Mega Matrix Corp. - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
(Mark
One)
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x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
fiscal year ended December 31, 2008
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o
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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
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|
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
(IRS
Employer Identification No.)
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1440
Chapin Avenue, Suite 310
Burlingame,
California 94010
(Address
of Principal Executive Offices)
Registrant’s
Telephone Number, Including Area Code: (650) 340-1888
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes oNo 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 oNo 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 xNo 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 oNo x
On March
13, 2009 the aggregate market value of the voting and non-voting common equity
held by non-affiliates (based upon the closing price as of March 12, 2009) was
$5,591,400.
1
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: (i) Part I, Item 1, “Description of Business,” the
Company’s statements regarding its belief that the Company can purchase assets
at an appropriate price and maintain an acceptable overall on-lease rate for
them; that the Company is able to enter into transactions with a wider range of
lessees than its competitors; that the Company does not anticipate further
asset-based term loans with the current lender to its special purpose
subsidiary; and that the Company has a competitive advantage due to its
experience and operational efficiency and JMC’s global reputation; (ii) in Part
I, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations
– Liquidity and Capital
Resources,” the Company’s statements regarding its belief that it will
remain in compliance with the covenants of its Credit Facility; that the Company
will continue to be in compliance with all covenants of its Subordinated Notes
Agreement; that the Company will be successful in extending the
leases for a majority of aircraft coming off lease in 2009; and that the Company
will have adequate cash flow to meet its ongoing operational needs, including
required repayments under its Credit Facility, Subordinated Notes financing and
special purpose financings and that this belief is based on reasonable
assumptions; (iii) in Part I, Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations –– Outlook,” the Company’s
statements regarding its belief that many air carriers will reduce capacity due
to the current economic downtown which may result in fewer leasing or sales
opportunities for the Company; that there may be increased demand for
sale-leasebacks; that the Company’s borrowing capacity will be sufficient to
fund 2009 acquisitions; that the total maintenance expense to prepare one of the
Company’s Saab 340A aircraft will be approximately $367,000, that the total
maintenance expense to prepare the off-lease Fokker 50 aircraft will be $1.8
million; that the Company expects to deliver the Fokker 50 to a new lessee in
the second quarter of 2009; that the Company will not receive significant
monetary recovery from a defaulting insolvent Australian lessee of a Saab 340B;
that the total maintenance expense to prepare that Saab 340B aircraft for
re-lease will be approximately $1.2 million; that the Company will be able to
complete the maintenance and re-lease that Saab 340B during
2009; that the Company will be successful in extending the leases for
a majority of the aircraft coming off lease in 2009; and that due to the
adoption of FSP AUG AIR-1 the Company’s reported net income may be subject to
significant fluctuations; (iv) in Part I, Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Factors that May Affect Future
Results,” the Company’s statements regarding its belief that the current
banking crisis will not have an immediate effect on the Company; that the
lenders in its Credit Facility will continue to be able to honor their
commitment to provide loans as committed in the Credit Facility agreements and
that the unused capacity under the Credit Facility provides sufficient capital
to fund acquisitions through the end of 2009; that the current lenders in the
Credit Facility will remain as participants in the amount for which they are
currently committed when the Credit Facility expires in March 2010; that the
Company will have sufficient cash funds to make any payment that arises due to
borrowing base limitations caused by assets scheduled to come off lease in the
near term; that JMC personnel's overall industry experience and its technical
resources should permit the Company to effectively manage new aircraft types and
engines; that the bulk of the equipment the Company acquires will be used
aircraft equipment; that the Company intends to focus on regional air carriers
and typically is able to obtain generally higher lease rates from regional
carriers than mainline carriers; and that the Company is competitive because of
JMC’s experience and operational efficiency in identifying and obtaining
financing for the transaction types desired by regional air carriers and that it
benefits from JMC’s reputation; and (v) in Part I, Item 8, “Financial Statements,” that
the Company will not receive significant monetary recovery from a defaulting
insolvent Australian lessee of a Saab 340B aircraft. 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 impact of the current economic downtown on
the Company’s customer base of regional air carriers; the continued availability
of financing for acquisitions; the compliance of the Company's lessees with
obligations under their respective leases; risks related to use of debt
financing for acquisitions; 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.
2
Item
1. Description of Business.
Business
of the Company
AeroCentury
Corp., a Delaware corporation incorporated in 1997 (the Company, as defined
below) acquires used regional aircraft for lease to foreign and domestic
regional carriers. Financial information for AeroCentury Corp. and
its wholly-owned subsidiaries, AeroCentury Investments V LLC (“AeroCentury V
LLC”) which was dissolved on August 25, 2008, and AeroCentury Investments VI LLC
(“AeroCentury VI LLC”) (collectively, the “Company”), is presented on a
consolidated basis. All intercompany balances and transactions have
been eliminated in consolidation.
The
business of the Company is managed by JetFleet Management Corp. ("JMC"),
pursuant to a management agreement between the Company and JMC (“the Management
Agreement”), which is an integrated aircraft management, marketing and financing
business and a subsidiary of JetFleet Holding Corp.
("JHC"). Certain officers of the Company are also officers of
JHC and JMC and hold significant ownership positions in both JHC and the
Company.
The
Company is engaged in the business of investing in used regional aircraft
equipment leased to foreign and domestic regional air carriers and has been
engaged in such business since its formation. The Company’s principal business
objective is to increase stockholder value by acquiring aircraft assets and
managing those assets in order to provide a return on investment through lease
revenue and, eventually, sale proceeds. The Company 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
acquisition financing.
The
Company acquires additional assets in one of three ways. The
Company may purchase an asset already subject to a lease and assume the rights
and obligations of the seller, as lessor under the existing lease. In
addition the Company may purchase an asset, usually from an air carrier, and
lease it back to the seller. Finally, the Company may purchase an
asset from a seller and then immediately enter into a new lease for the aircraft
with a third party lessee. In this last case, the Company typically
does not purchase an asset unless a potential lessee has been identified and has
committed to lease the aircraft.
The
Company generally targets used regional aircraft and engines with purchase
prices between $1 million and $10 million, and lease terms less than five
years. In determining assets for acquisition, the Company evaluates,
among other things, the type of asset, its current price and projected future
value, its versatility or specialized uses, the current and projected future
availability of and demand for that asset, and the type and number of future
potential lessees. Because JMC has extensive experience in
purchasing, leasing and selling used regional aircraft, the Company believes it
can purchase these assets at an appropriate price and maintain an acceptable
overall on-lease rate for the Company’s assets.
In order
to improve the remarketability of an aircraft after expiration of the lease, the
Company focuses on having lease provisions for its aircraft that contain
maintenance payments and return conditions such that when the lessee returns the
aircraft, the Company receives the aircraft in a condition which allows it to
expediently re-lease or sell the aircraft, or receives sufficient payments from
the lessee over the lease term to cover any maintenance or overhaul of the
aircraft required to bring the aircraft to such a state.
When
considering whether to accept transactions with a lessee, the Company examines
the creditworthiness of the lessee, its short and long-term growth prospects,
its financial status and backing, the experience of its management, and the
impact of pending governmental regulation or de-regulation of the lessee’s
market, all of which are weighed in determining the lease rate that is offered
to the lessee. In addition, where applicable, it is the Company’s policy to
monitor the lessee’s business and financial performance closely throughout the
term of the lease, and if requested, provide assistance drawn from the
experience of the Company’s management in many areas of the air carrier
industry. Because of its “hands-on” approach to portfolio management,
the Company believes it is able and willing to enter into transactions with a
wider range of lessees than would be possible for traditional, large lending
institutions and leasing companies.
3
The
Company has funded its asset acquisitions primarily through debt financing
supplemented by free cash flow. The primary source of debt has been a
revolving credit facility, expiring in March 2010, provided by a syndicate of
banks, with National City Bank as agent (the “Credit Facility”). The current
amount available under the Credit Facility is $80 million and may be increased
to a maximum of $110 million. An additional $14 million in debt
financing was raised through the issuance of 16% senior unsecured subordinated
notes ("Subordinated Notes") in 2007 and 2008, due December 30, 2011, the
proceeds of which were used to pay down amounts previously borrowed under the
Credit Facility. There is currently approximately
$24,000,000 of unused capacity available for draw under the Credit
Facility. The Company has also financed acquisition of assets with a
lender through asset-based term loans using a special purpose subsidiary, but
does not anticipate further financings with this lender.
Working
Capital Needs
The
Company’s portfolio of assets has historically generated revenues which have
exceeded the Company’s cash expenses, which consist mainly of management fees,
maintenance expense, financing interest payments, professional fees, insurance
and, beginning in April 2009, principal payments of the Subordinated Notes
pursuant to an amortization schedule.
The
Company's management fees payable to JMC are based upon the size of the asset
pool. Pursuant to Financial Accounting Standards Board (“FASB”) Staff Position
AUG AIR-1, “Accounting for Planned Major Maintenance Activities” (“FSP AUG
AIR-1”), which the Company adopted on January 1, 2007, maintenance costs are
recognized as an expense as incurred. Because the Company has
steadily increased its borrowing under the Credit Facility, and issued the
Subordinated Notes in 2007 and 2008 to raise additional capital, interest
expense has become an increasingly large portion of the Company’s expenses.
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 insurance for periods when an aircraft is off
lease. So long as the Company succeeds in keeping the majority of its
assets on lease and interest rates do not rise significantly and rapidly, the
Company’s cash flow should be sufficient to cover these expenses and
Subordinated Notes payments and provide excess cash flow.
Competition
The
Company competes with other leasing companies, banks, financial institutions,
and aircraft leasing partnerships for customers who generally are regional
commercial aircraft operators seeking to lease aircraft under an operating
lease. Management believes that competition may increase if
competitors who have traditionally neglected the regional air carrier market
begin to focus on that market. Because competition is largely based
on price and lease terms, the entry of new competitors into the market,
particularly those with greater access to capital markets than the Company,
could lead to fewer acquisition opportunities for the Company and/or lease terms
less favorable to the Company on new acquisitions, as well as renewals of
existing leases or new leases of existing aircraft, all of which could lead to
lower revenues for the Company.
The
Company, however, believes that it has a competitive advantage due to its
experience and operational efficiency in financing the transaction sizes that
are desired by the regional air carrier market. Management
believes that the Company also has a competitive advantage because JMC has
developed a reputation as a global participant in the regional aircraft leasing
market.
Dependence
on Significant Customers
For the
year ended December 31, 2008, the Company had five significant customers, which
accounted for 17%, 15%, 11%, 11% and 10%, respectively, of lease revenue,
aggregating 64% of total revenue. Concentration of credit risk with
respect to lease receivables will diminish in the future only if the Company is
able to lease additional assets or re-lease to new customers assets currently on
lease to significant customers.
4
Employees
Under the
Company’s management contract with JMC, JMC is responsible for all
administration and management of the Company. Consequently, the
Company does not have any employees.
Item
2. Description of Property.
As of
December 31, 2008, 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.
At
December 31, 2008, the Company owned eight deHavilland DHC-8-300s, three
deHavilland DHC-8-100s, three deHavilland DHC-6s, fourteen Fokker 50s, two Saab
340As, six Saab 340Bs, seven Fokker 100s and one turboprop engine which are on
lease or held for lease.
Item
3. Legal Proceedings.
The
Company is not involved in any material legal proceedings.
Item
4. Submission of Matters to a Vote of Security
Holders.
None.
PART
II
Item
5. Market for 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 New York Stock Exchange
(“NYSE”) Alternext U.S. exchange (formerly known as the American Stock
Exchange) (“AMEX”) under the symbol “ACY.”
Market
Information
The
Company’s Common Stock has been traded on the AMEX since January 16,
1998. The following table sets forth the high and low sales prices
reported on the AMEX for the Company’s Common Stock for the periods
indicated:
|
Period
|
High
|
Low
|
||||||
|
Fiscal
year ending December 31, 2009:
|
||||||||
|
First
quarter through March 12, 2009
|
$ | 11.00 | $ | 3.15 | ||||
|
Fiscal
year ended December 31, 2008:
|
||||||||
|
Fourth
Quarter
|
14.55 | 7.60 | ||||||
|
Third
Quarter
|
17.20 | 8.85 | ||||||
|
Second
Quarter
|
18.40 | 7.76 | ||||||
|
First
Quarter
|
26.67 | 13.30 | ||||||
|
Fiscal
year ended December 31, 2007:
|
||||||||
|
Fourth
Quarter
|
24.37 | 13.20 | ||||||
|
Third
Quarter
|
21.90 | 12.70 | ||||||
|
Second
Quarter
|
20.59 | 10.95 | ||||||
|
First
Quarter
|
24.50 | 6.58 | ||||||
On March
12, 2009, the closing stock sale price on the AMEX was $4.65 per
share.
5
Number
of Security Holders
According
to the Company’s transfer agent, the Company had approximately 1,700
stockholders of record as of March 2, 2009. Because many of the
Company’s shares of common stock are held by brokers and other institutions on
behalf of beneficial stockholders, 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 and Subordinated Notes 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 and Subordinated Notes agreements.
Stockholder
Rights Plan
In April
1998, in connection with the adoption of a stockholder rights plan, the Company
filed a Certificate of Designation detailing the rights, preferences and
privileges of a new Series A Preferred Stock. Pursuant to the plan,
the Company issued rights to its stockholders of record as of April 23, 1998,
giving each stockholder the right to purchase one one-hundredth of a share of
Series A Preferred Stock for each share of Common Stock held by the
stockholder. Such rights are exercisable only under certain
circumstances in connection with a proposed acquisition or merger of the
Company.
Item
6. Selected Financial Data.
This
report does not include information described under Item 301 of Regulation S-K
pursuant to the rules of the Securities and Exchange Commission 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 leased to customers under
triple net operating leases. The
acquisition of such equipment is generally made using debt financing. The
Company’s profitability and cash flow are dependent in large part upon its
ability to acquire equipment, obtain and maintain favorable lease rates on such
equipment, and re-lease or sell owned equipment that comes off
lease. The Company is subject to the credit risk of its lessees, both
as to collection of rental payments under its operating leases 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 the assets age, the Company’s ability to maintain revenue
and earnings is primarily dependent upon the Company’s ability to acquire and
lease additional aircraft.
The
Company’s principal cash expenditures are for management fees, maintenance
expense, financing interest payments, professional fees, insurance and,
beginning in April 2009, principal payments of the Subordinated Notes pursuant
to an amortization schedule. Maintenance expenditures are incurred when aircraft
or equipment are off lease, are being prepared for re-lease, or require
maintenance in excess of lease return conditions, as well as when maintenance
work is performed in connection with the release of maintenance reserves
previously received by the Company from lessees. See “c. Maintenance Reserves and Accrued
Costs,” below, regarding the Company’s accounting treatment of
maintenance expenses.
The most
significant non-cash expenses include aircraft and equipment depreciation and
impairment provisions, which are affected by significant estimates, and,
beginning in the second quarter of 2007, amortization of costs associated with
the Company’s Subordinated Notes, which is included in interest
expense.
6
Critical
Accounting Policies, Judgments and Estimates
The
discussion and analysis of the Company’s financial condition and results of
operations are based upon the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets and liabilities, revenues and expenses, and the
related disclosure of contingent assets and liabilities at the date of the
financial statements. 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.
The
Company’s significant accounting policies are described in Notes 1 and 4 to the
consolidated financial statements. The Company believes that the most
critical accounting policies include the following: Aircraft Capitalization and
Depreciation; Impairment of Long-lived Assets; Maintenance Reserves and Accrued
Costs; Accounting for Income Taxes; and Revenue Recognition and Accounts
Receivable and Allowance for Doubtful Accounts.
a. 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
purchased only used aircraft. It is the Company’s policy to hold
aircraft for approximately twelve years unless market conditions dictate
otherwise. Depreciation is computed using the straight-line method
over the twelve year period to an estimated residual value based on appraisal,
which is adjusted periodically. Decreases in the market value of
aircraft could not only affect the current value, discussed above, but could
also affect the assumed residual value.
b. Impairment
of Long-lived Assets
The
Company periodically reviews its portfolio of assets for impairment in
accordance with Statement of Financial Accounting Standards (“SFAS”) 144,
“Accounting for the Impairment or Disposal of Long-lived Assets." Such
review includes estimating current market values, re-lease rents, residual
values and component values. The estimates are based on currently
available market data and third-party appraisals and are subject to fluctuation
from time to time. The Company initiates
its review annually or whenever events or changes in circumstances indicate that
the carrying amount of a long-lived asset may not be recoverable.
Recoverability of an asset is measured by comparison of its carrying amount to
the expected future undiscounted cash flows (without interest charges) that the
asset is expected to generate. Any impairment to be recognized is measured
by the amount by which the carrying amount of the asset exceeds its fair market
value. Significant management judgment is required in the forecasting of
future operating results which are used in the preparation of projected
undiscounted cash flows and if different conditions prevail, material write
downs may occur. During 2008, the Company recorded an impairment
provision of $745,000 for one of its off-lease aircraft based on the difference
between the net book value and the fair value of the aircraft.
c. Maintenance
Reserves and Accrued Costs
Maintenance
costs under the Company’s triple net operating leases are typically the
responsibility of the lessees, and the majority of the Company’s leases
require the payment of monthly maintenance reserves. Maintenance
reserves and accrued costs in the accompanying consolidated balance sheets
includes: (i) refundable maintenance payments received from lessees, which are
paid out as related maintenance is performed, (ii) for lessees who pay
non-refundable maintenance reserves, estimated maintenance costs accrued at the
time a reimbursement claim or sufficient information is received regarding
maintenance work performed, and (iii) maintenance for work performed for
off-lease aircraft, which is not related to the release of reserves received
from lessees.
7
Upon
adoption of FSP AUG AIR-1 on January 1, 2007, as discussed in Note 4 to the
consolidated financial statements, the Company was required to discontinue the
accrue-in-advance method of accounting for planned major maintenance for
financial reporting periods beginning on January 1, 2007. The Company
evaluated the impact of the adoption of this new staff position and elected to
use the direct expensing method, under which maintenance costs are expensed as
incurred. Under this method, non-refundable maintenance reserves for
planned major maintenance are reflected as income based on reported usage, if
collectability is reasonably assured.
Maintenance
reserves are set by mutual agreement of the Company and its lessee at inception
of the lease and are based on the Company's estimate of the total maintenance
cost at some future point resulting from the lessee’s usage. Reserve rates are
typically subject to an annual adjustment provision that accounts for inflation
of maintenance costs. If a lessee is required to repair a component
during the lease or perform a repair at lease end in order to comply with
aircraft return conditions, it will be entitled to collect the reserves related
to that repair from the Company, and any excess costs would then be
the responsibility of the lessee. Therefore, if maintenance
rates do not accurately reflect the true cost of a repair, the Company will not
incur any financial impact. If, however, the Company repossesses
an aircraft upon a lessee default, the Company would incur
expense for the entire cost of the maintenance, and if maintenance rates
under the defaulted lease inaccurately reflect the costs of the lessee's usage,
such costs would be in excess of collected reserves. It is also possible
that, in the case of a repossessed aircraft, in order to remarket the aircraft,
certain inspections and repairs would need to be performed earlier than
otherwise required by the manufacturer's or regulatory specifications and
anticipated by the Company. In such a case, the collected reserves from
the defaulted lessee, which were set assuming a normal interval between repairs,
would likely be insufficient to cover the total cost incurred by the
Company.
d. Accounting
for Income Taxes
As part
of the process of preparing the Company’s consolidated financial statements,
management is required to estimate income taxes in each of the jurisdictions in
which the Company operates. This process involves estimating the
Company’s current tax exposure under the most recent tax laws and assessing
temporary differences resulting from differing treatment of items for tax and
GAAP purposes. These differences result in deferred tax assets and
liabilities, which are included in the consolidated balance
sheet. Management must also assess the likelihood that the Company’s
deferred tax assets will be recovered from future taxable income, and, to the
extent management believes it is more likely than not that some portion or all
of the deferred tax assets will not be realized, the Company must establish a
valuation allowance. To the extent the Company establishes a
valuation allowance or changes the allowance in a period, the Company reflects
the corresponding increase or decrease in the tax provision in the consolidated
statements of operations. As discussed in Notes 1 and 9 to the
consolidated financial statements, the Company adopted FASB Interpretation
Number (“FIN”) 48, “Accounting for Uncertainty in Income Taxes,” on January 1,
2007, which prescribes treatment of “unrecognized tax positions” and requires
measurement and disclosure of such amounts.
Significant
management judgment is required in determining the Company’s future taxable
income for purposes of assessing the Company’s ability to realize any benefit
from its deferred taxes. In the event that actual results differ from
these estimates or the Company adjusts these estimates in future periods, the
Company’s operating results and financial position could be materially
affected.
e. 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 rent is recorded when the cash rent received is
lower than the straight-line revenue recognized. Such receivables decrease over
the term of the applicable leases. Non-refundable maintenance
reserves billed to lessees are accrued as maintenance reserves income based on
aircraft usage. In instances for which collectibility 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 in the business and with each specific customer, the
level of past due accounts, and its analysis of the lessees’ overall financial
condition. If the financial condition of the Company’s customers
deteriorates, it could result in actual losses exceeding the estimated
allowances.
8
Results
of Operations
(a)
Revenues
Operating
lease revenue was $4,995,100 greater in 2008 compared to 2007, primarily because
of a $6,348,000 increase in operating lease revenue from aircraft purchased
during 2007 and 2008 and re-leases of several of the Company’s aircraft during
2007 and 2008 at increased rental rates. The aggregate effect of these increases
was partially offset by a decrease in revenue related to aircraft that were off
lease for all or part of 2008 in the amount of $1,327,000.
Maintenance
reserves revenue, comprised of non-refundable reserves which are earned based on
lessee aircraft usage, was $7,169,300 and $4,309,700 in 2008 and 2007,
respectively. Such income was $2,859,600 greater in 2008 compared to
2007 primarily as a result of the maintenance reserves increase related to
aircraft acquisitions in 2007.
Gain on
sale of aircraft and aircraft engines and other income included $150,000 of
compensation in 2008 paid by a lessee for canceling a potential re-lease
transaction. In 2007, a gain of $97,500 for the sale of parts of a
damaged engine was included in this item.
(b) Expense
items
Interest
expense was $893,800 greater in 2008 compared to 2007. The Company
incurred $1,178,200 more in interest expense related to its Credit Facility and
Subordinated Notes in 2008 than in 2007 as a result of a higher principal
balances. The Company incurred $602,000 more of amortization expense
as a result of a full year of Subordinated Notes fee amortization in 2008
compared to a partial year in 2007. During 2008, the Company recorded $232,900
of net settlement interest related to its interest rate swap compared to no such
expense in the prior year. The Company also recorded a loss in fair
value of $495,800 related to the interest rate swap compared to a $150,000 loss
in 2007. The aggregate effect of these increases was partially offset
by $1,409,800 less interest related to the Company’s Credit Facility debt in
2008 compared to 2007 as a result of lower average interest rates. The Company
also recorded $55,300 less in unused commitment and renewal fees related to its
Credit Facility, Subordinated Notes and special purpose financing debt in 2008
compared to 2007 primarily as a result of a lower average unused
balances.
Depreciation
was $1,607,600 greater in 2008 compared to 2007, primarily because of purchases
of aircraft during 2007 and 2008. As a result of the Company’s
SFAS 144 analysis as of December 31, 2008, the Company recorded an impairment
provision of $745,000 for one of its off-lease aircraft based on the difference
between the net book value and the fair value at that date. The
Company recorded no such provisions in 2007.
Management
fees, which are calculated on the net book value of the aircraft, were $659,400
greater in 2008 compared to 2007 because of higher net book values as a result
of aircraft acquisitions. The effects of this increase were partially
offset by the effect of depreciation on the net book value of the Company’s
aircraft.
The
Company’s maintenance expense is dependent on the aggregate amount of
maintenance incurred by lessees related to non-refundable reserves and expenses
incurred in connection with off-lease aircraft. In 2008, the Company
recognized $4,376,500 more in maintenance expense than in 2007, as a result of
an increase in total lessee work incurred in 2008, as well as an increase in
expense related to off-lease aircraft. During 2008 and 2007,
$2,680,500 and $1,707,600 respectively, of the Company’s maintenance expense was
funded by non-refundable maintenance reserves which were recorded as income when
accrued.
The
Company records non-income based sales, use, value-added and franchise taxes as
other tax expense. Such expenses were $404,100 lower in 2008 compared
to 2007. Based on the Company’s analysis of value-added taxes related
to an aircraft leased in Australia, the Company recorded value-added taxes,
penalties and interest totaling $326,700 in 2007. Upon completion of
further analysis and confirmation from the Australian tax authority, the Company
reduced the accruals for such amounts in 2008 by $177,100.
9
The
Company's insurance expense consists primarily of directors and officers
insurance, as well as product liability insurance and insurance for off-lease
aircraft and aircraft engines, which varies depending on the type and length of
time each off-lease asset is insured. Aircraft insurance expense was
$157,400 greater in 2008 compared to 2007 as a result of differences in the type
of and length of time the insured assets were off lease.
The
Company’s effective tax rates for the years ended December 31, 2008 and 2007
were approximately 36% and 29%, respectively. The change in rate was
the result of (i) recognition in 2008 of the effect of a difference for
GAAP and tax purposes in the valuation of warrants issued in connection with the
Company’s issuance of the Subordinated Notes (which increased the effective tax
rate for 2008) and (ii) the Company’s recognition in 2007 of tax benefits
associated with a decision to amend its tax returns to claim foreign tax credits
rather than deduct foreign taxes for several prior years (which lowered the
effective rate for 2007).
Liquidity
and Capital Resources
The
Company is currently financing its assets primarily through debt borrowings,
special purpose financing and excess cash flows.
(a) Credit
Facility
The
Company’s Credit Facility, which is collateralized by all of the assets of
AeroCentury Corp., expires on March 31, 2010. The current amount
available under the Credit Facility is $80 million and may be increased to a
maximum of $110 million. During 2008, the Company borrowed
$12,500,000 and repaid $14,000,000 of the outstanding principal under its Credit
Facility. As of December 31, 2008, the Company was in compliance with
all covenants under the Credit Facility agreement, $58,096,000 in principal
amount was outstanding, interest of $39,500 was accrued and there was
$21,904,000 of borrowing capacity remaining. As of December 31, 2007, the
Company was in compliance with all covenants under the Credit Facility
agreement, $59,596,000 in principal amount was outstanding, interest of $144,400
was accrued, and there was $20,404,000 in borrowing capacity
remaining. Under the terms of the Credit Facility, the Company pays a
commitment fee based upon the applicable commitment fee rate on the unused
portion of the Credit Facility. Commitment fees are expensed as
incurred and paid quarterly in arrears.
The
Company is currently in compliance with all covenants and, based on its current
projections, the Company believes it will continue to be in compliance with all
covenants of its Credit Facility, but there can be no assurance of such
compliance in the future. See "Factors That May Affect Future
Results – 'Risks of Debt Financing’ and 'Credit Facility
Obligations,’” below.
The
Company's interest expense in connection with the Credit Facility generally
increases and decreases with prevailing interest rates. Because
aircraft owners seeking financing generally can obtain financing through either
leasing transactions or traditional secured debt financings, prevailing interest
rates are a significant factor in determining market lease rates, and market
lease rates generally move up or down with prevailing interest rates, assuming
supply and demand of the desired equipment remain constant. However,
because lease rates for the Company’s assets typically are fixed under existing
leases, the Company normally does not experience any positive or negative impact
in revenue from changes in market lease rates due to interest rate changes until
existing leases have terminated and new lease rates are set as aircraft are
re-leased. As discussed in (b) below, the Company
entered into an interest rate swap in December 2007.
(b) Derivative
instrument
In
December 2007, the Company entered into a two-year interest rate swap (the
“Swap”) with a notional amount of $20 million, under which it committed to make
or receive a net settlement for the difference in interest receivable computed
monthly on the basis of 30-day LIBOR and interest payable monthly on the basis
of a fixed rate of 4.04% per annum. The Swap is designed to limit exposure to
interest rate increases on $20 million of the Company’s Credit Facility debt by
fixing the net interest payable over the term of the Swap.
10
Under
SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as
amended, the Company is required to recognize the fair value of the Swap as an
asset or liability at its fair value, which is based upon the amount the Company
would receive or pay to terminate its agreements at the reporting date, taking
into account market conditions and the creditworthiness of the derivative
counterparties. Because the Swap does not qualify as a hedge, the
value of the Swap is marked to market at the end of each reporting period and
changes in fair value of the Swap are reported in the consolidated statement of
operations as interest expense. As such, at December 31, 2008 and 2007, the
Company recorded the fair value of the Swap of $645,800 and $150,000,
respectively, as a liability on its consolidated balance sheet as a component of
notes payable and accrued interest. The Company recorded a loss on the Swap of
$495,800 and $150,000 for 2008 and 2007, respectively, as a component of
interest expense. The Company also recognized additional interest
expense on the net settlement of the Swap of $232,900 in 2008 as a component of
interest expense.
SFAS No.
157 discusses valuation techniques, such as the market approach (comparable
market prices), the income approach (present value of future income or cash
flow), and the cost approach (cost to replace the service capacity of an asset
or replacement cost). The statement utilizes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The following is a brief description of those three
levels:
|
|
Level
1: Observable inputs such as quoted prices (unadjusted) in
active markets for identical assets or
liabilities.
|
|
|
Level
2: Inputs, other than quoted prices, that are observable for
the asset or liability, either directly or indirectly. These include
quoted prices for similar assets or liabilities in active markets and
quoted prices for identical or similar assets or liabilities in markets
that are not active.
|
|
|
Level
3: Unobservable inputs that reflect the reporting entity’s own
assumptions.
|
The
Company’s interest rate swap agreement effectively converts a portion of the
Company’s short-term variable rate debt to a fixed rate. Under this
agreement, the Company pays a fixed rate and receives a variable rate of
LIBOR. The fair value of this interest rate derivative is based on
quoted prices for similar instruments from a commercial bank and, therefore, the
interest rate derivative is considered a Level 2 input in 2008 and
2007.
(c) Senior
unsecured subordinated debt
In April
2007, the Company entered into a securities purchase agreement (the
“Subordinated Notes Agreement”), whereby the Company would issue 16% senior
unsecured Subordinated Notes, with an aggregate principal amount of $28 million
to certain note purchasers. The Subordinated Notes were to be
issued at 99% of the face amount and are due December 30,
2011. Principal payments which fully amortize the balance of the
Subordinated Notes are due beginning April 30, 2009 through December 30, 2011 in
amounts necessary to cause (i) the balance of the Subordinated Notes and (ii)
the ratio of total outstanding debt under the Credit Facility and Subordinated
Notes compared to the discounted portfolio value to not exceed amounts specified
in the Securities Notes Agreement.
Under the
Subordinated Notes Agreement, the holders of Subordinated Notes also were issued
warrants to purchase up to 171,473 shares of the Company's common stock at an
exercise price of $8.75 per share. The warrants are exercisable for a
four-year period after the earliest of (i) a change of control, or (ii) the
final maturity of the related Subordinated Notes, which is December 30,
2011. Pursuant to an investors rights agreement, the warrants are
subject to registration rights that require the Company to use commercially
reasonable efforts to register the shares issued upon exercise of the warrants
on a registration statement filed with the SEC.
In July
2008, the Company and the holders of Subordinated Notes agreed to amend the
Subordinated Notes Agreement to reduce the maximum amount of Subordinated Notes
to be issued under the Agreement from $28 million to $14 million and to reduce
the number of shares of the Company’s common stock issuable upon exercise of the
warrants issued to the holders of Subordinated Notes under the Subordinated
Notes Agreement from 171,473 to 81,224. The estimated fair value of
the warrants cancelled was $597,500 and was recorded as a reduction to paid-in
capital and debt discount. The amendment also provided for the refund
to the Company of certain fees paid to the purchasers of Subordinated Notes at
the initial closing of the Subordinated Notes Agreement, as well as a portion of
the unused commitment fees paid to the noteholders through June 30, 2008, and
revised certain prepayment provisions of the Subordinated Notes
Agreement. The amendment was accounted for as a debt
modification. The net proceeds from the $4,000,000 of Subordinated
Notes that were issued pursuant to the amendment were used to repay a portion of
the Company’s Credit Facility debt.
11
As of
December 31, 2008, the carrying amount of the Subordinated Notes was
approximately $12,833,500 (outstanding principal amount of $14,000,000 less
unamortized debt discount of approximately $1,166,500) and accrued interest
payable was $0. As of December 31, 2007, the carrying amount of the
Subordinated Notes was approximately $7,612,100 (outstanding principal amount of
$10,000,000 less unamortized debt discount of approximately $2,387,900) and
accrued interest payable was $0. As of December 31, 2008 and 2007,
the Company was in compliance with all covenants under the Subordinated Notes
Agreement. The Company is currently in compliance with all covenants
and, based on its current projections, the Company believes it will continue to
be in compliance with all covenants of its Subordinated Notes Agreement, but
there can be no assurance of such compliance in the future. See "Factors That May Affect Future
Results – 'Risks of Debt Financing’ and 'Credit Facility
Obligations,’” below.
(d) Special
purpose financings
In
September 2000, a special purpose subsidiary acquired a deHavilland DHC-8-100
aircraft using cash and bank financing separate from the Credit
Facility. The related note obligation, which was due April 15,
2006, was refinanced in April 2006 using bank financing from another lender, and
the subsidiary was dissolved. The aircraft was transferred to AeroCentury VI
LLC, a newly formed special purpose limited liability company, which borrowed
$1,650,000, due October 15, 2009. The note bears interest at an
adjustable rate of one-month LIBOR plus 3%. The note is
collateralized by the aircraft and the Company’s interest in AeroCentury VI LLC
and is non-recourse to AeroCentury Corp. Payments due under the note
consist of monthly principal and interest through April 20, 2009, interest only
from April 20, 2009 until the maturity date, and a balloon principal payment due
on the maturity date. During 2008, $361,200 of principal was repaid
on the note. The principal amount owed under the note at December 31,
2008 was $748,000 and interest of $700 was accrued. The principal
amount owed under the note at December 31, 2007 was $1,109,100 and interest of
$2,700 was accrued. As of December 31, 2008 and 2007, the Company was
in compliance with all covenants of this note obligation and is currently in
compliance.
In
November 2005, the Company refinanced two DHC-8-300 aircraft that had been part
of the collateral base for the Credit Facility. The financing, which
was provided by a bank by means separate from the Credit Facility, was provided
to a newly formed special purpose subsidiary, AeroCentury V LLC, to which the
aircraft were transferred. The financing resulted in a note
obligation in the amount of $6,400,000, due November 10, 2008, which accrued
interest at the rate of 7.87%. The note was collateralized by the
aircraft and the Company’s interest in AeroCentury V LLC and was non-recourse to
AeroCentury Corp. Payments due under the note consisted of monthly
principal and interest through April 22, 2008. In April 2008, the
Company repaid the outstanding principal of $4,109,900 owed by AeroCentury V LLC
under its special purpose financing and paid a prepayment penalty of $8,200. In
August 2008, the Company transferred ownership of the two aircraft that served
as collateral for the financing from AeroCentury V LLC to AeroCentury Corp., at
which time the aircraft became eligible as collateral under the Credit
Facility. The principal amount owed under the note at December 31,
2007 was $4,455,300 and interest of $4,900 was accrued. As of
December 31, 2007, the Company was in compliance with all covenants of this note
obligation. On August 25, 2008, AeroCentury V LLC was
dissolved.
(e) Future
maturities of notes payable
As of
December 31, 2008, principal payments due under the Company’s Credit Facility,
Subordinated Notes and special purpose financing were as follows:
|
Less
than one year
|
$ | 5,286,000 | ||
|
1-3
years
|
67,558,000 | |||
|
4-5
years
|
- | |||
|
After
5 years
|
- | |||
| $ | 72,844,000 |
12
(f) Cash
flow
The
Company's primary source of cash is lease rentals of its aircraft assets.
Currently, one of the Company’s Fokker 50 aircraft, its two Saab 340A aircraft,
one of its Saab 340B aircraft and one turboprop engine are off lease, for which
the Company is not currently receiving rent income. The Company has
and will continue to incur significant maintenance expense in order to prepare
these aircraft for re-lease. Ten of the Company’s leases expire in
2009. The Company believes that it will be successful in extending
the leases for a majority of the aircraft, given preliminary indications from
current lessees.
The
Company’s primary uses of cash are for management fees, maintenance expense,
financing interest payments, professional fees, insurance and, beginning in
April 2009, principal payments of the Subordinated Notes pursuant to an
amortization schedule. The amount and timing of the Company’s maintenance
expenditures are dependent on the aggregate amount of the maintenance claims
submitted by lessees for reimbursement from reserves and expenses incurred in
connection with off-lease aircraft and preparation of such aircraft for
re-lease. The amount of interest paid by the Company is dependent on
the outstanding balance of its Credit Facility, Subordinated Notes and special
purpose financing debt. In addition, the amount of interest
expenditures related to the Company’s Credit Facility and special purpose
financing debt are dependent on changes in prevailing interest
rates.
Management
believes that the Company will have adequate cash flow to meet its ongoing
operational needs, including required repayments under its Credit Facility,
Subordinated Notes financing and special purpose financings, based upon its
estimates of future revenues and expenditures. The Company’s expectations
concerning such cash flows are based on existing lease terms and rents, as well
as numerous estimates, including (i) rents on assets to be re-leased, (ii)
timely use of proceeds of unused debt capacity toward additional acquisitions of
income producing assets, and (iii) the cost and anticipated timing of
maintenance to be performed.
While the
Company believes that the assumptions it has made in forecasting its cash flow
are reasonable in light of experience, actual results could deviate from such
assumptions. Among the more significant external factors outside the
Company’s control that could have an impact on the accuracy of cash flow
assumptions are (i) an increase in interest rates that negatively affects the
Company’s profitability and causes the Company to violate covenants of its
Credit Facility or its Subordinated Notes, which may in turn require repayment
of some or all of the amounts outstanding under the Credit Facility or the
Subordinated Notes, (ii) lessee non-performance or non-compliance with lease
obligations which may affect Credit Facility collateral limitations and
Subordinated Notes covenants, as well as revenue and expenses, (iii) inability
to locate and acquire a sufficient volume of additional aircraft assets at
prices that will produce acceptable net returns, (iv) lessee performance of
maintenance earlier than anticipated and (v) failure of the Credit Facility
participants to fully fund their respective commitments.
(i) Operating
activities
The
Company’s cash flow from operations for the year ended December 31, 2008
compared to 2007 decreased by $458,800. The change in cash flow is a
result of changes in several cash flow items during the year, including
principally the following:
Lease rents, maintenance
reserves and security deposits
Payments
received from lessees for rent were $4,214,200 greater in 2008 compared to 2007,
due primarily to rent payments for aircraft acquired during 2007 and 2008, and
re-leases during 2007 and 2008 at increased rental rates for several of the
Company’s aircraft. The aggregate effect of these increases was partially offset
by a decrease in revenue related to aircraft that were off lease for all or part
of the 2008 period.
Payments
received for refundable and non-refundable maintenance reserves are based on
usage of the Company’s aircraft. Such payments were $3,072,900
greater in 2008 than in 2007 as a result of usage of the aircraft acquired in
2007, the effect of which was partially offset by a net decrease in average
lessee usage of other aircraft owned by the Company.
During
2008, the Company returned a $308,000 security deposit to a lessee upon return
of an aircraft at lease end and received $240,000 of deposits in connection with
the re-lease of one of the Company’s aircraft. During 2007, the
Company received $1,980,000 of security deposits in connection with aircraft
purchased in 2007 and re-leases of two aircraft and returned security deposits
totaling $377,500 at the end of two leases.
13
Sales proceeds and other
income
In 2008,
the Company received $150,000 of compensation for a potential re-lease
transaction that was not consummated. In 2007, the Company received
$97,500 for the sale of parts of a damaged engine.
Payments for
interest
Payments
for interest decreased by $406,100 in 2008 compared to 2007. The
Company paid $903,800 less interest related to the Company’s Credit Facility and
special purpose financing debt in 2008 compared to 2007. This
decrease was a result of the net effect of lower average index rates upon which
the Credit Facility’s and one of the special purpose financing interest rates
were based, and higher average balances. The Company also paid
$54,500 less in commitment fees related to the unused portion of its Credit
Facility and Subordinated Notes debt and $400,000 less of Credit Facility
renewal fees in 2008 compared to 2007. The aggregate effect of these decreases
was partially offset by an increase of $767,100 in interest expense related to
the Company’s Subordinated Notes in 2008 compared to 2007 as a result of a
higher principal balance. During 2008, the Company also recorded
$185,100 of net settlement interest related to the Swap.
Payments for
maintenance
Payments
for maintenance were $5,113,800 greater in 2008 compared to 2007 as a result of
increases in the amount of maintenance claims submitted by lessees in 2008 and
the amount of maintenance for off-lease aircraft. The amount of payments for
maintenance in future periods will be dependent on the amount and timing of
maintenance paid from lessee maintenance reserves held by the Company and
maintenance paid for off-lease aircraft.
Payments for amounts accrued
related to aircraft acquisitions and capital equipment
additions
During
2008, the Company paid $344,900 for amounts capitalized and accrued in 2007
related to aircraft acquisitions and capital equipment additions to aircraft
owned by the Company.
Payments for management
fees
Payments
for management fees increased by $704,500 in 2008 compared to 2007 because of an
overall higher net book value as a result of aircraft acquisitions in 2007 and
2008.
Payments for professional
fees and general and administrative expenses
Payments
for professional fees and general and administrative expenses increased by
$128,200 in 2008 compared to 2007 primarily because of higher accounting and
legal fees.
Payments for aircraft
insurance
Payments
for aircraft insurance were $280,300 greater in 2008 compared to 2007 because
the Company had more aircraft off lease in the 2008 period.
Income
taxes
Federal
and state income tax receipts net of payments were $119,900 higher in 2008 than
in 2007. In 2008, the Company made payments of $3,700 for federal and
state taxes and received a tax refund of $210,500 as a result of amending its
2003 and 2005 federal tax returns. In 2007, the Company made payments
of $1,200 for state taxes and received federal tax refunds of $88,100 as a
result of amending its 2003 and 2006 federal tax returns.
14
(ii) Investing
activities
During
2008 and 2007, the Company used cash of $13,929,700 and $32,333,400
respectively, for aircraft acquisitions and capital equipment installed on
aircraft.
(iii) Financing
activities
The
Company borrowed $12,500,000 and $25,500,000 for aircraft financing and repaid
$18,816,500 and $18,077,600 of its outstanding debt in 2008 and 2007,
respectively. The Company also issued $4,000,000 and $10,000,000 of
principal amount of Subordinated Notes in 2008 and 2007, respectively, the net
proceeds of which were used to repay a portion of the Company’s Credit Facility
debt.
Outlook
Because
the global economy is in a significant downturn, the Company anticipates that
many air carriers will be forced to reduce capacity, which may negatively impact
their needs for additional aircraft, which in turn may mean fewer leasing or
sales opportunities for the Company. To date, except for the lease termination
and payment deferral discussed below, the Company has not experienced
significant changes in any of its customers’ payment timeliness but has seen
indications of a weakening in the financial condition and operating results of
some customers.
The
current tightening of the credit markets may create increased demand for
sale-leasebacks from carriers as a way to monetize owned assets, or from
carriers that are proceeding with fleet expansion but are unable to obtain
asset-based acquisition loans. The Company therefore anticipates that
there will be opportunities for acquisitions during 2009, and that the available
borrowing capacity under the Credit Facility will be sufficient to fund
acquisitions projected for 2009.
The
Company is currently seeking to re-lease its two Saab 340A aircraft and one
Fokker 50 aircraft that are off lease. One of the Saab 340A aircraft has already
had significant maintenance performed on it to ready it for
remarketing. Maintenance on the second Saab 340A aircraft, estimated
to cost approximately $367,000 will not commence until a new lessee is
identified. The Fokker 50 aircraft was returned early by its lessee,
which ceased operations in late 2008. Maintenance reserves of
approximately $1.1 million previously collected from the lessee and previously
recorded as income are being used to partially fund the work necessary to
prepare the aircraft for re-lease. The repair work commenced in late 2008, and
the Company recorded approximately $1.2 million of expense through December 31,
2008. The remaining work will be recognized as expense when it is
performed in the first half of 2009. Total maintenance expense to
prepare this aircraft for re-lease is estimated to be $1.8 million. A
current lessee of two of the Company’s aircraft and the Company are currently
negotiating a term sheet for the off-lease Fokker 50 aircraft.
In
January 2009, the Company terminated its lease for a Saab 340B with an
Australian lessee due to payment default and other breaches under the
lease. The expiration date of the lease for this aircraft had been in
March 2009. The Company is likely to incur significant expense to repossess the
aircraft and prepare it for remarketing during 2009. The lessee has ceased
operations and is being wound up under its local insolvency laws. The
Company will file a claim for its unpaid obligations and other expenses arising
from the lessee’s breach but does not anticipate a significant monetary recovery
on such claim, as the Company is an unsecured creditor and the lessee appears to
have insufficient remaining assets to satisfy secured creditors who have
priority over unsecured creditors in the liquidation. This aircraft
will require approximately $1.2 million of maintenance to
prepare it for re-lease, but the Company believes that it will be able to
complete such maintenance and find a new customer for the aircraft during
2009.
15
Ten of
the Company’s other aircraft leases expire in 2009. The Company
believes that it will be successful in extending the leases for a majority of
these aircraft, given preliminary indications from current lessees. If the
aircraft that are currently off lease remain off lease for an extended period of
time and the Company is not successful in extending the leases for a majority of
the ten aircraft with leases expiring in 2009, the Company may not be able to
meet its operational needs or remain in compliance with the terms of its Credit
Facility and Subordinated Notes. Although increased demand generally in the
turboprop market has caused lease rates to stabilize and, in some cases, rise,
there can be no assurance that rental rates on aircraft to be re-leased will not
decline, so that, absent additional acquisitions by the Company beyond those
made in 2007 and in 2008, aggregate lease revenues for the current portfolio
could decline in the future.
The
Company continually monitors the financial condition of its lessees to avoid
unanticipated creditworthiness issues, and where necessary, works with lessees
to ensure continued compliance with obligations under their respective
leases. Currently, the Company is closely monitoring the performance
of three lessees with a total of seven aircraft under lease. The
Company continues to work closely with these lessees to ensure compliance with
their current obligations. In February 2009, the Company and the lessee of two
of the Company’s aircraft agreed to defer a portion of the rent and maintenance
reserves due from the lessee. The deferral is to be paid in four
monthly installments beginning in March 2009. If any of the Company's
current lessees are unable to meet their lease payment obligations, the
Company's future operating results could be materially impacted. Any
weakening in the aircraft industry may also affect the performance of lessees
that currently appear to the Company to be creditworthy. See "Factors that May Affect Future
Results – General Economic Conditions," below.
Beginning
on January 1, 2007, due to the adoption of FSP AUG AIR-1, the Company began to
accrue non-refundable maintenance reserves billed to lessees as income based on
aircraft usage and record maintenance expenses as incurred. The
Company accrues estimated maintenance costs based on information provided by its
third party lessees and, accordingly, estimates of such expenses depend on
timely and accurate reporting by such parties. The Company believes
that its reported net income may be subject to significant fluctuations from
quarter-to-quarter as a result of the adoption of FSP AUG AIR-1. Due
to the recent acquisition of Fokker 100 jet engine powered aircraft, the
magnitude of these fluctuations may be greater as a result of the higher
maintenance reserve rates and related maintenance expense for jet engines as
compared to turboprop engines.
Factors
that May Affect Future Results
Availability of
Financing. The Company’s continued growth will depend on its
ability to obtain capital, either through debt or equity
financings. The financial markets have experienced certain setbacks
related in many cases to certain financial institutions’ investments in
mortgage-backed securities. As a result, commercial lending
origination has dramatically decreased, and asset based debt financing is now
more difficult to obtain. The Company believes that the current
banking crisis will not have an immediate effect on the Company. The
Company believes the lenders in its Credit Facility will continue to be able to
honor their commitment to provide loans as committed in the Credit Facility
agreements and that the unused capacity under the Credit Facility provides
sufficient capital to fund acquisitions through the end of 2009. The
Company, however, will eventually need to seek additional capital once its
Credit Facility is fully drawn. The Company is currently seeking
additional lenders for participation in its Credit Facility, and investigating
other sources of debt financing. There is no assurance that the Company will
succeed in finding such additional capital, and if such financing is found, it
may not be on terms as favorable as its current debt financings. The
current term of the Credit Facility expires in March 2010. While the
Company anticipates that, at that time, the current lenders participating in the
facility will remain as participants in the amount for which they are currently
committed, there is no assurance that such will occur. If one or more
participants decides not to continue, then the Company will either need to pay
off such participant by obtaining additional commitment amounts from the
remaining lenders, finding new replacement lenders, or selling assets, or doing
a combination of any of the foregoing.
Risks of Debt
Financing. The Company’s use of debt as the primary form of
acquisition financing subjects the Company to increased risks of
leveraging. Indebtedness owed under the Credit Facility is secured by
the Company’s existing assets as well as the specific assets acquired with each
financing. In addition to payment obligations, the Credit Facility
also requires the Company to comply with certain financial covenants, including
a requirement of positive earnings, interest coverage and net worth
ratios. Any default under the Credit Facility, if not waived by the
lenders, could result in foreclosure upon not only the asset acquired using such
financing, but also the existing assets of the Company securing the
loan. Any such default could also result in a cross default under the
Subordinated Notes.
16
The
addition of the Subordinated Notes, while providing additional resources for
acquisition by the Company of revenue generating assets, also had the effect of
increasing the Company’s overall cost of capital, as they bear an effective
overall interest rate that is currently higher than the rate payable under the
Credit Facility. The two tranches of Subordinated Notes financing
started bearing interest immediately upon their issuance and, therefore, timely
acquisition of income producing assets has become more critical to the Company’s
financial results. The agreement under which the Subordinated Notes were issued
also contains financial and other covenants which, if violated, could cause a
default under the Subordinated Notes.
Credit Facility Obligations.
The Company is obligated to make repayments of principal under the Credit
Facility in order to maintain certain debt ratios with respect to its assets in
the borrowing base. Assets that come off lease and remain off-lease
for a period of time, as well as assets with lease payments more than 30 days
past due, are excluded from the borrowing base. The Company believes
it will have sufficient cash funds to make any payment that arises due to
borrowing base limitations caused by assets scheduled to come off lease in the
near term. The Company’s belief is based on certain assumptions
regarding renewal of existing leases, interest rates, profitability, lessee
defaults or bankruptcies, and certain other matters that the Company deems
reasonable in light of its experience in the industry. There can be no assurance
that the Company’s assumptions will prove to be correct. If the
assumptions are incorrect (for example, if an asset in the collateral
base unexpectedly goes off lease for an extended period of time) and the Company
has not obtained an applicable waiver or amendment of applicable covenants from
its lenders to mitigate the situation, the Company may have to sell a
significant portion of its portfolio in order to maintain compliance with
covenants or face default on its Credit Facility.
General Economic Conditions.
The Company’s business is dependent upon general economic conditions and
the strength of the travel and transportation industry. The industry
is in a period of financial difficulty and contraction caused primarily by
recent record-high fuel prices and may be severely affected by the global
downturn brought on by the ongoing credit crisis. Continuing
unavailability of additional debt financing relied on by many regional carriers
caused by the current credit crisis and a protracted economic downturn, which
will certainly affect carriers’ revenue, may result in more
failures. A widespread economic setback in the industry may result in
the increased possibility of an economic failure of one or more of the Company’s
lessees. If lessees experience financial difficulties, this could, in
turn, affect the Company’s financial performance.
During
periods of economic contraction, carriers generally reduce capacity in response
to lower passenger loads, and as a result, there is a reduced demand for
aircraft and a corresponding decrease in market lease rental rates and aircraft
values. This reduced market value for aircraft could affect the
Company’s results if the market value of an asset or assets in the Company’s
aircraft portfolio falls below carrying value, and the Company determines that a
write-down of the value on the Company’s balance sheet is appropriate.
Furthermore, as older leases expire and are replaced by lease renewals or
re-leases at decreasing lease rates, the lease revenue 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 specific regions of the world exclusively. As
the Company’s portfolio is not entirely globally diversified, a localized
downturn in one of the key regions in which the Company leases aircraft could
have a significant adverse impact on the Company.
Investment in New Aircraft
Types. The Company has traditionally invested in a limited
number of types of turboprop aircraft and engines. While the Company intends to
continue to focus solely on regional aircraft and engines, the Company has
acquired Fokker 100 regional jet aircraft, and may continue to seek acquisition
opportunities for new types and models of regional jet and turboprop aircraft
and engines used in the Company's targeted customer base of regional air
carriers. Acquisition of other aircraft types and engines not
previously acquired by the Company entails greater ownership risk due to the
Company's lack of experience managing those aircraft and engine types. 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,”
below).
17
Warrant
Issuance. As part of the Subordinated Notes financing, as
revised upon the second and final closing in July 2008, the holders of
Subordinated Notes hold warrants to purchase up to 81,224 shares of the
Company’s common stock, which represents 5% of the post-exercise fully diluted
capitalization of the Company as of the initial closing of the Subordinated
Notes financing. The exercise price under 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 fair market value of the Company’s
common stock, there would be dilution to the existing holders of common
stock. This dilution of the Company’s common stock could depress its
trading price.
Concentration of Lessees and
Aircraft Type. Currently, the Company’s five largest customers are
located in Mexico, Antigua, Norway, Netherlands Antilles and Germany and
currently account for approximately 16%, 14%, 10%, 10% and 10%, respectively, 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
therefore, the Company’s operating results are especially sensitive to any
negative developments with respect to these customers in terms of lease
compliance or collection. Such concentration of lessee credit risk decreases as
the Company leases additional assets to new lessees.
Currently,
the Company owns eight DHC-8-300, fourteen Fokker 50 and seven Fokker 100
aircraft, making these three aircraft types the dominant types in the portfolio
and representing 25%, 23% and 34%, respectively, of net book value. As a result,
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 large impact on the Company’s portfolio value. Such aircraft
type concentration will diminish if the Company acquires additional assets of
other types. Conversely, acquisition of these types of aircraft will increase
the Company’s risks related to its concentration of those aircraft
types.
Lessee Credit
Risk. If a customer defaults upon its lease
obligations, the Company may be limited in its ability to enforce
remedies. Most of the Company’s lessees are small regional passenger
airlines, which may be even more sensitive to airline industry market conditions
than the major airlines. As a result, the Company’s inability to
collect rent under a lease or to repossess equipment in the event of a default
by a lessee could have a material adverse effect on the Company’s
revenue. If a lessee that is a certified U.S. airline is in default
under the lease and seeks protection under Chapter 11 of the United States
Bankruptcy Code, Section 1110 of the Bankruptcy Code would automatically prevent
the Company from exercising any remedies for a period of 60
days. After the 60-day period has passed, the lessee must agree to
perform the obligations and cure any defaults, or the Company will have the
right to repossess the equipment. This procedure under the Bankruptcy
Code has been subject to significant litigation, however, and it is possible
that the Company’s enforcement rights may be further adversely affected by a
declaration of bankruptcy by a defaulting lessee. Most of the
Company’s lessees are foreign and not subject to U.S. bankruptcy laws but there
may be similar applicable foreign bankruptcy debtor protection schemes available
to foreign lessees.
Leasing Risks. The
Company’s successful negotiation of lease extensions, re-leases and sales may be
critical to its ability to achieve its financial objectives, and involves a
number of risks. Demand for lease or purchase of the assets depends
on the economic condition of the airline industry, which is, in turn, sensitive
to general economic conditions. The ability to remarket equipment at
acceptable rates may depend on the demand and market values at the time of
remarketing. The Company anticipates that the bulk of the equipment
it acquires will be used aircraft equipment. The market for used
aircraft equipment is cyclical, and generally reflects economic conditions and
the strength of the travel and transportation industry. The demand
for and value of many types of used aircraft in the recent past has been
depressed by such factors as airline financial difficulties, increased fuel
costs, the number of new aircraft on order and the number of aircraft coming
off-lease. Values may also increase for certain aircraft types that
become desirable based on market conditions and changing airline
capacity. If the Company were to purchase an aircraft during a period
of increasing values, it would in turn need to lease such aircraft at a
corresponding higher lease rate.
Risks Related to Regional Air
Carriers. Because the Company’s customer base is regional air
carriers and the Company continues to focus on regional carriers, it is subject
to additional risks. Some of the lessees in the regional air carrier
market are companies that are start-up, low-capital, low-margin
operations. Often, the success of such carriers is dependent upon
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 with short notice
periods. Because of this exposure, the Company typically is able to
obtain generally higher lease rates from these types of lessees. In
the event of a business failure or bankruptcy of the lessee, the Company can
generally regain possession of its aircraft, but the aircraft could be in
substantially worse condition than would be the case if the aircraft were
returned in accordance with the lease provisions at lease
expiration.
18
The
Company evaluates the credit risk of each lessee carefully, and attempts to
obtain a third party guaranty, letters of credit or other credit enhancements,
if it deems them necessary in addition to customary security
deposits. There is no assurance, however, that such enhancements will
be available or that, if obtained, they will fully protect the Company from
losses resulting from a lessee default or bankruptcy. Also, a
significant area of market growth is outside of the United States, where
collection and enforcement are often more difficult and complicated than in the
United States. If any of the Company's current or future lessees are unable to
meet their lease obligations, the Company's future results could be materially
impacted.
Interest Rate
Risk. The Company’s current Credit Facility and the
indebtedness of its special purpose subsidiary carry a floating interest rate
based upon short-term interest rate indices. Lease rates typically, but not
always, move with interest rates, but market demand for the asset also affects
lease rates. Because lease rates are fixed at the origination of leases,
interest rate changes during the term of a lease have no effect on existing
lease payments. Therefore, if interest rates rise significantly, and
there is relatively little lease origination by the Company following such rate
increases, the Company could experience lower net
income. Further, even if significant lease origination occurs
following such rate increases, if the contemporaneous aircraft market forces
result in lower or flat rental rates, the Company could also experience lower
net income.
In
December 2007, the Company entered into the Swap, a two-year interest rate swap
with a notional amount of $20 million, under which it committed to make or
receive a net settlement for the difference in interest receivable computed
monthly on the basis of 30-day LIBOR and interest payable monthly on the basis
of a fixed rate of 4.04% per annum. The Swap is designed to limit exposure to
interest rate increases on $20 million of the Company’s Credit facility debt by
fixing the net interest payable over the term of the
Swap. Nonetheless, if an interest rate increase were great enough,
the Company might not be able to generate sufficient lease revenue to meet its
other interest payments and obligations and comply with the other covenants of
its Credit Facility or indebtedness of one of its special purpose subsidiaries.
If the one-month LIBOR rate applicable for an interest period is below the fixed
swap rate set in the Swap contract, as has been the case in recent months, the
Company will be obligated to pay the swap counterparty the difference between
the fixed swap rate of 4.04% and that one-month LIBOR rate, resulting in a
negative impact on the Company’s results. As of March 12, 2009, the
one-month LIBOR rate was 0.5625%.
International
Risks. The Company has focused on leases in overseas
markets. Leases with foreign lessees, however, may present different
risks than those with domestic lessees.
Foreign
laws, regulations and judicial procedures may be more or less protective of
lessor rights than those which apply in the United States. The
Company could experience collection or repossession problems related to the
enforcement of its lease agreements under foreign local laws and remedies in
foreign jurisdictions. The protections potentially offered by Section 1110 of
the Bankruptcy Code do not apply to non-U.S. carriers, and applicable local law
may not offer similar protections. Certain countries do not have a
central registration or recording system with which to locally establish the
Company’s interest in equipment and related leases. This could make
it more difficult for the Company to recover an aircraft in the event of a
default by a foreign lessee.
A lease
with a foreign lessee is subject to risks related to the economy of the country
or region in which such lessee is located, which may be weaker than the U.S.
economy. A foreign economic downturn may impact a foreign lessee’s
ability to make lease payments, even though the U.S. and other economies remain
stable.
Furthermore,
foreign lessees are subject to risks related to currency conversion
fluctuations. Although the Company’s current leases are all payable
in U.S. dollars, the Company may agree in the future to leases that permit
payment in foreign currency, which would subject such lease revenue to monetary
risk due to currency fluctuations. 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 causing 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 dollar cost for the Company.
19
Even with
U.S. dollar-denominated lease payment provisions, the Company could still be
affected by a devaluation of the lessee’s local currency that would make it more
difficult for a lessee to meet its U.S. dollar-denominated lease payments,
increasing the risk of default of that lessee, particularly if its revenue is
primarily derived in the local currency.
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 domestically operated aircraft. Depending on the
jurisdiction, laws governing such tax liabilities may be complex or 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.
Reliance on
JMC. All management of the Company is performed by JMC under a
Management Agreement between the Company and JMC, which is in the twelfth year
of a 20-year term and provides for an asset-based management fee. JMC is not a
fiduciary to the Company or its stockholders. The Company’s Board of Directors
(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. All of the
officers of JMC are also officers of the Company, and certain directors of the
Company are also directors of JMC. Consequently, the directors and
officers of JMC may have a conflict of interest in the event of a dispute
between the Company and JMC. Although the Company has taken steps to
prevent conflicts of interest arising from such dual roles, such conflicts may
still occur.
JMC has
acted as the management company for two other aircraft portfolio owners,
JetFleet III, which raised approximately $13,000,000 in bond issuance proceeds,
and AeroCentury IV, Inc. (“AeroCentury IV”), which raised approximately
$5,000,000 in bond issuance proceeds. In the first quarter of 2002,
AeroCentury IV defaulted on certain bond obligations. In June 2002,
the indenture trustee for AeroCentury IV’s bondholders repossessed AeroCentury
IV’s assets and took over management of AeroCentury IV’s remaining
assets. JetFleet III defaulted on its bond obligation of $11,076,400
in May 2004. The indenture trustee for JetFleet III bondholders
repossessed JetFleet III’s unsold assets in late May 2004.
Ownership
Risks. The Company’s portfolio is leased under operating
leases, where the terms of the leases are less than the entire anticipated
useful life of an asset. The Company’s ability to recover its
purchase investment in an asset subject to an operating lease is dependent upon
the Company’s ability to profitably re-lease or sell the asset after the
expiration of the initial lease term. Some of the factors that
have an impact on the Company’s ability to re-lease or sell include worldwide
economic conditions, general aircraft market conditions, regulatory changes that
may make an asset’s use more expensive or preclude use unless the asset is
modified, changes in the supply or cost of aircraft equipment and technological
developments which cause the asset to become obsolete. If the Company is unable
to remarket its aircraft equipment on favorable terms when the operating leases
for such equipment expire, the Company’s business, financial condition, cash
flow, ability to service debt and results of operations could be adversely
affected.
20
In
addition, a successful investment in an asset subject to an operating lease
depends in part upon having the asset returned by the lessee in the condition as
required under the lease. In the ordinary course, a lessee has the
obligation to return an aircraft to the Company in the condition required under
a lease, which generally requires the aircraft be returned in equal or better
condition than that at delivery to the lessee. If the lessee becomes
insolvent during the term of its lease and the Company has to repossess the
aircraft from the lessee, it is unlikely that the lessee will have the financial
ability to meet these return obligations. Thus upon repossession, the
Company will be required to expend its own resources to return the aircraft to a
remarketable condition, and maintenance reserves collected from the lessee
during the term of the lease may be insufficient to fund the total expense of
such repair and maintenance.
Furthermore,
an asset impairment charge against the Company’s earnings may result from the
occurrence of unexpected adverse changes that impact the Company’s estimates of
expected cash flows generated from such asset. The Company periodically reviews
long-term assets for impairment, in particular, when events or changes in
circumstances indicate the carrying value of an asset may not be recoverable. An
impairment loss is recognized when the carrying amount of an asset is not
recoverable and exceeds its fair value. The Company may be required to recognize
asset impairment charges in the future as a result of a prolonged weak economic
environment, challenging market conditions in the airline industry or events
related to particular lessees, assets or asset types.
Several
of the Company’s leases do not require the payment of monthly maintenance
reserves, and if a repossession due to lessee default occurs with that lessee,
the Company may have to bear the entire cost of such repair and
maintenance.
Government
Regulation. There are a number of areas in which government
regulation may result in costs to the Company. These include aircraft
registration, safety requirements, required equipment modifications, and
aircraft noise requirements. Although it is contemplated that the
burden and cost of complying with such requirements will fall primarily upon
lessees of equipment, there can be no assurance that the cost will not fall on
the Company. Furthermore, future government regulations could cause
the value of any non-complying equipment owned by the Company to decline
substantially.
Competition. The
aircraft leasing industry is highly competitive. The Company competes
with aircraft manufacturers, distributors, airlines and other operators,
equipment managers, leasing companies, equipment leasing programs, financial
institutions and other parties engaged in leasing, managing or remarketing
aircraft, many of which have significantly greater financial
resources. However, the Company believes that it is competitive
because of JMC’s experience and operational efficiency in identifying and
obtaining financing for the transaction types desired by regional air
carriers. This market segment, which is characterized by transaction
sizes of less than $10 million and lessee creditworthiness that may be strong,
but generally unrated, 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. Further, some protection may be provided by the United States
Aviation Act with respect to the Company’s aircraft assets. It is,
however, not clear to what extent such statutory protection would be available
to the Company, and the United States Aviation Act may not apply to aircraft
operated in foreign countries. Also, although the Company’s leases
generally require a lessee to insure against likely risks, there may be certain
cases where the loss is not entirely covered by the lessee or its
insurance. Though this is a remote possibility, an uninsured loss
with respect to the equipment, or an insured loss for which insurance proceeds
are inadequate, would result in a possible loss of invested capital in and any
profits anticipated from, such equipment, as well as a potential claim directly
against the Company.
Possible Volatility of Stock
Price. The market price of the Company’s common stock has been
subject to fluctuations in response to the Company’s operating results, changes
in general conditions in the economy, the financial markets, the airline
industry, changes in accounting principles or tax laws applicable to the Company
or its lessees, or other developments affecting the Company, its customers or
its competitors, some of which may be unrelated to the Company’s
performance. Also, because the Company has a relatively small
capitalization of approximately 1.5 million shares outstanding, there is a
correspondingly limited amount of trading of the Company’s
shares. Consequently, a single or small number of trades could result
in a market fluctuation not related to any business or financial development
concerning the Company.
21
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.
(a) Financial Statements and
Schedules
(1) Financial
statements for the Company:
Report of Independent Registered Public Accounting
Firm
Consolidated
Balance Sheets as of December 31, 2008 and
2007
Consolidated
Statements of Operations for the Years Ended
December 31, 2008 and 2007
Consolidated
Statements of Stockholders’ Equity for the Years
Ended
December
31, 2008 and 2007
Consolidated
Statements of Cash Flows for the Years
Ended
December
31, 2008 and 2007
Notes
to Consolidated Financial Statements
(2)
Schedules:
|
|
All
schedules have been omitted since the required information is presented in
the financial statements or is not
applicable.
|
22
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders
AeroCentury
Corp.
Burlingame,
California
We
have audited the accompanying consolidated balance sheets of AeroCentury Corp.
as of December 31, 2008 and 2007 and the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the two years in
the period ended December 31, 2008. 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,
2008 and 2007, and the results of its operations and its cash flows for each of
the two years in the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America.
/s/
BDO Seidman, LLP
March
13, 2009
San
Francisco, California
23
AeroCentury
Corp.
Consolidated
Balance Sheets
|
ASSETS
|
||||||||
|
December
31,
2008
|
December
31,
2007
|
|||||||
|
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 2,169,700 | $ | 2,843,200 | ||||
|
Accounts
receivable, including deferred rent of $244,100 and $675,600 at December
31, 2008 and December 31, 2007, respectively
|
2,022,800 | 1,647,700 | ||||||
|
Aircraft
and aircraft engine held for lease,
net
of accumulated depreciation of $33,385,300 and $26,163,200 at December 31,
2008 and December 31, 2007, respectively
|
124,913,600 | 118,924,000 | ||||||
|
Taxes
receivable
|
1,626,800 | 1,835,600 | ||||||
|
Prepaid
expenses and other
|
1,000,600 | 1,402,300 | ||||||
|
Total
assets
|
$ | 131,733,500 | $ | 126,652,800 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Liabilities:
|
||||||||
|
Accounts
payable and accrued expenses
|
$ | 598,700 | $ | 811,000 | ||||
|
Notes
payable and accrued interest
|
72,411,300 | 73,074,500 | ||||||
|
Maintenance
reserves and accrued costs
|
8,095,000 | 6,025,500 | ||||||
|
Security
deposits
|
5,498,800 | 5,696,500 | ||||||
|
Prepaid
rent
|
1,072,900 | 1,028,000 | ||||||
|
Deferred
income taxes
|
9,169,400 | 7,649,000 | ||||||
|
Taxes
payable
|
52,300 | 228,600 | ||||||
|
Total
liabilities
|
96,898,400 | 94,513,100 | ||||||
|
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 | 15,377,600 | ||||||
|
Retained
earnings
|
20,557,500 | 17,264,600 | ||||||
| 35,339,200 | 32,643,800 | |||||||
|
Treasury
stock at cost, 63,300 shares
|
(504,100 | ) | (504,100 | ) | ||||
|
Total
stockholders’ equity
|
34,835,100 | 32,139,700 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 131,733,500 | $ | 126,652,800 | ||||
The
accompanying notes are an integral part of these statements.
24
AeroCentury
Corp.
Consolidated
Statements of Operations
|
For
the Years Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Revenues
and other income:
|
||||||||
|
Operating
lease revenue
|
$ | 24,407,000 | $ | 19,411,900 | ||||
|
Maintenance
reserves income
|
7,169,300 | 4,309,700 | ||||||
|
Gain
on sale of aircraft and aircraft engines and other income
|
219,000 | 128,200 | ||||||
| 31,795,300 | 23,849,800 | |||||||
|
Expenses:
|
||||||||
|
Interest
|
7,154,000 | 6,260,200 | ||||||
|
Depreciation
|
7,222,100 | 5,614,500 | ||||||
|
Provision
for aircraft impairment
|
745,000 | - | ||||||
|
Maintenance
costs
|
6,772,100 | 2,395,600 | ||||||
|
Management
fees
|
3,676,800 | 3,017,400 | ||||||
|
Professional
fees and general and administrative
|
782,800 | 649,700 | ||||||
|
Insurance
|
388,800 | 215,600 | ||||||
|
Other
taxes
|
(77,500 | ) | 326,600 | |||||
|
Bad
debt expense
|
1,300 | 15,700 | ||||||
| 26,665,400 | 18,495,300 | |||||||
|
Income
before income tax provision
|
5,129,900 | 5,354,500 | ||||||
|
Income
tax provision
|
1,837,000 | 1,579,100 | ||||||
|
Net
income
|
$ | 3,292,900 | $ | 3,775,400 | ||||
|
Earnings
per share:
|
||||||||
|
Basic
|
$ | 2.13 | $ | 2.45 | ||||
|
Diluted
|
$ | 2.08 | $ | 2.36 | ||||
|
Weighted
average shares used in earnings per share computations:
|
||||||||
|
Basic
|
1,543,257 | 1,543,257 | ||||||
|
Diluted
|
1,585,274 | 1,598,516 | ||||||
The
accompanying notes are an integral part of these statements.
25
AeroCentury
Corp.
Consolidated
Statements of Stockholders’ Equity
For the
Years Ended December 31, 2008 and 2007
|
Common
Stock
|
Paid-in
Capital
|
Retained
Earnings
|
Treasury
Stock
|
Total
|
||||||||||||||||
|
Balance,
December 31, 2006
|
$ | 1,600 | $ | 13,821,200 | $ | 13,489,200 | $ | (504,100 | ) | $ | 26,807,900 | |||||||||
|
Warrants
issued in connection
with
Subordinated Notes, net
|
- | 1,556,400 | - | - | 1,556,400 | |||||||||||||||
|
Net
income
|
- | - | 3,775,400 | - | 3,775,400 | |||||||||||||||
|
Balance,
December 31, 2007
|
1,600 | 15,377,600 | 17,264,600 | (504,100 | ) | 32,139,700 | ||||||||||||||
|
Warrants
cancelled in connection
with
Subordinated Notes, net
|
- | (597,500 | ) | - | - | (597,500 | ) | |||||||||||||
|
Net
income
|
- | - | 3,292,900 | - | 3,292,900 | |||||||||||||||
|
Balance,
December 31, 2008
|
$ | 1,600 | $ | 14,780,100 | $ | 20,557,500 | $ | (504,100 | ) | $ | 34,835,100 | |||||||||
The
accompanying notes are an integral part of these statements.
26
AeroCentury
Corp.
Consolidated
Statements of Cash Flows
|
For
the Years Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Operating
activities:
|
||||||||
|
Net
income
|
$ | 3,292,900 | $ | 3,775,400 | ||||
|
Adjustments
to reconcile net income to net cash
|
||||||||
|
provided
by operating activities:
|
||||||||
|
Gain
on sale of aircraft and aircraft engine
|
(15,000 | ) | (97,500 | ) | ||||
|
Depreciation
|
7,222,100 | 5,614,500 | ||||||
|
Provision
for aircraft impairment
|
745,000 | - | ||||||
|
Non-cash
interest
|
1,251,400 | 311,800 | ||||||
|
Provision
for bad debts
|
1,300 | 15,700 | ||||||
|
Deferred
taxes
|
1,520,400 | 3,178,200 | ||||||
|
Change
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(376,400 | ) | (164,800 | ) | ||||
|
Taxes
receivable
|
208,900 | (1,812,100 | ) | |||||
|
Prepaid
expenses and other
|
(111,500 | ) | (339,500 | ) | ||||
|
Accounts
payable and accrued expenses
|
(103,600 | ) | 156,800 | |||||
|
Accrued
interest on notes payable
|
(64,000 | ) | (17,100 | ) | ||||
|
Maintenance
reserves and accrued costs
|
2,069,500 | 2,857,300 | ||||||
|
Security
deposits
|
(197,700 | ) | 1,509,100 | |||||
|
Prepaid
rent
|
44,900 | 554,300 | ||||||
|
Taxes
payable
|
(176,300 | ) | 228,600 | |||||
|
Net
cash provided by operating activities
|
15,311,900 | 15,770,700 | ||||||
|
Investing
activities:
|
||||||||
|
Proceeds
from sale of aircraft and aircraft engines, net of re-sale
fees
|
15,000 | 97,500 | ||||||
|
Purchases
of aircraft
|
(13,929,700 | ) | (32,333,400 | ) | ||||
|
Net
cash used in investing activities
|
(13,914,700 | ) | (32,235,900 | ) | ||||
|
Financing
activities:
|
||||||||
|
Borrowings
under Credit Facility
|
12,500,000 | 25,500,000 | ||||||
|
Net
proceeds received from issuance of Subordinated Notes
payable
|
3,960,000 | 9,237,400 | ||||||
|
Debt
issuance costs
|
285,800 | (735,300 | ) | |||||
|
Repayments
of the Credit Facility and notes payable
|
(18,816,500 | ) | (18,077,600 | ) | ||||
|
Net
cash (used in)/provided by financing activities
|
(2,070,700 | ) | 15,924,500 0 | |||||
|
Net
decrease in cash and cash equivalents
|
(673,500 | ) | (540,700 | ) | ||||
|
Cash
and cash equivalents, beginning of period
|
2,843,200 | 3,383,900 | ||||||
|
Cash
and cash equivalents, end of period
|
$ | 2,169,700 | $ | 2,843,200 | ||||
During
the years ended December 31, 2008 and 2007, the Company paid interest totaling
$6,016,600 and $6,422,800, respectively. During the year ended
December 31, 2008, the Company paid income taxes totaling $3,700 and received
federal tax refunds totaling $210,500. During the year ended December
31, 2007, the Company paid income taxes totaling $1,200 and received federal tax
refunds totaling $88,100.
The
accompanying notes are an integral part of these statements.
27
AeroCentury
Corp.
Notes to
Consolidated Financial Statements
December
31, 2008
1.
Organization and Summary of Significant Accounting Policies
(a) The Company
and Basis of Presentation
AeroCentury Corp., a Delaware
corporation incorporated in 1997 (the Company, as defined below) acquires used
regional aircraft for lease to foreign and domestic regional
carriers. Financial information for AeroCentury Corp. and its
wholly-owned subsidiaries, AeroCentury Investments V LLC (“AeroCentury V LLC”)
which was dissolved on August 25, 2008, and AeroCentury Investments VI LLC
(“AeroCentury VI LLC”) (collectively, the “Company”), is presented on a
consolidated basis in accordance with accounting principles generally accepted
in the United States of America (“GAAP”). All intercompany balances
and transactions have been eliminated in consolidation.
(b) Use of
Estimates
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 of the aircraft,
the useful lives of the aircraft, the estimated fair value of financial
instruments, the amount and timing of cash flow associated with each aircraft
that are used to evaluate impairment, if any, 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 purchased only used
aircraft. It is the Company’s policy to hold aircraft for
approximately twelve years unless market conditions dictate
otherwise. Depreciation is computed using the straight-line method
over the twelve year period to an estimated residual value based on appraisal,
which is adjusted periodically. Decreases in the market value of
aircraft could not only affect the current value, but could also affect the
assumed residual value. Aircraft that are held for sale are not subject to
depreciation and are separately classified on the consolidated balance
sheet.
(e) Fair Value
of Financial Instruments and Accounting for Derivative Instrument
The Company’s financial instruments,
other than cash, consist principally of cash equivalents, accounts receivable,
accounts payable, amounts borrowed under a credit facility, borrowings under
notes payable and a derivative instrument. The fair value of cash,
cash equivalents, accounts receivable and accounts payable approximates the
carrying value of these financial instruments because of their short-term
nature.
28
AeroCentury
Corp.
Notes to
Consolidated Financial Statements
December
31, 2008
1.
Organization and Summary of Significant Accounting Policies
(continued)
(e) Fair Value
of Financial Instruments and Accounting for Derivative Instrument
(continued)
Borrowings under the Company’s
revolving credit facility (the “Credit Facility”) and certain notes payable bear
floating rates of interest that reset periodically to a market benchmark rate
plus a credit margin. The Company believes the effective rates of the
Credit Facility and debt agreements approximate current market rates for such
indebtedness at the balance sheet date. The Company believes the
carrying amount of its fixed rate debt approximates fair value at the balance
sheet date. As discussed in Note 7, the fair value of the Company’s
interest rate swap derivative instrument is determined by reference to banker
quotations.
(f) Impairment
of Long-lived Assets
The Company periodically reviews its
portfolio of assets for impairment in accordance with SFAS 144, “Accounting for
the Impairment or Disposal of Long-lived Assets." Such review includes
estimating current market values, re-lease rents, residual values and component
values. The estimates are based on currently available market data and
third party appraisals and are subject to fluctuation from time to time. The Company initiates
its review annually or whenever events or changes in circumstances indicate that
the carrying amount of a long-lived asset may not be recoverable.
Recoverability of an asset is measured by comparison of its carrying amount to
the expected future undiscounted cash flows (without interest charges) that the
asset is expected to generate. Any impairment to be recognized is measured
by the amount by which the carrying amount of the asset exceeds its fair market
value. Significant management judgment is required in the forecasting of
future operating results which are used in the preparation of projected
undiscounted cash flows and, if different conditions prevail, material write
downs may occur. During 2008, the Company recorded an impairment
provision of $745,000 for one of its aircraft.
(g) Deferred
Financing Costs, Commitment Fees and Interest Swap Valuation
Costs incurred in connection with term
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 revolving debt are deferred and amortized using the straight
line method.
Commitment fees for unused funds are
expensed as incurred.
In December 2007, the Company entered
into an interest rate swap (the “Swap”), expiring December 31, 2009, of 30-day
LIBOR for a fixed rate payment on a nominal principal amount of $20
million. Because the Swap does not qualify as a hedge, the value of
the Swap is marked to market at the end of each reporting period and changes in
fair value of the Swap are reported in the consolidated statements of operations
as interest expense.
(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.
29
AeroCentury
Corp.
Notes to
Consolidated Financial Statements
December
31, 2008
1.
Organization and Summary of Significant Accounting Policies
(continued)
(i)
Taxes
As
part of the process of preparing the Company’s consolidated financial
statements, management is required to estimate income taxes in each of the
jurisdictions in which the Company operates. This process involves
estimating the Company’s current tax exposure under the most recent tax laws and
assessing temporary differences resulting from differing treatment of items for
tax and GAAP purposes. These differences result in deferred tax
assets and liabilities, which are included in the consolidated balance
sheet. Management must also assess the likelihood that the Company’s
deferred tax assets will be recovered from future taxable income, and, to the
extent management believes it is more likely than not that some portion or all
of the deferred tax assets will not be realized, the Company 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
consolidated statement of operations. Significant management judgment is
required in determining the Company’s future taxable income for purposes of
assessing the Company’s ability to realize any benefit from its deferred
taxes.
The
Company adopted the provisions of FASB issued Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109” (“FIN 48”) effective
January 1, 2007. As a result of the
implementation of FIN 48, no adjustment in the liability for unrecognized income
tax benefits relating to uncertain tax positions was necessary.
The Company accrues non-income based
sales, use, value added and franchise taxes as other tax expense in the
consolidated 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.
Non-refundable maintenance reserves billed to lessees are accrued as maintenance
reserves income based on aircraft usage. In instances for which
collectibility 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 and with each specific customer,
the level of past due accounts, and its analysis of the lessees’ overall
financial condition. If the financial condition of any of the
Company’s customers deteriorates, it could result in actual losses exceeding any
estimated allowances. The Company’s allowance for doubtful accounts
at December 31, 2008 and 2007 was $0.
(k)
Comprehensive Income/(Loss)
The Company does not have any
comprehensive income other than the revenue and expense items included in the
consolidated statements of operations. As a result, comprehensive
income equals net income for the years ended December 31, 2008 and
2007.
(l) Recent
Accounting Pronouncements
On May 14, 2008, the FASB issued SFAS
162, “The Hierarchy of Generally Accepted Accounting Principles,” which codified
the sources of accounting principles and the framework for selecting the
principles to be used in preparation of financial statements of non-governmental
entities that are presented in conformity with generally accepted accounting
principles. This statement is effective sixty days following the adoption
by the Securities and Exchange Commission (“SEC”) of the Public Company
Accounting Oversight Board amendments to AU 411, “The Meaning of Fairly
Presented in Conformity With Generally Accepted Accounting Principles,” and is
not expected to have any effect on the Company’s consolidated financial
statements.
30
AeroCentury
Corp.
Notes to
Consolidated Financial Statements
December
31, 2008
1.
Organization and Summary of Significant Accounting Policies
(continued)
(l) Recent
Accounting Pronouncements (continued)
On March 19, 2008, the FASB issued SFAS
161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS
161”), which is effective for fiscal years and interim periods beginning after
November 15, 2008 and which requires enhanced disclosure about derivatives and
hedging transactions. Early adoption is encouraged. SFAS 161 amends
SFAS 133, and requires that objectives for using derivative instruments be
disclosed in terms of the underlying risk and accounting designation, better
conveying the purpose underlying the derivatives’ use in terms of the risk the
reporting entity is intending to manage. It further requires disclosure of
the fair value of derivative instruments and their gains or losses in tabular
format, information about credit risk-related contingent features providing
information on the potential effect on the reporting entity’s liquidity from
using derivatives, and cross-referencing within footnotes. The Company has
not yet adopted the provisions of SFAS 161. Adoption of SFAS 161 will
require additional footnote disclosure but will not impact the amount of gain or
loss recognized or the financial position of the Company.
The Company adopted SFAS 157, “Fair
Value Measurements,” which provides guidance on the use of fair value
measurements in generally accepted accounting standards, on January 1, 2008,
except with respect to non-financial assets and liabilities covered by FSP
157-2, discussed below. Information regarding the Company’s fair
value measurements is presented in Note 7.
During February 2008, two FASB Staff
Positions (“FSP”) related to implementation of SFAS 157 were issued.
FSP 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and
Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13,” amends SFAS
157 to exclude SFAS 13 and other pronouncements that address fair value
measurements for purposes of lease classification or amendment from the
provisions of SFAS 157, except in the case of a business combination where such
measures are governed by SFAS 141. FSP 157-1 is effective upon adoption of
SFAS 157. Implementation of FSP 157-1 had no material effect on the
Company’s consolidated financial statements.
FSP 157-2, “Effective Date of FASB
Statement No. 157,” delayed the effective date of SFAS 157 for non-financial
assets and liabilities that are not recognized or disclosed at fair value, to
fiscal years beginning after November 15, 2008 and interim periods within such
years. The Company is required to adopt SFAS 157 with respect to such
assets and liabilities in its year beginning January 1, 2009. The only
category of non-financial assets or liabilities that may be significantly
affected by adoption of SFAS 157 under FSP 157-2 is the Company’s carrying value
of Aircraft and Aircraft Engines. The Company does not believe that
delayed adoption of SFAS 157 with respect to such assets and liabilities will
have a material effect on the Company’s consolidated financial
statements.
In June
2008, the FASB Emerging Issues Task Force ("EITF") reached a consensus on EITF
Issue No. 07-5, "Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entity's Own Stock" ("EITF 07-5"). EITF 07-5 provides
that an entity should use a two step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instrument's contingent exercise and settlement
provisions. EITF 07-5 is effective for fiscal years beginning after
December 15, 2008. The Company believes that adoption of EITF 07-5 will
not have a material effect on its consolidated financial
statements.
31
AeroCentury
Corp.
Notes to
Consolidated Financial Statements
December
31, 2008
2.
Fourth Quarter Adjustment
During
the quarter ended December 31, 2008, the Company recorded an impairment charge
of $745,000 related to one off-lease aircraft, which should have been recorded
in the quarter ended September 30, 2008. There was no impact to any
other prior periods. The Company evaluated the error in accordance with the
quantitative and qualitative guidance set forth in SEC Staff Accounting Bulletin
No. 99, “Materiality.” The Company determined that the effect
of this error did not impact the Company’s trend of earnings or any of its
financial covenants and, therefore, was not material to the quarters ended
December 31, 2008 and September 30, 2008. Accordingly, the Company
has not restated the interim financial statements for these periods; however,
the Company has provided the following table summarizing the unaudited condensed
balance sheets and statements of operations for the quarters ended December 31,
2008 and September 30, 2008, as if the error had been corrected:
|
Condensed Consolidated
Statements of Operations
|
||||||||
|
For
the Three Months Ended
|
||||||||
|
December
31,
2008
|
September
30,
2008
|
|||||||
|
Operating
lease revenue
|
$ | 6,411,700 | $ | 6,342,200 | ||||
|
Maintenance
reserves income
|
1,635,300 | 1,883,900 | ||||||
|
Gain
on sale of aircraft and other
|
4,000 | 10,100 | ||||||
| 8,051,000 | 8,236,200 | |||||||
|
Interest
|
2,174,000 | 1,749,800 | ||||||
|
Depreciation
|
1,895,600 | 1,876,700 | ||||||
|
Provision
for aircraft impairment
|
- | 745,000 | ||||||
|
Maintenance
|
2,216,500 | 920,800 | ||||||
|
Management
fees
|
946,800 | 957,300 | ||||||
|
Professional
fees and other
|
314,900 | 219,800 | ||||||
| 7,547,800 | 6,469,400 | |||||||
|
Income
before income tax provision
|
503,200 | 1,766,800 | ||||||
|
Income
tax provision
|
173,700 | 684,600 | ||||||
|
Net
income
|
$ | 329,500 | $ | 1,082,200 | ||||
|
Earnings
per share:
|
||||||||
|
Basic
|
$ | 0.21 | $ | 0.70 | ||||
|
Diluted
|
$ | 0.21 | $ | 0.69 | ||||
|
Weighted
average shares used in earnings per share computations:
|
||||||||
|
Basic
|
1,543,257 | 1,543,257 | ||||||
|
Diluted
|
1,555,880 | 1,572,420 | ||||||
|
Condensed
Consolidated Balance Sheet
|
||||||||
|
Total
assets
|
$ | 131,733,500 | $ | 133,639,000 | ||||
|
Total
liabilities
|
$ | 96,898,400 | $ | 99,133,400 | ||||
|
Total
stockholders’ equity
|
$ | 34,835,100 | $ | 34,505,600 | ||||
32
AeroCentury
Corp.
Notes to
Consolidated Financial Statements
December
31, 2008
3.
Aircraft and Aircraft Engine Held for Lease
At December 31, 2008, the Company owned
eight deHavilland DHC-8-300s, three deHavilland DHC-8-100s, three deHavilland
DHC-6s, fourteen Fokker 50s, two Saab 340As, six Saab 340Bs, seven Fokker 100s
and one turboprop engine which are on lease or held for lease. At
December 31, 2007, the Company owned eight deHavilland DHC-8-300s, three
deHavilland DHC-8-100s, three deHavilland DHC-6s, fourteen Fokker 50s, two Saab
340As, six Saab 340Bs, five Fokker 100s and one turboprop engine which are held
for lease. During 2008, the Company purchased two Fokker 100
aircraft, which are subject to leases with a regional carrier in Germany for
terms expiring in March 2013. During 2008, the Company also extended
the leases for several of its aircraft. At December 31, 2008, the
Company’s two Saab 340A aircraft, one of its Fokker 50 aircraft and one
turboprop engine were off lease. The Fokker 50, the lease for which
was to expire in November 2008, was returned to the Company in August 2008
pursuant to an early termination agreement with the lessee. The
aircraft is undergoing maintenance to prepare it for
re-lease. As discussed in Note 12, the lease for one of the
Company’s Saab 340-B aircraft was terminated early in the first quarter of
2009.
4.
Maintenance Reserves and Accrued Costs
The Company adopted the provisions of
FASB Staff Position AUG AIR-1, “Accounting for Planned Major Maintenance
Activities” (“FSP AUG AIR-1”) effective January 1, 2007. The Company
has elected to use the direct expensing method to account for maintenance
costs. Maintenance costs associated with non-refundable reserves are
expensed as such in the consolidated statement of operations in the period a
reimbursement claim for incurred maintenance or sufficient information is
received from the lessee. Non-refundable maintenance reserves
collected from lessees are recorded monthly as maintenance reserves income,
based on the lessee’s reported asset usage during the applicable month, assuming
collections are reasonably assured or cash is received. Due to the
timing difference of recording maintenance reserves income and recording
maintenance costs, the effect on current period income could be
material.
Maintenance costs under the Company’s
triple net operating leases are generally the responsibility of the lessees.
Refundable maintenance reserves received by the Company are accounted for as a
liability, which is reduced when maintenance work is performed during the lease.
Generally, under the terms of the Company’s leases, the lessees pay amounts to
the Company based on usage, which are estimated to cover the expected
maintenance cost. Maintenance reserves which are refundable to the
lessee are refunded after all return conditions specified in the lease and, in
some cases, any other payments due under the lease, are
satisfied. Any refundable reserves retained by the Company to satisfy
return conditions or in connection with an early return of an aircraft are
recorded as income. The accompanying
consolidated balance sheets reflect liabilities for maintenance reserves and
accrued costs, which include refundable maintenance payments received from
lessees based on usage. At December 31, 2008 and 2007, the Company’s
maintenance reserves and accruals consisted of the following:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Refundable
maintenance reserves
|
$ | 5,746,600 | $ | 4,434,200 | ||||
|
Accrued
costs
|
2,348,400 | 1,591,300 | ||||||
| $ | 8,095,000 | $ | 6,025,500 | |||||
33
AeroCentury
Corp.
Notes to
Consolidated Financial Statements
December
31, 2008
4.
Maintenance Reserves and Accrued Costs (continued)
Additions to and deductions from the
Company’s accrued costs during the years ended December 31, 2008 and 2007 for
aircraft maintenance were as follows:
|
For
the Years Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Balance,
beginning of year
|
$ | 1,591,300 | $ | 3,846,700 | ||||
|
Adjustment
pursuant to FSP AUG AIR-1
|
- | (3,499,300 | ) | |||||
|
Balance,
beginning of year, adjusted for adoption of FSP AUG AIR-1
|
1,591,300 | 347,400 | ||||||
|
Additions:
|
||||||||
|
Charged
to expense
|
5,742,300 | 1,988,800 | ||||||
|
Deductions:
|
||||||||
|
Paid
for previously accrued maintenance
|
4,865,800 | 526,200 | ||||||
|
Reversals
of over-accrued maintenance
|
119,400 | 218,700 | ||||||
| 4,985,200 | 744,900 | |||||||
|
Net
increase in accrued maintenance costs
|
757,100 | 1,243,900 | ||||||
|
Balance,
end of year
|
$ | 2,348,400 | $ | 1,591,300 | ||||
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 7% and 10% of the Company’s
operating lease revenue was derived from lessees domiciled in the United States
during 2008 and 2007, 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
|
2008
|
2007
|
||||||
|
Europe
and United Kingdom
|
$ | 9,080,900 | $ | 6,527,000 | ||||
|
Caribbean
|
6,240,000 | 4,857,800 | ||||||
|
Central
America
|
4,153,800 | 958,400 | ||||||
|
Asia
|
1,971,800 | 3,853,700 | ||||||
|
United
States
|
1,717,200 | 1,834,500 | ||||||
|
Africa
|
969,600 | 842,700 | ||||||
|
South
America
|
273,700 | 537,800 | ||||||
| $ | 24,407,000 | $ | 19,411,900 | |||||
34
AeroCentury
Corp.
Notes to
Consolidated Financial Statements
December
31, 2008
5.
Operating Segments (continued)
|
December
31,
|
||||||||
|
Net
Book Value of Aircraft and Aircraft Engines Held for Lease
|
2008
|
2007
|
||||||
|
Europe
and United Kingdom
|
$ | 47,459,800 | $ | 30,981,900 | ||||
|
Caribbean
|
26,778,500 | 28,486,800 | ||||||
|
Central
America
|
17,154,100 | 18,170,300 | ||||||
|
Africa
|
10,016,200 | 4,913,200 | ||||||
|
Asia
|
9,872,100 | 15,692,300 | ||||||
|
United
States
|
7,337,800 | 7,734,600 | ||||||
|
South
America
|
- | 3,650,900 | ||||||
|
Off
lease
|
6,295,100 | 9,294,000 | ||||||
| $ | 124,913,600 | $ | 118,924,000 | |||||
6.
Concentration of Credit Risk
Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
deposits and receivables. The Company places its deposits with
financial institutions and other creditworthy issuers and limits the amount of
credit exposure to any one party.
For the year ended December 31, 2008
the Company had five significant customers, which accounted for 17%, 15%, 11%,
11% and 10%, respectively, of lease revenue. For the year ended
December 31, 2007 the Company had four significant customers, which accounted
for 12%, 12%, 11% and 11%, respectively, of lease revenue.
At December 31, 2008, the Company had
significant receivables from three lessees, which accounted for 35%, 13% and
10%, respectively, of the Company’s total receivables. At December 31, 2007, the
Company had significant receivables from four lessees, which accounted for 27%,
15%, 14% and 10%, respectively, of the Company’s total receivables.
As of December 31, 2008, minimum future
operating lease revenue payments receivable under noncancelable leases were as
follows:
|
Years ending
|
||||
|
2009
|
$ | 23,922,600 | ||
|
2010
|
18,468,100 | |||
|
2011
|
8,221,900 | |||
|
2012
|
2,808,700 | |||
|
2013
|
480,300 | |||
| $ | 53,901,600 | |||
35
AeroCentury
Corp.
Notes to
Consolidated Financial Statements
December
31, 2008
7.
Notes Payable and Accrued Interest
At December 31, 2008 and 2007, the
Company’s notes payable and accrued interest consisted of the
following:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Credit
Facility principal
|
$ | 58,096,000 | $ | 59,596,000 | ||||
|
Credit
Facility accrued interest
|
39,500 | 144,400 | ||||||
|
Subordinated
Notes principal
|
14,000,000 | 10,000,000 | ||||||
|
Subordinated
Notes discount
|
(1,166,500 | ) | (2,387,900 | ) | ||||
|
Special
purpose financing principal
|
748,000 | 5,564,400 | ||||||
|
Special
purpose financing accrued interest
|
700 | 7,600 | ||||||
|
Interest
Swap valuation
|
645,800 | 150,000 | ||||||
|
Interest
Swap accrued interest
|
47,800 | - | ||||||
| $ | 72,411,300 | $ | 73,074,500 | |||||
(a) Credit
Facility
The
Company’s Credit Facility, which is collateralized by all of the assets of
AeroCentury Corp., expires on March 31, 2010. The current amount
available under the Credit Facility is $80 million and may be increased to a
maximum of $110 million. During 2008, the Company borrowed
$12,500,000 and repaid $14,000,000 of the outstanding principal under its Credit
Facility. As of December 31, 2008, the Company was in compliance with
all covenants under the Credit Facility agreement, $58,096,000 in principal
amount was outstanding, interest of $39,500 was accrued, and there was
$21,904,000 in borrowing capacity remaining. As of December 31, 2007, the
Company was in compliance with all covenants under the Credit Facility
agreement, $59,596,000 in principal amount was outstanding, interest of $144,400
was accrued, and there was $20,404,000 in borrowing capacity
remaining. Under the terms of the Credit Facility, the Company pays a
commitment fee based upon the applicable commitment fee rate on the unused
portion of the Credit Facility. Commitment fees are expensed as
incurred and paid quarterly in arrears. The weighted average interest
rate on the Credit Facility at December 31, 2008 and 2007 was 3.42% and 7.77%,
respectively.
(b) Derivative
instrument
In
December 2007, the Company entered into a two-year interest rate swap (the
“Swap”) with a notional amount of $20 million, under which it committed to make
or receive a net settlement for the difference in interest receivable computed
monthly on the basis of 30-day LIBOR and interest payable monthly on the basis
of a fixed rate of 4.04% per annum. The Swap is designed to
limit exposure on $20 million of the Company’s Credit facility debt by fixing
the net interest payable over the term of the Swap.
Under
SFAS 133, as amended, the Company is required to recognize the fair value of the
Swap as an asset or liability at its fair value, which is based upon the amount
the Company would receive or pay to terminate its agreements at the reporting
date, taking into account market conditions and the creditworthiness of the
derivative counterparties. Because the Swap does not qualify as a
hedge, the value of the Swap is marked to market at the end of each reporting
period and changes in fair value of the Swap are reported in the consolidated
statement of operations as interest expense. As such, at December 31,
2008 and 2007, the Company recorded the fair value of the Swap of $645,800 and
$150,000, respectively, as a liability on its consolidated balance sheet as a
component of notes payable and accrued interest. The Company recorded a loss on
the Swap of $495,800 and $150,000 for 2008 and 2007, respectively, as a
component of interest expense. The Company also recognized additional
interest expense on the net settlement of the Swap of $232,900 and $0 in 2008
and 2007, respectively, as a component of interest expense.
36
AeroCentury
Corp.
Notes to
Consolidated Financial Statements
December
31, 2008
7. Notes Payable and Accrued Interest
(continued)
(b) Derivative
instrument (continued)
SFAS No.
157 discusses valuation techniques, such as the market approach (comparable
market prices), the income approach (present value of future income or cash
flow), and the cost approach (cost to replace the service capacity of an asset
or replacement cost). The statement utilizes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The following is a brief description of those three
levels:
|
|
Level
1: Observable inputs such as quoted prices (unadjusted) in
active markets for identical assets or
liabilities.
|
|
|
Level
2: Inputs, other than quoted prices, that are observable for
the asset or liability, either directly or indirectly. These include
quoted prices for similar assets or liabilities in active markets and
quoted prices for identical or similar assets or liabilities in markets
that are not active.
|
|
|
Level
3: Unobservable inputs that reflect the reporting entity’s own
assumptions.
|
The Company’s interest rate swap
agreement effectively converts $20 million of the Company’s short-term variable
rate debt to a fixed rate. Under this agreement, the Company pays a
fixed rate and receives a variable rate of LIBOR. The fair value of
this interest rate derivative is based on quoted prices for similar instruments
from a commercial bank and, therefore, the interest rate derivative is
considered a Level 2 input for 2008 and 2007.
(c) Senior
unsecured subordinated debt
In April
2007, the Company entered into a securities purchase agreement (the
“Subordinated Notes Agreement”), whereby the Company would issue 16% senior
unsecured subordinated notes ("Subordinated Notes"), with an aggregate principal
amount of $28 million to certain note purchasers. The
Subordinated Notes were to be issued at 99% of the face amount and are due
December 30, 2011. Principal payments which fully amortize the
balance of the Subordinated Notes are due beginning April 30, 2009 through
December 30, 2011 in amounts necessary to cause (i) the balance of the
Subordinated Notes and (ii) the ratio of total outstanding debt under the Credit
Facility and Subordinated Notes compared to the discounted portfolio value to
not exceed amounts specified in the Securities Notes Agreement.
Under the
Subordinated Notes Agreement, the holders of Subordinated Notes also were issued
warrants to purchase up to 171,473 shares of the Company's common stock at an
exercise price of $8.75 per share. The warrants are exercisable for a
four-year period after the earliest of (i) a change of control, or (ii) the
final maturity of the related Subordinated Notes, which is December 30,
2011. Pursuant to an investors rights agreement, the warrants are
subject to registration rights that require the Company to use commercially
reasonable efforts to register the shares issued upon exercise of the warrants
on a registration statement filed with the SEC.
37
AeroCentury
Corp.
Notes to
Consolidated Financial Statements
December
31, 2008
7.
Notes Payable and Accrued Interest (continued)
(c) Senior
unsecured subordinated debt (continued)
In July
2008, the Company and the holders of Subordinated Notes agreed to amend the
Subordinated Notes Agreement to reduce the maximum amount of Subordinated Notes
to be issued under the Agreement from $28 million to $14 million and to reduce
the number of shares of the Company’s common stock issuable upon exercise of the
warrants issued to the holders of Subordinated Notes under the Subordinated
Notes Agreement from 171,473 to 81,224. The estimated fair value of
the warrants cancelled was $597,500 and was recorded as a reduction to paid-in
capital and debt discount. The amendment also provided for the refund
to the Company of certain fees paid to the purchasers of Subordinated Notes at
the initial closing of the Subordinated Notes Agreement, as well as a portion of
the unused commitment fees paid to the noteholders through June 30, 2008, and
revised certain prepayment provisions of the Subordinated Notes
Agreement. The amendment was accounted for as a debt
modification. The net proceeds from the $4,000,000 of Subordinated
Notes that were issued pursuant to the amendment were used to repay a portion of
the Company’s Credit Facility debt.
As of
December 31, 2008, the carrying amount of the Subordinated Notes was
approximately $12,833,500 (outstanding principal amount of $14,000,000 less
unamortized debt discount of approximately $1,166,500) and accrued interest
payable was $0. As of December 31, 2007, the carrying amount of the Subordinated
Notes was approximately $7,612,100 (outstanding principal amount of $10,000,000
less unamortized debt discount of approximately $2,387,900) and accrued interest
payable was $0. The Company was in compliance with all covenants under the
Subordinated Notes Agreement as of December 31, 2008 and 2007.
(d) Special
purpose financings
In September 2000, a special purpose
subsidiary acquired a deHavilland DHC-8-100 aircraft using cash and bank
financing separate from the Credit Facility. The related note
obligation, which was due April 15, 2006, was refinanced in April 2006 using
bank financing from another lender, and the subsidiary was dissolved. The
aircraft was transferred to AeroCentury VI LLC, a newly formed special purpose
limited liability company, which borrowed $1,650,000, due October 15,
2009. The note bears interest at an adjustable rate of one-month
LIBOR plus 3%. The note is collateralized by the aircraft and the
Company’s interest in AeroCentury VI LLC and is non-recourse to AeroCentury
Corp. Payments due under the note consist of monthly principal and
interest through April 20, 2009, interest only from April 20, 2009 until the
maturity date, and a balloon principal payment due on the maturity
date. During 2008, $361,200 of principal was repaid on the
note. The principal amount owed under the note at December 31, 2008
was $748,000 and interest of $700 was accrued. The principal amount
owed under the note at December 31, 2007 was $1,109,100 and interest of $2,700
was accrued. As of December 31, 2008 and 2007, the Company was in
compliance with all covenants of this note obligation.
In November 2005, the Company
refinanced two DHC-8-300 aircraft that had been part of the collateral base for
the Credit Facility. The financing, which was provided by a bank by
means separate from the Credit Facility, was provided to a newly formed special
purpose subsidiary, AeroCentury V LLC, to which the aircraft were
transferred. The financing resulted in a note obligation in the
amount of $6,400,000, due November 10, 2008, which accrued interest at the rate
of 7.87%. The note was collateralized by the aircraft and the
Company’s interest in AeroCentury V LLC and was non-recourse to AeroCentury
Corp. Payments due under the note consisted of monthly principal and
interest through April 22, 2008. In April 2008, the Company repaid
the outstanding principal of $4,109,900 owed by AeroCentury V LLC under its
special purpose financing and paid a prepayment penalty of $8,200. In August
2008, the Company transferred ownership of the two aircraft that served as
collateral for the financing from AeroCentury V LLC to AeroCentury Corp., at
which time the aircraft became eligible as collateral under the Credit
Facility. The principal amount owed under the note at December 31,
2007 was $4,455,300 and interest of $4,900 was accrued. As of
December 31, 2007, the Company was in compliance with all covenants of this note
obligation. On August 25, 2008, AeroCentury V LLC was
dissolved.
38
AeroCentury
Corp.
Notes to
Consolidated Financial Statements
December
31, 2008
7.
Notes Payable and Accrued Interest (continued)
(e) Future
maturities of notes payable
As of December 31, 2008, principal
payments due under the Company’s Credit Facility, Subordinated Notes and special
purpose financing were as follows:
|
Years ending
|
||||
|
2009
|
$ | 5,286,000 | ||
|
2010
|
65,214,500 | |||
|
2011
|
2,343,500 | |||
|
2012
and thereafter
|
- | |||
| $ | 72,844,000 | |||
8.
Stockholder Rights Plan
On April 8, 1998, the Company’s Board
of Directors adopted a stockholder rights plan granting a dividend of one stock
purchase right for each share of the Company’s common stock outstanding as of
April 23, 1998. The rights become exercisable only upon the
occurrence of certain events specified in the plan, including the acquisition of
15% of the Company’s outstanding common stock by a person or
group. Each right entitles the holder to purchase one one-hundredth
of a share of Series A Preferred Stock of the Company at an exercise price of
$66.00 per one-one-hundredth of a share. Each right entitles the
holder, other than an “acquiring person,” to acquire shares of the Company’s
common stock at a 50% discount to the then prevailing market price. The
Company’s Board of Directors may redeem outstanding rights at a price of $0.01
per right.
9.
Income Taxes
The items comprising income tax expense
are as follows:
|
For
the Years Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Current
tax provision:
|
||||||||
|
Federal
|
$ | - | $ | (1,900,200 | ) | |||
|
State
|
1,400 | 2,000 | ||||||
|
Foreign
|
315,200 | 181,200 | ||||||
|
Current
tax provision/(benefit)
|
316,600 | (1,717,000 | ) | |||||
|
Deferred
tax provision:
|
||||||||
|
Federal
|
1,505,500 | 3,281,400 | ||||||
|
State
|
14,900 | 14,700 | ||||||
|
Deferred
tax provision
|
1,520,400 | 3,296,100 | ||||||
|
Total
income tax provision
|
$ | 1,837,000 | $ | 1,597,100 | ||||
39
AeroCentury
Corp.
Notes to
Consolidated Financial Statements
December
31, 2008
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,
|
||||||||
|
2008
|
2007
|
|||||||
|
Income
tax provision at statutory federal income tax rate
|
$ | 1,744,200 | $ | 1,820,500 | ||||
|
State
tax provision, net of federal benefit
|
17,500 | 19,000 | ||||||
|
Tax
expense from valuation of stock warrants (a)
|
93,000 | - | ||||||
|
Estimated
tax benefit from election to claim foreign tax credits (b)
|
- | (252,400 | ) | |||||
|
Tax
rate differences (c)
|
- | (22,000 | ) | |||||
|
Other
|
(17,700 | ) | 14,000 | |||||
|
Total
income tax provision
|
$ | 1,837,000 | $ | 1,579,100 | ||||
(a) In 2008, the Company recognized a
tax expense resulting from a difference between GAAP and tax rules for the
valuation of warrants issued in connection with the Company’s issuance of
Subordinated Notes and capitalized as a discount to the Subordinated Notes.
(b) In 2007, the Company corrected an
overstatement of prior period income tax expense arising from a decision to
amend its prior year tax returns to claim foreign tax credits, and recognized an
out of period tax benefit of approximately $250,000.
(c) Tax rate differences reflect the
change in effective state tax rates that resulted from changes in state income
tax apportionment related to changes in the nexus of aircraft leasing activities
among various states.
Temporary differences and
carry-forwards that give rise to a significant portion of deferred tax assets
and liabilities as of December 31, 2008 and 2007 were as follows:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Prior
year tax losses
|
$ | 673,900 | $ | 974,000 | ||||
|
Prepaid
rent
|
366,700 | 159,500 | ||||||
|
Maintenance
|
5,800 | 117,000 | ||||||
|
Derivative
|
221,700 | 51,500 | ||||||
|
Foreign
tax credit carryover
|
1,006,800 | 691,600 | ||||||
|
Prior
year minimum tax credit
|
100,800 | 100,800 | ||||||
|
Bad
debt allowance and other
|
200 | 5,700 | ||||||
|
Deferred
tax assets
|
$ | 2,375,900 | $ | 2,100,100 | ||||
|
Deferred
tax liabilities:
|
||||||||
|
Accumulated
depreciation on aircraft and aircraft engines
|
(11,405,600 | ) | (9,658,500 | ) | ||||
|
Subordinated
Notes loan fees and discount
|
(139,700 | ) | (90,600 | ) | ||||
|
Net
deferred tax liabilities
|
$ | (9,169,400 | ) | $ | (7,649,000 | ) | ||
40
AeroCentury
Corp.
Notes to
Consolidated Financial Statements
December
31, 2008
9.
Income Taxes (continued)
Prior year tax losses include losses
resulting from a change in accounting method for maintenance costs approved by
the Internal Revenue Service in August 2007. The change was effective
for tax years beginning January 1, 2005 and related to the Company’s method of
accounting for major maintenance costs. In addition, prior year tax
losses include other adjustments involving the corrected treatment of reserves
received when certain aircraft were acquired. The prior year tax losses will be
available to offset taxable income in each of the two preceding tax years from
when the loss was incurred and in future years through 2026. In 2007,
the Company filed amended tax returns for 2003 through 2006 to claim
approximately $1,900,000 in tax refunds from prior year tax losses, of which
approximately $1,627,000 remains outstanding and is included in taxes receivable
on the consolidated balance sheets.
The foreign tax credit carryover will
be available to offset federal tax expense in the first preceding tax year and
in future years. The foreign tax credit carryover expires beginning
in 2013 and extend through 2018. The 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.
No valuation allowance was deemed
necessary at December 31, 2008 and 2007, as the Company has concluded that,
based on an assessment of all available evidence, it is more likely than not
that future taxable income will be sufficient to realize the tax benefits of all
the deferred tax assets on the consolidated balance sheets.
The Company adopted FIN 48 on January
1, 2007, which prescribed treatment of "unrecognized tax positions," and
required measurement and disclosure of such amounts. At December 31,
2008 and December 31, 2007, the Company had no material unrecognized 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.
10.
Computation of Earnings Per Share
Basic and diluted earnings per share
are calculated as follows:
|
For
the Years Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Net
income
|
$ | 3,292,900 | $ | 3,775,400 | ||||
|
Weighted
average shares outstanding for the period
|
1,543,257 | 1,543,257 | ||||||
|
Dilutive
effect of warrants
|
42,017 | 55,259 | ||||||
|
Weighted
average diluted shares outstanding
|
1,585,274 | 1,598,516 | ||||||
|
Basic
earnings per share
|
$ | 2.13 | $ | 2.45 | ||||
|
Diluted
earnings per share
|
$ | 2.08 | $ | 2.36 | ||||
41
AeroCentury
Corp.
Notes to
Consolidated Financial Statements
December
31, 2008
10.
Computation of Earnings Per Share (continued)
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 is computed using net income and the weighted average
number of common shares outstanding, assuming dilution. Weighted
average common shares outstanding, assuming dilution, includes potentially
dilutive common shares outstanding during the period. Potentially dilutive
common shares include the assumed exercise of warrants using the treasury stock
method.
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. JMC also receives an acquisition fee for locating assets for
the Company, provided that the aggregate purchase price, including chargeable
acquisition costs and any acquisition fee, does not exceed the fair market value
of the asset based on appraisal, and may receive a remarketing fee in connection
with the sale or re-lease of the Company’s assets. The Company recorded
management fees of $3,676,800 and $3,017,400 during 2008 and 2007, respectively.
The Company paid acquisition fees totaling $437,000 and $1,067,500 to JMC during
2008 and 2007, respectively, which are included in the cost basis of the
aircraft purchased. No remarketing fees were paid to JMC during 2008
or 2007.
12.
Subsequent Events
In January
2009, the Company terminated its lease for a Saab 340B with an Australian lessee
due to payment default and other breaches under the lease. The
expiration date of the lease for this aircraft had been in March 2009. The
Company is likely to incur significant expense to repossess the aircraft and
prepare it for remarketing during 2009. The amount of such expense
will not be ascertainable until the aircraft is fully inspected. The
lessee has ceased operations and is being wound up under its local insolvency
laws. The Company will file a claim for its unpaid obligations and
other expenses arising from the lessee’s breach but does not anticipate a
significant monetary recovery on such claim, as the Company is an unsecured
creditor and the lessee appears to have insufficient remaining assets to satisfy
secured creditors who have priority over unsecured creditors in the
liquidation.
In February 2009, the Company and the
lessee of two of the Company’s aircraft agreed to defer $710,900 of rent and
maintenance reserves due from the lessee. The deferred amount is to
be paid in four monthly installments beginning in March 2009.
42
Item
9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
None.
Item
9A(T). Controls and Procedures.
Evaluation of the Company’s
Disclosure Controls and Internal Controls. As of the end of the period
covered by this annual report (the “Report”), the Company evaluated the
effectiveness of the design and operation of its “disclosure controls and
procedures” (“Disclosure Controls”), and its “internal control over financial
reporting” (“Internal Controls”). This evaluation (the “Controls Evaluation”)
was done under the supervision and with the participation of management,
including the Company’s Chief Executive Officer (“CEO”) and Chief Financial
Officer (“CFO”). Rules adopted by the Securities and Exchange
Commission (“SEC”) require that in this section of the Report, the Company
present the conclusions of the CEO and the CFO about the effectiveness of our
Disclosure Controls and Internal Controls based on and as of the date of the
Controls Evaluation.
CEO and CFO Certifications.
Attached as exhibits to this Report are two separate forms of “Certifications”
of the CEO and the CFO. The first form of Certification is required
in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section
302 Certification”). This section of the Report is the information concerning
the Controls Evaluation referred to in the Section 302 Certifications and this
information should be read in conjunction with the Section 302 Certifications
for a more complete understanding of the topics presented.
Disclosure Controls and Internal
Controls. Disclosure Controls are procedures that are designed with the
objective of ensuring that information required to be disclosed in the Company’s
reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”),
such as this Report, is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms. Disclosure Controls are
also designed with the objective of ensuring that such information is
accumulated and communicated to the Company’s management, including the CEO and
CFO, as appropriate to allow timely decisions regarding required disclosure.
Internal Controls are procedures which are designed with the objective of
providing reasonable assurance that (1) the Company’s transactions are properly
authorized; (2) the Company’s assets are safeguarded against unauthorized or
improper use; and (3) the Company’s transactions are properly recorded and
reported, all to permit the preparation of the Company’s consolidated financial
statements in conformity with accounting principles generally accepted in the
United States. The Company’s management is responsible for
establishing and maintaining adequate Internal Controls.
Limitations on the Effectiveness of
Controls. The Company’s management, including the CEO and CFO, does not
expect that its Disclosure Controls or its Internal Controls will prevent all
errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
43
Scope of the Controls
Evaluation. The CEO/CFO evaluation of the Company’s Disclosure Controls
and the Company’s Internal Controls included a review of the controls objectives
and design, the controls implementation by the Company and the effect of the
controls on the information generated for use in this
Report. Management’s assessment of the Company’s Internal Controls
was based on criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission in Internal Control-Integrated
Framework. In the course of the Controls Evaluation, the CEO
and CFO sought to identify data errors, controls problems or acts of fraud and
to confirm that appropriate corrective action, including process improvements,
were being undertaken. This type of evaluation is being done on a quarterly
basis so that the conclusions concerning controls effectiveness can be reported
in the Company’s quarterly reports on Form 10-Q and annual report on Form 10-K.
The Company’s Internal Controls are also evaluated on an ongoing basis by other personnel in the
Company’s finance organization and by the Company’s independent auditors in
connection with their audit and review activities. The overall goals of these
various evaluation activities are to monitor the Company’s Disclosure Controls
and the Company’s Internal Controls and to make modifications as necessary; the
Company’s intent in this regard is that the Disclosure Controls and the Internal
Controls will be maintained as dynamic systems that change (reflecting
improvements and corrections) as conditions warrant.
Among
other matters, the Company sought in its evaluation to determine whether there
were any “significant deficiencies” or “material weaknesses” in the Company’s
Internal Controls, or whether the Company had identified any acts of fraud
involving personnel who have a significant role in the Company’s Internal
Controls. This information was important both for the Controls Evaluation
generally and because item 5 in the Section 302 Certifications of the CEO and
CFO requires that the CEO and CFO disclose that information to the Audit
Committee of the Company’s Board of Directors and to the Company’s independent
auditors and report on related matters in this section of the Report. In the
professional auditing literature, “significant deficiencies” are referred to as
“reportable conditions” these are control issues that could have a significant
adverse effect on the ability to record, process, summarize and report financial
data in the financial statements. A “material weakness” is defined in the
auditing literature as a particularly serious reportable condition where the
internal control does not reduce to a relatively low level the risk that
misstatements caused by error or fraud may occur in amounts that would be
material in relation to the financial statements and not be detected within a
timely period by employees in the normal course of performing their assigned
functions. The Company also sought to deal with other controls matters in the
Controls Evaluation, and in each case if a problem was identified, the Company
considered what revision, improvement and/or correction to make in accordance
with the on-going procedures.
In
accordance with SEC requirements, the CEO and CFO note that, notwithstanding the
changes described below to prevent recurrence of a specific type of aircraft
valuation error, there has been no significant change in Internal Controls that
occurred during the most recent fiscal quarter that has materially affected or
is reasonably likely to materially affect the Company’s Internal
Controls.
Management’s Report on Internal
Control Over Financial Reporting. In the course of the audit
of the 2008 consolidated financial statements of the Company, management
identified and reported a material weakness in its internal control over
financial reporting at December 31, 2008 related to management’s controls over
its review of the appraised values of its aircraft assets used for impairment
evaluation purposes. In the process of providing the Company’s independent
auditors information that had previously been used in preparing the aircraft
appraisal, management reviewed the assumptions specified in the appraisal
report. As a result of this review, management determined that the
underlying assumptions for certain aircraft should be modified. Based
on the revised appraised current value of one of the Company’s aircraft, during
the fourth quarter of 2008, the Company recognized an impairment provision,
which should have been recorded in the third quarter of 2008. There
was no impact to any other prior periods.
Management
has determined that this deficiency constituted a material weakness as of
December 31, 2008. The Company determined that the error was
inadvertent and unintentional. Upon becoming aware of this issue, the
Company initiated a review of its Internal Controls and processes with respect
to valuation of assets and evaluation of such assets for potential
impairment. As a result of such review, the Company has instituted
new control procedures over its process of obtaining and reviewing
appraisals. Accordingly, management believes that it has corrected
the material weakness relating to evaluation of the possible impairment of its
assets as of the date of this filing.
Conclusions. Based upon the
Controls Evaluation, the Company’s CEO and CFO have concluded that because of
the material weakness discussed above, (i) the Company’s Disclosure Controls
were not effective as of December 31, 2008 to ensure that the information
required to be disclosed by the Company in the reports that it files under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission’s rules and forms and then accumulated and
communicated to Company management, including the CEO and CFO, as appropriate to
make timely decisions regarding required disclosures, and (ii) the Company’s
Internal Controls were not effective as of December 31,
2008.
This
Report does not include an attestation report of the Company’s registered public
accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this Report.
44
Item
9B. Other Information.
None.
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance.
Information
relating to the Company’s board of directors and executive officers, including
the independence of the audit committee and audit committee financial expert,
will be incorporated by reference from the Company’s definitive proxy statement
(“the “2009 Proxy Statement”) for its annual stockholders’ meeting to be held on
April 30, 2009 in the section entitled “Information Regarding the Company’s
Directors and Officers.”
The
Company has adopted a code of business conduct and ethics, or code of
conduct. The code of conduct qualifies as a “code of ethics” within
the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules
promulgated thereunder. A copy of the code of conduct is available on the
Company’s website at www.aerocentury.com
or upon written request to the Investor Relations Department, 1440 Chapin
Avenue, Suite 310, Burlingame, California 94010. To the extent
required by law, any amendments to, or waivers from, any provision of the code
will be promptly disclosed publicly. To the extent permitted by such
requirements, 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 2009 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 2009 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 2009 Proxy Statement entitled “Related Party
Transactions.”
Item
14. Principal Accountant Fees and Services.
Incorporated
by reference to the section of the 2009 Proxy Statement entitled “Information
Regarding Auditors – Audit Fees.”
45
PART
IV
Item
15. Exhibits.
(a)
Exhibits
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3.1
Certificate of Incorporation of the Company, incorporated by
reference to Exhibit 3.08 to the registration statement on Form S-4/A
filed with the Securities and Exchange Commission on July 24,
1997
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3.2 Form
of Certificate of Amendment of Certificate of Incorporation of the
Company, incorporated by reference to Exhibit 3.07 to the registration
statement on Form S-4/A filed with the Securities and Exchange Commission
on June 10, 1997
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3.3
Amended and Restated Bylaws of the Company dated January 22, 1999,
incorporated by reference to Exhibit 3.1 to the Report on Form 10-KSB for
the fiscal year ended December 31, 1998 filed with the Securities and
Exchange Commission on March 22,
1999
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3.4
Certificate of Designation of the Company dated April 15, 1998,
incorporated by reference to Exhibit 3.2 to the Report on Form 10-KSB for
the fiscal year ended December 31,
1998
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3.5
Amended and Restated Stockholder Rights Agreement, dated April 8,
1998, incorporated by reference to Exhibit 1 to Form 8-A/A filed with the
Securities and Exchange Commission on February 5,
1999
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3.6
Certificate of Amendment to Amended and Restated Certificate of
Incorporation, dated May 6, 2008, incorporated by reference to Exhibit
99.1 to the Report on Form 8-K filed with the Securities and Exchange
Commission on May 7, 2008
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3.7
Amendment to Bylaws, dated January 30, 2009, incorporated by
reference to Exhibit 3.1 to the Report on Form 8-K filed with the
Securities and Exchange Commission on February 3,
2009
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4.1
Reference is made to Exhibit
3.5
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*
10.1
Employment Agreement between the Company and Neal D. Crispin, dated
April 24, 2003, incorporated by reference to Exhibit 10.1 to the Report on
Form 10-KSB for the fiscal year ended December 31, 2003 filed with the
Securities and Exchange Commission on March 26,
2004
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10.4 Form
of Indemnity Agreement between the Company and each of its directors and
officers, incorporated by reference to Exhibit 10.03 to the Report on Form
10-KSB for the fiscal year ended December 31, 1997 filed with the
Securities and Exchange Commission on March 31,
1998
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10.5
Amended and Restated Management Agreement, dated April 23, 1998,
between the Company and JetFleet Management Corp., incorporated by
reference to Exhibit 10.5 to the Report on Form 10-KSB for the fiscal year
ended December 31, 1999 filed with the Securities and Exchange Commission
on March 10, 2000
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10.6
Certificate of Designation of the Company dated April 15, 1998,
incorporated by reference to exhibit 3.2 to Report on Form 10-KSB for the
fiscal year ended December 31, 1998 filed with the Securities and Exchange
Commission on March 22, 1999
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46
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*
10.18
Employment Agreement between the Company and Marc J. Anderson dated
December 19, 2005 incorporated by reference to exhibit 10.18 to Report on
Form 10-KSB for the fiscal year ended December 31, 2005 filed with the
Securities and Exchange Commission on March 13,
2006
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10.22
Purchase Agreement with Denim Air Lease & Finance B.V. and
Purchase Agreement with VLM Airlines, N.V. incorporated by reference to
Exhibit 10.1 and 10.2 to the Report on Form 8-K filed with the Securities
and Exchange Commission on December 28,
2005
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10.23
Credit Agreement between the Company, AeroCentury Investments VI
LLC & Landsbanki Islands HF, dated April 19, 2006, incorporated by
reference to Exhibit 10.1 to the Report on Form 8-K filed with the
Securities and Exchange Commission on April 24,
2006
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10.26
Securities Purchase Agreement between Satellite Fund II, LP,
Satellite Fund IV, LP, The Apogee Group LLC, and Satellite Fund V, LLC
(collectively the "Subordinated Lenders") and the
Company, incorporated by reference to Exhibit 10.1 to the Report on
Form 8-K filed with the Securities and Exchange Commission on April 18,
2007
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10.27 Form
of Warrant issued to the Subordinated Lenders incorporated by
reference to Exhibit 10.2 to the Report on Form 8-K filed with the
Securities and Exchange Commission on April 18,
2007
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10.28
Investors Rights Agreement between the Company and the Subordinated
Lenders incorporated by reference to Exhibit 10.3 to the Report on
Form 8-K filed with the Securities and Exchange Commission on April 18,
2007
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10.29
Second Amended and Restated Credit Agreement between the Company,
National City Bank, as agent, and National City Bank, California Bank
& Trust, Bridge Bank, National Association, and First Bank dba First Bank &
Trust, as lenders, dated April 17, 2007, incorporated by reference to
Exhibit 10.4 to the Report on Form 8-K filed with the Securities and
Exchange Commission on April 18,
2007
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10.30
Aircraft Sale Agreement (S/N 11331) between the Company
and Pembroke Capital Aircraft (Shannon) Limited, dated June 27,
2007, incorporated by reference to Exhibit 10.1 to the Report on Form
8-K filed with the Securities and Exchange Commission on June 28,
2007
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10.31
Aircraft Sale Agreement (S/N 11310) between the Company and
Pembroke Capital Aircraft (Shannon) Limited, dated June 27,
2007, incorporated by reference to Exhibit 10.2 to the Report on Form
8-K filed with the Securities and Exchange Commission on June 28,
2007
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10.32
Amendment to Securities Purchase Agreement between the Subordinated
Lenders and the Company, incorporated by reference to Exhibit 99 to
the Report on Form 8-K filed with the Securities and Exchange Commission
on June 19, 2008
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10.33
Second Amendment to Securities Purchase Agreement between the
Subordinated Lenders and the Company, incorporated by reference to
Exhibit 10.1 to the Report on Form 8-K filed with the Securities and
Exchange Commission on July 23,
2008
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10.34 Form
of Amended and Restated Warrant issued to the Subordinated
Lenders incorporated by reference to Exhibit 10.4 to the Report on
Form 8-K filed with the Securities and Exchange Commission on July 23,
2008
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47
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16
Letter from PricewaterhouseCoopers LLP, dated October 13, 2006,
incorporated by reference to Exhibit 16 to the Report on Form 8-K filed
with the Securities and Exchange Commission on October 16,
2006
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21
Subsidiaries of the Company
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31.1
Certification of Neal D. Crispin, Chief Executive Officer, pursuant
to Section 302 of the Sarbanes-Oxley Act of
2002
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31.2
Certification of Toni M. Perazzo, Chief Financial Officer, pursuant
to Section 302 of the Sarbanes-Oxley Act of
2002
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32.1
Certification of Neal D. Crispin, Chief Executive Officer, pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002
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32.2
Certification of Toni M. Perazzo, Chief Financial Officer, pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002
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____________________
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·
|
Indicates
management contract or compensatory plan or
arrangement
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48
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SIGNATURES
|
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: /s/ Toni M. Perazzo | |||
| ------------------------------- | |||
| Toni M. Perazzo | |||
| Senior Vice President-Finance and | |||
| Chief Financial Officer | |||
Date: March 13,
2009
POWER
OF ATTORNEY
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Neal D. Crispin and Toni M. Perazzo, and each of them,
his or her attorneys-in-fact, each with the power of substitution, for him or
her in any and all capacities, to sign any amendments to this Report on Form
10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his or her
substitute or substitutes, may do or cause to be done by virtue
hereof.
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated on
March 13, 2009.
Signature Title
| /s/ Neal D. Crispin | Director, President and Chairman of the | ||||||
| ---------------------- | Board of Directors of the Registrant | ||||||
| Neal D. Crispin | (Principal Executive Officer) | ||||||
| /s/ Toni M. Perazzo | Director, Senior Vice President-Finance and Secretary of the | ||||||
| ---------------------- | Registrant (Principal Financial and Accounting Officer) | ||||||
| Toni M. Perazzo |
| /s/ Roy E. Hahn | Director | |||||||
| ------------------------ | ||||||||
| Roy E. Hahn | ||||||||
| /s/ Thomas W. Orr | Director | |||||||
| ---------------------------- | ||||||||
| Thomas W. Orr | ||||||||
| /s/ Evan M. Wallach | Director | |||||||
| -------------------------- | ||||||||
| Evan M. Wallach | ||||||||