SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
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Exchange Act of 1934
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Preliminary proxy statement
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o Definitive proxy statement
¨ Definitive additional materials
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AEROCENTURY CORP.
NOTICE OF 2015 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 7, 2015
TO OUR STOCKHOLDERS:
You are cordially invited to attend the 2015 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 12:00 p.m. on May 7, 2015, for the following purposes:
1. To elect two directors to the Board of Directors;
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To approve, in an advisory (non-binding) vote, the Company’s executive compensation as disclosed in the accompanying Proxy Statement;
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To consider and vote upon a proposal to ratify the selection of BDO USA, LLP as independent registered public accounting firm for the Company for the fiscal year ending December 31, 2015; and
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To act upon such other business as may properly come before the meeting or any adjournment or postponement thereof.
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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 16, 2015, as the record date for determining those stockholders who will be entitled to vote at the 2015 Annual Meeting of Stockholders. The stock transfer books will not be closed between the record date and the date of the meeting.
The Board of Directors is pleased to unanimously nominate for election as directors the nominees named in Proposal 1 in the attached proxy statement, and recommends you vote “FOR” these two nominees on the enclosed WHITE proxy card. In selecting director nominees, the Board of Directors has focused on experienced candidates with strong credentials and relevant expertise who will work together constructively to execute the Company’s strategic plan for delivering long-term growth and stockholder value.
The Company has received notice from one of our stockholders, Lee G. Beaumont, (“Beaumont”) stating that he intends to nominate one or more candidates for election as director at the annual meeting in opposition to one or more directors on the slate nominated by the Board of Directors. You may receive solicitation materials from Beaumont, including opposition proxy statements and a proxy card. The Company is not responsible for the accuracy of any information provided by or relating to Beaumont or his nominee(s) contained in solicitation materials filed or disseminated by or on behalf of Beaumont or any other statements Beaumont may make.
The Board of Directors believes that Beaumont’s actions are not in the best interests of the Company or its stockholders, and URGES YOU TO DISCARD ANY PROXY CARD SENT TO YOU BY BEAUMONT, AND COMPLETE ONLY THE WHITE PROXY CARD DISTRIBUTED BY THE COMPANY. Please note that voting to “WITHHOLD” votes on the alternate proxy card sent by Beaumont is not the equivalent of voting “FOR” the candidates listed on the Company’s WHITE proxy card, because it will revoke any prior WHITE proxy card you may have previously submitted.
If you have previously signed a proxy card sent to you on behalf of Beaumont, you have the right to change your vote by completing and returning the enclosed WHITE proxy card, which will revoke any previously submitted proxy card. Only the latest proxy card that you submit, whether the Company’s WHITE proxy card or Beaumont’s alternate proxy card, will be counted.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED WHITE PROXY CARD AS SOON AS POSSIBLE AND RETURN IT IN THE ENCLOSED ENVELOPE. Your vote is particularly important this year, no matter how many shares you owned on the record date. A return envelope is enclosed for your convenience and needs no postage if mailed in the United States.
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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 materials carefully. Your vote is important and the Company appreciates your cooperation in considering and acting on the matters presented.
By Order of the Board of Directors
Neal D. Crispin, Chairman
April 6, 2015
Burlingame, California
If you have any questions, require assistance with voting, or need additional copies of proxy materials, please contact:
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If you have questions or need assistance in voting your shares, please call:
GEORGESON
480 Washington Blvd., 26th Floor
Jersey City, NJ 07310
(800) 868-1390 (Toll Free)
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PRELIMINARY PROXY STATEMENT
FOR
2015 ANNUAL MEETING OF STOCKHOLDERS
OF
AEROCENTURY CORP.
TO BE HELD ON MAY 7, 2015
This Proxy Statement and the enclosed WHITE proxy card are furnished in connection with the solicitation by the Board of Directors (the “Board”) of AEROCENTURY CORP. (the “Company”) of proxies to be voted at the 2015 Annual Meeting of Stockholders (the “2015 Annual Meeting” or the “Annual Meeting”), which will be held at 12:00 p.m. on May 7, 2015, 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 2015 Annual Meeting of Stockholders. You do not need to attend the meeting to vote your shares. Instead you may simply complete, date, sign and return the enclosed WHITE proxy card.
This Proxy Statement and the Company’s WHITE proxy card were first mailed to stockholders on or about April 6, 2015. The Company's 2014 Annual Report was mailed to stockholders concurrently with this Proxy Statement. The 2014 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
Record Date and Required Quorum. The close of business on March 16, 2015 was the record date for stockholders entitled to notice of, and to vote at, the 2015 Annual Meeting. As of that date, the Company had 1,543,257 shares of Common Stock, $0.001 par value (the “Common Stock”), issued and outstanding, excluding shares held by the Company as treasury stock. The presence at the Annual Meeting of a majority of the issued and outstanding Common Stock, or 771,629 shares, either present in person or represented by proxy, will constitute a quorum for the transaction of business at the Annual Meeting. All of the shares of the Company's Common Stock outstanding on the record date are entitled to vote at the 2015 Annual Meeting, and stockholders of record entitled to vote at the Annual Meeting will have one vote for each share of Common Stock so held with regard to each matter to be voted upon.
Voting if you are the Registered Holder of Shares. If your shares are registered directly in your name with the Company’s transfer agent, Continental Stock Transfer & Trust Co., you are considered the “stockholder of record” with respect to these shares and the Company is sending these proxy materials directly to you. As the stockholder of record, you have the right to grant your voting proxy directly to the Company by completing the enclosed WHITE proxy card or to vote in person at the Annual Meeting. To grant your voting proxy, you should return the enclosed WHITE proxy card to the Company. Even if you have voted by WHITE proxy card, you may still vote in person if you attend the meeting and your vote at the meeting will revoke any prior proxy card you submitted.
Voting if you hold shares in a Brokerage or other Nominee Account. 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 your broker or nominee is considered the stockholder of record with respect to those shares. That broker or nominee has forwarded these proxy materials to you. As the beneficial owner, you have the right to direct your broker on how to vote. To direct your broker or nominee on how to vote your shares, you must follow the procedure explained in the accompanying materials provided by your broker or nominee which generally consists of completing and returning to your broker an instruction card that was sent to you along with this Proxy Statement by your broker. Your broker or nominee may also have provided information regarding how to give voting instructions to it with respect to voting through the Internet or by telephone. Notwithstanding that your broker or nominee will be voting your shares on your behalf and as instructed by you, you may still attend the Annual Meeting to vote your shares directly. If you are going to attend the meeting, and want to vote your shares directly there, you must obtain a proxy card issued in your name from that broker, bank or other nominee that is the shareholder of record of your shares.
Effect of Returning the Company’s WHITE proxy card. Shares of the Company's Common Stock represented by WHITE proxy cards that are properly executed and returned to the Company will be voted at the 2015 Annual Meeting in accordance with the instructions of the stockholder of record filled in on the proxy card. In the absence of contrary instructions contained on the WHITE [proxy card, however, shares represented by such proxies will be voted FOR the election of the director nominees as described herein under “Proposal 1: Election of Directors”; FOR approval, in an advisory (non-binding) vote, of the Company’s executive compensation as disclosed in this Proxy Statement as described herein under “Proposal 2: Advisory Vote on Executive Compensation”; and FOR ratification of the selection of BDO USA, LLP as independent registered public accounting firm as described herein under “Proposal 3: Ratification of Selection of Independent Registered Public Accounting Firm.”
Competing Proxy Solicitation by Beaumont. With respect to Proposal 1 – Election of Directors, an individual stockholder, Lee G. Beaumont (“Beaumont”), has notified the Company that he intends to nominate himself for election as director at the Annual Meeting and that he reserves the right to nominate additional persons for election as director at the Annual Meeting. As a result, if Beaumont or any other such persons are in fact nominated for election at the Annual Meeting, the election of directors will be a contested election because there would be more nominees than available director positions. Directors will be elected on a plurality basis, meaning the two nominees who receive the greatest number of votes “For” at the Annual Meeting will be elected. THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE CANDIDATES LISTED UNDER PROPOSAL 1 ON THE WHITE PROXY CARD AND RETURN ONLY THE WHITE PROXY CARD. THE BOARD URGES THAT YOU SHOULD NOT RETURN ANY PROXY CARD SENT TO YOU ON BEHALF OF BEAUMONT.
IF YOU HOLD SHARES IN STREET NAME, THE DIRECTORS RECOMMENDED BY THE BOARD WILL BE LISTED AS SUCH ON THE INSTRUCTION CARD PROVIDED BY YOUR BROKER IN CONNECTION WITH THE COMPANY’S PROXY SOLICITATION. THE BOARD URGES YOU TO COMPLETE AND RETURN ONLY THIS INSTRUCTION CARD. IF BEAUMONT PROCEEDS WITH HIS OWN PROXY SOLICITATION, YOU MAY RECEIVE AN ALTERNATIVE INSTRUCTION CARD FROM YOUR BROKER. THE BOARD URGES THAT YOU SHOULD NOT RETURN ANY ALTERNATIVE INSTRUCTION CARD SENT TO YOU BY YOUR BROKER ON BEHALF OF BEAUMONT.
Consideration of Other Matters at Annual Meeting. The Company does not know of any matters to be presented at the 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 Annual Meeting, the proxy holders designated by the Company (the “Proxy Holders”) will have the power to vote shares represented on any WHITE proxy cards they receive in accordance with the Proxy Holders’ best judgment. In addition, the Company’s WHITE proxy card confers upon the Proxy Holders the authority to adjourn or postpone the Annual Meeting in order to assure that all stockholders who wish to vote on the matters will be able to cast their votes and to act upon the matters incident to the conduct of the meeting.
Revocation of Previously Submitted Proxy. Any stockholder of record has the right to revoke a proxy card at any time before it is voted at the Annual Meeting by: (1) delivering to the Company (to the attention of Toni Perazzo, Secretary, 1440 Chapin Avenue, Suite 310, Burlingame, California 94010) a written notice of revocation, (2) delivering a duly executed proxy or voting instructions bearing a later date before the Annual Meeting (to the attention of Toni Perazzo, Secretary, 1440 Chapin Avenue, Suite 310, Burlingame, California 94010), or (3) attending the Annual Meeting and voting in person.
Effect of Broker Non-Votes. A “broker non-vote” occurs when a broker or other nominee lacks discretionary voting power to vote on a “non-routine” proposal and a beneficial owner fails to give the broker or nominee voting instructions on that matter. Broker non-votes are in all cases, counted for purposes of determining a quorum for the Annual Meeting. Under the rules of the New York Stock Exchange, however, the effect of a broker non-vote depends upon whether the broker non-vote occurs with respect to “routine” or “non-routine” matters presented at the Annual Meeting, as discussed below.
Non- Routine Matters Presented at the Annual Meeting. The election of directors (Proposal 1) and the advisory vote on executive compensation (Proposal 2) are considered “non-routine” matters. Beneficial owners who hold their shares through a stock brokerage account will have to give voting instructions to their brokers in order for a broker to vote on these non-routine matters in order for a vote to be recorded with respect to those shares. Your broker has enclosed or otherwise provided to you a voting instruction card for you to use in directing the broker how to vote your shares. Your broker may also have provided information regarding how to give voting instructions through the Internet or by telephone. If you are a beneficial owner, failure to provide instructions to your broker in the manner as directed by your broker, will result in your shares not being voted in connection with these non-routine matters.
Routine Matters Presented at the Annual Meeting. The ratification of the selection of BDO USA, LLP as the Company’s independent registered public accounting firm for fiscal year 2015 is normally considered a “routine” matter, and a broker has the discretionary voting power to vote on this matter without any instructions from the beneficial owner. However, since Mr. Beaumont has proceeded with his competing proxy solicitation, the ratification of the selection of BDO USA, LLP as the Company’s independent registered public accounting firm for fiscal year 2015 will become a non-routine matter.
Stockholder Vote Required to Approve Proposal 1. The election of a director 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, and the nominees receiving the greatest number of affirmative votes of the shares present in person, or represented by proxy, and entitled to vote at the Annual Meeting will be elected, provided a quorum is present. Abstentions and broker non-votes will not be counted toward a nominee’s total. Because brokers or other nominees who hold shares “in street name” do not have discretionary voting authority over such shares in an election of directors, shares held “in street name” will not be voted in this election for a director unless the holder specifically instructs the holder’s brokers or other nominees on how to vote.
Stockholder Vote Required to Approve Proposal 2. The proposal on approval of executive compensation will be approved in a non-binding advisory vote if the votes cast in favor exceed the votes cast against approval. Abstentions and broker non-votes will not be counted as either a vote “For” or “Against” Proposal 2. Because brokers or other nominees who hold shares “in street name” do not have discretionary voting authority over such shares in such non-routine matters, shares held “in street name” will not be voted on this advisory vote on executive compensation unless the holders specifically instruct their brokers or other nominees on how to vote.
Stockholder Vote Required to Approve Proposal 3. Ratification of the Company’s selection of independent registered public accounting firm will require the affirmative vote of a majority of the shares present in person, or represented by proxy, and entitled to vote at the Annual Meeting, provided a quorum is present. As a result, abstentions and broker non-votes will have the same effect as votes against the proposal. Due to the competing solicitation by Mr. Beaumont, the vote on this proposal is considered non-routine. As a result, because brokers or other nominees who hold shares “in street name” do not have discretionary voting authority over such shares in such non-routine matters, shares held “in street name” would not be voted on this proposal unless the holders specifically instruct their brokers or other nominees on how to vote.
Proxy Solicitation. The Company is making this solicitation of proxies and will bear all related costs. The Company estimates that the total expenditures relating to its current proxy solicitation (other than salaries and wages of officers and employees) will be approximately $25,000, of which approximately $15,000 has been incurred as of the date of this Proxy Statement. The Company will conduct the solicitation by mail, personally, telephonically, through the Internet or by facsimile through its officers, directors and employees identified on Appendix A, none of whom will receive additional compensation for assisting with the solicitation. The Company may also solicit stockholders through press releases issued by the Company, advertisements in periodicals and postings on the Company’s website. The Company has also retained Georgeson, Inc. (“Georgeson”) to assist in the solicitation of proxies for a fixed fee of $20,000, plus out-of-pocket expenses. In addition, the Company has agreed to indemnify Georgeson against certain liabilities and expenses arising out of or in connection with the engagement. Georgeson has advised the Company that approximately 50 of its employees will be involved in the proxy solicitation by Georgeson on behalf of the Company.
HOUSEHOLDING OF ANNUAL MEETING MATERIALS
Some brokers and other nominee record holders may be participating in the practice of “householding” proxy statements and annual reports. This means that only one copy of the Proxy Statement and annual report may have been sent to multiple stockholders sharing the same household. The Company will promptly deliver a separate copy of either document to any stockholder requesting such copies who contacts the Company’s Investor Relations Department at (650) 340-1888 or by mail to 1440 Chapin Avenue, Suite 310, Burlingame, California 94010. If a stockholder is receiving multiple copies of the Proxy Statement and annual report at the stockholder’s household and would like to receive only a single copy of the Proxy Statement and annual report for a stockholder’s household in the future, the stockholder should contact the stockholder’s broker, other nominee record holder, or the Company’s Investor Relations Department to request mailing of a single copy of the Proxy Statement and annual report.
BACKGROUND OF THE SOLICITATION FOR DIRECTOR ELECTION TO OCCUR AT THE 2015 ANNUAL MEETING
By letter to the Company dated February 6, 2015, a stockholder of the Company, Lee G. Beaumont (“Beaumont”) notified the Company that he intended to nominate himself for election as a director of the Company at the 2015 Annual Meeting, and that he intended to solicit proxies to approve his election as a director at the 2015 Annual Meeting or any other meeting at which directors are to be elected.
Beaumont first had contact with the Company when Beaumont, acting through his one-person consulting company, Beau-Tech Consulting, Inc. approached the Company to act as a finder for the Company in connection with an acquisition of two regional jet engines in 2009 and as a remarketing agent for the Company for the engines at their lease expiration. The Company entered into an agreement with Beaumont for these transactions. Beaumont also acted as a finder for the Company in an engine purchase and lease transaction involving a third regional jet engine in late 2009, and when the intended lessee for the engine reneged on its commitment to lease prior to delivery, Beaumont acted as remarketing agent for the Company for that engine, pursuant to the agreement previously entered into between the Company and Beaumont.
The Company’s agreement with Beaumont was entered into in 2009, was limited to the three regional jet engines purchased by the Company in those transactions, and had a three-year term. Although Beaumont had represented that, based on his knowledge of the regional jet engine market, there would be high demand for these engines, the actual demand and resulting on-lease utilization of these engines was disappointing and well short of the results expected based on those representations. During the term of the agreement, the Company was dissatisfied with Beaumont’s performance in finding new qualified lessees for the engines. Furthermore, the Company became aware that in 2011, Beaumont had formed Beautech Power Systems LLC to acquire and lease engines, which the Company viewed as a conflict of interest with Beaumont’s role as a remarketing agent for the Company and a potential reason for Beaumont’s poor remarketing performance. Therefore, once the agreement expired in 2012, the Company did not renew it.
Aside from the Company’s dealings with Beaumont’s in connection with the aforementioned engine transactions, at various times beginning in 2009 and through 2013, Beaumont contacted the Company to present, as a finder, various asset purchase opportunities that he recommended. He presented a number of aircraft engines for sale to the Company between 2009 and 2012. Each proposal was analyzed and considered by the Company, but was ultimately rejected by the Company due to unworkable economics and/or lessee creditworthiness issues that made the proposed asset purchases unacceptable to the Company and/or its credit facility lenders.
Beaumont also contacted the Company as a finder of opportunities outside the aircraft engine segment, including the proposed purchase from Beaumont of two helicopters in October 2009 that he had previously committed to purchase for his own account from a third party, and, in January 2013 the proposed purchase of an electric power plant turbine in the United Kingdom. Even though these opportunities were entirely outside the scope of the core business of the Company, the Company analyzed and considered each of the opportunities, and found each proposed transaction unacceptable. In the case of the proposed power turbine transaction, the Company discovered that the contract that provided for the lessee to make payments under the lease was cancellable upon short notice, rendering the economics of the transaction unreliable. In the case of the proposed helicopter transaction, the creditworthiness of the proposed lessee was not as represented by Beaumont.
Since engaging in the engine transactions with Beaumont in 2009, the Company has had the opportunity to evaluate the actual performance of the engines held for lease in its asset portfolio. Through the Company’s experience with these engines, the Company has concluded that the business model for engine leasing is entirely different from that for the Company’s core business of aircraft leasing. The Company has also become aware of the increasing competition faced by independent engine lessors coming from the vertically integrated aircraft engine manufacturers, such as General Electric, that not only sell but also repair engines and are able to provide low-cost spare engines to their repair customers, which lowers yields and demand for engines owned by independent engine lessors. Because an engine lessee’s needs are usually short-term (to replace engines that need repair), the engine leasing industry is characterized by short-term leases, which results in high overall transaction costs, unpredictable off-lease periods, and extensive human resource allocation to remarketing. This is inconsistent with the Company’s core aircraft operating lease business, characterized by longer three to seven year lease terms, often with multiple renewals by existing lessees.
As a result, the Company has determined that expanding its engine leasing business, which in fiscal year 2014 accounted for only 3% of its lease revenue, through further engine acquisitions is not compatible with the Company’s long-term business strategy.
In June 2013, Beaumont approached the Company’s CEO and suggested negotiations for an unspecified joint venture relating to aircraft engines between Beaumont and the Company aimed at using the Company’s credit facility resources to enable the joint venture to acquire aircraft engines. The vague proposal was considered by management and by the Board of Directors. The Company rejected the joint venture overtures made by Beaumont, based on the impermissibility of such a transaction under the covenants contained in the Company’s credit facility, the Company’s past negative experience with Beaumont with respect to the engine transactions and the other flawed proposals that he had previously presented to the Company, and, most importantly, because of the Company’s desire not to divert any further focus from the Company’s core business of aircraft leasing.
On December 5, 2014, the Company and its Board received an unsolicited proposal from Beaumont for the acquisition of the Company by Beau Tech Power Systems, LLC, a privately held company, which the Company believes is controlled by Beaumont, in a merger transaction for a price of $12.50 per share. The letter did not make clear that Beaumont had the required financing for the proposed transaction in place; it promised only that he “anticipates no difficulties in financing the acquisition and therefore the definitive merger documentation is not likely to have a financing condition.” In a Schedule 13D filed by Beaumont on the same day with the Securities and Exchange Commission, Beaumont stated he had begun exploring strategic alternatives that may be available to the Company and had decided to make a proposal to the Company following “general discussions” with Mr. Crispin. The Schedule 13D, however, revealed that in the sixty days prior to its filing, Beaumont had actually reduced his holdings in the Company, having sold shares as recently as November 2014.
On December 16, 2014, the Board met to review and consider the proposal. The Board considered, among other things, the proposed terms and conditions outlined in the proposal and the Company’s long-term corporate strategy objectives and business plan. The Board of Directors unanimously determined that the terms of the proposal were not acceptable to the Company and that continuing to implement the Company’s long-term corporate strategy objectives and business plan was the best way to increase stockholder value going forward. The Board notified Beaumont of its decision in a letter dated December 17, 2014.
On January 9, 2015, Beaumont sent a further letter to the Board in which, among other things, he urged the Board to engage seriously with him to explore his proposal and to negotiate a transaction. In the letter, he indicated that he would be willing to discuss a possible increase in his offer, but did not suggest a specific price. His letter stated that if he did not receive a positive response by January 14, 2015, he would pursue other actions, including seeking Board representation.
On January 16, 2015, the Board of Directors held a special meeting by teleconference. At the meeting, the Board reviewed the January 9 letter from Beaumont and unanimously determined that its contents did not alter their previous decision regarding the Beaumont proposal and did not warrant a further response from the Company.
On February 6, 2015, Beaumont sent a letter to the Company withdrawing his offer to discuss a potential acquisition of the Company. In the letter, he notified the Company that he intended to nominate himself for election as a director of the Company at the 2015 Annual Meeting, and that he intended to prepare, file with the Securities Exchange Commission and mail definitive proxy materials and solicit proxies from of at least the percentage of the Company’s voting shares required to approve his election as a director at the 2015 Annual Meeting or any other meeting at which directors are to be elected. The letter indicated that Beaumont reserved the right to nominate additional persons to be elected to director positions in the event that there is more than one director position open for election at the 2015 Annual Meeting.
Consequently, you may have received already, or may be receiving shortly, a proxy solicitation package from Beaumont, asking you to complete a proxy card provided by Beaumont, which proxy card would grant Beaumont the power to vote your shares in the election the Board of Directors for a slate of one or more directors chosen at Beaumont’s discretion, instead of for those candidates recommended by the Board for election described in this Proxy Statement.
THE BOARD OF DIRECTORS RECOMMENDS YOU NOT RETURN ANY PROXY CARD SENT TO YOU ON BEHALF OF BEAUMONT.
YOU MUST COMPLETE AND RETURN THE COMPANY’S WHITE PROXY CARD TO VOTE FOR THE NOMINEES RECOMMENDED BY THE BOARD OF DIRECTORS.
IF YOU HAVE ALREADY COMPLETED AND RETURNED A PROXY CARD SOLICITED BY BEAUMONT, THE BOARD URGES YOU TO REVOKE THE PROXY GRANTED TO BEAUMONT BY COMPLETING AND RETURNING THE ENCLOSED “WHITE” PROXY CARD.
IF YOU HOLD SHARES IN STREET NAME AND HAVE PREVIOUSLY COMPLETED AN INSTRUCTION CARD TO YOUR BROKER REGARDING THE ELECTION OF DIRECTORS, BUT WANT TO REVOKE THAT INSTRUCTION AND INSTRUCT YOUR BROKER TO VOTE FOR THE CANDIDATES NOMINATED BY THE COMPANY, PLEASE CONTACT YOUR BROKER FOR ASSISTANCE.
PROPOSAL 1:
ELECTION OF DIRECTORS
Two of the Company’s six directors will be elected at the 2015 Annual Meeting. The Board of Directors has nominated the nominees set forth below. The Proxy Holders intend to vote all shares represented on WHITE proxy cards 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 2015 Annual Meeting, the proxies received on the enclosed WHITE proxy card 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 director, 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 that any nominee is unable or will decline to serve as a director. The term of office of a person elected as a director at the Annual Meeting will continue until the 2018 Annual Meeting of Stockholders or until the director's resignation, or removal or successor has been elected.
Nominees To Board Of Directors
Mr. Thomas W. Orr, age 80. Mr. Orr has served on the Company’s Board of Directors since 1997, and was also, during that time, Chair of the Audit Committee of the Board of Directors. Mr. Orr is currently a self-employed consultant on accounting matters. Since 2003, Mr. Orr has served as a Director of Internet Patents Corp, (formerly known as “InsWeb”), a publicly traded online insurance marketplace. From 1992 until 2002, Mr. Orr was a partner at the accounting firm of Bregante + Company LLP. 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 & Co., Certified Public Accountants, 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. Mr. Orr 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 Board of Directors has concluded that Mr. Orr should serve as a director of the Company because of his knowledge of the Company’s business and history, his status as an “audit committee financial expert,” and his experience with and understanding of corporate governance principles.
Mr. David P. Wilson, age 60. Mr. Wilson has been a member of the Company’s Board of Directors and the Audit Committee since February 2015. Mr. Wilson retired in 2014 from General Electric Capital Aviation Services (“GECAS”), where he was most recently a Senior Vice President, concentrating on asset sales and aircraft securitizations to a worldwide investor base. Prior to his 21-year tenure at GECAS, Mr. Wilson held positions as a product specialist and in aircraft finance marketing at Citicorp's Equipment Finance and Leasing Division. Prior to joining Citicorp in 1985, Mr. Wilson held various financial positions at De Lange Landen (formerly Master Lease Corp.) and Air Products. Mr. Wilson started his career with the public accounting firm of Ernst & Young in 1977. Mr. Wilson received a Bachelor's Degree in Accounting and Finance from Boston College in 1977 and a MS/MBA in Finance from Drexel University in Philadelphia in 1983.
The Board of Directors has concluded that Mr. Wilson should serve as a director of the Company because of his knowledge of the aircraft leasing and finance industry.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE TWO NOMINEES LISTED ABOVE.
Competing Proxy Solicitation by Beaumont
As discussed above in the section of this proxy entitled “Background of the Solicitation for the Director Election to Occur at the 2015 Annual Meeting,” Lee G. Beaumont (“Beaumont”) has notified the Company that he intends to nominate himself for election as a director of the Company at the 2015 Annual Meeting. Beaumont also notified the Company that he reserves the right to nominate additional persons to be elected to director positions in the event that there is more than one director position open for election at the 2015 Annual Meeting.
Consequently, you may have received already, or may be receiving shortly, a proxy solicitation package from Beaumont, asking you to complete a proxy card provided by Beaumont, which proxy card would grant Beaumont the power to vote your shares in the election the Board of Directors for a slate of one or more directors chosen at Beaumont’s discretion, instead of for those candidates recommended by the Board for election described above.
THE BOARD OF DIRECTORS RECOMMENDS YOU NOT RETURN ANY PROXY CARD SENT TO YOU ON BEHALF OF BEAUMONT.
YOU MUST COMPLETE AND RETURN THE COMPANY’S WHITE PROXY CARD TO VOTE FOR THE NOMINEES RECOMMENDED BY THE BOARD OF DIRECTORS.
IF YOU HAVE ALREADY COMPLETED AND RETURNED A PROXY CARD SOLICITED BY BEAUMONT, THE BOARD URGES YOU TO REVOKE THE PROXY GRANTED TO BEAUMONT BY COMPLETING AND RETURNING THE ENCLOSED “WHITE” PROXY CARD.
IF YOU HOLD SHARES IN STREET NAME AND HAVE PREVIOUSLY COMPLETED AN INSTRUCTION CARD TO YOUR BROKER REGARDING THE ELECTION OF DIRECTORS, BUT WANT TO REVOKE THAT INSTRUCTION AND INSTRUCT YOUR BROKER TO VOTE FOR THE CANDIDATES NOMINATED BY THE COMPANY, PLEASE CONTACT YOUR BROKER FOR ASSISTANCE.
PROPOSAL 2:
ADVISORY VOTE ON EXECUTIVE COMPENSATION
The Company is requesting your advisory approval of the compensation of the Company’s named executive officers as disclosed in the compensation table and the narrative discussion set forth in this Proxy Statement. This non-binding advisory vote is commonly referred to as a “say on pay” vote and is required to be conducted pursuant to Section 14A of the Securities Exchange Act of 1934, as amended. Because the Company receives management services from JetFleet Management Corp. (“JMC”), the Company has no employees and does not pay any compensation to its named executive officers. Instead, the named executive officers of the Company are compensated in their capacities as employees of JMC. You are encouraged to carefully review the information concerning compensation paid by JMC to the Company’s named executive officers beneath the caption “Executive Compensation” in the section of this Proxy Statement entitled “Information Regarding the Company’s Directors and Officers.”
The Company asks you to indicate your support for the compensation of the Company’s named executive officers as described in this Proxy Statement. This vote is not intended to address any specific item of compensation, but rather the overall compensation of the named executive officers and the practices described in this Proxy Statement. Accordingly, the Company requests that you vote, on an advisory basis, “FOR” the following resolution at the Annual Meeting:
“RESOLVED, that the compensation paid to the Company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, is hereby approved.”
While the results of this advisory vote are not binding, the Board of Directors will consider the outcome of the vote in deciding whether to take any action as a result of the vote and when making future compensation decisions for named executive officers.
The Company currently anticipates that it will conduct a “say on pay” advisory vote every year and anticipates that the next “say-on-pay” vote will occur at the 2016 annual meeting. The Company also currently intends to ask stockholders every six years whether the “say on pay” vote should occur every one, two or three years. The Company currently anticipates that the next advisory vote as to frequency of “say on pay” advisory votes will occur at the 2019 annual meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE COMPENSATION OF THE NAMED EXECUTIVE OFFICERS AS DISCLOSED IN THIS PROXY STATEMENT.
PROPOSAL 3:
RATIFICATION OF SELECTION OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The firm of BDO USA, LLP served as independent registered public accounting firm for the Company for the fiscal year ended December 31, 2014. The Board of Directors desires the firm to continue in this capacity for the current fiscal year. Accordingly, a proposal will be presented at the Annual Meeting to ratify the selection of BDO USA, LLP by the Board of Directors as independent registered public accounting firm to audit the accounts and records of the Company for the fiscal year ending December 31, 2015, and to perform other appropriate services. In the event that stockholders fail to ratify the selection of BDO USA, LLP, the Board of Directors will reconsider such selection.
A representative of BDO USA, LLP will be present at the Annual Meeting, will have the opportunity to make a statement if he or she so desires and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE SELECTION OF BDO USA, LLP AS INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.
INFORMATION REGARDING AUDITORS
Audit. The aggregate fees accrued by the Company as payable to BDO USA, LLP (the “Auditor”) for professional services rendered for the audit of the Company's financial statements for the fiscal year ended December 31, 2014, and for the review of the financial statements included in the Company's Forms 10-Q during the 2014 fiscal year was $304,000. During the fiscal year ended December 31, 2014, the Company did not accrue any fees payable to the Auditor for audit-related services or Sarbanes-Oxley internal controls compliance review.
The aggregate fees accrued by the Company as payable to the Auditor for professional services rendered for the audit of the Company's financial statements for the fiscal year ended December 31, 2013, and for the reviews of the financial statements included in the Company's Forms 10-Q during the 2013 fiscal year were $251,000. During the fiscal year ended December 31, 2013, the Company accrued no fees payable to the Auditor for audit-related services or Sarbanes-Oxley internal controls compliance review.
Audit-Related Fees. The Company made no payments to the Auditor for audit-related services in the fiscal years ended December 31, 2013 and 2014.
Tax Fees. The Company made no payments to the Auditor for tax-related services, including tax planning and preparation of returns, in the fiscal years ended December 31, 2013 and 2014.
All Other Fees. No other fees were paid to the Auditor in the fiscal years ended December 31, 2013 and 2014.
Audit Committee Approval. The retainer agreements between the Company and the Auditor containing the terms and conditions and estimated fees to be paid to the Auditor for audit and tax return preparation services were pre-approved by the Audit Committee at the beginning of their respective engagements. The Audit Committee’s policy is to pre-approve all audit and non-audit services provided by the Auditor. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The Audit Committee has delegated pre-approval authority to its Chair when expedition of services is necessary. One hundred percent of the audit-related fees and tax fees paid to the Auditor in the fiscal years ended December 31, 2013 and 2014 were pre-approved by the Audit Committee. The Auditor and management are required to periodically report to the full Audit Committee regarding the extent of services provided by the Auditor in accordance with this pre-approval, and the fees for the services performed to date. None of the services rendered by the Auditor were rendered pursuant to the de minimis exception established by the Securities and Exchange Commission.
AUDIT COMMITTEE REPORT
Notwithstanding anything to the contrary set forth in any of the Company’s previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate future filings, including this Proxy Statement, in whole or in part, the following Report of the Audit Committee shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any such filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
The Audit Committee of the Board of Directors of the Company serves as the representative of the Board of Directors for general oversight of the Company's financial accounting and reporting process, internal controls, audit process and process for monitoring compliance with laws and regulations. The Audit Committee is responsible for the appointment, compensation and oversight of the work of the Auditor. The members of the Audit Committee are independent (as defined in Section 803A of the NYSE MKT Company Guide). The Company's management has primary responsibility for preparing the Company's financial statements and the Company's financial reporting process. The Company's Auditor, BDO USA, LLP, is responsible for expressing an opinion on the fairness and conformity of the Company's audited financial statements to generally accepted accounting principles. In this context, the Audit Committee hereby reports as follows:
1. The Audit Committee reviewed and discussed the audited financial statements with the Company's management.
2. The Audit Committee discussed with the Auditor the matters required to be discussed by Auditing Standard No. 16 - Communications with Audit Committees (“AS 16”).
3. The Audit Committee reviewed and discussed with BDO USA, LLP its judgments as to the quality and acceptability of the Company's accounting principles and such other matters as are required to be discussed pursuant to AS 16.
4. The Audit Committee reviewed and discussed with BDO USA, LLP its independence from the Company and its management. As part of that review, BDO USA, LLP provided the Audit Committee the written disclosures and letter required by Public Company Accounting Oversight Board Ethics and Independence Rule 3526, Communication with Audit Committees Concerning Independence.
5. Based on the review and discussion referred to in paragraphs (1) through (4) above, the Audit Committee recommended to the Board of Directors of the Company, and the Board of Directors has approved, that the audited financial statements be included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014, for filing with the Securities and Exchange Commission.
The Audit Committee held seven meetings during the fiscal year ended December 31, 2014.
Submitted by the Audit Committee of the Board of Directors:
Thomas W. Orr, Chair
Roy E. Hahn
Evan M. Wallach
David P. Wilson
INFORMATION REGARDING THE COMPANY’S
DIRECTORS AND OFFICERS
Current Board Of Directors
When considering whether directors and nominees have the experience, qualifications, attributes, skills, diversity of experience and background, taken as a whole, to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of the Company’s business and structure, the Board of Directors focused primarily on the information discussed in each of the directors’ individual biographies set forth below.
The following directors have a term expiring at the Company’s 2015 Annual Meeting: Thomas W. Orr and David P. Wilson. Each has been nominated for re-election to the Board of Directors. For biographical information on Messrs. Orr and Wilson, see “PROPOSAL 1: ELECTION OF DIRECTORS - Nominees To Board Of Directors,” above.
The following directors have a term expiring at the Company’s 2016 Annual Meeting of Stockholders:
Mr. Neal D. Crispin, age 69. 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 the Company’s inception in 1997. He has also served as President and Chairman of the Board of JetFleet Management Corp. (“JMC”), the management company for AeroCentury Corp. since the Company’s founding in 1997. Since 1983, he has been President and Chairman of CMA Consolidated, Inc. (“CMA”), an investment management firm that is no longer active. Since 2005, he has served as the President of Structured Funding, Inc., and an investment management firm. Since 2007, he has served as the President of Passport Holding Corp., an investment services firm. Since 2007, he has served as a Director of NuCapital Curaçao B.V., a private energy development company. Prior to forming CMA in 1983, Mr. Crispin spent two 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 certified public accountant, is a member of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants.
The Board of Directors has concluded that Mr. Crispin should serve as a director of the Company because of his knowledge of the Company’s business operations and history, his many years of experience with JMC, and his experience in finance and leasing.
Mr. Evan M. Wallach, age 60. Mr. Wallach is President and Chief Executive Officer of Global Airfinance Services, Inc., an aviation consulting business he founded in 1998 and returned to in June 2012. Mr. Wallach is a member of the Audit Committee and has served on the Board since 1997. From December 2009 until June 2012, Mr. Wallach was Managing Director, Aviation/Transportation Markets at Jefferies & Company, Inc. From 2005 to 2009, Mr. Wallach was a Managing Director, Airline/Aircraft Securities Sales at Guggenheim Capital Markets, LLC, a securities broker/dealer. From 2001 to 2005, he served as Managing Director, Fixed Income Institutional Sales, at Piper Jaffray LLC, and from 1998 to 2001 he served as Vice President, Finance of C-S Aviation Inc., an aviation consulting firm. Mr. Wallach has specialized in aircraft and airline financing for over thirty years, having held senior level positions with The CIT Group, Bankers Trust Company, Kendall Capital Partners, Drexel Burnham Lambert, and American Express Aircraft Leasing. 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 Board of Directors has concluded that Mr. Wallach should serve as a director of the Company because of his knowledge of the Company’s business and history and his expertise in aircraft finance.
The following directors have a term expiring at the Company’s 2017 Annual Meeting of Stockholders:
Mr. Roy E. Hahn, age 62. Mr. Hahn is a member of the Audit Committee of the Board of Directors and has served on the Board since 2007. Mr. Hahn is currently Managing Director of Marbridge Group, LLC, an alternative investment management firm he founded in 2004. Prior to his founding of Marbridge Group, LLC, he was Managing Director of Chenery Associates, an investment management firm. Mr. Hahn was a Director at Coopers & Lybrand from 1987 to 1988, and a tax partner with that firm from 1989 to 2003. Prior to Coopers & Lybrand, he was a partner at Arthur Young & Co. His educational background includes a Bachelor's Degree in Accounting from San Francisco State University. Mr. Hahn is a certified public accountant and a member of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants.
The Board of Directors has concluded that Mr. Hahn should serve as a director of the Company because of his knowledge of the Company’s business and history, his status as an “audit committee financial expert,” and his overall expertise in accounting and finance principles and international finance transactions.
Ms. Toni M. Perazzo, age 67. Ms. Perazzo is a member of the Executive Committee of the Board of Directors and has served on the Board since the Company’s inception in 1997. She is the Company’s Chief Financial Officer, Treasurer, Senior Vice President-Finance and Secretary and has held these same positions with JetFleet Management Corp. (“JMC”), the management company for AeroCentury Corp., since 1994, and CMA Consolidated, Inc. (“CMA”), an investment management firm that is no longer active, since 1990. Since 2005, she has also been Senior Vice President-Finance at Structured Funding, Inc., an investment management firm. 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 is a certified public accountant and member of the California Society of Certified Public Accountants and the American Institute of Certified Public Accountants.
The Board of Directors has concluded that Ms. Perazzo should serve as a director of the Company because of her knowledge of the Company’s business and history, capitalization structure and finances, and her accounting and audit experience, as well as her many years of experience with JMC.
Board Meetings and Committees
The Board of Directors of the Company held a total of five meetings during the fiscal year ended December 31, 2014. During the last year, no incumbent director attended fewer than 75% of the meetings of the Board of Directors and its committees on which he or she served that were held during the period in which he or she was a director.
The Company has an Audit Committee and an Executive Committee of the Board of Directors. The Audit Committee operates under a charter approved by the Board of Directors. The Audit Committee meets with the Company's financial management and its independent registered public accounting firm to review internal financial information, audit plans and results, and financial reporting procedures. This committee currently consists of Thomas W. Orr, Chair, Roy E. Hahn, Evan M. Wallach, and David P. Wilson. The Board has determined that Messrs. Orr, Hahn, Wallach, and Wilson are independent within the meaning of “independence” as set forth in the NYSE MKT Company Guide.
The Board of Directors has determined that at least two members of the Audit Committee, Messrs. Orr and Hahn, are “audit committee financial experts” within the meaning of Item 407(d)(5) of Regulation S-K of the Securities Exchange Act of 1934, as amended. Each of Messrs. Orr and Hahn is also an “independent director” within the meaning of Section 803A of the NYSE MKT Company Guide. Mr. Orr is a self-employed accounting consultant and former partner of the accounting firms Bregante + Company LLP and Arthur Young & Co., Certified Public Accountants. Mr. Hahn is a founder of Marbridge Group, LLC, an alternative investment management firm, and prior to that was a tax partner in the accounting firms of Coopers & Lybrand and Arthur Young & Co. In the course of their respective careers, each of Messrs. Orr and Hahn acquired (i) an understanding of generally accepted accounting principles and financial statements, (ii) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves, (iii) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company’s financial statements, (iv) an understanding of internal control over financial reporting, and (v) an understanding of audit committee functions.
The Audit Committee held seven meetings during the fiscal year ended December 31, 2014.
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 exercises all other powers of the Board of Directors except for those which require action by all of 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 two directors, Neal D. Crispin, Chair, and Toni M. Perazzo.
The Company does not have a formal Nominating Committee. The independent directors separately consider and make recommendations to the full Board of Directors regarding any candidate being considered to serve on the Board of Directors. The full Board of Directors reviews potential candidates for the Board of Directors. While the Board of Directors does not have a specific policy for considering nominees recommended by stockholders, this does not mean that a recommendation would not be considered if received from a stockholder. The Board has not yet considered a procedure for considering nominees recommended by stockholders in addition to the procedures already set forth in the Bylaws of the Company. It believes that the current informal consideration process has been adequate in light of the historical absence of stockholder proposals. In any event, there would be no difference between the manner in which the Board of Directors would evaluate a nominee for director whether recommended by a stockholder or recommended by a member of the Board of Directors or one of the Company’s executive officers. The Company does not pay any third party to identify or assist in identifying or evaluating potential nominees. Additionally, other than attempting to constitute the Board of Directors with directors who have skills and experience that are relevant and helpful to the Company's industry and operations and who have the desire and capacity to actively serve, the Board of Directors does not have a policy of considering diversity in identifying director nominees.
In reviewing potential candidates for the Board, the Board of Directors considers the individual's experience in the Company's industry, the general business or other experience of the candidate, the needs of the Company for an additional or replacement director, the personality of the candidate, and the candidate's interest in the business of the Company, as well as numerous other subjective criteria. Of greatest importance is the individual's integrity, willingness to actively participate and ability to bring to the Company his or her experience and knowledge in areas that are most beneficial to the Company. The Board intends to continue to evaluate candidates for election to the Board on the basis of the foregoing criteria.
Since the Company receives management services from JMC, the Company has no employees and does not pay any compensation to its officers. As a result, the Company has no compensation committee.
Board Leadership Structure
The Board believes that the Company’s President is best situated to serve as Chairman of the Board because he is the director most familiar with the Company’s business and industry, and most capable of effectively identifying strategic priorities for the Company, leading the Board in discussions regarding the Company’s business and industry, and focusing the Board on execution of strategy. Independent directors and management have different perspectives and roles in strategy development. The Company’s independent directors bring experience, oversight and expertise from outside the Company and its industry, while the President brings Company-specific and industry-specific experience and expertise. The Board believes that the combined role of Chairman and President promotes strategy development and execution, and facilitates information flow between management and the Board, which are essential to effective governance.
Board of Directors’ Role in Risk Oversight
The Company is exposed to a number of operational and financial risks. The Board plays an active role in overseeing management of such risks. The Company’s President (who is himself a member of the Board) is directly responsible for a number of operational risks, such as the risks inherent in acquiring and owning used aircraft or engines, the risks associated with leasing such aircraft or engines to air carriers, and the risks inherent in disposing of such aircraft or engines. The Board regularly receives reports from the President on these risks and works closely with the Company’s management on strategies to manage these risks and to develop contingency plans. The Company’s Chief Financial Officer (who is herself a member of the Board) is directly responsible for a number of financial risks, such as the risks associated with the Company’s credit and liquidity. The Board regularly receives reports from the Chief Financial Officer on these risks and works closely with the Company’s management on strategies to manage these risks and to develop contingency plans. The Board also meets and confers regularly with the Company’s management to identify other risks faced by the Company. The Company believes that the inclusion of these members of senior management of the Company on the Board provides the Board with visibility into and access to the details underlying the risks the Company faces, and thereby enhances the quality of the Board’s risk oversight. Also, the Audit Committee oversees management of certain specific financial risks, such as variable interest rate risk.
Communication between Stockholders and Directors
The Company’s Board of Directors currently does not have a formal process for stockholders to send communications to the Board of Directors and does not believe such procedures are necessary at this time because it believes that informal communications are sufficient to communicate questions, comments and observations that could be useful to the Board.
Director Attendance at the Annual Meeting
It is the policy of the Company and Board of Directors that directors attend the Annual Meeting and be available for questions from the stockholders. All the then-sitting directors were in attendance at the 2014 Annual Meeting. It is anticipated that the directors nominated for election at the 2015 Annual Meeting will also be in attendance at that meeting.
Board Independence
If the nominees to the Board of Directors are elected, a majority of the Board of Directors of the Company, consisting of Messrs. Orr, Hahn, Wallach and Wilson, will be “independent directors,” as defined in accordance with Section 803A of the NYSE MKT Company Guide.
Involvement in Legal Proceedings
No director or associate of a director is involved in a material proceeding as a party adverse to the Company or with a material interest adverse to the Company.
Director Compensation
Non-employee board members receive an annual fee of $25,000, paid in quarterly installments and are also reimbursed for all reasonable out-of-pocket costs incurred in connection with their attendance at such meetings of the Board of Directors. Non-employee members also receive $1,000 annually for each committee membership, and the audit committee chair receives an additional $3,000. Board members who are officers of the Company do not receive any compensation for Board or committee membership. No member of the Company’s Board of Directors receives equity compensation in relation to his/her service as a member of the Company’s Board of Directors.
The table below provides the compensation of the Company’s directors for the fiscal year ended December 31, 2014:
FISCAL YEAR 2014 DIRECTOR COMPENSATION
|
Name
|
|
Fees Earned or
Paid in Cash
($) (1)
|
|
|
Total
($)
|
|
|
Roy E. Hahn
|
|
|
26,000 |
|
|
|
26,000 |
|
|
Thomas W. Orr
|
|
|
29,000 |
|
|
|
29,000 |
|
|
Evan M. Wallach
|
|
|
26,000 |
|
|
|
26,000 |
|
|
David Wilson (2)
|
|
|
0 |
|
|
|
0 |
|
|
(1)
|
Neal Crispin and Toni Perazzo were officers of the Company and JMC during 2014 and therefore did not receive compensation for their respective service as members of the Company’s Board of Directors or committee thereof, in accordance with the Company’s director compensation policy. Mr. Orr earned $25,000 as a non-employee member of the Board, an additional $1,000 for his membership on the Audit Committee and an additional $3,000 for chairing the Audit Committee. Each of Messrs. Wallach and Hahn earned $25,000 as a non-employee member of the Board and an additional $1,000 for each of their respective memberships on the Audit Committee.
|
|
(2)
|
Mr. Wilson joined the Board on February 6, 2015.
|
Officers and Key Employees
For biographies of Neal D. Crispin, President & Chairman of the Board, and Toni M. Perazzo, Chief Financial Officer, Treasurer, Senior Vice President - Finance, & Secretary, see “Current Board of Directors.” Listed below are the other officers of the Company who are also key officers and employees of JMC, and are responsible for the management of various aspects of the Company’s business:
Mr. Brian J. Ginna, Vice President, Corporate Development, age 46. Mr. Ginna is responsible for all corporate communications, investor relations and public relations of the Company and JMC. Mr. Ginna joined the Company and JMC in 2001, and has served as Controller for CMA, which he joined in 1991. Mr. Ginna received a Bachelor’s Degree in Finance from Babson College.
Mr. Byron Hurey, Vice President, Aircraft Acquisitions, age 67. Mr. Hurey is responsible for identifying, recommending and completing aircraft acquisition and lease opportunities. Mr. Hurey joined the Company and JMC in February 2007. From 2001 to 2007, Mr. Hurey was a self-employed consultant specializing in equipment leasing. Mr. Hurey is a former U.S. Navy aviator and has held significant marketing and sales positions in the aerospace and financial community over the past thirty years. Among his past responsibilities were positions at Gates Learjet, PLM International, ATEL Financial Corporation and Sansome Street Holdings. Mr. Hurey is a graduate of Cornell University with a degree in Business Administration.
Mr. Harold M. Lyons, Vice President, Finance, age 56. Mr. Lyons is responsible for overseeing tax accounting and tax analysis as well as Sarbanes-Oxley internal controls compliance review. Mr. Lyons joined the Company and JMC in October 2003. Since 2005, Mr. Lyons has also served as the Senior Vice President of Structured Funding, Inc. Since 1992, Mr. Lyons has also served as the Senior Vice President of CMA. Prior to joining CMA in 1992, Mr. Lyons was a Manager in the Tax Department of Coopers & Lybrand, Certified Public Accountants and, before that, Mr. Lyons was a Manager in the Tax Department of Arthur Young & Co., Certified Public Accountants. He received a Bachelors Degree in Business Administration (specializing in Accounting and Applied Economics) and a Masters Degree in Business Administration (specializing in finance and management science) from the University of California, Berkeley. Mr. Lyons is a certified public accountant, and is a member of the American Institute of Certified Public Accountants (and a member of the Tax Section) and of the California Society of Public Accountants.
Mr. Frank Pegueros, Senior Vice President, Operations, age 55. Mr. Pegueros is responsible for negotiation of aircraft acquisitions and aircraft remarketing and sales, as well as drafting of contractual documents. Mr. Pegueros joined JMC and the Company in 2007 and was previously in a variety of positions with United Airlines over a twenty-year period. Initially as power plant engineer and finally as a senior aircraft sales executive, he was a member of the United's aircraft team responsible for aircraft acquisitions and sales as well as lender negotiations. He is a graduate of Cal Poly State University with BS in Aeronautical Engineering.
Mr. Glenn Roberts, Vice President, Controller, age 50. Mr. Roberts is responsible for financial accounting and analysis. Mr. Roberts joined JMC in 1994 and the Company in 1997. He has been employed by affiliates of the Company since 1989 in various capacities of increasing responsibility.
Mr. Christopher B. Tigno, General Counsel, age 53. 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 has also served as General Counsel of Structured Funding, Inc. since 2005 and of CMA since 1996. He joined the Company in 1997 and joined JMC and CMA in 1996. He was also Senior Counsel with the law firm of Wilson, Ryan & Campilongo from 1992 to 1996, and prior to that was associated with the law firm of Fenwick & West from 1988 to 1992 and the law firm of Morrison & Foerster from 1986 to 1988. Mr. Tigno received his Juris Doctor Degree from the University of California at Berkeley, 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.
Executive Compensation
Because the Company receives management services from JMC, the Company has no employees and does not pay any compensation to its executive officers. Instead, the executive officers of the Company are compensated in their capacities as employees of JMC. The executive officers of the Company do not receive any compensation from JetFleet Holding Corp. JMC is an at-will employer, and none of the Company’s current executive officers has an employment agreement with JMC. The compensation paid by JMC to the Company’s executive officers consists solely of base salary plus bonus payments. Mr. Neal Crispin, in his capacity as President of JMC, has sole discretion in determining annual salary and bonus payments for the JMC officers and employees, including his own salary and bonus.
The following table sets forth certain information for the fiscal years ending December 31, 2014 and December 31, 2013, concerning compensation paid by JMC to the Company’s executive officers who were serving as such at December 31, 2014:
SUMMARY COMPENSATION TABLE
| Name and Position |
Year |
Salary($) |
Bonus($) |
All OtherCompensation($) |
Total($) |
| Neal D. Crispin |
2014 |
1 |
0 |
0 |
1 |
| President & Chairman |
2013 |
1 |
0 |
0 |
1 |
| Toni M. Perazzo |
2014 |
310,000 |
170,000 |
0 |
480,000 |
| , CFO, Treasurer, Senior VP - Finance, & Secretary |
2013 |
310,000 |
0 |
0 |
310,000 |
JMC Management Fee and Risk Management
Because the Company has no employees, it has no compensation policies or practices that are reasonably likely to have a material adverse effect on the Company. However, the structure of the Company’s management fee arrangement with JMC may affect the Company’s risk exposure. All decisions regarding acquisitions and disposal of assets from the Company’s portfolio are made by JMC. JMC is paid an annual management fee equal to 3% of the net asset value of the Company’s portfolio. JMC also receives acquisition fees up to to 4% of the first $5,000,000 of assets purchased in a single transaction by the Company and 3% of any excess over the first $5,000,000, as confirmed by a letter agreement approved by the Board of Directors and the independent directors voting separately on February 27, 2007. JMC also is entitled, under the Management Agreement, to receive reimbursement of remarketing fees and expenses paid by it upon the re-lease or resale of an asset.
Under this management fee structure, a larger volume of acquisitions generates acquisition fees and also increases the periodic management fee by increasing the size of the asset portfolio. This management fee structure may create a situation where a decision by JMC for the Company to forego an asset acquisition transaction deemed to be an unacceptable business risk due to the lessee or the asset type is in conflict with JMC's own pecuniary interest, and conversely a situation where a decision by JMC for the Company to pursue an asset acquisition transaction that presents significant business risk due to the lessee or the asset type furthers JMC’s own pecuniary interest. As a result, the management fee structure could act to incent greater risk-taking by JMC in asset acquisition decision-making.
The Company has established objective target guidelines for yields on acquired assets. Further, the Board, including outside independent directors, must approve any acquisition that involves a new asset type. While the Company currently believes the foregoing are effective mitigating factors against undue compensation-incented risk-taking by JMC, there is no assurance that such mechanisms can entirely and effectively eliminate such risk.
The current Management Agreement has a term that expires on April 23, 2018. The Management Agreement contains a provision that entitles the Company to unilaterally terminate the Management Agreement prior to its scheduled expiration. If the Company exercises its right to unilaterally terminate the Management Agreement before its scheduled expiration, the Agreement requires the Company to pay JMC an early termination fee according to a formula as follows:
Payment Amount = A – ($1,000,000 x B)
Where:
|
|
A = $12,000,000 adjusted to reflect CPI inflation from April 23, 1998 to the date of early termination;
|
|
|
B = the number of years or portion thereof remaining in the term at the time of early termination.
|
By way of example, if the Management Agreement had been unilaterally terminated by the Company on February 1, 2015, using the formula, A = $17,333,169, and B = 4, and, thus, the early termination fee would have been $13,333,169 on that date.
The Management Agreement does not automatically terminate upon, and does not require the Company to pay JMC any fee resulting from, a change in control of the Company.
Compensation Committee Interlocks And Insider Participation
Neal D. Crispin and Toni M. Perazzo are executive officers and directors of both the Company and JMC. As described above under “Employee Compensation,” the Company receives management services from JMC and has no employees and does not pay any compensation to its executive officers. The Company does not have a compensation committee because it has no employees. None of the Company’s executive officers serves on a compensation committee (or any other committee of the board of directors performing similar functions), and there were no interlocks or insider participation between any member of the Board of Directors and any member of the board of directors or any compensation committee 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, 2015, by: (i) each person or entity that 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
Common Stock (2)
|
|
|
Neal D. Crispin
Chairman of Board of
Directors,
President, and Principal
Stockholder (3)(4)(6)
|
|
|
332,005 |
|
|
|
20.44 |
% |
|
Toni M. Perazzo
Director, Sr. Vice President-Finance,
Secretary and
Principal Stockholder (3)(5)(6)
|
|
|
332,005 |
|
|
|
20.44 |
% |
|
Thomas W. Orr
Director (3)
|
|
|
1,700 |
|
|
|
* |
|
|
Evan M. Wallach
Director (3)
|
|
|
100 |
|
|
|
* |
|
|
Roy E. Hahn
Director (3)
|
|
|
0 |
|
|
|
* |
|
|
David P. Wilson
Director (3)
|
|
|
0 |
|
|
|
* |
|
|
All directors and executive
officers as a group
(5 persons)
|
|
|
333,805 |
|
|
|
20.55 |
% |
|
JetFleet Holding Corp.
Principal Stockholder (7)
|
|
|
198,067 |
|
|
|
12.19 |
% |
|
Seabreeze Capital Management, LLC (8)
|
|
|
210,747 |
|
|
|
12.97 |
% |
|
Lee G. Beaumont (9)
|
|
|
150,450 |
|
|
|
9.26 |
% |
|
Whitebox Advisors, LLC (10)
|
|
|
81,224 |
|
|
|
5.00 |
% |
|
Dimensional Fund Advisors LP (11)
|
|
|
79,503 |
|
|
4.89
|
% |
----------------------------------
* Less than 1%
Footnotes to Security Ownership:
(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. Beneficial ownership of shares is determined in accordance with the rules of the Securities and Exchange Commission (“SEC”) and generally includes any shares over which a person exercises sole or shared voting or investment power, or of which a person has the right to acquire ownership within 60 days after, March 1, 2015.
(2) For purposes of calculating percentages, 1,624,481 shares were used as the total outstanding shares, consisting of 1,543,257 shares of outstanding Common Stock (excluding Company treasury stock) as of March 1, 2015, plus 81,224 shares issuable upon exercise of outstanding warrants exercisable on March 1, 2015, or within sixty (60) days thereafter.
(3) The mailing address is c/o AeroCentury Corp., 1440 Chapin Avenue Suite 310, Burlingame, California 94010.
(4) Includes 198,067 shares owned by JetFleet Management Corp., a wholly owned subsidiary of JetFleet Holding Corp., of which Mr. Crispin is an officer, director and/or principal shareholder; 60,869 shares indirectly held by The ARC Trust, an irrevocable trust, of which a dependent child of Mr. Crispin is beneficiary; and 60,869 shares beneficially owned by his spouse, Ms. Toni Perazzo, through the Stargate Trust.
(5) Includes 198,067 shares owned by JetFleet Management Corp., a wholly owned subsidiary of JetFleet Holding Corp., of which Ms. Perazzo is an officer, director and/or principal shareholder and 60,869 shares held by Stargate Trust, an irrevocable trust, of which Ms. Perazzo is a beneficial owner, and 60,869 shares indirectly held by the ARC Trust, an irrevocable trust, of which a dependent child of Ms. Perazzo is the beneficiary.
(6) The shares listed for Mr. Crispin and Ms. Perazzo represent the same shares, not separate lots of shares. Mr. Crispin and Ms. Perazzo are deemed to be beneficial owner of all shares owned by the other.
(7) Consists of 198,067 shares owned by a wholly owned subsidiary, JetFleet Management Corp.
(8) Based solely on a Schedule 13G/A filed with the SEC on February 4, 2015, Seabreeze Capital Management, LLC has sole voting power and sole dispositive power with respect to 210,747 shares as of December 31, 2014. Seabreeze Capital Management, LLC, 3511 Venture Drive, Huntington Beach, CA 92649.
(9) Based solely on a Schedule 13D/A filed with the SEC on February 10, 2015, Lee G. Beaumont has sole voting power and sole dispositive power with respect to 150,450 shares as of February 6, 2015. Lee G. Beaumont, 2090 Centro Street, East, Tiburon, CA 94920.
(10) Based solely on a Schedule 13G filed with the SEC on February 14, 2012, Whitebox Advisors, LLC, its affiliates and affiliated funds, together, have shared voting power and dispositive power with respect to 81,224 shares of the Company’s Common Stock as of December 31, 2011. Includes shares and warrants exercisable for shares owned by Whitebox Multi-Strategy Advisors, LLC, Whitebox Multi-Strategy Partners, L.P., Whitebox Multi-Strategy Fund, L.P., Whitebox Multi-Strategy Fund, Ltd., Whitebox Small Cap Long Short Equity Advisors, LLC, Whitebox Small Cap Long Short Equity Partners LP, Whitebox Small Cap Long Short Equity Fund LP, Whitebox Small Cap Long Short Equity Fund Ltd., Pandora Select Advisors, LLC; Pandora Select Partners, LP; Pandora Select Fund, LP; and Pandora Select Fund, Ltd. Whitebox Advisors, LLC, 3033 Excelsior Blvd. Ste. 300, Minneapolis, MN 55416.
(11) Based solely on a Schedule 13G filed with the SEC on February 5, 2015, Dimensional Fund Advisors LP has sole voting power and sole dispositive power with respect to 79,503 shares as of December 31, 2014. According to the Schedule 13G, Dimensional Fund Advisors LP, as an investment adviser, furnishes investment advice to four investment companies and serves as investment manager to certain other commingled group trusts and separate accounts (collectively referred to as the “Dimensional Funds”). In certain cases, subsidiaries of Dimensional Fund Advisors LP may act as an adviser or sub-adviser to certain Fund. In its role as investment adviser, sub-adviser and/or manager, Dimensional Fund Advisors LP or its subsidiaries (collectively, “Dimensional”) may be deemed to be the beneficial owner of the shares of owned by the Dimensional Funds, but Dimensional and its subsidiaries disclaim beneficial ownership of such shares. Dimensional Fund Advisors LP, Palisades West, Building One, 6300 Bee Cave Road, Austin, Texas, 78746.
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 April 23, 1998, between JMC and the Company (the “Management Agreement”). The officers of the Company are also officers of JMC and two members of 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 and may also be reimbursed for third party remarketing fees and expenses paid in connection with the sale or re-lease of the Company’s assets. The management fees, acquisition fees, and remarketing expenses may not exceed the customary and usual fees that would be paid to an unaffiliated party for such services. During 2014 and 2013, the Company recognized as expense $3,864,900 and $4,369,300 respectively, of management fees payable to JMC. On November, 1, 2014, to assist the Company and enable the Company to comply with certain financial covenants contained in its credit facility, JMC granted the Company a one-time permanent waiver of the management fee that would have been payable by the Company to JMC for the fourth quarter of 2014 amounting to approximately $1,200,000. In connection with asset purchases during 2014 and 2013, the Company paid JMC a total of $2,100,000 and $799,000, respectively, in acquisition fees, which are included in the capitalized cost of the assets. Remarketing expenses reimbursed to JMC were $64,000 and $589,300 in 2014 and 2013, respectively.
Office Space. The Company maintains its principal office at the offices of JMC at 1440 Chapin Avenue, Suite 310, Burlingame, California 94010, without reimbursement to JMC.
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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, 2014 with all Section 16(a) filing requirements applicable to the Company's officers, directors and greater than ten percent beneficial owners.
STOCKHOLDER PROPOSALS
Requirements for Stockholder Proposals to be Brought Before 2016 Annual Meeting of Stockholders (“2016 Annual Meeting”). For stockholder proposals to be considered properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Company. To be timely for the 2016 Annual Meeting, notice of stockholder proposals must be delivered to, or mailed and received by, the Secretary of the Company at the principal executive offices of the Company between January 21, 2016, and February 20, 2016. A stockholder's notice to the Secretary must set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the Annual Meeting and the reasons for conducting such business at the Annual Meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the number of shares of the Company’s Common Stock which are beneficially owned by the stockholder, and (iv) any material interest of the stockholder in such business.
Requirements for Stockholder Proposals to be Considered for Inclusion in the Company's Proxy Materials. Stockholder proposals submitted pursuant to Rule 14a-8 under the Exchange Act and intended to be presented at the Company's 2016 Annual Meeting must be received by the Company not later than December 7, 2015, in order to be considered for inclusion in the Company's proxy materials for that meeting.
ANNUAL REPORT ON FORM 10-K
A copy of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, is available without charge to each person solicited by this Proxy Statement upon the written request of such person to Investor Relations, AeroCentury Corp., 1440 Chapin Avenue, Suite 310, Burlingame, California 94010.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON MAY 7, 2014
The Notice of Annual Meeting, Proxy Statement, and the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 are available online at:
http://www.aerocentury.com/downloads.htm
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, nor has it received any notice of any matter by the deadline prescribed by SEC Rule 14a-4(c). Without limiting the Company’s ability to apply the advance notice provisions in its Amended and Restated Bylaws with respect to the procedures that must be followed for a matter to be properly presented at an annual meeting, if other matters should properly come before the meeting, the Proxy Holders will vote on such matters in accordance with their best judgment.
It is important that your shares be represented at the Annual Meeting, regardless of the number of shares that you hold. YOU ARE, THEREFORE, URGED TO EXECUTE PROMPTLY AND RETURN THE ACCOMPANYING WHITE PROXY CARD IN THE ENVELOPE THAT HAS BEEN ENCLOSED FOR YOUR CONVENIENCE. Stockholders of record who are present at the Annual 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,
Neal D. Crispin, President
April 6, 2015
Burlingame, California
APPENDIX A
INFORMATION CONCERNING PARTICIPANTS
IN THE COMPANY’S SOLICITATION OF PROXIES
The following tables (“Directors and Nominees” and “Officers and Employees”) set forth the name, principal business address and the present principal occupation or employment, and the name, principal business and address of any corporation or other organization in which their employment is carried on, of the Company’s directors, nominees, officers and employees who, under the rules of the Securities and Exchange Commission, are considered to be “participants” in the Company’s solicitation of proxies from its stockholders in connection with the 2015 Annual Meeting.
The names and principal occupations of the Company’s directors and nominees who are considered “participants” in the Company’s solicitation are set forth under the section above titled “Proposal 1: Election of Directors” of this Proxy Statement.
The business address for all of the Company’s directors and nominees is: AeroCentury Corp., 1440 Chapin Avenue, Suite 310, Burlingame, California 94010, and the name and business addresses of the organization of employment of the Company’s directors and nominees are as follows:
|
Name
|
Business Address
|
|
Neal D. Crispin
|
1440 Chapin Avenue, Suite 310, Burlingame, California 94010
|
|
Roy E. Hahn
|
703 Market Street, Suite 300, San Francisco, California 94103
|
|
Thomas W. Orr
|
16 Locksly Lane, San Rafael, California 94901
|
|
Toni M. Perazzo
|
1440 Chapin Avenue, Suite 310, Burlingame, California 94010
|
|
Evan M. Wallach
|
150 West 87th Street, New York, New York, 10024
|
|
David P. Wilson
|
Retired
|
Officers and Employees
The principal occupations of the Company’s and JMC’s executive officers and employees who are considered “participants” in the Company’s solicitation of proxies are set forth below. The principal occupation refers to such person’s position with the Company, and the business address for each person is AeroCentury Corp., 1440 Chapin Avenue, Suite 310, Burlingame, California 94010. As disclosed in the Proxy Statement, JMC is the management company for the Company, and Ms. Perazzo and Mr. Crispin are controlling shareholders and directors and officers of JMC. Neither Ms. Perazzo nor Mr. Crispin receives any compensation from the Company or JetFleet Holding Corp. The compensation received by Ms. Perazzo and Mr. Crispin from JMC is set forth in the Summary Compensation Table set forth in the Proxy Statement.
|
Name
|
Principal Occupation
|
|
Neal D. Crispin
|
Chairman of the Board and President
|
|
Toni M. Perazzo
|
Chief Financial Officer, Treasurer, Senior V.P. Finance and Secretary
|
Information Regarding Ownership of the Company’s Securities by Participants
The number of shares of the Company’s common stock beneficially owned or held as of March 1, 2015 by the persons listed above under “Directors and Nominees” and “Officers and Employees,” are set forth in the section entitled “Security Ownership of Certain Beneficial Owners and Management” of this Proxy Statement. Except as noted in that section, to our knowledge each of these persons has sole voting and investment power with respect to the securities they hold, other than any property rights of spouses
Information Regarding Transactions in the Company’s Securities by Participants
The following table sets forth all transactions that may be deemed purchases and sales of shares of our common stock by the individuals who are considered “participants” during the past two years. Except as described in this Proxy Statement, shares of the Company’s common stock owned of record by each participant are also beneficially owned by such participant. Unless otherwise indicated, all transactions were in the public market and none of the purchase price or market value of those shares is represented by funds borrowed or otherwise obtained for the purpose of acquiring or holding such securities.
|
Participant
|
Date
|
Purchase (Sale)*
|
|
Toni M. Perazzo
|
03/05/2015
03/06/2015
03/10/2015
|
Purchase 7,500 shares
Purchase 2,000 shares
Purchase 5,100 shares
|
|
Evan M. Wallach
|
03/12/2015
|
Purchase 70 shares
|
| JetFleet Holding Corp. |
03/11/2015
03/12/2015
03/13/2015
|
Purchase 4,305 shares
Purchase 3,904 shares
Purchase 7,600 shares
|
Miscellaneous Information Regarding Participants
Except as disclosed in this Appendix A or the Proxy Statement, none of the participants (i) beneficially owns (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, any shares or other securities of the Company or any of its subsidiaries, (ii) has purchased or sold any of such securities within the past two years or (iii) is, or within the past year was, a party to any contract, arrangement or understanding with any person with respect to any such securities. Except as disclosed in this Appendix A or the Proxy Statement, none of the participants’ associates beneficially owns, directly or indirectly, any of the Company’s securities. Other than as disclosed in this Appendix A or the Proxy Statement, neither the Company nor any of the participants has any substantial interests, direct or indirect, by security holding or otherwise, in any matter to be acted upon at the 2015 Annual Meeting or is or has been within the past year a party to any contract, arrangement or understanding with any person with respect to any of the Company’s securities, including, but not limited to, joint ventures, loan or option agreements, puts or calls, guarantees against loss or guarantees of profit, division of losses or profits or the giving or withholding of proxies. Except as disclosed in this Appendix A or the Proxy Statement, none of the Company, the participants or any of their associates has had or will have a direct or indirect material interest in any transaction or series of similar transactions since the beginning of the Company’s last fiscal year or any currently proposed transactions, or series of similar transactions, to which the Company or any of its subsidiaries was or is to be a party in which the amount involved exceeds $120,000.
Other than as set forth in this Appendix A or the Proxy Statement, neither the Company, nor any of the participants nor or any of their associates has any arrangements or understandings with any person with respect to any future employment by the Company or its affiliates or with respect to any future transactions to which the Company or any of its affiliates will or may be a party.
[PRELIMINARY COPY]
EVERY STOCKHOLDER’S VOTE IS IMPORTANT
EASY VOTING OPTION:
[QR CODE GRAPHIC]
VOTE ON THE INTERNET
Log on to:
www.proxy-direct.com
or scan the QR code
Follow the on-screen instructions
available 24 hours
VOTE BY PHONE
Call 1-800-337-3503
Follow the recorded instructions
available 24 hours
VOTE BY MAIL
Vote, sign and date this Proxy
Card and return in the
postage-paid envelope
Please detach at perforation before mailing.
[ PRELIMINARY COPY ]
PROXY CARD
AEROCENTURY CORP.
2015 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 7, 2015
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The undersigned hereby appoints Toni M. Perazzo and Christopher B. Tigno, as Proxies, with full power of substitution, and hereby authorizes them to represent and to vote, as designated below, all of the shares of Common Stock of AeroCentury Corp. (the “Company”) held of record by the undersigned on March 16, 2015, at the 2015 Annual Meeting of Stockholders of the Company to be held on May 7, 2015, or at any adjournment or postponement thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS SPECIFIED ON THE REVERSE SIDE. IF NO SPECIFICATION IS MADE, THEN THIS PROXY WILL BE VOTED “FOR” THE NOMINEES LISTED ON THE REVERSE SIDE FOR THE BOARD OF DIRECTORS AND “FOR” PROPOSALS NO. 2 AND 3.
VOTE VIA THE INTERNET: www.proxy-direct.com
VOTE VIA THE TELEPHONE: 1-800-337-3503
Note: Please sign exactly as your name(s) appear(s) on this card. When shares are held by joint tenants, both should sign. When signing as an attorney, executor, administrator, trustee, or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person.
_____________________________
Signature and Title, if applicable
_____________________________
Signature (if held jointly)
_____________________________
Date GSC_26534_022715
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD USING THE ENCLOSED ENVELOPE.
EVERY STOCKHOLDER’S VOTE IS IMPORTANT
Important Notice Regarding the Availability of Proxy Materials for the
Annual Stockholder Meeting to Be Held on May 7, 2015.
The Proxy Statement and Annual Report for this meeting are available at:
http://www.aerocentury.com/downloads.htm
IF YOU VOTE BY TELEPHONE OR INTERNET,
PLEASE DO NOT MAIL YOUR CARD
Please detach at perforation before mailing.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” PROPOSALS NO. 1, 2 AND 3.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK. Example: ■
1. ELECTION OF DIRECTORS.
FOR WITHHOLD FOR ALL
ALL ALL EXCEPT
|
01.
|
Thomas W. Orr
|
02.
|
David P. Wilson
|
|
£ £
|
£
|
INSTRUCTIONS: To withhold authority to vote for any individual nominee(s), mark the box
“FOR ALL EXCEPT” and write the nominee’s number on the line provided below.
___________________________________________________________________
FOR AGAINST ABSTAIN
|
2.
|
PROPOSAL TO APPROVE, by non-binding vote, the compensation of the Company’s named
|
|
|
|
|
|
executive officers as disclosed in the Proxy Statement.
|
|
3.
|
PROPOSAL TO RATIFY THE APPOINTMENT OF BDO USA, LLP as independent auditors for the
|
£
|
£
|
£
|
|
|
Company for the fiscal year ending December 31, 2015.
|
|
4.
|
In their discretion, the Proxies are authorized to vote upon such other matters as may properly come before the meeting.
|
PLEASE SIGN AND DATE ON THE REVERSE SIDE.
GSC_26534_022715
[front cover -graphics omitted]
AeroCentury®
Worldwide ▪ Regional Aircraft ▪ Leasing
2014 Annual Report
TO OUR STOCKHOLDERS
The 2014 fiscal year was one of fleet renewal and continued diversification in terms of both aircraft type and geographic location.
Total annual revenues in 2014 were $28.7 million compared to $38.2 million in 2013; however, operating lease revenues increased 17% for the year, primarily because of operating lease revenue from aircraft purchased during the fourth quarter of 2013 and in 2014. Average portfolio utilization increased to 82% in 2014, compared to 76% in 2013.
For 2014, total expenses were $46.0 million compared to $25.6 million for 2013, primarily due to the non-cash, pre-tax write-downs totaling $18.7 million on certain of the Company’s older aircraft. As a result of these write-downs, we had a net loss of $11.3 million for the year, compared to net income of $8.3 million in 2013.
The non-cash write-down had a significant effect on the Company’s financial results posted for 2014; however, we believe those write-downs have set the stage for moving forward with the Company’s strategic growth plan of fleet renewal by adding mid-life regional jet aircraft and new generation turboprops, while reducing older aircraft in our portfolio. A significant highlight of 2014 was the 22% growth of our leasing portfolio from $153.0 million to $186.8 million, featuring the addition of one new ATR 42-600 turboprop, and three CRJ-700 and two CRJ-900 mid-life regional jets all on long-term leases. As a result of these aircraft acquisitions combined with aircraft sales during 2014, the average age of the Company's leasing portfolio at year-end 2014 was reduced by 28% to approximately 13 years, compared to 18 years at year-end 2013. Meanwhile, the average remaining lease term for aircraft leases in place as of the end of 2014 increased by 66% to approximately 60 months, up from 36 months at the end of 2013 and the related minimum future lease revenue payments have increased over 100%, from $59.9 million at the end of 2013 to $126.4 million at the end of 2014.
During 2014, the Company’s efforts on the remarketing side resulted in the extension of leases for nine of its assets and re-lease of two assets that had been off lease at December 31, 2013 to new lessees. As a result of acquisitions, re-leases, and lease renewals in 2014, the geographical distribution of our sources of operating lease revenue in 2014 was altered significantly, with the percentage of lease revenue from North America substantially increasing from its 2013 levels, the percentage of lease revenue from Africa, Asia, and Europe in 2014 correspondingly decreasing, and the entry of the Company into the Australian market through the lease of two aircraft to a major Australian carrier.
The Company’s portfolio now consists of thirty-eight aircraft, covering ten different aircraft types, and five aircraft engines. Our customer base continues to consist exclusively of regional carriers – twelve airlines operating worldwide.
I appreciate your interest and support.
Neal D. Crispin
President and Chairman of the Board
March 23, 2015
This letter contains certain statements that may include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including the Company’s statements regarding the Company’s belief that the write-downs on certain assets have set the stage for moving forward with the Company’s strategic growth plan of fleet renewal by adding mid-life aircraft and new aircraft, while reducing older aircraft in the portfolio. All statements, other than statements of historical fact, included herein are "forward-looking statements.” Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including the availability of appropriate aircraft for acquisition; acquisition financing availability under the Company’s credit facility, reduced demand for leased aircraft of the types in the Company’s portfolio; and the demand for older aircraft of the type the Company desires to sell; as well as those discussed in the Company's reports that are filed with the Securities and Exchange Commission. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this letter. Other than as required by law, the Company does not assume a duty to update any forward-looking statement.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
|
x
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the fiscal year ended December 31, 2014
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from ____________ to ____________
Commission File Number: 001-13387
AeroCentury Corp.
(Exact name of Registrant as Specified in Its Charter)
|
Delaware
|
|
94-3263974
|
|
(State or Other Jurisdiction of Incorporation or Organization)
|
|
(IRS Employer Identification No.)
|
1440 Chapin Avenue, Suite 310
Burlingame, California 94010
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code: (650) 340-1888
Securities registered pursuant to Section 12(b) of the Act:
| |
|
|
Title of each class
|
Name of each exchange on which registered
|
|
Common Stock, par value $0.001 per share
|
NYSE MKT Exchange
|
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o
Non-accelerated filer o Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates (based upon the closing price as of June 30, 2014) was $15,332,400.
The number of shares of the Registrant’s Common Stock outstanding as of March 12, 2015 was 1,543,257.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates information by reference from the Registrant’s Proxy Statement for its 2015 Annual Meeting of Stockholders. Except as expressly incorporated by reference, the Registrant’s Proxy Statement shall not be deemed to be a part of this Annual Report on Form 10-K.
PART I
FINANCIAL INFORMATION
Forward Looking Statements
This Annual Report on Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (“the Exchange Act”). All statements in this Report other than statements of historical fact are "forward-looking statements" for purposes of these provisions, including any statements of plans and objectives for future operations and any statements of assumptions underlying any of the foregoing. Statements that include the use of terminology such as "may," "will," "expects," "plans," "anticipates," "estimates," "potential," or "continue," or the negative thereof, or other comparable terminology are forward-looking statements. Forward-looking statements include these statements: (i) in Part I, Item 1, “Business of the Company,” that the Company can purchase assets at an appropriate price and maintain an acceptable overall on-lease rate for the Company’s assets; and that it is able and willing to enter into transactions with a wider range of lessees than would be possible for traditional, large lending institutions and leasing companies; (ii) in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” that the Company will be in compliance with all of its credit facility covenants at future calculation dates; and that the Company will have adequate cash flow to meet its ongoing operational needs, including any required repayments under the Credit Facility due to borrowing base limitations; (iii) in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Outlook,” that the Company could experience a delay in remarketing its off-lease assets; that the customers under several of the leases that expire in 2015 will choose to return the assets; that three of the Company’s aircraft will be returned at lease-end in 2015 after meeting the return conditions of the leases; that the leases for the remaining four aircraft will be extended; and that the Company will be in compliance with all of its Credit Facility covenants at future calculation dates; that available borrowings under the Credit Facility will be sufficient to meet its continuing obligations and, if it is expanded to the maximum of $180 million, to fund anticipated acquisitions; (v) in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors that May Affect Future Results,” that the Company will be in compliance with all of its credit facility covenants at future calculation dates; that the Company will have sufficient cash funds to make any required principal repayment that arises due to borrowing base limitations; that most of the Company’s growth will be outside North America; that the overall industry experience of JMC’s personnel and its technical resources should permit the Company to effectively manage new aircraft types and engines; that effective mitigating factors exist against undue compensation-incented risk-taking by JMC; that the burden and cost of complying with regulatory requirements will fall primarily upon lessees of equipment or the Company as owner of the equipment; that the costs of complying with environmental regulations will not have a material adverse effect on the Company; that the Company has sufficient cyber-security measures in place; that its main vulnerability would be interruption to email communication, loss of archives and loss of document sharing; and that sufficient replacement mechanisms exist such that there would not be a material adverse financial impact on the Company’s business.
These forward-looking statements involve risks and uncertainties, and it is important to note that the Company's actual results could differ materially from those projected or assumed in such forward-looking statements. Among the factors that could cause actual results to differ materially are the factors detailed under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations –– Factors That May Affect Future Results," including the lack of any unexpected lessee defaults or insolvency; a deterioration of the market values of aircraft types owned by the Company; compliance by the Company's lessees with obligations under their respective leases; no sudden current economic downturn or unanticipated future financial crises; the continued availability of financing for acquisitions under the Credit Facility; the Company’s success in finding appropriate assets to acquire with such financing; deviations from the assumption that future major maintenance expenses will be relatively evenly spaced over the entire portfolio; and future trends and results which cannot be predicted with certainty. The cautionary statements made in this Report should be read as being applicable to all related forward-looking statements wherever they appear herein. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward-looking statement or risk factor. You should consult the risk factors listed from time to time in the Company's filings with the Securities and Exchange Commission.
Item 1.Business.
Business of the Company
AeroCentury Corp., a Delaware corporation incorporated in 1997 (the “Company”), typically acquires used regional aircraft and aircraft engines for lease to regional carriers worldwide.
The business of the Company is managed by JetFleet Management Corp. ("JMC"), pursuant to a management agreement (the “Management Agreement”) with JMC. JMC is an integrated aircraft management, marketing and financing business and a subsidiary of JetFleet Holding Corp. ("JHC"). Certain officers of the Company are also officers of JHC and JMC and hold significant ownership positions in both JHC and the Company.
Since its formation, the Company has been engaged in the business of investing in used regional aircraft equipment leased to foreign and domestic regional air carriers. The Company’s principal business objective is to increase stockholder value by acquiring aircraft assets and managing those assets in order to provide a return on investment through lease revenue and, eventually, sale proceeds. The Company strives to achieve its business objective by reinvesting cash flow and using short-term and long-term debt and/or equity financing.
The Company’s success in achieving its objective depends in large part on its success in three areas: asset selection, lessee selection and obtaining financing for acquisition of aircraft and engines.
The Company typically acquires assets in one of three ways. The Company may purchase an asset already subject to a lease and assume the rights and obligations of the seller, as lessor under the existing lease. Additionally, the Company may purchase an asset from an air carrier and lease it back to the air carrier. Finally, the Company may purchase an asset from a seller and then immediately enter into a new lease for the aircraft with a third party lessee. In this last case, the Company typically does not purchase an asset unless a potential lessee has been identified and has committed to lease the asset. Occasionally, the Company may also acquire an asset for which it does not have a potential lessee.
Although the Company has generally targeted used regional aircraft and engines with purchase prices between $3 million and $10 million, and lease terms of less than five years, in 2013 and 2014, the Company acquired six regional jets and a new ATR 42-600 aircraft with purchase prices and lease terms exceeding those of previously-acquired aircraft. In determining assets for acquisition, the Company evaluates, among other things, the type of asset, its current price and projected future value, its versatility or specialized uses, the current and projected availability of and demand for that asset, and the type and number of future potential lessees. Because JMC has extensive experience in purchasing, leasing and selling used regional aircraft and engines, the Company believes it can purchase these assets at an appropriate price and maintain an acceptable overall on-lease rate for the Company’s assets.
In order to improve the remarketability of an aircraft after expiration of a lease, the Company’s leases generally contain provisions that require lessees to return the aircraft in a condition that allows the Company to expediently re-lease or sell the aircraft, or pay sufficient amounts based on usage under the lease to cover any maintenance or overhaul of the aircraft required to bring the aircraft to such a state.
When considering whether to enter into transactions with a lessee, the Company generally reviews the lessee’s creditworthiness, growth prospects, financial status and backing; the experience of its management; and the impact of legal and regulatory matters in the lessee's market, all of which are weighed in determining the lease terms offered to the lessee. In addition, it is the Company’s policy to monitor the lessee’s business and financial performance closely throughout the term of the lease, and, if requested, provide assistance drawn from the experience of the Company’s management in many areas of the air carrier industry. Because of its “hands-on” approach to portfolio management, the Company believes it is able and willing to enter into transactions with a wider range of lessees than would be possible for traditional, large lending institutions and leasing companies.
The Company has funded its asset acquisitions primarily through debt financing supplemented by free cash flow. The Company’s primary source of debt financing has been a secured credit facility. The Company's current credit facility ("Credit Facility") is provided by a syndicate of banks, with MUFG Union Bank, N.A. as agent, and in May 2014, the term was extended to May 31, 2019.
Working Capital Needs
The Company’s portfolio of assets has historically generated revenues that have exceeded the Company’s cash expenses, which consist mainly of management fees, maintenance costs, principal and interest payments on debt, professional fees, and insurance premiums.
The management fees paid by the Company to JMC are based upon the size of the Company’s asset pool. Maintenance costs for off-lease aircraft are recognized as expenses as incurred, while reimbursement of lessee maintenance costs from previously collected maintenance reserves reduce the Company's maintenance reserves liability. Interest expense is dependent on both the balance of the Company’s indebtedness and applicable interest rates. Professional fees are paid to third parties for expenses not covered by JMC under the Management Agreement. Insurance expense includes amounts paid for directors and officers insurance, as well as product liability insurance and aircraft hull insurance for periods when an aircraft is off lease.
So long as the Company succeeds in keeping the majority of its assets on lease and interest rates do not rise significantly and rapidly, the Company’s cash flow should continue to be sufficient to cover its expenses and provide excess cash flow. If the Company incurs unusually large maintenance costs or reimbursements for maintenance in any given period, the Company expects it will have sufficient cash flow or borrowing availability under its credit facility to fund such maintenance.
Competition
The Company competes with other leasing companies, banks, financial institutions, and aircraft leasing partnerships for customers that generally are regional commercial aircraft operators seeking to lease aircraft under operating leases. Competition has increased as competitors who have traditionally neglected the regional air carrier market have begun to focus on that market. Because competition is largely based on price and lease terms, the entry of new competitors into the market, and/or the entry of traditional large aircraft lessors into the regional aircraft niche, particularly those with greater access to capital markets than the Company, could lead to fewer acquisition opportunities for the Company and/or lease terms less favorable to the Company on acquisitions, as well as fewer renewals of existing leases or new leases of existing aircraft, all of which could lead to lower revenues, profitability and cash flow for the Company.
The Company, however, believes that it has a competitive advantage due to its experience and operational efficiency in financing the transaction sizes that are desired by many in the regional air carrier market. Management believes that the Company also continues to have a competitive advantage because JMC has developed a presence as a global participant in the regional aircraft leasing market.
Dependence on Significant Customers
For the year ended December 31, 2014, the Company’s four largest customers accounted for 20%, 18%, 14% and 11% of lease revenue. For the year ended December 31, 2013, the Company’s four largest customers accounted for 23%, 19%, 11% and 10% of lease revenue. Concentration of credit risk with respect to lease receivables will diminish in the future only if the Company is able to re-lease assets currently on lease to significant customers to new customers and/or acquire assets for lease to new customers.
Environmental Matters
Neither compliance with federal, state and local provisions regulating discharge of greenhouse gas emissions (including carbon dioxide (CO2)) in the environment and/or aircraft noise regulations, nor remedial agreements or other actions relating to the environment, has had, or is expected to have, a material effect on the Company’s capital expenditures, financial condition, results of operations or competitive position.
Employees
Under the Company’s Management Agreement with JMC, JMC is responsible for all administration and management of the Company. Consequently, the Company does not have any employees.
Available Information
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The headquarters of AeroCentury Corp. is located at 1440 Chapin Avenue, Suite 310, Burlingame, California 94010. The main telephone number is (650) 340-1888. The Company’s website is located at: http://www.aerocentury.com.
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The Company is subject to the reporting requirements of the Securities Exchange Act (the “Exchange Act”). Therefore, the Company files periodic reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). Copies of these materials, filed by us with the SEC, are available free of charge on our website at www.aerocentury.com through the Investor Relations link (SEC Filings). The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room of the SEC at 100 F Street N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
Item 1A.Risk Factors.
Smaller reporting companies are not required to provide this information.
Item 1B.Unresolved Staff Comments.
None.
Item 2.Properties.
As of December 31, 2014, the Company did not own or lease any real property, plant or materially important physical properties. The Company maintains its principal office at 1440 Chapin Avenue, Suite 310, Burlingame, California 94010. However, since the Company has no employees and the Company’s portfolio of leased aircraft assets is managed and administered under the terms of the Management Agreement with JMC, all office facilities are provided by JMC.
For information regarding the aircraft and aircraft engines owned by the Company, refer to Note 3 to the Company’s financial statements in Item 8 of this Annual Report on Form 10-K.
Item 3.Legal Proceedings.
The Company from time to time engages in ordinary course litigation relating to lease collection matters against defaulting lessees and mechanic’s lien claims by vendors hired by lessees. None of the current litigation, if resolved adverse to the Company, is anticipated to have a material adverse effect on the Company’s financial condition or results of operations.
Item 4.Mine Safety Disclosures.
Not applicable.
PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
The shares of the Company’s Common Stock are traded on the NYSE MKT exchange ("NYSE MKT") under the symbol “ACY.”
Market Information
The Company’s Common Stock has been traded on the NYSE MKT since January 16, 1998. The following table sets forth the high and low sales prices reported on the NYSE MKT for the Company’s Common Stock for the periods indicated:
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Period
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High
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Low
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Fiscal year ended December 31, 2014:
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Fourth Quarter
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$ |
11.82 |
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$ |
8.05 |
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Third Quarter
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16.40 |
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10.90 |
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Second Quarter
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18.90 |
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15.25 |
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First Quarter
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19.00 |
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15.03 |
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Fiscal year ended December 31, 2013:
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Fourth Quarter
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20.60 |
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14.65 |
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Third Quarter
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22.30 |
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19.10 |
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Second Quarter
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21.50 |
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17.53 |
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First Quarter
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18.31 |
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14.20 |
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On March 10, 2015, the closing sale price of the Company’s Common Stock on the NYSE MKT exchange was $13.50 per share.
Number of Security Holders
According to the Company’s transfer agent, the Company had approximately 1,400 stockholders of record as of March 10, 2015. Because brokers and other institutions on behalf of beneficial stockholders hold many of the Company’s shares of Common Stock, the Company is unable to estimate the total number of beneficial stockholders represented by those record holders.
Dividends
No dividends have been declared or paid to date. The Company has no plans at this time to declare or pay dividends, and intends to re-invest any earnings into the acquisition of additional revenue-generating aircraft equipment.
The terms of the Credit Facility prohibit the Company from declaring or paying dividends on its Common Stock, except for cash dividends in an aggregate annual amount not to exceed 50% of the Company's net income in the immediately preceding fiscal year so long as immediately prior to and immediately following such dividend the Company is not in default under the Credit Facility.
Stockholder Rights Plan
For information regarding the Company’s stockholder rights plan, refer to Note 8 to the Company’s financial statements in Item 8 of this Annual Report on Form 10-K.
Item 6.Selected Financial Data.
This report does not include information described under Item 301 of Regulation S-K pursuant to the rules of the SEC that permit “smaller reporting companies” to omit such information.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The Company owns regional aircraft and engines, which are typically leased to customers under triple net leases with terms that are less than the useful life of the assets. A “triple net operating lease” is an operating lease under which, in addition to monthly rental payments, the lessee is generally responsible for the taxes, insurance and maintenance and repair of the aircraft arising from the use and operation of the aircraft during the term of the lease. The acquisition of such equipment is generally made using debt financing. The Company’s profitability and cash flow are dependent in large part upon its ability to acquire equipment, obtain and maintain favorable lease rates on such equipment, and re-lease or sell equipment that comes off lease. The Company is subject to the credit risk of its lessees, both as to collection of rental payments and as to performance by lessees of their obligations to maintain the equipment. Since lease rates for assets in the Company’s portfolio generally decline as assets age, the Company’s ability to maintain and grow revenue and earnings is primarily dependent upon the Company’s ability to acquire and lease additional assets.
The Company’s primary uses of cash are for purchases of aircraft and engines, maintenance, debt service payments, management fees, insurance and professional fees.
The Company's most significant non-cash expenses include aircraft and engine depreciation, amortization of costs associated with the Company’s indebtedness, which is included in interest expense, and, in some years, impairment provisions, which are affected by significant estimates.
Critical Accounting Policies, Judgments and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities at the date of the financial statements. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods, the Company’s operating results and financial position could be materially affected. For a discussion of Critical Accounting Policies, Judgments and Estimates, refer to Note 1 to the Company’s financial statements in Item 8 of this Annual Report on Form 10-K.
For a discussion of the Company’s accounting policies regarding maintenance reserves, refer to Note 4 to the Company’s financial statements in Item 8 of this Annual Report on Form 10-K. For a discussion of the Company's change in method of accounting for certain maintenance reserves and lessor maintenance obligations and its application to prior periods, refer to Note 2 to the Company's financial statements in Item 8 of this Annual Report on Form 10-K.
Results of Operations
The Company recorded a net loss of $11.3 million in 2014 compared to net income of $8.3 million in 2013, primarily as a result of recording impairment charges totaling $18.2 million for its seven Fokker 100 aircraft, as well as impairment charges of $0.5 million for three of its Fokker 50 aircraft in 2014. There were no recorded impairment charges of long-lived assets during 2013.
Operating lease revenue increased 17% from $18.8 million in 2013 to $21.9 million in 2014, primarily as a result of assets purchased during 2013 and 2014. The effect of these increases was partially offset by the effect of assets that were on lease in the 2013 period but off lease in the 2014 period and asset sales during 2013 and 2014.
Maintenance reserves revenue decreased 77% from $14.9 million in 2013 to $3.4 million in 2014. The amount recorded in 2013 period was comprised of $6.5 million, which was received from the prior lessee of two of the Company’s aircraft when the leases were assigned to a new lessee in 2012 and recognized as maintenance reserves revenue upon termination of those leases in the first quarter of 2013, and $8.4 million from maintenance reserves retained at lease end for five other aircraft. The amount recorded in 2014 period includes approximately $1.7 million of maintenance reserves retained at lease end for one aircraft and approximately $1.7 million of maintenance reserves retained when six aircraft were returned to the Company prior to lease expiration.
During 2014, the Company recorded $3.1 million of net gains on the sale of nine aircraft and an aircraft engine, as compared to 2013, when the Company recorded $3.8 million in net gains from the sale of five aircraft and an engine, as well as the disposal of a spare engine.
During 2014, the Company recorded $0.1 million of other income from retention of a non-refundable security deposit when a potential buyer of one of the Company's aircraft did not complete the planned purchase. During 2013, the Company recorded $0.5 million of other income from security deposits retained upon early termination of two leases following the lessee's bankruptcy.
During 2014 and 2013, the Company added equipment to its lease portfolio of approximately $81.0 million and $24.7 million, respectively. The Company sold equipment with book values of approximately $14.5 million and $8.7 million million during 2014 and 2013, respectively. As a result of the timing of these asset acquisitions and sales, as well as changes in residual value assumptions from year to year, depreciation decreased by 1% in 2014 over the previous year. Management fees, which are based on the net asset value of the Company's aircraft and engines, increased by 12% in 2014 as compared to 2013. Due to a waiver by JMC of its fourth quarter management fees of approximately $1.2 million, management fees incurred by the Company were less by that amount than they would have been without such waiver.
The average net book value of assets held for lease during 2014 and 2013 was approximately $171.7 million and $143.3 million, respectively, representing an increase of 20%. The average portfolio utilization during 2014 and 2013 was 82% and 76%, respectively.
The Company's maintenance expense increased by 7% from $7.0 million in 2013 to $7.5 million in 2014, primarily as a result of an increase in maintenance performed by the Company on off-lease aircraft.
The Company’s interest expense increased by 26% from $4.1 million in 2013 to $5.1 million in 2014, primarily as a result of a higher average Credit Facility balance.
The Company’s professional fees, general and administrative and other expenses increased by 46% from $1.2 million in 2013 to $1.7 million in 2014, primarily as a result of expenses incurred in connection with the return of six aircraft and two engines by one of the Company’s customers when it ceased operations in 2014.
The Company's other taxes expense increased by $0.4 million in 2014 compared to 2013 as a result of the accrual of goods and service tax related to four of the Company's aircraft that are leased to a customer in Papua New Guinea.
Liquidity and Capital Resources
The Company is currently financing its assets primarily through debt financing and excess cash flows.
(a)Credit Facility
In May 2014, the Company’s $130 million Credit Facility was increased to $180 million and extended through May 31, 2019. The Credit Facility is provided by a syndicate of banks and is secured by all of the assets of the Company, including its aircraft and engine portfolio.
In November 2013, the Company obtained a waiver of compliance with a lessee concentration covenant under its Credit Facility agreement at the September 30, 2013 and December 31, 2013 calculation dates. The Company was in compliance with all covenants other than the waived covenant under the Credit Facility agreement at December 31, 2013.
Although the Company previously had letters of intent for the lease of five of its Fokker 100 aircraft, the prospective lessees decided not to lease the aircraft during the second quarter of 2014. Therefore, at June 30, 2014, the Company reevaluated the recoverability of the net book value of these assets and consequently obtained current market value appraisals, which resulted in aircraft impairment charges totaling $6.8 million being recorded for these aircraft during the second quarter of 2014. As a result of the impairment charges, the Company was out of compliance with a profitability covenant at June 30, 2014. In August 2014, the Company and the Credit Facility banks agreed to an amendment to the profitability covenant which cured the June 30, 2014 non-compliance.
During the third quarter of 2014, based on management's assessment of the market for Fokker 100 aircraft and the estimated costs associated with preparing the Company's five off-lease Fokker 100 aircraft for re-lease, the Company recorded additional impairment charges of $8.5 million for these aircraft to write them down to their estimated liquidation values. The Company also recorded impairment charges of $0.3 million for an off-lease Fokker 50 aircraft and reclassified these six aircraft as held for sale. The Company sold the Fokker 50 aircraft in March 2015. The Company also recorded an impairment charge of $2.9 million, based on the appraised market values, for its two other Fokker 100 aircraft that were leased in September and October 2014.
As a result of the third quarter impairment charges, the Company was out of compliance with the profitability, interest coverage and debt service coverage covenants of its Credit Facility at September 30, 2014. In November 2014, the Company and the Credit Facility banks agreed to an amendment to the Credit Facility that: cured the September 30, 2014 non-compliance; revised the compliance requirements through September 30, 2015; decreased the amount of the Credit Facility to $150 million due to the departure of two participant lenders; and decreased the maximum amount to which the Credit Facility can be expanded from $200 million to $180 million. The Company was in compliance with all covenants at December 31, 2014.
Based on its current projections, the Company believes that it will be in compliance with all of its Credit Facility covenants at future calculation dates. Although the Company believes that the assumptions it has made in forecasting its compliance with the Credit Facility covenants are reasonable in light of experience, actual results could deviate from such assumptions and there can be no assurance the Company's beliefs will prove to be correct. Among the more significant factors that could have an impact on the accuracy of the Company's covenant compliance forecasts are (i) unanticipated decreases in the market value of the Company’s assets, or in the rental rates deemed achievable for such assets that cause the Company to record an impairment charge against earnings; (ii) lessee non-compliance with lease obligations, (iii) inability to locate new lessees for returned equipment within a reasonable remarketing period, or at a rent level consistent with projected rates, (iv) inability to locate and acquire a sufficient volume of additional assets at prices that will produce acceptable net returns, (v) increases in interest rates, or (vi) inability to timely dispose of off-lease assets at prices commensurate with their market value.
Although the Company believes it will continue to be in compliance with all of the Credit Facility covenants, there can be no assurance of such compliance and, in the event of any non-compliance, the Company will need to seek further waivers or amendment of applicable covenants from its lenders if such compliance failure is not timely cured. Any default under the Credit Facility, if not cured in the time permitted under the facility or waived by the lenders, could result in foreclosure upon any or all of the assets of the Company.
For additional information regarding the Company’s Credit Facility, refer to Note 7 to the Company’s financial statements in Item 1 of this Annual Report on Form 10-K.
(b)Cash flow
The Company’s primary sources of cash are (i) rent payments due under the Company’s operating and finance leases, (ii) maintenance reserves billed monthly to lessees based on asset usage, and (iii) proceeds from the sale of aircraft and engines.
The Company’s primary uses of cash are for purchase of assets, maintenance expense and reimbursement to lessees from collected maintenance reserves, management fees, professional fees, insurance, and Credit Facility fees, interest and principal payments. The amount of interest paid by the Company depends on the outstanding balance of its Credit Facility, which carries a floating interest rate as well as an interest rate margin, and is therefore also dependent on changes in prevailing interest rates.
The timing and amount of the Company’s payments for maintenance vary, depending on the timing of lessee-performed maintenance that is eligible for reimbursement, the aggregate amount of such claims and the timing and amount of maintenance incurred in connection with preparation of off-lease assets for re-lease to new customers. The Company’s maintenance payments typically constitute a large portion of its cash needs, and the Company may from time to time borrow additional funds under the Credit Facility to provide funding for such payments.
Management believes that the Company will have adequate cash flow to meet its ongoing operational needs, including any required repayments under the Credit Facility due to borrowing base limitations, based upon its estimates of future revenues and expenditures, which include assumptions regarding (i) revenues for assets to be re-leased, (ii) the cost and anticipated timing of maintenance to be performed, (iii) required debt payments, (iv) timely use of proceeds of unused debt capacity toward additional acquisitions of income producing assets and (v) interest rates. There can be no assurance, however, that the Company's beliefs will prove to be correct.
Although the Company believes that the assumptions it has made in forecasting its cash flow are reasonable in light of experience, actual results could deviate from such assumptions. As discussed above, in “Liquidity and Capital Resources – (a) Credit Facility” above, there are a number of factors that may cause actual results to deviate from such forecasts.
(i)Operating activities
The Company’s cash flow from operations decreased by $1.6 million in 2014 compared to 2013. As discussed below, the change in cash flow was primarily a result of a decrease in payments received for maintenance reserves and increases in payments for maintenance, interest, management fees and professional fees and general and administrative expenses, the effects of which were partially offset by an increase in payments received for operating lease revenue and a decrease in payments for aircraft insurance.
Payments for operating lease revenue and maintenance reserves
Rent receipts from lessees increased by $2.9 million in 2014 compared to 2013, primarily due to rent from assets purchased during late 2013 and early 2014. Receipts from lessees for maintenance reserves decreased by $1.8 million in 2014 compared to 2013, primarily as a result of asset sales and returns, as well as lower utilization of some assets for which the Company collects maintenance reserves. In addition, the Company does not collect maintenance reserves for most of the aircraft it acquired in 2013 and 2014.
As of the date of this filing, the Company is receiving no lease revenue for six aircraft and five engines that are off lease, with a total book value of $22.3 million, representing 12% of the Company's total assets held for lease. One of the off-lease engines is being held as a spare and used in connection with required maintenance on the Company’s Fokker 100 aircraft. In addition, five off-lease Fokker 100 aircraft, with a total book value of $5.0 million, are being held for sale and not lease.
Payments for maintenance
Payments for maintenance increased by $0.7 million in 2014 compared to 2013, primarily as a result of an increase in maintenance costs for off-lease aircraft. The amount of payments for maintenance in future periods will depend on the amount and timing of maintenance paid as reimbursement to lessees for maintenance reserves claims, which are dependent upon utilization and required maintenance intervals, as well as maintenance paid for off-lease assets.
Payment for interest
Payments for interest increased by $1.1 million in 2014 compared to 2013 as a result of a higher Credit Facility balance.
Payments for management fees
Although JMC waived its management fees of approximately $1.2 million for the fourth quarter of 2014, payments for management fees increased by $0.4 million in 2014 compared to 2013 as a result of asset purchases in 2013 and 2014. No assurance can be given that JMC will waive any management fees in the future.
Payment for professional fees, general and administrative and other expenses and aircraft insurance
Payments for professional fees, general and administrative and other expenses increased by $0.6 million in 2014 compared to 2013 primarily as a result of expenses incurred in connection with the early return of six aircraft and two engines by one of the Company’s customers in 2014 period when it ceased operations. Payments for aircraft insurance decreased by $0.7 million in 2014 compared to 2013 primarily as a result of a difference in the timing of premium payments that are made on a semi-annual basis.
(ii)Investing activities
During 2014 and 2013, the Company received cash of $16.2 million and $10.9 million, respectively, from the sale of assets. During the same time periods, the Company used cash of $74.5 million and $25.0 million, respectively, for purchases and capital improvement of aircraft.
(iii)Financing activities
The Company borrowed $71.1 million and $19.0 million under the Credit Facility during 2014 and 2013, respectively. In these same time periods, the Company repaid $15.2 million and $9.3 million, respectively, of its total outstanding debt under the Credit Facility. Such repayments were funded by excess cash flow and the sale of assets. During 2014 and 2013, the Company paid $3.0 million and $2.1 million of fees, respectively, in connection with the extension and administration of the Company’s Credit Facility, as well as the waiver obtained from the banks during the fourth quarter of 2014. Such fees are being amortized over the term of the Credit Facility.
Outlook
(a)General
While in certain areas of the world the air carrier industry is now beginning to experience growth after a period of contraction following the global downturn of recent years, other areas of the world continue to experience slow recovery and failures of weaker air carrier competitors that were unable to survive the aftermath of the global downturn. Overall, the Company continues to experience a reduction in the number of aircraft and aircraft engines needed for operation by carriers in nearly all geographic areas, especially in Western Europe, as compared to periods before the global downturn.
The Company has identified three areas that could challenge the Company's growth and operating results by negatively affecting its collateral base and, therefore, its ability to access sources of financing:
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• The Company could experience (i) a delay in remarketing its off-lease assets, as well as (ii) lower rental rates for assets that are remarketed. The Company expects that the customers for several of the leases that expire in 2015 and after will choose to return the assets rather than renew the leases, notwithstanding that any such customer may incur significant expenses to satisfy return conditions.
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• Lessees that are located in low- or no- growth areas of the world carry heightened risk of an unanticipated lessee default. A lessee’s default and the unscheduled return of an asset to the Company for remarketing could result not only in reduced operating lease revenue but also in unanticipated, unrecoverable expenses arising from the lessee’s default on its maintenance and return condition obligations. The Company monitors the performance of all of its customers and has noted that several of the Company’s customers continue to experience weakened operating results and have not yet achieved financial stability.
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• Competition in the Company's market niche has increased recently as a result of new entrants to the acquisition and leasing market. The increased competition has put downward pressure on lease rates, resulting in lower margins.
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(b)Operating Segments
The Company operates in one business segment, the leasing of regional aircraft to foreign and domestic regional airlines, and therefore does not present separate segment information for lines of business.
At February 28, 2015, the dominant types of aircraft in the Company’s portfolio of assets held for lease were as follows:
|
Model
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|
Number
owned
|
|
|
% of net
book value
|
|
|
Bombardier Dash-8-300
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|
|
8 |
|
|
|
17 |
% |
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Bombardier CRJ-700
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|
|
3 |
|
|
|
16 |
% |
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Bombardier CRJ-900
|
|
|
2 |
|
|
|
16 |
% |
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Bombardier Dash-8-Q400
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|
|
3 |
|
|
|
13 |
% |
For the month ended February 28, 2015, the Company’s sources of operating lease revenue were from the following regions:
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Region
|
|
Number
of lessees
|
|
|
% of
operating
lease revenue
|
|
|
Europe
|
|
|
3 |
|
|
|
29 |
% |
|
North America
|
|
|
2 |
|
|
|
22 |
% |
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Africa
|
|
|
2 |
|
|
|
17 |
% |
|
Asia
|
|
|
3 |
|
|
|
14 |
% |
|
Central and South America
|
|
|
1 |
|
|
|
9 |
% |
|
Australia
|
|
|
1 |
|
|
|
9 |
% |
(c)Remarketing Efforts
At December 31, 2014, five Fokker 100 aircraft and one Fokker 50 aircraft were classified as held for sale. In March 2015, the Company sold the Fokker 50 aircraft. The Company is seeking sales opportunities for the Fokker 100 aircraft.
The Company is seeking remarketing opportunities for six aircraft and five engines that are held for lease. The Company is considering selling some or all of these assets. The Company is analyzing the amount and timing of maintenance required to remarket the assets, the amount of which may differ significantly if the assets are sold rather than re-leased.
The leases for seven of the Company’s aircraft will expire during the first half of 2015. The Company believes that three of the aircraft will be returned at lease-end in 2015 after meeting the return conditions of the leases, and the Company believes that the leases for the remaining four aircraft will be extended.
(d)Credit Facility
In August 2014 and November 2014, the Company and the Credit Facility banks agreed to amendments to the Credit Facility, which cured non-compliance with certain of the covenants under the Credit Facility at June 30, 2014 and September 30, 2014. The November 2014 amendment also revised the compliance requirements through September 30, 2015, decreased the amount of the Credit Facility to $150 million due to the departure of two participant lenders, and decreased the maximum amount to which the Credit Facility can be expanded from $200 million to $180 million.
The unused amount of the Credit Facility was $16,600,000 as of March 12, 2015. Based on its current projections, the Company believes that it will be in compliance with all of its Credit Facility covenants at future calculation dates. The Company also believes that available borrowings under the Credit Facility will be sufficient to meet its continuing obligations and, if it is expanded to the maximum of $180 million, to fund anticipated acquisitions. However, there can be no assurance the Company's beliefs will prove to be correct.
Factors that May Affect Future Results
Noncompliance with Credit Facility Financial Covenants. The Company’s use of debt as the primary form of acquisition financing subjects the Company to increased risks associated with leverage. In addition to payment obligations, the Credit Facility agreement includes financial covenants, including some requiring the Company to have positive earnings, meet minimum net worth standards and be in compliance with certain other financial ratios.
As discussed above in “Outlook – Credit Facility,” the Company was out of compliance with a number of covenants under its Credit Facility at June 30, 2014 and September 30, 2014. The Credit Facility was amended in August 2014 to cure the June 30, 2014 non-compliance and in November 2014 to cure the September 30, 2014 non-compliance, revise certain compliance requirements and decrease the amount of the Credit Facility from $180 million to $150 million. The November amendment also reduced the amount to which the Credit Facility can be expanded from $200 million to $180 million.
Although the Company believes it will continue to be in compliance with all of the Credit Facility covenants, there can be no assurance of such compliance, and in the event of any non-compliance, the Company will need to seek further waivers or amendment of applicable covenants from its lenders if such compliance failure is not timely cured. Any default under the Credit Facility, if not cured in the time permitted under the facility or waived by the lenders, could result in foreclosure upon any or all of the assets of the Company.
Ownership Risks. The Company’s leases typically are for a period shorter than the entire, anticipated, remaining useful life of the leased assets. The Company’s ability to recover its investment in an asset subject to such a lease is dependent upon the Company’s ability to profitably re-lease or sell the asset after the expiration of the lease term. This ability is dependent on worldwide economic conditions, general aircraft market conditions, regulatory changes that may make an asset’s use more expensive or preclude use due to the age of the aircraft or unless the asset is modified, changes in the supply or cost of aircraft equipment and technological developments that cause the asset to become obsolete. If the Company is unable to remarket its assets on favorable terms when the leases for such assets expire, the Company’s financial condition, cash flow, ability to service debt and results of operations could be adversely affected.
The Company typically acquires used aircraft equipment. The market for used aircraft equipment has been cyclical, and generally reflects economic conditions and the strength of the travel and transportation industry. The demand for and value of many types of used aircraft in the recent past has been depressed by such factors as airline financial difficulties, the number of new aircraft on order and the number of aircraft coming off lease, as well as introduction of new aircraft models and types that may be more technologically advanced, more fuel efficient and/or less costly to maintain and operate. Values may also increase or decrease for certain aircraft types that become more or less desirable based on market conditions and changing airline capacity.
In addition, a successful investment in an asset subject to a lease depends in part upon having the asset returned by the lessee in the condition as required under the lease. Each lease typically obligates a customer to return an asset to the Company in a specified condition, which generally requires it be returned in equal or better condition than at delivery to the lessee. If the lessee were to become insolvent during the term of its lease and the Company had to repossess the asset, it is unlikely that the lessee would have the financial ability to meet these return obligations and it is likely that the Company would be required to expend funds in excess of any maintenance reserves collected to return the asset to a remarketable condition. If the lessee filed for bankruptcy and rejected the aircraft lease, the lessee would be required to return the aircraft but would be relieved from further lease obligations, including return conditions specified in the lease. In that case, it is also likely that the Company would be required to expend funds in excess of any maintenance reserves collected to return the asset to a remarketable condition.
Several of the Company’s leases do not require payment of monthly maintenance reserves, which serve as the lessee’s advance payment for its future repair and maintenance obligations. If repossession due to lessee default or bankruptcy occurred under such a lease, the Company would be left with the costs of unperformed repair and maintenance under the applicable lease and the Company would likely incur an unanticipated expense in order to re-lease or sell the asset.
Furthermore, the occurrence of unexpected adverse changes that impact the Company’s estimates of expected cash flows generated from an asset could result in an asset impairment charge against the Company’s earnings. The Company periodically reviews long-term assets for impairment, in particular, when events or changes in circumstances indicate the carrying value of an asset may not be recoverable. An impairment charge is recorded when the carrying amount of an asset is estimated to be not recoverable and exceeds its fair value. The Company recorded impairment charges for some of its aircraft in 2014 and may be required to record asset impairment charges in the future as a result of a prolonged weak economic environment, challenging market conditions in the airline industry, events related to particular lessees, assets or asset types or other factors affecting the value of aircraft or engines.
Lessee Credit Risk. The Company carefully evaluates the credit risk of each customer and attempts to obtain a third party guaranty, letters of credit or other credit enhancements, if it deems them necessary in addition to customary security deposits. There can be no assurance, however, that such enhancements will be available, or that, if obtained, will fully protect the Company from losses resulting from a lessee default or bankruptcy.
If a lessee that is a certified U.S. airline were in default under a lease and sought protection under Chapter 11 of the United States Bankruptcy Code, Section 1110 of the Bankruptcy Code would automatically prevent the Company from exercising any remedies against such lessee for a period of 60 days. After the 60-day period had passed, the lessee would have to agree to perform the lease obligations and cure any defaults, or the Company would have the right to repossess the equipment. However, this procedure under the Bankruptcy Code has been subject to significant litigation, and it is possible that the Company’s enforcement rights would be further adversely affected by a bankruptcy filing by a defaulting lessee.
Several of the Company’s customers have experienced significant financial difficulties, become insolvent, or have been declared or have filed for bankruptcy. An insolvency or bankruptcy of a customer usually results in a total loss of those receivables. The Company closely monitors the performance of all of its lessees and its risk exposure to any lessee that may be facing financial difficulties, in order to guide decisions with respect to such lessee that would mitigate losses in the event the lessee is unable to meet or rejects its lease obligations. There can be no assurance that additional customers will not become insolvent or file for bankruptcy or that the Company will be able to mitigate any of the resultant losses.
Risks Related to Regional Air Carriers. The Company’s continued focus on its customer base of regional air carriers subjects the Company to additional risks. Some of the lessees in the regional air carrier market are companies that are start-up, low-capital, and/or low-margin operators. Often, the success of such carriers depends on contractual arrangements with major trunk carriers or franchises from governmental agencies that provide subsidies for operating essential air routes, both of which may be subject to termination or cancellation on short notice. Regional carriers, even if financially strong, that are affiliated with an established major carrier can also be swept into bankruptcy if the major carrier files for bankruptcy or becomes insolvent. Four of the Company's regional air carrier customers filed for bankruptcy in 2012 and 2013, and a Thai regional carrier that leased six aircraft and two engines from the Company ceased operations in May of 2014.
Credit Facility Debt Limitations. The amount available to be borrowed under the Credit Facility is limited by the asset-specific advance rates. Lessee arrearages or asset off-lease periods may reduce the advance rate for the related assets and, therefore, the permitted borrowing under the facility. Amounts subject to payment deferral agreements also reduce the amount of permitted borrowing. The Company believes it will have sufficient cash funds to make any required principal repayment that arises due to any such borrowing limitations.
Availability of Financing. The Company’s continued growth will depend on its ability to continue to obtain capital, either through debt or equity financings. There can be no assurance that the Company will succeed in obtaining capital in the future at terms favorable to the Company.
General Economic Conditions and Lowered Demand for Travel. The Company’s business is dependent upon general economic conditions and the strength of the travel and transportation industry. The industry is continuing to experience financial difficulty due to the slow recovery in the global economy. The spread of a disease epidemic, the threat or execution of a terrorist attack against aviation, a worsening financial/bank crisis in Europe, a natural event that interrupts air traffic, military conflict, political crises or other events that cause a prolonged spike in fuel prices, or other like events could exacerbate an already weakened condition and lead to widespread failures in the air carrier industry. If lessees experience financial difficulties and are unable to meet lease obligations, this will, in turn, negatively affect the Company’s financial performance.
Airline reductions in capacity in response to lower passenger loads have resulted in reduced demand for aircraft and aircraft engines and a corresponding decrease in market lease rental rates and aircraft values for many aircraft types. This reduced market value could affect the Company’s results if the market value of an asset or assets in the Company’s portfolio falls below carrying value, and the Company determines that a write-down of the value on its balance sheet is appropriate. Furthermore, if older, expiring leases are replaced with leases at decreased lease rates, the lease revenue from the Company’s existing portfolio is likely to decline, with the magnitude of the decline dependent on the length of the downturn and the depth of the decline in market rents.
Economic downturns can affect certain regions of the world more than others. As the Company’s portfolio is not entirely globally diversified, a localized downturn in one of the key regions in which the Company leases assets could have a significant adverse impact on the Company. The Company’s significant sources of operating lease revenue by region are summarized in “Outlook - Operating Segments,” above.
In past years, several of the Company’s customers have experienced financial difficulties arising from a combination of the weakened air carrier market and their own unique financial circumstances and have requested and been granted deferral of certain overdue and/or future rental or maintenance reserve payment obligations. It is possible that the Company may enter into additional deferral agreements if the current weakened air carrier environment continues. When a customer requests a deferral of lease obligations, the Company evaluates the lessee’s financial plan, the likelihood that the lessee can remain a viable carrier, and whether the deferral will be repaid according to the agreed schedule. The Company may elect to record the deferred rent and reserve payments from the lessee on a cash basis, which could have a material effect on the Company’s financial results in the applicable periods. Deferral agreements with lessees also reduce the Company's borrowing capacity under its Credit Facility.
International Risks. The Company leases assets in overseas markets. Leases with foreign lessees, however, may present different risks than those with domestic lessees. Most of the Company’s expected growth is outside of North America.
A lease with a foreign lessee is subject to risks related to the economy of the country or region in which such lessee is located, which may be weaker than the U.S. economy. An economic downturn in a particular country or region may impact a foreign lessee’s ability to make lease payments, even if the U.S. and other foreign economies remain stable.
Foreign lessees are subject to risks related to currency conversion fluctuations. Although the Company’s current leases are all payable in U.S. dollars, the Company may agree in the future to leases that permit payment in foreign currency, which would subject such lease revenue to monetary risk due to currency fluctuations. In addition, if the Company undertakes certain obligations under a lease to contribute to a repair or improvement and if the work is performed in a foreign jurisdiction and paid for in foreign currency, currency fluctuations resulting in a weaker dollar between the time such agreement is made and the time payment for the work is made may result in an unanticipated increase in U.S. dollar-denominated cost for the Company.
Even with U.S. dollar-denominated lease payment provisions, the Company could still be affected by a devaluation of the lessee’s local currency that would make it more difficult for a lessee to meet its U.S. dollar-denominated payments, increasing the risk of default of that lessee, particularly if its revenue is primarily derived in the local currency.
Foreign lessees that operate internationally may also face restrictions on repatriating foreign revenue to their home country. This could create a cash flow crisis for an otherwise profitable carrier, affecting its ability to meet its lease obligations. Foreign lessees may also face restrictions on payment of obligations to foreign vendors, including the Company, which may affect their ability to timely meet lease obligations to the Company.
Foreign lessees are not subject to U.S. bankruptcy laws, although there may be debtor protection similar to U.S. bankruptcy laws available in some jurisdictions. Certain countries do not have a central registration or recording system with which to locally establish the Company’s interest in equipment and related leases. This could make it more difficult for the Company to recover an aircraft in the event of a default by a foreign lessee. In any event, collection and enforcement may be more difficult and complicated in foreign countries.
Finally, ownership of a leased asset operating in a foreign country and/or by a foreign carrier may subject the Company to additional tax liabilities that are not present with aircraft operated in the United States. Depending on the jurisdiction, laws governing such tax liabilities may be complex, not well formed or not uniformly enforced. In such jurisdictions, the Company may decide to take an uncertain tax position based on the best advice of the local tax experts it engages, which position may be challenged by the taxing authority. If the taxing authority later assesses a liability, the Company may be required to pay penalties and interest on the assessed amount, which penalties and interest would not give rise to a corresponding foreign tax credit on the Company’s U.S. tax return.
Concentration of Lessees and Aircraft Type. For the month ended February 28, 2015, the Company’s four largest customers accounted for a total of approximately 54% of the Company’s monthly lease revenue. A lease default by or collection problem with one or a combination of any of these significant customers could have a disproportionate negative impact on the Company’s financial results and borrowing base under the Credit Facility, and, therefore, the Company’s operating results are especially sensitive to any negative developments with respect to these customers in terms of lease compliance or collection. In addition, if the Company’s revenues become overly concentrated in a small number of lessees, the Company could fail to comply with certain financial covenants in its Credit Facility related to customer concentration. In the event of any such failure to be in compliance, the Company will need to seek waivers or amendment of the applicable covenants from its lenders if such compliance failure is not timely cured. Any default under the Credit Facility, if not cured in the time permitted under the Credit Facility or waived by the lenders, could result in foreclosure upon any or all of the assets of the Company.
The dominant types of aircraft in the Company’s portfolio are summarized in “Outlook - Operating Segments,” above. A change in the desirability and availability of any of these types of aircraft, which would in turn affect valuations of such aircraft, would have a disproportionately significant impact on the Company’s portfolio value. Such aircraft type concentration would diminish if the Company acquires assets of other types. Conversely, acquisition of these types of aircraft will increase the Company’s risks related to its concentration of those aircraft types.
Investment in New Aircraft Types and Engines. The Company intends to continue to focus solely on regional aircraft and engines. Although the Company has traditionally invested in a limited number of types of turboprop aircraft and engines, the Company has also acquired several types of regional jet aircraft and regional jet aircraft engines, and may continue to seek acquisition opportunities for new types and models of aircraft and engines used in the Company’s targeted customer base of regional air carriers. Acquisition of aircraft types and engines not previously acquired by the Company entails greater ownership risk due to the Company's lack of experience managing those assets. The Company believes, however, that the overall industry experience of JMC’s personnel and its technical resources should permit the Company to effectively manage such new aircraft types and engines. Further, the broadening of the asset types in the aircraft portfolio may have a benefit of diversifying the Company’s portfolio (see “Factors That May Affect Future Results – Concentration of Lessees and Aircraft Type,” above).
Engine Leasing Risk. The Company currently has five engines in its portfolio, making up 5% of the Company’s total net book value of aircraft and aircraft engines held for lease. The Company may from time to time lease one or more of these engines under industry standard short-term engine leases, which place the risk of an engine failure not caused by lessee negligence or foreign object damage upon the lessor. It is not economically practicable for an engine lessor to insure against that risk. If an engine failure occurs and is not covered by a manufacturer’s warranty or is not otherwise caused by circumstances that the lessee is required to cover, the Company’s investment in the engine could be a significant loss or the Company might incur a significant maintenance expense.
Interest Rate Risk. The Credit Facility carries a floating interest rate based upon short-term interest rate indices. Lease rates typically, but not always, move over time with interest rates, but market demand and numerous other asset-specific factors also affect lease rates. Because the Company’s typical lease rates are fixed at lease origination, interest rate changes during the lease term have no effect on existing lease rental payments. Therefore, if interest rates rise significantly and there is relatively little lease origination by the Company following such rate increases, the Company could experience decreased net income as additional interest expense outpaces revenue growth. Further, even if significant lease origination occurs following such rate increases, other contemporaneous aircraft market forces may result in lower or flat rental rates, thereby decreasing net income.
Reliance on JMC. All management of the Company is performed by JMC under the twenty-year Management Agreement between the Company and JMC that expires in April of 2018 and provides for an asset-based management fee. JMC is not a fiduciary of the Company or its stockholders. The Company’s Board of Directors (the “Board”) has ultimate control and supervisory responsibility over all aspects of the Company and owes fiduciary duties to the Company and its stockholders. The Board has no control over the internal operations of JMC, but the Board does have the ability and responsibility to manage the Company’s relationship with JMC and the performance of JMC's obligations to the Company under the Management Agreement, as it would have for any third party service provider to the Company. While JMC may not owe any fiduciary duties to the Company by virtue of the Management Agreement, all of the officers of JMC are also officers of the Company, and in that capacity owe fiduciary duties to the Company and its stockholders. In addition, certain officers of the Company hold significant ownership positions in the Company and JHC, the parent company of JMC.
The Management Agreement may be terminated if JMC defaults on its obligations to the Company. However, the agreement provides for liquidated damages in the event of its wrongful termination by the Company. Certain directors of the Company are also directors of JMC and, as discussed above, the officers of the Company are also officers of JMC and certain officers hold significant ownership positions in both the Company and JHC, the holding company for JMC. Consequently, the directors and officers of JMC may have a conflict of interest in the event of a dispute between the Company and JMC. Although the Company has taken steps to prevent conflicts of interest arising from such dual roles, such conflicts may still occur.
Management Fee Structure. All decisions regarding acquisitions and disposal of aircraft from the Company’s portfolio are made by JMC. JMC is paid a management fee based on the net asset value of the Company’s portfolio. It may also receive a one-time asset acquisition fee upon purchase of an asset by the Company, and a one-time remarketing fee in connection with the sale or re-lease of an asset. Optimization of the results of the Company depends on timing of the acquisition, lease yield on the acquired assets, and re-lease or sale of its portfolio assets. Under the current management fee structure, a larger volume of acquisitions generates acquisition fees and also increases the periodic management fee by increasing the size of the aircraft portfolio. Since the Company’s current business strategy involves continued growth of its portfolio and a “buy and hold” strategy, a compensation structure that results in greater compensation with an increased portfolio size is consistent with that strategy. The compensation structure does, nonetheless, create a situation where a decision by JMC for the Company to forego an asset transaction deemed to be an unacceptable business risk due to the lessee or the aircraft type is in conflict with JMC’s own pecuniary interest. As a result, the compensation structure could act to incent greater risk-taking by JMC in asset acquisition decision-making. The Company has established objective target guidelines for yields on acquired assets. Further, the Company’s Board, including a majority of the outside independent directors, must approve any acquisition that involves a new asset type. While the Company currently believes the foregoing are effective mitigating factors against undue compensation-incented risk-taking by JMC, there is no assurance that such mechanisms can entirely and effectively eliminate such risk.
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, maximum aircraft age, and aircraft noise requirements. Although it is contemplated that the burden and cost of complying with such requirements will fall primarily upon lessees of equipment, there can be no assurance that the cost will not fall on the Company. Furthermore, future government regulations could cause the value of any non-complying equipment owned by the Company to decline substantially.
Competition. The aircraft leasing industry is highly competitive. The Company competes with aircraft manufacturers, distributors, airlines and aircraft 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. Nevertheless, the Company believes that it is competitive because of JMC’s experience and operational efficiency in identifying and obtaining financing for the transaction types desired by regional air carriers. This market segment, which in many cases involves customers that are private companies without well-established third party credit ratings, is not well served by the Company’s larger competitors. JMC has developed a reputation as a global participant in this segment of the market, and the Company believes that JMC’s reputation benefits the Company. There is, however, no assurance that competition from larger aircraft leasing companies will not increase significantly or that JMC’s reputation will continue to be strong in this market segment.
Casualties, Insurance Coverage. The Company, as owner of transportation equipment, may be named in a suit claiming damages for injuries or damage to property caused by its assets. As a triple-net lessor, the Company is generally protected against such claims, since the lessee would be responsible for, insure against and indemnify the Company for such claims. A “triple net lease” is a lease under which, in addition to monthly rental payments, the lessee is generally responsible for the taxes, insurance and maintenance and repair of the aircraft arising from the use and operation of the aircraft during the term of the lease. Although the United States Aviation Act may provide some protection with respect to the Company’s aircraft assets, it is unclear to what extent such statutory protection would be available to the Company with respect to its assets that are operated in foreign countries where such provisions of the United States Aviation Act may not apply.
The Company’s leases generally require a lessee to insure against likely risks of loss or damage to the leased asset, and liability to passengers and third parties pursuant to industry standard insurance policies and require lessees to provide insurance certificates documenting the policy periods and coverage amounts. The Company tracks receipt of the certificates and calendars their expiration dates. Prior to the expiration of an insurance certificate, if a replacement certificate has not been received, the Company reminds the lessee of its obligation to provide current insurance certificates to avoid a default under the lease.
Despite these requirements and procedures, there may be certain cases where the loss is not entirely covered by the lessee or its insurance. The possibility of such an event is remote, but any such uninsured loss with respect to the equipment or insured loss for which insurance proceeds are inadequate might result in a loss of invested capital in and any profits anticipated from, such equipment, as well as a potential claim directly against the Company.
Compliance with Future Environmental Regulations. Compliance with future environmental regulations may harm the Company’s business. Many aspects of aircraft operations are subject to increasingly stringent environmental regulations, and growing concerns about climate change may result in the imposition by the U.S and foreign governments of additional regulation of carbon emissions, aimed at either requiring adoption of technology to reduce the amount of carbon emissions or putting in place a fee or tax system on carbon emitters. It is likely that any such regulation will be directed at the Company’s customers, as operators of aircraft, or at the Company, as owners of aircraft. Under the Company’s triple-net lease arrangements, the Company would likely shift responsibility for compliance to its lessees, but there might be some costs of regulation that the Company could not shift and would itself have to bear. Although it is not expected that the costs of complying with current environmental regulations will have a material adverse effect on the Company’s financial position, results of operations, or cash flows, no assurance can be given that the costs of complying with environmental regulations adopted in the future will not have such an effect.
Cyber-Security Risks. The Company believes that it has sufficient cyber-security measures in place commensurate with the risks to the Company of a successful cyber-attack or breach of security. The Company believes that its main vulnerability to a cyber-attack would be interruption of the Company’s email communications internally and with third parties, loss of customer and lease archives, and loss of document sharing between the Company’s offices and remote workers. Such an attack could temporarily impede the efficiency of the Company’s operations; however, the Company believes that sufficient replacement mechanisms exist in the event of such an interruption that there would not be a material adverse financial impact on the Company’s business.
Warrants. As part of a subordinated debt financing, which was fully repaid in December of 2011, the Company issued warrants to purchase up to 81,224 shares of the Company’s common stock that are currently exercisable (and expire on December 31, 2015) and represent approximately 5% of the post-exercise fully diluted capitalization of the Company. The exercise price of the warrants is $8.75 per share. If the warrants to purchase shares are exercised at a time when the exercise price is less than the market price of the Company’s common stock, there will be dilution to the existing holders of common stock. This dilution of the Company’s common stock could depress its trading price.
Possible Volatility of Stock Price. The market price of the Company’s common stock may be subject to fluctuations following developments relating to the Company’s operating results, changes in general conditions in the economy, the financial markets, the airline industry, changes in accounting principles or tax laws applicable to the Company or its lessees, or other developments affecting the Company, its customers or its competitors, or arising from other investor sentiment unknown to the Company. Because the Company has a relatively small capitalization of approximately 1.5 million shares outstanding, there is a correspondingly limited amount of trading and float of the Company’s shares. Consequently, the Company’s stock price is more sensitive to a single large trade or a small number of simultaneous trades along the same trend than a company with larger capitalization and higher trading volume and float.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk.
This report does not include information described under Item 305 of Regulation S-K pursuant to the rules of the Securities and Exchange Commission that permit “smaller reporting companies” to omit such information.
Item 8.Financial Statements and Supplementary Data.
(a)Financial Statements and Schedules
(1)Financial statements for the Company:
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2014 and 2013
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Statements of Operations for the Years Ended December 31, 2014 and 2013
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Statements of Stockholders’ Equity for the Years Ended December 31, 2014 and 2013
Statements of Cash Flows for the Years Ended December 31, 2014 and 2013
Notes to Financial Statements
(2)Schedules:
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All schedules have been omitted since the required information is presented in the financial statements or is not applicable.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
AeroCentury Corp.
Burlingame, California
We have audited the accompanying balance sheets of AeroCentury Corp. (the "Company") as of December 31, 2014 and 2013 and the related statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AeroCentury Corp. at December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the financial statements, the Company changed its method of accounting for non-refundable maintenance reserves and lessor maintenance obligations during the year ended December 31, 2014. These changes were applied retrospectively to all periods presented.
/s/ BDO USA, LLP
San Francisco, California
March 12, 2015
Item 8.Financial Statements and Supplementary Data.
AeroCentury Corp.
Balance Sheets
|
ASSETS
|
|
| |
|
December 31,
|
|
|
December 31,
|
|
| |
|
2014
|
|
|
2013
|
|
| |
|
|
|
|
(As adjusted)
|
|
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
1,840,500 |
|
|
$ |
2,112,700 |
|
|
Accounts receivable, including deferred rent of $111,300 and $217,200 at
December 31, 2014 and December 31, 2013, respectively
|
|
|
2,128,600 |
|
|
|
3,303,800 |
|
|
Finance leases receivable
|
|
|
- |
|
|
|
1,895,200 |
|
|
Aircraft and aircraft engines held for lease, net of accumulated
depreciation of $38,962,800 and $50,679,300 at
December 31, 2014 and December 31, 2013, respectively
|
|
|
186,762,600 |
|
|
|
152,954,600 |
|
|
Assets held for sale
|
|
|
6,522,900 |
|
|
|
735,000 |
|
|
Prepaid expenses and other
|
|
|
4,520,300 |
|
|
|
3,633,000 |
|
|
Total assets
|
|
$ |
201,774,900 |
|
|
$ |
164,634,300 |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$ |
2,818,200 |
|
|
$ |
1,202,700 |
|
|
Notes payable and accrued interest
|
|
|
133,590,600 |
|
|
|
77,527,300 |
|
|
Maintenance reserves
|
|
|
12,927,700 |
|
|
|
16,671,800 |
|
|
Accrued maintenance costs
|
|
|
2,115,700 |
|
|
|
1,612,100 |
|
|
Security deposits
|
|
|
5,218,300 |
|
|
|
6,265,000 |
|
|
Unearned revenues
|
|
|
1,642,200 |
|
|
|
646,700 |
|
|
Deferred income taxes
|
|
|
8,621,300 |
|
|
|
14,573,800 |
|
|
Total liabilities
|
|
|
166,934,000 |
|
|
|
118,499,400 |
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 2,000,000 shares
authorized, no shares issued and outstanding
|
|
|
- |
|
|
|
- |
|
|
Common stock, $0.001 par value, 10,000,000 shares
authorized, 1,606,557 shares issued and outstanding
|
|
|
1,600 |
|
|
|
1,600 |
|
|
Paid-in capital
|
|
|
14,780,100 |
|
|
|
14,780,100 |
|
|
Retained earnings
|
|
|
20,563,300 |
|
|
|
31,857,300 |
|
| |
|
|
35,345,000 |
|
|
|
46,639,000 |
|
|
Treasury stock at cost, 63,300 shares
|
|
|
(504,100 |
) |
|
|
(504,100 |
) |
|
Total stockholders’ equity
|
|
|
34,840,900 |
|
|
|
46,134,900 |
|
|
Total liabilities and stockholders’ equity
|
|
$ |
201,774,900 |
|
|
$ |
164,634,300 |
|
The accompanying notes are an integral part of these statements.
AeroCentury Corp.
Statements of Operations
| |
|
For the Years Ended December 31,
|
|
| |
|
2014
|
|
|
2013
|
|
| |
|
|
|
|
(As adjusted)
|
|
|
Revenues and other income:
|
|
|
|
|
|
|
|
Operating lease revenue, net
|
|
$ |
21,913,300 |
|
|
$ |
18,794,200 |
|
|
Maintenance reserves revenue, net
|
|
|
3,393,600 |
|
|
|
14,910,400 |
|
|
Net gain on disposal of assets
|
|
|
3,147,200 |
|
|
|
3,808,200 |
|
|
Other income
|
|
|
252,400 |
|
|
|
718,800 |
|
| |
|
|
28,706,500 |
|
|
|
38,231,600 |
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Provision for impairment in value of aircraft
|
|
|
18,736,500 |
|
|
|
- |
|
|
Maintenance
|
|
|
7,478,400 |
|
|
|
6,962,400 |
|
|
Depreciation
|
|
|
7,299,000 |
|
|
|
7,363,100 |
|
|
Management fees, net of approximately $1,200,000
of fees waived by JMC in 2014
|
|
|
3,864,900 |
|
|
|
4,369,300 |
|
|
Interest
|
|
|
5,134,200 |
|
|
|
4,075,000 |
|
|
Professional fees, general and administrative and other
|
|
|
1,718,800 |
|
|
|
1,174,500 |
|
|
Insurance
|
|
|
1,255,300 |
|
|
|
1,166,400 |
|
|
Other taxes
|
|
|
465,200 |
|
|
|
90,200 |
|
|
Bad debt expense
|
|
|
- |
|
|
|
357,600 |
|
| |
|
|
45,952,300 |
|
|
|
25,558,500 |
|
|
(Loss)/income before income tax provision
|
|
|
(17,245,800 |
) |
|
|
12,673,100 |
|
|
Income tax (benefit)/provision
|
|
|
(5,951,800 |
) |
|
|
4,329,200 |
|
|
Net (loss)/income
|
|
$ |
(11,294,000 |
) |
|
$ |
8,343,900 |
|
|
(Loss)/earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(7.32 |
) |
|
$ |
5.41 |
|
|
Diluted
|
|
$ |
(7.32 |
) |
|
$ |
5.26 |
|
|
Weighted average shares used in (loss)/earnings per share computations:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,543,257 |
|
|
|
1,543,257 |
|
|
Diluted
|
|
|
1,543,257 |
|
|
|
1,587,036 |
|
The accompanying notes are an integral part of these statements.
AeroCentury Corp.
Statements of Stockholders’ Equity
For the Years Ended December 31, 2014 and 2013
| |
|
Common
Stock
|
|
|
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Total
|
|
|
Balance, December 31, 2012 (As adjusted)
|
|
$ |
1,600 |
|
|
$ |
14,780,100 |
|
|
$ |
23,513,400 |
|
|
$ |
(504,100 |
) |
|
$ |
37,791,000 |
|
|
Net income
|
|
|
- |
|
|
|
- |
|
|
|
8,343,900 |
|
|
|
- |
|
|
|
8,343,900 |
|
|
Balance, December 31, 2013 (As adjusted)
|
|
|
1,600 |
|
|
|
14,780,100 |
|
|
|
31,857,300 |
|
|
|
(504,100 |
) |
|
|
46,134,900 |
|
|
Net loss
|
|
|
- |
|
|
|
- |
|
|
|
(11,294,000 |
) |
|
|
- |
|
|
|
(11,294,000 |
) |
|
Balance, December 31, 2014
|
|
$ |
1,600 |
|
|
$ |
14,780,100 |
|
|
$ |
20,563,300 |
|
|
$ |
(504,100 |
) |
|
$ |
34,840,900 |
|
The accompanying notes are an integral part of these statements.
AeroCentury Corp.
Statements of Cash Flows
| |
|
For the Years Ended December 31,
|
|
| |
|
2014
|
|
|
2013
|
|
| |
|
|
|
|
(As adjusted)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$ |
(11,294,000 |
) |
|
$ |
8,343,900 |
|
|
Adjustments to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Net gain on disposal of assets
|
|
|
(3,147,200 |
) |
|
|
(3,808,200 |
) |
|
Depreciation
|
|
|
7,299,000 |
|
|
|
7,363,100 |
|
|
Provision for impairment in value of aircraft
|
|
|
18,736,500 |
|
|
|
- |
|
|
Non-cash interest
|
|
|
950,100 |
|
|
|
1,113,600 |
|
|
Deferred income taxes
|
|
|
(5,952,600 |
) |
|
|
4,321,300 |
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(498,000 |
) |
|
|
(96,100 |
) |
|
Finance leases receivable
|
|
|
1,895,200 |
|
|
|
246,000 |
|
|
Income taxes receivable
|
|
|
- |
|
|
|
2,000 |
|
|
Prepaid expenses and other
|
|
|
486,700 |
|
|
|
(772,400 |
) |
|
Accounts payable and accrued expenses
|
|
|
(132,400 |
) |
|
|
(23,400 |
) |
|
Accrued interest on notes payable
|
|
|
163,300 |
|
|
|
(38,400 |
) |
|
Maintenance reserves and accrued costs
|
|
|
(1,313,700 |
) |
|
|
(9,128,800 |
) |
|
Security deposits
|
|
|
(2,167,700 |
) |
|
|
(525,200 |
) |
|
Unearned revenue
|
|
|
210,200 |
|
|
|
(105,700 |
) |
|
Income taxes payable
|
|
|
- |
|
|
|
(19,100 |
) |
|
Net cash provided by operating activities
|
|
|
5,235,400 |
|
|
|
6,872,600 |
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of aircraft and aircraft engines held for lease,
net of re-sale fees
|
|
|
15,854,800 |
|
|
|
10,018,700 |
|
|
Proceeds from sale of assets held for sale, net of re-sale fees
|
|
|
312,100 |
|
|
|
945,100 |
|
|
Purchases of aircraft and aircraft engines
|
|
|
(74,529,000 |
) |
|
|
(24,965,500 |
) |
|
Net cash used in investing activities
|
|
|
(58,362,100 |
) |
|
|
(14,001,700 |
) |
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Borrowings under Credit Facility
|
|
|
71,100,000 |
|
|
|
19,000,000 |
|
|
Repayments of Credit Facility
|
|
|
(15,200,000 |
) |
|
|
(9,300,000 |
) |
|
Debt issuance costs
|
|
|
(3,045,500 |
) |
|
|
(2,055,000 |
) |
|
Net cash provided by financing activities
|
|
|
52,854,500 |
|
|
|
7,645,000 |
|
|
Net (decrease)/increase in cash and cash equivalents
|
|
|
(272,200 |
) |
|
|
515,900 |
|
|
Cash and cash equivalents, beginning of year
|
|
|
2,112,700 |
|
|
|
1,596,800 |
|
|
Cash and cash equivalents, end of year
|
|
$ |
1,840,500 |
|
|
$ |
2,112,700 |
|
During the years ended December 31, 2014 and 2013, the Company paid interest totaling $4,117,900 and $3,077,100, respectively. During the years ended December 31, 2014 and 2013, the Company paid income taxes totaling $800 and $800, respectively.
The accompanying notes are an integral part of these statements.
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
1.Organization and Summary of Significant Accounting Policies
(a)The Company and Basis of Presentation
AeroCentury Corp. ("the Company'), a Delaware corporation incorporated in 1997, typically acquires used regional aircraft and engines for lease to foreign and domestic regional carriers.
As discussed in Note 2, during the first quarter of 2014, the Company changed its method of accounting for non-refundable maintenance reserves and certain lessor maintenance obligations. The Company has applied this change in accounting principle retrospectively to all periods presented in accordance with ASC 250, Accounting Changes and Error Corrections (“ASC 250”).
(b)Use of Estimates
The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable for making judgments that are not readily apparent from other sources.
The most significant estimates with regard to these financial statements are the residual values and useful lives of the assets, the amount and timing of cash flows associated with each asset that are used to evaluate whether assets are impaired, accrued maintenance costs, accounting for income taxes, and the amounts recorded as allowances for doubtful accounts.
(c)Cash and cash equivalents
The Company considers highly liquid investments readily convertible into known amounts of cash, with original maturities of 90 days or less from the date of acquisition, as cash equivalents.
(d)Aircraft Capitalization and Depreciation
The Company’s interests in aircraft and aircraft engines are recorded at cost, which includes acquisition costs. Since inception, the Company has typically purchased only used aircraft and aircraft engines. It is the Company’s policy to hold aircraft for approximately twelve years unless market conditions dictate otherwise. Therefore, depreciation of aircraft is initially computed using the straight-line method over the anticipated holding period, usually twelve years, to an estimated residual value based on appraisal. For an aircraft engine held for lease as a spare, the Company estimates the length of time that it will hold the aircraft engine based upon estimated usage, repair costs and other factors, and depreciates it to the appraised residual value over such period using the straight-line method.
The Company periodically reviews plans for lease or sale of its aircraft and aircraft engines and changes, as appropriate, the remaining expected holding period for such assets. Estimated residual values are reviewed and adjusted periodically, based upon updated estimates obtained from an independent appraiser. Decreases in the fair value of aircraft could affect not only the current value, discussed below, but also the estimated residual value.
Assets that are held for sale are not subject to depreciation and are separately classified on the balance sheet. Such assets are carried at the lower of their carrying value or estimated fair values, less costs to sell.
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
1.Organization and Summary of Significant Accounting Policies (continued)
(e)Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible. The fair value hierarchy under GAAP is based on three levels of inputs.
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The carrying amount of the Company's money market funds included in cash and cash equivalents was $1,044,300 and $1,842,000 at December 31, 2014 and December 31, 2013. The fair value of the Company's money market funds would be categorized as Level 1 under the GAAP fair value hierarchy.
As of December 31, 2014 and December 31, 2013, there were no liabilities that were required to be measured and recorded at fair value on a recurring basis.
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company determines fair value of long-lived assets held and used, such as aircraft and aircraft engines held for lease and held for sale, by reference to independent appraisals, quoted market prices (e.g., offers to purchase) and other factors. An impairment charge is recorded when the Company believes that the carrying value of an asset will not be recovered through future net cash flows and that the carrying value exceeds its fair value.
During 2014, based on appraised values, the Company recorded impairment charges totaling $3,124,200 for two Fokker 100 aircraft and two Fokker 50 aircraft that are held for lease, resulting in a carrying value of $7,837,300. The fair value of such assets would be categorized as Level 2 under the GAAP fair value hierarchy. No impairments were recorded on the Company's aircraft and aircraft engines held for lease in 2013.
During 2014, based on management's estimate of realizable value, the Company recorded impairment charges totaling $15,612,300 for five Fokker 100 aircraft and one Fokker 50 aircraft that are held for sale, resulting in a carrying value of $6,100,000. The fair value of such assets would be categorized as Level 3 under the GAAP fair value hierarchy. No impairments were recorded on the Company's aircraft and aircraft engines held for sale in 2013.
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
1.Organization and Summary of Significant Accounting Policies (continued)
Fair Value of Other Financial Instruments
The Company’s financial instruments, other than cash and cash equivalents, consist principally of finance leases receivable and amounts borrowed under its credit facility (the “Credit Facility,” as defined in Note 7). The fair value of accounts receivable, finance leases receivable, accounts payable and the Company’s maintenance reserves and accrued maintenance costs approximates the carrying value of these financial instruments.
Borrowings under the Company’s Credit Facility bear floating rates of interest that reset periodically to a market benchmark rate plus a credit margin. The Company believes the effective interest rate of this debt agreement approximates current market rates for such indebtedness at the balance sheet date, and therefore that the carrying amount of its floating rate debt at the balance sheet dates approximates its fair value. The fair value of the Company’s outstanding balance of its Credit Facility would be categorized as Level 3 under the GAAP fair value hierarchy.
(f)Impairment of Long-lived Assets
The Company reviews assets for impairment when there has been an event or a change in circumstances indicating that the carrying amount of a long-lived asset may not be recoverable. In addition, the Company routinely reviews all long-lived assets for impairment annually. Recoverability of an asset is measured by comparison of its carrying amount to the future estimated undiscounted cash flows (without interest charges) that the asset is expected to generate. Estimates are based on currently available market data and independent appraisals and are subject to fluctuation from time to time. If these estimated future cash flows are less than the carrying value of an asset at the time of evaluation, any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Fair value is determined by reference to independent appraisals and other factors considered relevant by management. Significant management judgment is required in the forecasting of future operating results that are used in the preparation of estimated future undiscounted cash flows and, if different conditions prevail in the future, material write-downs may occur. As discussed in (e) Fair Value Measurements above, the Company recorded impairment provisions totaling $18,736,500 in 2014. No impairment provisions were recorded in 2013.
(g)Deferred Financing Costs and Commitment Fees
Costs incurred in connection with debt financing are deferred and amortized over the term of the debt using the effective interest method or, in certain instances where the differences are not material, using the straight-line method. Costs incurred in connection with the Company’s Credit Facility are deferred and amortized using the straight-line method. Commitment fees for unused funds are expensed as incurred.
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
1.Organization and Summary of Significant Accounting Policies (continued)
(h)Security deposits
The Company’s leases are typically structured so that if any event of default occurs under a lease, the Company may apply all or a portion of the lessee’s security deposit to cure such default. If such application of the security deposit is made, the lessee typically is required to replenish and maintain the full amount of the deposit during the remaining term of the lease. All of the security deposits received by the Company are refundable to the lessee at the end of the lease upon satisfaction of all lease terms.
(i)Taxes
As part of the process of preparing the Company’s financial statements, management estimates income taxes in each of the jurisdictions in which the Company operates. This process involves estimating the Company’s current tax exposure under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and GAAP purposes. These differences result in deferred tax assets and liabilities, which are included in the balance sheet. Management also assesses the likelihood that the Company’s deferred tax assets will be recovered from future taxable income, and, to the extent management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized, the Company establishes a valuation allowance. To the extent the Company establishes a valuation allowance or changes the allowance in a period, the Company reflects the corresponding increase or decrease within the tax provision in the statement of operations. Significant management judgment is required in determining the Company’s future taxable income for purposes of assessing the Company’s ability to realize any benefit from its deferred taxes.
The Company accrues non-income based sales, use, value added and franchise taxes as other tax expense in the statements of operations.
(j)Revenue Recognition, Accounts Receivable and Allowance for Doubtful Accounts
Revenue from leasing of aircraft assets is recognized as operating lease revenue on a straight-line basis over the terms of the applicable lease agreements. Deferred payments are recorded as accrued rent when the cash rent received is lower than the straight-line revenue recognized. Such receivables decrease over the term of the applicable leases. Interest income is recognized on finance leases based on the interest rate implicit in the lease and the outstanding balance of the lease receivable. Maintenance reserves retained by the Company at lease-end are recognized as maintenance reserves revenue.
In instances where collectability is not reasonably assured, the Company recognizes revenue as cash payments are received. The Company estimates and charges to income a provision for bad debts based on its experience with each specific customer, the amount and length of payment arrearages, and its analysis of the lessee’s overall financial condition. If the financial condition of any of the Company’s customers deteriorates, it could result in actual losses exceeding any estimated allowances.
The Company had no allowance for doubtful accounts at December 31, 2014 and 2013.
(k)Comprehensive (Loss)/Income
The Company does not have any comprehensive income other than the revenue and expense items included in the statements of operations. As a result, comprehensive (loss)/income equals net (loss)/income for the years ended December 31, 2014 and 2013.
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
1.Organization and Summary of Significant Accounting Policies (continued)
(l)Finance Leases
The lease for one of the Company’s aircraft contained a lessee purchase option at a price substantially below the asset's estimated residual value at the exercise date for the option. Consequently, the Company considered the purchase option to be a “bargain purchase option” and classified the lease as a finance lease for financial accounting purposes. The Company does not include the value, purchase price or accumulated depreciation of finance lease assets on its balance sheet. Instead, the discounted present value of (i) future minimum lease payments (including the bargain purchase option) and (ii) any residual value not subject to a bargain purchase option are reported as a finance lease receivable. Rental revenue and depreciation expense are not recognized on finance leases. Rather, the Company accrues interest on the balance of the finance lease receivable based on the interest rate inherent in the applicable lease. The aircraft that was subject to a finance lease was sold to the lessee during 2014.
Two engines that were previously subject to finance leases were returned to the Company during 2014 and the finance lease receivable balances were reclassified to aircraft and aircraft engines held for lease on the Company’s balance sheet.
The Company recognized interest earned on finance leases as “other income” in the amount of $150,000 and $175,700 in 2014 and 2013, respectively.
(m)Recent Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09 (the "ASU") that created the new Topic 606 in the Accounting Standards Codification ("ASC"). The ASU also included numerous conforming additions and amendments to other Topics within the ASC. Topic 606 establishes new rules that affect the amount and timing of revenue recognition for contracts with customers, but does not affect lease accounting and reporting. As such, adoption of these provisions will not affect the Company's lease revenues but may affect the reporting of other of the Company's revenues. The provisions included in the ASU are effective for years commencing after December 15, 2016, cannot be adopted early, and may be reflected using either a full retrospective method or a simplified method that does not recast prior periods but does disclose the effect of the adoption on the current period financial statements. The Company has not determined either the potential impact on its financial statements nor the method it will elect to use in connection with the adoption of the changes included in the ASU.
On August 27, 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements - Going Concern," which added Subtopic 205-40 to the ASC (the "Subtopic"). This Subtopic requires management to determine whether substantial doubt exists concerning the reporting entity's ability to continue as a going concern, in which case certain disclosures will be required. The Subtopic affects financial statement presentation but not methods of accounting, and is effective on a prospective basis for annual periods ending after December 2016 and each reporting period thereafter, although early adoption is permitted. The Company has not early adopted the Subtopic.
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
2.Change in Accounting Principle
The Company previously adopted the direct expensing method under Financial Accounting Standards Board (“FASB”) ASC 908, formerly FASB Staff Position AUG AIR-1, Accounting for Planned Major Maintenance Activities (“FSP AUG AIR-1”) on January 1, 2007. Under FSP AUG AIR-1, non-refundable maintenance reserves were recorded as maintenance reserves revenue (assuming cash was received or collection was reasonably assured), and associated maintenance work was recorded as maintenance expense when the work was performed. During the first quarter of 2014, the Company evaluated its method of accounting for maintenance reserves and lessor maintenance obligations and elected to change its method of accounting to:
|
|
(i) Recognize non-refundable maintenance reserves as liabilities for deposits against future maintenance reimbursements of maintenance reserves received in the normal course of ongoing leases;
|
|
|
(ii) Recognize reimbursements from such collected reserves as disbursements against the liability when claims are submitted for payment against previously collected maintenance reserves;
|
|
|
(iii) Reflect as liabilities non-refundable reserves received by the prior lessor upon acquisition of an aircraft, which are claimable by the lessee when maintenance is performed;
|
|
|
(iv) Recognize as income non-refundable reserves not refunded to lessees upon termination of the lease and return of the aircraft to the Company in accordance with all lease return requirements; and
|
|
|
(v) Record lessor maintenance obligations as liabilities upon acquisition of an aircraft subject to a lease under which the Company assumes the prior lessor’s obligation to pay a portion of a first-time maintenance event.
|
In management’s judgment, the change to this accounting method is preferable in that it will provide the user of the Company’s financial statements a better understanding of the underlying business terms of the Company’s leasing transactions and provide additional clarity with respect to the Company’s sources of income, its non-refundable reserve obligations, and its lessor maintenance obligations. The Company has applied the change in method of accounting for maintenance reserves and lessor maintenance obligations to all prior periods presented within the financial statements in accordance with accounting principles relating to accounting changes. The change in accounting principle resulted in a cumulative net decrease of $8,088,200 in stockholders’ equity as of January 1, 2013.
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
2.Change in Accounting Principle (continued)
The effects on the Company’s balance sheet at December 31, 2013 as a result of the retroactive application of the change in accounting principle in accordance with ASC 250 were as follows:
| |
|
December 31, 2013
|
|
| |
|
As reported
previously
|
|
|
As adjusted
|
|
|
Effect of change
|
|
|
Cash and cash equivalents
|
|
$ |
2,112,700 |
|
|
$ |
2,112,700 |
|
|
$ |
- |
|
|
Accounts receivable, net
|
|
|
3,313,700 |
|
|
|
3,303,800 |
|
|
|
(9,900 |
) |
|
Finance leases receivable
|
|
|
1,895,200 |
|
|
|
1,895,200 |
|
|
|
- |
|
|
Aircraft and aircraft engines held for lease, net
|
|
|
152,375,200 |
|
|
|
152,954,600 |
|
|
|
579,400 |
|
|
Assets held for sale
|
|
|
735,000 |
|
|
|
735,000 |
|
|
|
- |
|
|
Prepaid expenses and other
|
|
|
3,633,000 |
|
|
|
3,633,000 |
|
|
|
- |
|
|
Total assets
|
|
$ |
164,064,800 |
|
|
$ |
164,634,300 |
|
|
$ |
569,500 |
|
|
Accounts payable and accrued expenses
|
|
$ |
1,175,300 |
|
|
$ |
1,202,700 |
|
|
$ |
27,400 |
|
|
Notes payable and accrued interest
|
|
|
77,527,300 |
|
|
|
77,527,300 |
|
|
|
- |
|
|
Maintenance reserves and accrued maintenance costs
|
|
|
13,254,100 |
|
|
|
18,283,900 |
|
|
|
5,029,800 |
|
|
Security deposits
|
|
|
6,265,000 |
|
|
|
6,265,000 |
|
|
|
- |
|
|
Unearned revenues
|
|
|
646,700 |
|
|
|
646,700 |
|
|
|
- |
|
|
Deferred income taxes
|
|
|
16,099,700 |
|
|
|
14,573,800 |
|
|
|
(1,525,900 |
) |
|
Total liabilities
|
|
|
114,968,100 |
|
|
|
118,499,400 |
|
|
|
3,531,300 |
|
|
Preferred stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Common stock
|
|
|
1,600 |
|
|
|
1,600 |
|
|
|
- |
|
|
Paid-in capital
|
|
|
14,780,100 |
|
|
|
14,780,100 |
|
|
|
- |
|
|
Retained earnings
|
|
|
34,819,100 |
|
|
|
31,857,300 |
|
|
|
(2,961,800 |
) |
|
Treasury stock
|
|
|
(504,100 |
) |
|
|
(504,100 |
) |
|
|
- |
|
|
Total stockholders’ equity
|
|
|
49,096,700 |
|
|
|
46,134,900 |
|
|
|
(2,961,800 |
) |
|
Total liabilities and stockholders’ equity
|
|
$ |
164,064,800 |
|
|
$ |
164,634,300 |
|
|
$ |
569,500 |
|
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
2.Change in Accounting Principle (continued)
The effects on the Company’s statement of operations for the year ended December 31, 2013 as a result of the retroactive application of the change in accounting principle in accordance with ASC 250 were as follows:
| |
|
For the Year Ended
December 31, 2013
|
|
| |
|
As reported
previously
|
|
|
As adjusted
|
|
|
Effect of
change
|
|
| |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Operating lease revenue, net
|
|
$ |
18,794,200 |
|
|
$ |
18,794,200 |
|
|
$ |
- |
|
|
Maintenance reserves income, net
|
|
|
8,878,300 |
|
|
|
14,910,400 |
|
|
|
6,032,100 |
|
|
Gain on disposal of assets and other income
|
|
|
4,527,000 |
|
|
|
4,527,000 |
|
|
|
- |
|
| |
|
|
32,199,500 |
|
|
|
38,231,600 |
|
|
|
6,032,100 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance
|
|
|
8,765,000 |
|
|
|
6,962,400 |
|
|
|
(1,802,600 |
) |
|
Depreciation
|
|
|
7,312,500 |
|
|
|
7,363,100 |
|
|
|
50,600 |
|
|
Management fees
|
|
|
4,352,400 |
|
|
|
4,369,300 |
|
|
|
16,900 |
|
|
Interest
|
|
|
4,075,000 |
|
|
|
4,075,000 |
|
|
|
- |
|
|
Professional fees, general and administrative and other
|
|
|
1,532,100 |
|
|
|
1,532,100 |
|
|
|
- |
|
|
Insurance
|
|
|
1,166,400 |
|
|
|
1,166,400 |
|
|
|
- |
|
|
Other taxes
|
|
|
90,200 |
|
|
|
90,200 |
|
|
|
- |
|
| |
|
|
27,293,600 |
|
|
|
25,558,500 |
|
|
|
(1,735,100 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
4,905,900 |
|
|
|
12,673,100 |
|
|
|
7,767,200 |
|
|
Tax provision
|
|
|
1,688,400 |
|
|
|
4,329,200 |
|
|
|
2,640,800 |
|
|
Net income
|
|
$ |
3,217,500 |
|
|
$ |
8,343,900 |
|
|
$ |
5,126,400 |
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
2.08 |
|
|
$ |
5.41 |
|
|
$ |
3.33 |
|
|
Diluted
|
|
$ |
2.03 |
|
|
$ |
5.26 |
|
|
$ |
3.23 |
|
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
2.Change in Accounting Principle (continued)
The effects on the Company’s statement of cash flows for the year ended December 31, 2013 as a result of the retroactive application of the change in accounting principle in accordance with ASC 250 were as follows:
| |
|
For the Year Ended
December 31, 2013
|
|
| |
|
As reported
previously
|
|
|
As adjusted
|
|
|
Effect of
change
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
3,217,500 |
|
|
$ |
8,343,900 |
|
|
$ |
5,126,400 |
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on disposal of assets
|
|
|
(3,808,200 |
) |
|
|
(3,808,200 |
) |
|
|
- |
|
|
Depreciation
|
|
|
7,312,500 |
|
|
|
7,363,100 |
|
|
|
50,600 |
|
|
Non-cash interest
|
|
|
1,113,600 |
|
|
|
1,113,600 |
|
|
|
- |
|
|
Deferred income taxes
|
|
|
1,680,500 |
|
|
|
4,321,300 |
|
|
|
2,640,800 |
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(106,000 |
) |
|
|
(96,100 |
) |
|
|
9,900 |
|
|
Finance lease receivable
|
|
|
246,000 |
|
|
|
246,000 |
|
|
|
- |
|
|
Income taxes receivable
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
- |
|
|
Prepaid expenses and other
|
|
|
(772,400 |
) |
|
|
(772,400 |
) |
|
|
- |
|
|
Accounts payable and accrued expenses
|
|
|
(40,300 |
) |
|
|
(23,400 |
) |
|
|
16,900 |
|
|
Accrued interest on notes payable
|
|
|
(38,400 |
) |
|
|
(38,400 |
) |
|
|
- |
|
|
Maintenance reserves and accrued costs
|
|
|
(1,284,200 |
) |
|
|
(9,128,800 |
) |
|
|
(7,844,600 |
) |
|
Security deposits
|
|
|
(525,200 |
) |
|
|
(525,200 |
) |
|
|
- |
|
|
Unearned revenue
|
|
|
(105,700 |
) |
|
|
(105,700 |
) |
|
|
- |
|
|
Income taxes payable
|
|
|
(19,100 |
) |
|
|
(19,100 |
) |
|
|
- |
|
|
Net cash provided by operating activities
|
|
|
6,872,600 |
|
|
|
6,872,600 |
|
|
|
- |
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of aircraft and aircraft
engines held for lease, net of re-sale fees
|
|
|
10,018,700 |
|
|
|
10,018,700 |
|
|
|
- |
|
|
Proceeds from sale of assets held for sale,
net of re-sale fees
|
|
|
945,100 |
|
|
|
945,100 |
|
|
|
- |
|
|
Purchases of aircraft and aircraft engines
|
|
|
(24,965,500 |
) |
|
|
(24,965,500 |
) |
|
|
- |
|
|
Net cash used in investing activities
|
|
|
(14,001,700 |
) |
|
|
(14,001,700 |
) |
|
|
- |
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under Credit Facility
|
|
|
19,000,000 |
|
|
|
19,000,000 |
|
|
|
- |
|
|
Repayments of Credit Facility
|
|
|
(9,300,000 |
) |
|
|
(9,300,000 |
) |
|
|
- |
|
|
Debt issuance costs
|
|
|
(2,055,000 |
) |
|
|
(2,055,000 |
) |
|
|
- |
|
|
Net cash provided by financing activities
|
|
|
7,645,000 |
|
|
|
7,645,000 |
|
|
|
- |
|
|
Net increase in cash and cash equivalents
|
|
|
515,900 |
|
|
|
515,900 |
|
|
|
- |
|
|
Cash and cash equivalents, beginning of year
|
|
|
1,596,800 |
|
|
|
1,596,800 |
|
|
|
- |
|
|
Cash and cash equivalents, end of year
|
|
$ |
2,112,700 |
|
|
$ |
2,112,700 |
|
|
$ |
- |
|
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
3.Aircraft and Aircraft Engines Held for Lease or Sale
(a)Assets Held for Lease
At December 31, 2014 and December 31, 2013, the Company’s aircraft and aircraft engines, which were on lease or held for lease, consisted of the following:
| |
|
December 31, 2014
|
|
|
December 31, 2013
|
|
| |
|
Number
|
|
|
% of net
|
|
|
Number
|
|
|
% of net
|
|
|
Model
|
|
owned
|
|
|
book value
|
|
|
owned
|
|
|
book value
|
|
|
Bombardier Dash-8-300
|
|
|
8 |
|
|
|
17 |
% |
|
|
9 |
|
|
|
23 |
% |
|
Bombardier CRJ-700
|
|
|
3 |
|
|
|
16 |
% |
|
|
- |
|
|
|
- |
|
|
Bombardier CRJ-900
|
|
|
2 |
|
|
|
16 |
% |
|
|
- |
|
|
|
- |
|
|
Bombardier Dash-8-Q400
|
|
|
3 |
|
|
|
13 |
% |
|
|
3 |
|
|
|
17 |
% |
|
ATR 42-600
|
|
|
1 |
|
|
|
9 |
% |
|
|
- |
|
|
|
- |
|
|
Bombardier CRJ-705
|
|
|
1 |
|
|
|
9 |
% |
|
|
1 |
|
|
|
12 |
% |
|
Saab 340B Plus
|
|
|
6 |
|
|
|
7 |
% |
|
|
6 |
|
|
|
8 |
% |
|
Fokker 50
|
|
|
6 |
|
|
|
5 |
% |
|
|
10 |
|
|
|
10 |
% |
|
General Electric CF34-8E5 engine
|
|
|
2 |
|
|
|
4 |
% |
|
|
3 |
|
|
|
6 |
% |
|
Fokker 100
|
|
|
2 |
|
|
|
3 |
% |
|
|
7 |
|
|
|
19 |
% |
|
Saab 340B
|
|
|
1 |
|
|
|
1 |
% |
|
|
4 |
|
|
|
4 |
% |
|
Tay 650-15 engine
|
|
|
1 |
|
|
|
- |
|
|
|
1 |
|
|
|
1 |
% |
|
General Electric CT7-9B engine
|
|
|
2 |
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
Saab 340A
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
Assets subject to finance leases are not included in the net book value of assets held for lease. Therefore, the Company’s single Saab 340A aircraft and two General Electric CT7-9B engines, which were subject to finance leases in 2013, are not included in the net book value calculation as of December 31, 2013.
During 2014, based on appraised values, the Company recorded impairment charges on assets held for lease totaling $2,906,400 and $217,800 on two Fokker 100 and two Fokker 50 aircraft, respectively.
During 2014 and 2013, the Company used cash of $74,529,000 and $24,965,500, respectively, for the purchase and capital improvement of aircraft and engines.
During 2014, the Company recorded net gains totaling $3,147,200 from the sale of three Fokker 50 aircraft, five Saab 340B aircraft, one Bombardier Dash-8-300 aircraft and one General Electric CF34-8E5 engine. During 2013, the Company recorded net gains totaling $4,504,200 from the sale of three Fokker 50 aircraft, a deHavilland DHC-8-100 aircraft, a deHavilland DHC-6 aircraft and a General Electric CT7-9B engine. The Company also leased an engine pursuant to a finance lease in 2013 and recorded a gain of $73,300. In addition, the Company recorded a loss of $769,300 in 2013 on the disposal of a Tay 650-15 engine, which was replaced by one of the Company's spare engines.
During 2014, the Company extended the leases for nine of its assets and leased two assets that had been off lease at December 31, 2013.
In May 2014, six Saab 340B Plus aircraft and two General Electric CT7-9B engines were returned by a customer when it ceased operations. Two of the aircraft have been re-leased.
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
3.Aircraft and Aircraft Engines Held for Lease or Sale (continued)
(a)Assets Held for Lease (continued)
Ten of the Company’s assets that are held for lease were off lease at December 31, 2014, representing 10% of the net book value of the Company’s aircraft and engines held for lease. Such assets were comprised of four Saab 340B Plus aircraft, one Saab 340B aircraft, and five engines.
(b)Assets Held for Sale
Assets held for sale include two Saab 340B airframes, which are being sold in parts, as well as five Fokker 100 aircraft and a Fokker 50 aircraft.
During 2014 and 2013, the Company received $312,100 and $945,100, respectively, from the sale of parts belonging to the two airframes, which proceeds reduced their carrying value.
During 2014, the Company recorded impairment charges totaling $15,278,900 and $333,400 related to five Fokker 100 aircraft and one Fokker 50 aircraft, respectively. At December 31, 2014, five of the Fokker 100 aircraft and one of the Fokker 50 aircraft were classified as held for sale on the Company's balance sheet. As discussed in Note 13, the Company sold the Fokker 50 aircraft in March 2015.
4.Maintenance Reserves and Accrued Maintenance Costs
Maintenance costs under the Company’s triple net leases are generally the responsibility of the lessees. Most of the Company’s leases require payment of maintenance reserves, which are based upon lessee-reported usage and billed monthly, and are intended to accumulate and be applied by the Company toward reimbursement of most or all of the cost of the lessees’ performance of certain maintenance obligations under the leases. Maintenance reserves are characterized as either refundable or non-refundable depending on their disposition at lease-end. The Company retains non-refundable maintenance reserves at lease-end, even if the lessee has met all of its obligations under the lease, including any return conditions applicable to the leased asset, while refundable reserves are returned to the lessee under such circumstances.
The liabilities for maintenance reserves in the accompanying balance sheets include both refundable and non-refundable maintenance reserves payments billed to and received from lessees. These amounts are paid out as related maintenance is performed and, in the case of refundable reserves, at the end of the lease. Such payments reduce the associated maintenance reserve liability. Any reserves retained by the Company at lease end are recorded as revenue at that time.
Accrued maintenance costs include (i) maintenance for work performed for off-lease aircraft, which is not related to the release of reserves received from lessees and (ii) lessor maintenance obligations assumed upon acquisition of aircraft subject to a lease with such provisions. Maintenance costs are expensed as incurred.
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
5.Operating Segments
The Company operates in one business segment, the leasing of regional aircraft to foreign and domestic regional airlines, and therefore does not present separate segment information for lines of business.
Approximately 18% and 0% of the Company’s operating lease revenue was derived from lessees domiciled in the United States during 2014 and 2013, respectively. All revenues relating to aircraft leased and operated internationally are denominated and payable in U.S. dollars.
The tables below set forth geographic information about the Company’s operating lease revenue for leased aircraft and aircraft equipment, grouped by domicile of the lessee:
| |
|
For the Years Ended December 31,
|
|
|
Operating Lease Revenue
|
|
2014
|
|
|
2013
|
|
| |
|
|
|
|
|
|
|
North America
|
|
$ |
6,423,700 |
|
|
$ |
1,542,000 |
|
|
Africa
|
|
|
5,183,600 |
|
|
|
5,454,700 |
|
|
Central and South America
|
|
|
3,533,300 |
|
|
|
4,233,000 |
|
|
Asia
|
|
|
3,460,400 |
|
|
|
4,149,000 |
|
|
Europe and United Kingdom
|
|
|
2,952,300 |
|
|
|
3,415,500 |
|
|
Australia
|
|
|
360,000 |
|
|
|
- |
|
| |
|
$ |
21,913,300 |
|
|
$ |
18,794,200 |
|
| |
|
December 31,
|
|
|
Net Book Value of Aircraft and Aircraft Engines Held for Lease
|
|
2014
|
|
|
2013
|
|
| |
|
|
|
|
|
|
|
North America
|
|
$ |
65,423,400 |
|
|
$ |
17,779,000 |
|
|
Europe and United Kingdom
|
|
|
43,468,700 |
|
|
|
20,384,700 |
|
|
Africa
|
|
|
28,858,200 |
|
|
|
29,951,800 |
|
|
Off lease
|
|
|
17,106,000 |
|
|
|
34,446,300 |
|
|
Asia
|
|
|
16,588,900 |
|
|
|
31,068,800 |
|
|
Central and South America
|
|
|
10,146,100 |
|
|
|
19,324,000 |
|
|
Australia
|
|
|
5,171,300 |
|
|
|
- |
|
| |
|
$ |
186,762,600 |
|
|
$ |
152,954,600 |
|
6.Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits and receivables. The Company places its deposits with financial institutions and other creditworthy issuers and limits the amount of credit exposure to any one party.
For the year ended December 31, 2014 the Company had four significant customers, which accounted for 20%, 18%, 14% and 11%, respectively, of lease revenue. For the year ended December 31, 2013 the Company had four significant customers, which accounted for 23%, 19%, 11% and 10%, respectively, of lease revenue.
At December 31, 2014, the Company had receivables from two customers totaling $1,130,000, representing 56% of the Company’s total receivables. The two customers paid the amounts owed in full in early 2015.
AeroCentury Corp.
Notes to Financial Statements
December 31, 2013
6.Concentration of Credit Risk (continued)
At December 31, 2013, the Company had receivables from two customers totaling $1,231,500, representing 40% of the Company’s total receivables, all of which was paid in 2014.
As of December 31, 2014, minimum future lease revenue payments receivable under noncancelable leases were as follows:
|
Years ending
|
|
|
|
| |
|
|
|
|
2015
|
|
$ |
22,938,700 |
|
|
2016
|
|
|
21,300,400 |
|
|
2017
|
|
|
17,937,600 |
|
|
2018
|
|
|
13,719,200 |
|
|
2019
|
|
|
12,860,000 |
|
|
Thereafter
|
|
|
37,596,300 |
|
| |
|
$ |
126,352,200 |
|
7.Notes Payable and Accrued Interest
At December 31, 2014 and December 31, 2013, the Company’s notes payable and accrued interest consisted of the following:
| |
|
December 31,
2014
|
|
|
December 31,
2013
|
|
|
Credit Facility principal
|
|
$ |
133,400,000 |
|
|
$ |
77,500,000 |
|
|
Credit Facility accrued interest
|
|
|
190,600 |
|
|
|
27,300 |
|
| |
|
$ |
133,590,600 |
|
|
$ |
77,527,300 |
|
The Company's Credit Facility is provided by a syndicate of banks and is secured by all of the assets of the Company, including its aircraft and engine portfolio.
In November 2013, the Company obtained a waiver of compliance with a customer concentration covenant under its Credit Facility at the September 30, 2013 and December 31, 2013 calculation dates. The Company was in compliance with all covenants other than the waived covenant under the Credit Facility agreement at December 31, 2013.
During May 2014, the Company’s Credit Facility was increased from $130 million to $180 million and extended through May 31, 2019.
The Company was out of compliance with a profitability covenant at June 30, 2014, primarily as a result of the Company recording aircraft impairment charges on aircraft totaling $6,800,000 during the quarter then ended. In August 2014, the Company and the Credit Facility banks agreed to an amendment to the profitability covenant, which cured the June 30, 2014 non-compliance.
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
7.Notes Payable and Accrued Interest (continued)
The Company was out of compliance with the profitability, interest coverage and debt service coverage covenants at September 30, 2014, resulting primarily from the Company recording additional aircraft impairment charges on aircraft totaling $11,718,700 during the third quarter of 2014. In November 2014, the Company and the Credit Facility banks agreed to an amendment to the Credit Facility, which cured the September 30, 2014 non-compliance, revised the compliance requirements through September 30, 2015, decreased the amount of the Credit Facility to $150 million due to the departure of two participant lenders, and decreased the maximum amount to which the Credit Facility can be expanded from $200 million to $180 million.
The unused amount of the Credit Facility was $16,600,000 and $52,500,000 as of December 31, 2014 and December 31, 2013, respectively.
The weighted average interest rate on the Credit Facility was 3.58% and 3.94% at December 31, 2014 and December 31, 2013, respectively.
8.Stockholder Rights Plan
In December 2009, the Company’s Board of Directors adopted a stockholder rights plan granting a dividend of one stock purchase right for each share of the Company’s common stock outstanding as of December 18, 2009 and the Company entered into a rights agreement dated December 1, 2009 in connection therewith. The rights become exercisable only upon the occurrence of certain events specified in the rights agreement, including the acquisition of 15% of the Company’s outstanding common stock by a person or group in certain circumstances. Each right allows the holder, other than an “acquiring person,” to purchase one one-hundredth of a share (a unit) of Series A Preferred Stock at an initial purchase price of $97.00 under circumstances described in the rights agreement. The purchase price, the number of units of preferred stock and the type of securities issuable upon exercise of the rights are subject to adjustment. The rights expire at the close of business December 1, 2019 unless earlier redeemed or exchanged. Until a right is exercised, the holder thereof, as such, has no rights as a stockholder of the Company, including the right to vote or to receive dividends.
9. Income Taxes
The items comprising the income tax provision are as follows:
| |
|
For the Years Ended December 31,
|
|
| |
|
2014
|
|
|
2013
|
|
| |
|
|
|
|
(As adjusted)
|
|
|
Current tax provision:
|
|
|
|
|
|
|
|
Federal
|
|
$ |
- |
|
|
$ |
- |
|
|
State
|
|
|
800 |
|
|
|
800 |
|
|
Foreign
|
|
|
- |
|
|
|
7,100 |
|
|
Current tax provision
|
|
|
800 |
|
|
|
7,900 |
|
|
Deferred tax (benefit)/provision:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(5,854,400 |
) |
|
|
4,478,800 |
|
|
State
|
|
|
(98,200 |
) |
|
|
1,100 |
|
|
Decrease in valuation allowance
|
|
|
- |
|
|
|
(158,600 |
) |
|
Deferred tax (benefit)/provision
|
|
|
(5,952,600 |
) |
|
|
4,321,300 |
|
|
Total income tax (benefit)/provision
|
|
$ |
(5,951,800 |
) |
|
$ |
4,329,200 |
|
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
9. 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,
|
|
| |
|
2014
|
|
|
2013
|
|
| |
|
|
|
|
(As adjusted)
|
|
| |
|
|
|
|
|
|
|
Income tax (benefit)/provision at statutory federal income tax rate
|
|
$ |
(5,863,600 |
) |
|
$ |
4,308,900 |
|
|
State tax (benefit)/provision, net of federal benefit
|
|
|
(97,500 |
) |
|
|
19,400 |
|
|
Prior year withholding tax adjustment
|
|
|
- |
|
|
|
174,600 |
|
|
Decrease in valuation allowance
|
|
|
- |
|
|
|
(158,600 |
) |
|
Other
|
|
|
9,300 |
|
|
|
(15,100 |
) |
|
Total income tax (benefit)/provision
|
|
$ |
(5,951,800 |
) |
|
$ |
4,329,200 |
|
Temporary differences and carry-forwards that give rise to a significant portion of deferred tax assets and liabilities as of December 31, 2014 and 2013 were as follows:
| |
|
December 31,
|
|
| |
|
2014
|
|
|
2013
|
|
| |
|
|
|
|
(As adjusted)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Maintenance reserves
|
|
$ |
2,138,900 |
|
|
$ |
1,813,900 |
|
|
Foreign tax credit carryover
|
|
|
- |
|
|
|
1,210,900 |
|
|
Alternative minimum tax credit
|
|
|
10,800 |
|
|
|
100,800 |
|
|
Bad debt allowance and other
|
|
|
961,100 |
|
|
|
490,100 |
|
|
Deferred tax assets
|
|
|
3,110,800 |
|
|
|
3,615,700 |
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation on aircraft and aircraft engines
|
|
|
(10,450,000 |
) |
|
|
(17,540,000 |
) |
|
Minimum lease payments receivable
|
|
|
- |
|
|
|
(649,500 |
) |
|
Deferred income
|
|
|
(1,282,100 |
) |
|
|
- |
|
|
Net deferred tax liabilities
|
|
$ |
(8,621,300 |
) |
|
$ |
(14,573,800 |
) |
All foreign tax credit carryovers were used to offset federal tax expense in 2014. The foreign tax credit carryovers are expected to expire between 2016 and 2022. A significant portion of the alternative minimum tax credit was used to offset federal tax expense in the current year. The remaining alternative minimum tax credit will be available to offset federal tax expense in excess of the alternative minimum tax in future years and does not expire.
At December 31, 2014 and December 31, 2013, the Company had no material uncertain tax positions.
The Company accounts for interest related to uncertain tax positions as interest expense, and for income tax penalties as tax expense.
All of the Company's tax years remain open to examination other than as barred in the various jurisdictions by statutes of limitation.
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
10.Computation of Earnings Per Share
Basic and diluted earnings per share are calculated as follows:
| |
|
For the Years Ended December 31,
|
|
| |
|
2014
|
|
|
2013
|
|
| |
|
|
|
|
(As adjusted)
|
|
|
Net (loss)/income
|
|
$ |
(11,294,000 |
) |
|
$ |
8,343,900 |
|
|
Weighted average shares outstanding for the period
|
|
|
1,543,257 |
|
|
|
1,543,257 |
|
|
Dilutive effect of warrants
|
|
|
- |
|
|
|
43,779 |
|
|
Weighted average diluted shares used in calculation
of diluted (loss)/earnings per share
|
|
|
1,543,257 |
|
|
|
1,587,036 |
|
|
Basic (loss)/earnings per share
|
|
$ |
(7.32 |
) |
|
$ |
5.41 |
|
|
Diluted (loss)/earnings per share
|
|
$ |
(7.32 |
) |
|
$ |
5.26 |
|
Basic earnings per common share is computed using net income and the weighted average number of common shares outstanding during the period. Diluted earnings per common share are computed using net income and the weighted average number of common shares outstanding, assuming dilution. Weighted average common shares outstanding, assuming dilution, include potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the assumed exercise of warrants using the treasury stock method. For the year ended December 31, 2014, warrants for 81,224 shares were not included in the calculation of diluted loss per share because the effect would have been anti-dilutive.
11. Related Party Transactions
The Company’s portfolio of leased aircraft assets is managed and administered under the terms of a management agreement with JetFleet Management Corp. (“JMC”), which is an integrated aircraft management, marketing and financing business and a subsidiary of JetFleet Holding Corp. ("JHC"). Certain officers of the Company are also officers of JHC and JMC and hold significant ownership positions in both JHC and the Company.
Under the management agreement, JMC receives a monthly management fee based on the net asset value of the assets under management. Such fee, totaling approximately $1,200,000, was waived by JMC for the fourth quarter of 2014. JMC also receives an acquisition fee for locating assets for the Company. Acquisition fees are included in the cost basis of the asset purchased. JMC may receive a remarketing fee in connection with the re-lease or sale of the Company’s assets. Remarketing fees are amortized over the applicable lease term or included in the gain or loss on sale.
Fees incurred during 2014 and 2013 were as follows:
| |
|
For the Years Ended December 31,
|
|
| |
|
2014
|
|
|
2013
|
|
|
Management fees, net of approximately $1,200,000
of fees waived by JMC in 2014
|
|
$ |
3,864,900 |
|
|
$ |
4,369,300 |
|
|
Acquisition fees
|
|
|
2,100,000 |
|
|
|
799,000 |
|
|
Remarketing fees
|
|
|
64,000 |
|
|
|
589,300 |
|
12. Warrants
As part of a previous subordinated debt financing, which was fully repaid in December 2011, the Company issued warrants to purchase up to 81,224 shares of the Company’s common stock that are currently exercisable (and expire on December 31, 2015) and represent approximately 5% of the post-exercise fully diluted capitalization of the Company. The exercise price of the warrants is $8.75 per share.
13.Subsequent Events
In March 2015, the Company sold a Fokker 50 aircraft that had been classified as held for sale at December 31, 2014 and recorded a gain of approximately $475,000.
Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.Controls and Procedures.
CEO and CFO Certifications. Attached as exhibits to this Annual Report on Form 10-K (the “Report”) are certifications of the Company’s Chief Executive Officer (the “CEO”) and the Company’s Chief Financial Officer (the “CFO”), which are required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). This section of the Report includes information concerning the evaluation of disclosure controls and procedures referred to in the Section 302 Certifications and this should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.
Evaluation of the Company’s Disclosure Controls and Procedures. Disclosure controls and procedures (“Disclosure Controls”) are controls and other procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”), such as this Report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”) and that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
The Company’s management, with the participation of the CEO and CFO, evaluated the effectiveness of the design and operation of the Company’s Disclosure Controls and concluded that the Company’s Disclosure Controls were effective as of December 31, 2014.
Management’s Annual Report on the Company’s Internal Control Over Financial Reporting. Internal control over financial reporting (“Internal Control”) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. The Company’s management is responsible for establishing and maintaining adequate Internal Control. Management evaluated the Company’s Internal Control based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (1992) and concluded that the Company’s Internal Control was effective as of December 31, 2014. This report does not include an attestation report on Internal Control by the Company’s independent registered public accounting firm since the Company is a smaller reporting company under the rules of the SEC.
Changes in Internal Control Over Financial Reporting. No change in Internal Control occurred during the fiscal quarter ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s Internal Control.
Item 9B.Other Information.
None.
PART III
Item 10.Directors, Executive Officers and Corporate Governance.
The information required by this item is included under (i) “Proposal 1: Election of Directors” as it relates to members of the Company’s Board of Directors, including the Company’s Audit Committee and the Company’s Audit Committee financial experts, any changes to procedures by which security holders may recommend nominees to the Company’s Board of Directors, (ii) “Information Regarding the Company’s Directors and Officers” as it relates to the Company’s executive officers, and (iii) “Section 16(a) Beneficial Ownership Reporting Compliance” as it relates to information concerning Section 16(a) beneficial ownership reporting compliance, in the Company’s definitive proxy statement (“Proxy Statement”), to be filed in connection with the Company’s 2015 Annual Meeting of Stockholders, and is incorporated herein by reference.
The Company has adopted a code of business conduct and ethics, or code of conduct. The code of conduct qualifies as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. A copy of the code of conduct is available on the Company’s website at http://www.aerocentury.com or upon written request to the Investor Relations Department, 1440 Chapin Avenue, Suite 310, Burlingame, California 94010. To the extent required by law, any amendments to, or waivers from, any provision of the code will be promptly disclosed publicly. To the extent permitted by such requirements, the Company intends to make such public disclosure on its website in accordance with SEC rules.
Item 11. Executive Compensation.
Incorporated by reference to the section of the Proxy Statement entitled “Information Regarding the Company’s Directors and Officers — Employee Compensation.”
Item 12.Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Incorporated by reference to the section of the Proxy Statement entitled “Security Ownership of Certain Beneficial Owners and Management.”
Item 13.Certain Relationships and Related Transactions, and Director Independence.
Incorporated by reference to the section of the Proxy Statement entitled “Related Party Transactions.”
Item 14.Principal Accountant Fees and Services.
Incorporated by reference to the section of the Proxy Statement entitled “Information Regarding Auditors – Audit Fees.”
PART IV
Item 15.Exhibits.
(b)Exhibits
|
Exhibit
Number
|
Description
|
|
10.19
|
Second Amended and Restated Loan and Security Agreement, between the Company and MUFG Union Bank, N.A., as agent and lender (“Union”), and the other lenders under its credit facility, California Bank and Trust, First Bank, Umpqua Bank, U.S. Bank National Association, and Cathay Bank (collectively, the “Participants”), incorporated by reference to Exhibit 10.19 to the Quarterly Report on Form 10-Q of the Company, filed with the Securities and Exchange Commission (“SEC”) on August 13, 2014
|
|
10.20
|
Modification and Limited Waiver to Second Amended and Restated Loan and Security Agreement between Union, the Participants and the Company, dated as of August 26, 2014, incorporated by reference to Exhibit 10.1 to the Report on Form 8-K of the Company, filed with the SEC on September 2, 2014
|
|
10.21
|
Second Modification Agreement between Union, Participants and the Company, dated as of November 13, 2014, incorporated by reference to Exhibit 10.21 to the Report on Form 10-Q of the Company, filed with the SEC on November 14, 2014
|
|
10.22
|
Form of Aircraft Sale Agreement (SN 15128) between the Company and Adria Airways d.d., dated December 5, 2014
|
|
10.23
|
Form of Aircraft Sale Agreement (SN15129) between the Company and Adria Airways d.d., dated December 5, 2014
|
|
31.1
|
Certification of Neal D. Crispin, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification of Toni M. Perazzo, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32.1*
|
Certification of Neal D. Crispin, Chief Executive Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32.2*
|
Certification of Toni M. Perazzo, Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
101.INS
|
XBRL Instance Document
|
|
101.SCH
|
XBRL Schema Document
|
|
101.CAL
|
XBRL Calculation Linkbase Document
|
|
101.LAB
|
XBRL Label Linkbase Document
|
|
101.PRE
|
XBRL Presentation Linkbase Document
|
|
101.DEF
|
XBRL Definition Linkbase Document
|
* These certificates are furnished to, but shall not be deemed to be filed with, the Securities and Exchange Commission.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AEROCENTURY CORP.
By
-------------------------------
Toni M. Perazzo
Senior Vice President-Finance and
Chief Financial Officer
DateMarch 12, 2015
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Neal D. Crispin and Toni M. Perazzo, and each of them, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated.
|
Signature
|
Title
|
Dated
|
| |
|
|
| |
Director, President and Chairman of the Board of
|
March 12, 2015
|
|
----------------------
|
Directors of the Registrant (Principal Executive Officer)
|
|
|
Neal D. Crispin
|
|
|
| |
Director, Senior Vice President-Finance and Secretary of the
|
March 12, 2015
|
|
----------------------
|
Registrant (Principal Financial and Accounting Officer)
|
|
|
Toni M. Perazzo
|
|
|
| |
Director
|
March 12, 2015
|
|
----------------------
|
|
|
|
Roy E. Hahn
|
|
|
| |
Director
|
March 12, 2015
|
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Thomas W. Orr
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Director
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March 12, 2015
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Evan M. Wallach
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Director
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March 12, 2015
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David P. Wilson
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[INSIDE BACK COVER]
CORPORATE INFORMATION
Officers and Directors
Neal D. Crispin
President and Chairman of the Board
Toni M. Perazzo
Director, Chief Financial Officer, Secretary, and
Senior Vice President - Finance
Christopher B. Tigno
General Counsel
Roy E. Hahn, Director
Managing Director of Marbridge Group, LLC
Thomas W. Orr, Director, Audit Committee Chair
Accounting Consultant
Evan M. Wallach, Director
President and Chief Executive Officer of
Global Airfinance Corporation
David P. Wilson, Director
Retired Senior Vice President of
GE Capital Aviation Services
Transfer Agent and Registrar
Continental Stock Transfer and Trust Company
17 Battery Place, 8th Floor
New York, NY 10004
Legal Counsel
Morrison & Foerster LLP
755 Page Mill Road
Palo Alto, CA 94304
Registered Independent Public Accountants
BDO USA, LLP
One Bush Street, Suite 1800
San Francisco, CA 94104
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 May 7, 2015 at 12:00 P.M.
Form 10-K
The Company’s Annual Report on Form 10-K
for 2014 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 NYSE MKT exchange under
the symbol ACY.
[outside back cover - graphics omitted]
AeroCentury Corp.
1440 Chapin Ave., Suite 310
Burlingame, CA94010
650-340-1888
Fax: 650-696-3929
www.aerocentury.com
Aerocentury (AMEX:ACY)
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