integral part of this statement. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Summary of Significant Accounting Policies (a) Basis of Presentation AeroCentury Corp. ("AeroCentury") was incorporated in the state of Delaware on February 28, 1997. AeroCentury was formed solely for the purpose of acquiring JetFleet Aircraft, L.P. and JetFleet Aircraft II, L.P., partnerships formed under California law for the purpose of investing in leased aircraft equipment, (collectively, the "Partnerships") in a statutory merger (the "Consolidation"), which was effective January 1, 1998. AeroCentury is continuing in the aircraft leasing business in which the Partnerships engaged and is using leveraged financing to acquire additional aircraft assets on lease. Because greater than 90% of the limited partnership units of each of the Partnerships agreed to the Consolidation, it was treated as a pooling-of-interests under generally accepted accounting principles with the assets and liabilities of the combining entities recorded at historical cost on the Consolidation date. On January 16, 1998, AeroCentury was listed on the American Stock Exchange under the symbol ACY. During November 1999, AeroCentury Corp. formed a wholly-owned subsidiary, AeroCentury Investments LLC ("AeroCentury LLC"), for the purpose of acquiring two aircraft using a combination of cash and bank financing separate from AeroCentury Corp.'s credit facility. Financial information for 1999 for AeroCentury and AeroCentury LLC (collectively, the "Company") is presented on a consolidated basis. All intercompany balances and transactions have been eliminated in consolidation. (b) Organization and Capitalization At December 31, 1997, all of the Company's outstanding stock was owned by JetFleet Holding Corp. ("JHC"), a California corporation. On January 1, 1998, 1,456,557 additional common shares were issued as a result of the Consolidation. JetFleet Management Corp. ("JMC"), a wholly owned subsidiary of JHC, is an integrated aircraft management, marketing and financing business. Prior to the Consolidation, JMC managed the aircraft assets of the Partnerships on behalf of their general and limited partners. JMC also manages the aircraft assets of JetFleet III and AeroCentury IV, Inc., California corporations which are affiliates of JMC. On April 17, 1998, in connection with the adoption of a shareholder rights plan, the Company filed a Certificate of Designation, designating the rights, preferences and privileges of a new Series A Preferred Stock. Pursuant to the plan, the Company issued rights to its shareholders of record as of April 23, 1998, entitling each shareholder to the right to purchase one one-hundredth of a share of Series A Preferred Stock for each share of Common Stock held by the shareholder. Such rights are exercisable only under certain circumstances concerning a proposed acquisition or merger of the Company. On October 23, 1998, the Company's Board of Directors adopted a stock repurchase plan, granting management the authority to purchase up to 100,000 shares of the Company's common stock, in privately negotiated transactions or on the market, at such price and on such terms and conditions deemed satisfactory to management. During the years ended December 31, 1999 and 1998, the Company purchased 54,100 shares and 9,200 shares, respectively, of its common stock. As discussed above, AeroCentury is the sole member of AeroCentury Investments LLC. 1. Organization and Summary of Significant Accounting Policies (continued) (c) Cash and Cash Equivalents/Deposits The Company considers highly liquid investments readily convertible into known amounts of cash, with original maturities of 90 days or less, as cash equivalents. Deposits represent cash balances held related to maintenance reserves and security deposits and generally are subject to withdrawal restrictions. At December 31, 1999, the Company held security deposits of $1,785,140, refundable maintenance reserves received from lessees of $2,623,080 and non-refundable maintenance reserves of $1,010,940. The Company's leases are typically structured so that if any event of default occurs under the lease, the Company may apply all or a portion of the lessee's security deposit to cure such default. If such an application of the security deposit is made, the lessee typically is required to replenish and maintain the full amount of the deposit during the remaining term of the lease. All of the security deposits currently held by the Company are refundable to the lessee at the end of the lease. Maintenance reserves which are refundable to the lessee at the end of the lease may be retained by the Company if such amounts are necessary to meet the return conditions specified in the lease and, in some cases, to satisfy any other payments due under the lease. Non-refundable maintenance reserves held by the Company are accounted for as a liability until the aircraft has been returned at the end of the lease, at which time the Company evaluates the adequacy of the remaining reserves in light of maintenance to be performed as a result of hours flown. At that time, any excess is recorded as income and any deficiency is recorded as expense. When an aircraft is sold, any excess non-refundable maintenance reserves are recorded as income. (d) Aircraft and Aircraft Engines On Operating Leases The Company's interests in aircraft and aircraft engines are recorded at cost, which includes acquisition costs. Depreciation is computed using the straight-line method over the aircraft's estimated economic life (generally assumed to be twelve years), to an estimated residual value. The depreciable base of the assets acquired by the Company in the Consolidation was equal to the net book value of the assets at December 31, 1997. (e) Loan Commitment and Related Fees To the extent that the Company is required to pay loan commitment fees and legal fees in order to secure debt, such fees are amortized over the life of the related loan. (f) Maintenance Reserves and Accrued Costs Maintenance costs under the Company's triple net leases are generally the responsibility of the lessees. Maintenance reserves and accrued costs in the accompanying balance sheet include refundable and non-refundable maintenance payments received from lessees. The Company periodically reviews maintenance reserves for adequacy in light of the number of hours flown, airworthiness directives issued by the manufacturer or government authority, and the return conditions specified in the lease. As a result of such review, when it is probable that the Company has incurred costs for maintenance in excess of amounts received from lessees, the Company accrues its share of costs for work to be performed as a result of hours flown. At December 31, 1999, the Company had accrued costs of approximately $609,000 related to one of its aircraft. 1. Organization and Summary of Significant Accounting Policies (continued) (g) Income Taxes The Company follows the liability method of accounting for income taxes as required by the provisions of SFAS No. 109 - Accounting for Income Taxes. Under the liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in the tax rates is recognized in income in the period that includes the enactment date. (h) Revenue Recognition Revenue from leasing of aircraft assets is recognized as operating lease revenue on a straight-line basis over the terms of the applicable lease agreements. Other income includes interest earned from one finance lease which expired in June 1998. (i) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. (j) Comprehensive Income The Company does not have any comprehensive income other than the revenue and expense items included in the consolidated statements of income. As a result, comprehensive income equals net income for the years ended December 31, 1999 and 1998. 2. Aircraft and Aircraft Engines On Operating Leases At December 31, 1999, the Company owned four deHavilland DHC-7, three deHavilland DHC-6, two Fairchild Metro III, three Shorts SD 3-60, six Fokker 50 aircraft, two Saab 340A aircraft and 26 turboprop engines, one of which is held in inventory as a spare and is not subject to a lease or to depreciation. During 1999, the Company acquired one of the Fairchild Metro III, two of the Shorts SD 3-60, five of the Fokker 50, the two Saab 340A aircraft and one turboprop engine, for a total of $34,741,340, including acquisition costs. The Metro III, Saab 340A aircraft and turboprop engine are leased to regional carriers in the United States. The Shorts SD-360 aircraft are leased to a regional carrier in Germany and, of the five Fokker 50 aircraft, one is leased in Brazil, two in Sweden and two in Spain. During 1999, the Company also made a short-term investment in a deHavilland DHC-7 aircraft which was not subject to a lease. The Company subsequently sold the aircraft and recognized a gain in connection with the sale. The lease for one of the Company's DHC-7 aircraft, serial number 72 ("S/N 72") expired in April 1999. The Company has been seeking re-lease opportunities for S/N 72 and is discussing lease terms with interested parties. The lease for another of the Company's Metro III aircraft, serial number 576, ("S/N 576") was extended by the lessee from its original expiration date on July 19, 1999 to August 31, 2000. 3. Operating Segments The Company operates in one business segment, aircraft leasing, and therefore does not present separate segment information for lines of business. Approximately 41% and 71% of the Company's operating lease revenue was derived from lessees domiciled in the United States during 1999 and 1998, respectively. All leases 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:
For the year ended December 31, 1999 Operating Net Region lease revenue book value United States $ 2,940,890 $ 17,236,150 Brazil 1,134,110 6,378,800 Belgium 840,000 3,910,190 Sweden 666,960 7,371,640 Spain 247,340 11,114,450 Other 1,299,390 9,842,710 --------------------------------------------- $ 7,128,690 $ 55,853,940 ============================================= For the year ended December 31, 1998 Operating Net Region lease revenue book value United States $ 2,478,890 $ 11,617,200 Canada 522,260 2,788,700 United Kingdom 389,430 1,714,210 Belgium 52,500 4,114,200 Colombia 51,250 2,578,290 --------------------------------------------- $ 3,494,330 $ 22,812,600 =============================================
For the year ended December 31, 1999, the Company had four significant customers, which accounted for 20%, 16%, 12% and 12%, respectively of lease revenue. For the year ended December 31, 1998, the Company had three significant customers, which accounted for 40%, 24% and 15%, respectively, of lease revenue. As of December 31, 1999, minimum future lease rent payments receivable under noncancelable leases were as follows: Year 2000 $ 9,442,530 2001 6,726,600 2002 2,786,150 2003 528,250 2004 - ------------- $ 19,483,530 ============= 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. 5. Notes Payable and Accrued Interest On June 30, 1998 the Company obtained a $15 million revolving credit facility to acquire regional aircraft and engines under lease. The facility, which expires on June 30, 2000 and which may be renewed annually thereafter, bears interest, payable monthly, at either prime or LIBOR plus 200 basis points, at the Company's option. The Company signed agreements increasing its facility to $22.5 million, then $30 million, on April 1, 1999 and July 16, 1999, respectively. The Company's aircraft and aircraft engines serve as collateral under the facility and, in accordance with the credit agreement, the Company must maintain compliance with certain financial covenants. As of December 31, 1999, the Company was in compliance with all such covenants. As of December 31, 1999, $27,990,000 was outstanding under the credit facility, and interest of $223,740 was accrued, using a combination of prime and LIBOR rates. The Company has been informed that the agent for the credit facility, First Union National Bank (the "Agent Bank"), will not be continuing as agent and, therefore, the credit facility will not be renewed when it expires on June 30, 2000. Although the Company has always been and continues to be in compliance with all covenants under its credit facility, the Bank has decided that the Company's long-term profile is not consistent with the Bank's revised business focus. The Company is currently in negotiations regarding a replacement credit facility. As discussed in Note 1, during November 1999, the Company acquired two aircraft using cash and bank financing separate from its credit facility. The financing consisted of a note in the amount of $9,061,000, due February 15, 2002 and which bears fixed interest at 8.04%. Payments due under the note consist of monthly principal and interest and a balloon principal payment due on the maturity date. The balance of the note payable at December 31, 1999 was $8,880,440 and interest of $740 was accrued. 6. Income Taxes The items comprising income tax expense are as follows:
For the Years Ended December 31, 1999 1998 Current tax provision: Federal $ 538,070 $ 74,260 State 13,280 20,380 Foreign 16,490 - ------------------------------------------- Current tax provision 567,840 94,640 ------------------------------------------- Deferred tax provision: Federal 135,060 648,500 State (67,220) 111,280 ------------------------------------------- Deferred tax provision 67,840 759,780 ------------------------------------------- Total provision for income taxes $ 635,680 $ 854,420 ===========================================
6. Income Taxes (continued) 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, 1999 1998 Income tax expense at statutory federal income tax rate $ 693,970 $ 692,090 State taxes net of federal benefit 16,260 118,800 Tax rate differences (74,550) 43,530 ---------- ---------- Total income tax expense $ 635,680 $ 854,420 ========== ==========
Tax rate differences result from a decrease in the Company's effective state tax rates. During 1999, the Company acquired substantial foreign assets, which resulted in a significantly higher apportionment of income to foreign sources rather than to U.S. states, subjecting the Company's income to lower tax. Temporary differences and carryforwards that gave rise to a significant portion of deferred tax assets and liabilities as of December 31, 1999 are as follows: Deferred tax assets: Amortization of organizational costs $ 46,110 Maintenance reserves 362,710 Prepaid rent 102,950 Deferred maintenance 84,000 ---------- Net deferred tax assets 595,770 Deferred tax liabilities: Depreciation on aircraft and engines (3,481,600) Other (342,040) ---------- Net deferred tax liability $ (3,227,870) ========== No valuation allowance is deemed necessary, as the Company anticipates generating adequate future taxable income to realize the benefits of all deferred tax assets on the balance sheet. 7. Related Party Transactions Since the Company has no employees, the Company's portfolio of leased aircraft assets is managed and administered under the terms of a management agreement with JMC. Under this agreement, JMC receives a monthly management fee based on the net asset value of the assets under management. JMC may also receive 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 7. Related Party Transactions (continued) services. During 1999 and 1998, the Company recognized as expense $1,148,800 and $520,280, respectively, of management fees payable to JMC. In connection with the purchases of aircraft during 1999 and 1998, the Company paid JMC a total of $1,080,100 and $397,230, respectively, in acquisition fees, which are included in the capitalized cost of the aircraft. No remarketing fees were paid to JMC during 1999 or 1998. In March 1998, the Company acquired an aircraft on lease using cash and a loan in the amount of $866,700 from an affiliate. The Company paid $43,910 of interest during the term of the loan. The loan was repaid during August 1998. Certain employees of JMC participate in an employee stock incentive plan which grants options to purchase shares of the Company held by JHC. As of December 31, 1999, 2,833 such options had been exercised. 8. Subsequent Events On February 22, 2000, the Company signed an agreement, increasing its $30 million revolving credit facility to $35 million. On February 24, 2000, the lessee of one of the Company's 30-seat aircraft filed for reorganization. The lessee is continuing to operate, and, under the reorganization plan, an agreement will be reached regarding the status of that aircraft. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of AeroCentury Corp.: We have audited the accompanying consolidated balance sheet of AeroCentury Corp. (a Delaware corporation) and its subsidiary as of December 31, 1999 and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the years ended December 31, 1999 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AeroCentury Corp. and its subsidiary as of December 31, 1999 and the results of their operations and their cash flows for the years ended December 31, 1999 and 1998 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP San Francisco, California, January 7, 2000 (except with respect to the matters discussed in Note 8, as to which the date is February 24, 2000) CORPORATE INFORMATION Officers and Directors Neal D. Crispin President and Chairman of the Board Marc J. Anderson Director, Chief Operating Officer, and Senior Vice President Toni M. Perazzo Director, Secretary and Vice President - Finance Christopher B. Tigno General Counsel Maurice J. Averay Director and Aircraft Consultant Thomas W. Orr Director and Partner, Bregante + Company LLP Evan M. Wallach Director and Vice President, Finance of C-S Aviation Transfer Agent and Registrar Continental Stock Transfer and Trust Company 2 Broadway, 19th Floor New York, NY 10004 Legal Counsel Morrison & Foerster LLP 755 Page Mill Road Palo Alto, CA 94304-1018 Independent Public Accountants Arthur Andersen LLP 101 2nd Street, Suite 1100 San Francisco, CA 94105 Corporate Headquarters AeroCentury Corp. 1440 Chapin Ave., Suite 310 Burlingame, CA 94010 Annual Meeting The Annual Meeting of Stockholders will be held at The Hiller Aviation Museum 601 SkyWay Road San Carlos, CA, on April 28, 2000 at 6 P.M. Form 10-K The Company's Annual Report on Form 10-K for 1999 may be obtained by writing: AeroCentury Corp. 1440 Chapin Ave., Suite 310 Burlingame, CA 94010 Stock Price and Shareholder Data The Company's common stock is traded on the AMEX national market system under the symbol ACY. -----END PRIVACY-ENHANCED MESSAGE-----