Worldwide • Regional Aircraft • Leasing
2014 Annual Report
TO OUR STOCKHOLDERS
The 2014 fiscal year was one of fleet renewal and continued diversification in terms of both aircraft type and geographic
location.
Total annual revenues in 2014 were $28.7 million compared to $38.2 million in 2013; however, operating lease revenues
increased 17% for the year, primarily because of operating lease revenue from aircraft purchased during the fourth quarter
of 2013 and in 2014. Average portfolio utilization increased to 82% in 2014, compared to 76% in 2013.
For 2014, total expenses were $46.0 million compared to $25.6 million for 2013, primarily due to the non-cash, pre-tax
write-downs totaling $18.7 million on certain of the Company’s older aircraft. As a result of these write-downs, we had a
net loss of $11.3 million for the year, compared to net income of $8.3 million in 2013.
The non-cash write-down had a significant effect on the Company’s financial results posted for 2014; however, we believe
those write-downs have set the stage for moving forward with the Company’s strategic growth plan of fleet renewal by
adding mid-life regional jet aircraft and new generation turboprops, while reducing older aircraft in our portfolio. A
significant highlight of 2014 was the 22% growth of our leasing portfolio from $153.0 million to $186.8 million, featuring
the addition of one new ATR 42-600 turboprop, and three CRJ-700 and two CRJ-900 mid-life regional jets all on long-term
leases. As a result of these aircraft acquisitions combined with aircraft sales during 2014, the average age of the Company's
leasing portfolio at year-end 2014 was reduced by 28% to approximately 13 years, compared to 18 years at year-end 2013.
Meanwhile, the average remaining lease term for aircraft leases in place as of the end of 2014 increased by 66% to
approximately 60 months, up from 36 months at the end of 2013 and the related minimum future lease revenue payments
have increased over 100%, from $59.9 million at the end of 2013 to $126.4 million at the end of 2014.
During 2014, the Company’s efforts on the remarketing side resulted in the extension of leases for nine of its assets and re-
lease of two assets that had been off lease at December 31, 2013 to new lessees. As a result of acquisitions, re-leases, and
lease renewals in 2014, the geographical distribution of our sources of operating lease revenue in 2014 was altered
significantly, with the percentage of lease revenue from North America substantially increasing from its 2013 levels, the
percentage of lease revenue from Africa, Asia, and Europe in 2014 correspondingly decreasing, and the entry of the
Company into the Australian market through the lease of two aircraft to a major Australian carrier.
The Company’s portfolio now consists of thirty-eight aircraft, covering ten different aircraft types, and five aircraft engines.
Our customer base continues to consist exclusively of regional carriers – twelve airlines operating worldwide.
I appreciate your interest and support.
Neal D. Crispin
President and Chairman of the Board
March 23, 2015
This letter contains certain statements that may include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934, including the Company’s statements regarding the Company’s belief that the write-downs on certain assets have set the stage for
moving forward with the Company’s strategic growth plan of fleet renewal by adding mid-life aircraft and new aircraft, while reducing older aircraft in the portfolio. All
statements, other than statements of historical fact, included herein are "forward-looking statements.” Although the Company believes that the expectations reflected in
these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. Actual results
could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including the availability of appropriate aircraft for
acquisition; acquisition financing availability under the Company’s credit facility, reduced demand for leased aircraft of the types in the Company’s portfolio; and the
demand for older aircraft of the type the Company desires to sell; as well as those discussed in the Company's reports that are filed with the Securities and Exchange
Commission. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this letter. Other than as required by law,
the Company does not assume a duty to update any forward-looking statement.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
(cid:1) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
(cid:2) 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
(State or Other Jurisdiction of Incorporation or Organization)
94-3263974
(IRS Employer Identification No.)
1440 Chapin Avenue, Suite 310
Burlingame, California 94010
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code: (650) 340-1888
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
Name of each exchange on which registered
NYSE MKT Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes (cid:2) No (cid:1)
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 (cid:2) No (cid:1)
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 (cid:1) No (cid:2)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Yes (cid:1) No (cid:2)
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. (cid:1)
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 (cid:2)
Non-accelerated filer (cid:2)
Accelerated filer (cid:2)
Smaller reporting company (cid:1)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes (cid:2) No (cid:1)
The aggregate market value of the voting and non-voting common equity held by non-affiliates (based upon the
closing price as of June 30, 2014) was $15,332,400.
The number of shares of the Registrant’s Common Stock outstanding as of March 12, 2015 was 1,543,257.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates information by reference from the Registrant’s Proxy
Statement for its 2015 Annual Meeting of Stockholders. Except as expressly incorporated by reference, the
Registrant’s Proxy Statement shall not be deemed to be a part of this Annual Report on Form 10-K.
2
Forward-Looking Statements
PART I
FINANCIAL INFORMATION
This Annual Report on Form 10-K includes "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of
1934, as amended (“the Exchange Act”). All statements in this Report other than statements of historical fact are
"forward-looking statements" for purposes of these provisions, including any statements of plans and objectives
for future operations and any statements of assumptions underlying any of the foregoing. Statements that include
the use of terminology such as "may," "will," "expects," "plans," "anticipates," "estimates," "potential," or
"continue," or the negative thereof, or other comparable terminology are forward-looking statements. Forward-
looking statements include these statements: (i) in Part I, Item 1, “Business of the Company,” that the Company
can purchase assets at an appropriate price and maintain an acceptable overall on-lease rate for the Company’s
assets; and that it is able and willing to enter into transactions with a wider range of lessees than would be possible
for traditional, large lending institutions and leasing companies; (ii) in Part II, Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” that the
Company will be in compliance with all of its credit facility covenants at future calculation dates; and that the
Company will have adequate cash flow to meet its ongoing operational needs, including any required repayments
under the Credit Facility due to borrowing base limitations; (iii) in Part II, Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Outlook,” that the Company could experience a
delay in remarketing its off-lease assets; that the customers under several of the leases that expire in 2015 will
choose to return the assets; that three of the Company’s aircraft will be returned at lease-end in 2015 after meeting
the return conditions of the leases; that the leases for the remaining four aircraft will be extended; and that the
Company will be in compliance with all of its Credit Facility covenants at future calculation dates; that available
borrowings under the Credit Facility will be sufficient to meet its continuing obligations and, if it is expanded to
the maximum of $180 million, to fund anticipated acquisitions; (v) in Part II, Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Factors that May Affect Future Results,” that the
Company will be in compliance with all of its credit facility covenants at future calculation dates; that the
Company will have sufficient cash funds to make any required principal repayment that arises due to borrowing
base limitations; that most of the Company’s growth will be outside North America; that the overall industry
experience of JMC’s personnel and its technical resources should permit the Company to effectively manage new
aircraft types and engines; that effective mitigating factors exist against undue compensation-incented risk-taking
by JMC; that the burden and cost of complying with regulatory requirements will fall primarily upon lessees of
equipment or the Company as owner of the equipment; that the costs of complying with environmental regulations
will not have a material adverse effect on the Company; that the Company has sufficient cyber-security measures
in place; that its main vulnerability would be interruption to email communication, loss of archives and loss of
document sharing; and that sufficient replacement mechanisms exist such that there would not be a material
adverse financial impact on the Company’s business.
These forward-looking statements involve risks and uncertainties, and it is important to note that the Company's
actual results could differ materially from those projected or assumed in such forward-looking statements. Among
the factors that could cause actual results to differ materially are the factors detailed under the heading
"Management's Discussion and Analysis of Financial Condition and Results of Operations –– Factors That May
Affect Future Results," including the lack of any unexpected lessee defaults or insolvency; a deterioration of the
market values of aircraft types owned by the Company; compliance by the Company's lessees with obligations
under their respective leases; no sudden current economic downturn or unanticipated future financial crises; the
continued availability of financing for acquisitions under the Credit Facility; the Company’s success in finding
appropriate assets to acquire with such financing; deviations from the assumption that future major maintenance
expenses will be relatively evenly spaced over the entire portfolio; and future trends and results which cannot be
predicted with certainty. The cautionary statements made in this Report should be read as being applicable to all
related forward-looking statements wherever they appear herein. All forward-looking statements and risk factors
included in this document are made as of the date hereof, based on information available to the Company as of the
date hereof, and the Company assumes no obligation to update any forward-looking statement or risk factor. You
should consult the risk factors listed from time to time in the Company's filings with the Securities and Exchange
Commission.
3
Item 1.
Business.
Business of the Company
AeroCentury Corp., a Delaware corporation incorporated in 1997 (the “Company”), typically acquires used regional
aircraft and aircraft engines for lease to regional carriers worldwide.
The business of the Company is managed by JetFleet Management Corp. ("JMC"), pursuant to a management
agreement (the “Management Agreement”) with JMC. JMC is an integrated aircraft management, marketing and
financing business and a subsidiary of JetFleet Holding Corp. ("JHC"). Certain officers of the Company are also
officers of JHC and JMC and hold significant ownership positions in both JHC and the Company.
Since its formation, the Company has been engaged in the business of investing in used regional aircraft equipment
leased to foreign and domestic regional air carriers. The Company’s principal business objective is to increase
stockholder value by acquiring aircraft assets and managing those assets in order to provide a return on investment
through lease revenue and, eventually, sale proceeds. The Company strives to achieve its business objective by
reinvesting cash flow and using short-term and long-term debt and/or equity financing.
The Company’s success in achieving its objective depends in large part on its success in three areas: asset selection,
lessee selection and obtaining financing for acquisition of aircraft and engines.
The Company typically acquires assets in one of three ways. The Company may purchase an asset already subject
to a lease and assume the rights and obligations of the seller, as lessor under the existing lease. Additionally, the
Company may purchase an asset from an air carrier and lease it back to the air carrier. Finally, the Company may
purchase an asset from a seller and then immediately enter into a new lease for the aircraft with a third party lessee.
In this last case, the Company typically does not purchase an asset unless a potential lessee has been identified and
has committed to lease the asset. Occasionally, the Company may also acquire an asset for which it does not have a
potential lessee.
Although the Company has generally targeted used regional aircraft and engines with purchase prices between $3
million and $10 million, and lease terms of less than five years, in 2013 and 2014, the Company acquired six
regional jets and a new ATR 42-600 aircraft with purchase prices and lease terms exceeding those of previously-
acquired aircraft. In determining assets for acquisition, the Company evaluates, among other things, the type of
asset, its current price and projected future value, its versatility or specialized uses, the current and projected
availability of and demand for that asset, and the type and number of future potential lessees. Because JMC has
extensive experience in purchasing, leasing and selling used regional aircraft and engines, the Company believes it
can purchase these assets at an appropriate price and maintain an acceptable overall on-lease rate for the Company’s
assets.
In order to improve the remarketability of an aircraft after expiration of a lease, the Company’s leases generally
contain provisions that require lessees to return the aircraft in a condition that allows the Company to expediently re-
lease or sell the aircraft, or pay sufficient amounts based on usage under the lease to cover any maintenance or
overhaul of the aircraft required to bring the aircraft to such a state.
When considering whether to enter into transactions with a lessee, the Company generally reviews the lessee’s
creditworthiness, growth prospects, financial status and backing; the experience of its management; and the impact
of legal and regulatory matters in the lessee's market, all of which are weighed in determining the lease terms
offered to the lessee. In addition, it is the Company’s policy to monitor the lessee’s business and financial
performance closely throughout the term of the lease, and, if requested, provide assistance drawn from the
experience of the Company’s management in many areas of the air carrier industry. Because of its “hands-on”
approach to portfolio management, the Company believes it is able and willing to enter into transactions with a
wider range of lessees than would be possible for traditional, large lending institutions and leasing companies.
The Company has funded its asset acquisitions primarily through debt financing supplemented by free cash flow.
The Company’s primary source of debt financing has been a secured credit facility. The Company's current credit
4
facility ("Credit Facility") is provided by a syndicate of banks, with MUFG Union Bank, N.A. as agent, and in May
2014, the term was extended to May 31, 2019.
Working Capital Needs
The Company’s portfolio of assets has historically generated revenues that have exceeded the Company’s cash
expenses, which consist mainly of management fees, maintenance costs, principal and interest payments on debt,
professional fees, and insurance premiums.
The management fees paid by the Company to JMC are based upon the size of the Company’s asset pool.
Maintenance costs for off-lease aircraft are recognized as expenses as incurred, while reimbursement of lessee
maintenance costs from previously collected maintenance reserves reduce the Company's maintenance reserves
liability. Interest expense is dependent on both the balance of the Company’s indebtedness and applicable interest
rates. Professional fees are paid to third parties for expenses not covered by JMC under the Management
Agreement. Insurance expense includes amounts paid for directors and officers insurance, as well as product
liability insurance and aircraft hull insurance for periods when an aircraft is off lease.
So long as the Company succeeds in keeping the majority of its assets on lease and interest rates do not rise
significantly and rapidly, the Company’s cash flow should continue to be sufficient to cover its expenses and
provide excess cash flow. If the Company incurs unusually large maintenance costs or reimbursements for
maintenance in any given period, the Company expects it will have sufficient cash flow or borrowing availability
under its credit facility to fund such maintenance.
Competition
The Company competes with other leasing companies, banks, financial institutions, and aircraft leasing partnerships
for customers that generally are regional commercial aircraft operators seeking to lease aircraft under operating
leases. Competition has increased as competitors who have traditionally neglected the regional air carrier market
have begun to focus on that market. Because competition is largely based on price and lease terms, the entry of new
competitors into the market, and/or the entry of traditional large aircraft lessors into the regional aircraft niche,
particularly those with greater access to capital markets than the Company, could lead to fewer acquisition
opportunities for the Company and/or lease terms less favorable to the Company on acquisitions, as well as fewer
renewals of existing leases or new leases of existing aircraft, all of which could lead to lower revenues, profitability
and cash flow for the Company.
The Company, however, believes that it has a competitive advantage due to its experience and operational efficiency
in financing the transaction sizes that are desired by many in the regional air carrier market. Management believes
that the Company also continues to have a competitive advantage because JMC has developed a presence as a global
participant in the regional aircraft leasing market.
Dependence on Significant Customers
For the year ended December 31, 2014, the Company’s four largest customers accounted for 20%, 18%, 14% and
11% of lease revenue. For the year ended December 31, 2013, the Company’s four largest customers accounted for
23%, 19%, 11% and 10% of lease revenue. Concentration of credit risk with respect to lease receivables will
diminish in the future only if the Company is able to re-lease assets currently on lease to significant customers to
new customers and/or acquire assets for lease to new customers.
Environmental Matters
Neither compliance with federal, state and local provisions regulating discharge of greenhouse gas emissions
(including carbon dioxide (CO2)) in the environment and/or aircraft noise regulations, nor remedial agreements or
other actions relating to the environment, has had, or is expected to have, a material effect on the Company’s capital
expenditures, financial condition, results of operations or competitive position.
5
Employees
Under the Company’s Management Agreement with JMC, JMC is responsible for all administration and
management of the Company. Consequently, the Company does not have any employees.
Available Information
The headquarters of AeroCentury Corp. is located at 1440 Chapin Avenue, Suite 310, Burlingame, California
94010.
located at:
The main
http://www.aerocentury.com.
The Company’s website
is (650) 340-1888.
telephone number
is
The Company is subject to the reporting requirements of the Securities Exchange Act (the “Exchange Act”).
Therefore, the Company files periodic reports, proxy statements and other information with the Securities and
Exchange Commission (the “SEC”). Copies of these materials, filed by us with the SEC, are available free of
charge on our website at www.aerocentury.com through the Investor Relations link (SEC Filings). The public may
read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room of the SEC at
100 F Street N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC.
Item 1A.
Risk Factors.
Smaller reporting companies are not required to provide this information.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
As of December 31, 2014, the Company did not own or lease any real property, plant or materially important
physical properties. The Company maintains its principal office at 1440 Chapin Avenue, Suite 310, Burlingame,
California 94010. However, since the Company has no employees and the Company’s portfolio of leased aircraft
assets is managed and administered under the terms of the Management Agreement with JMC, all office facilities
are provided by JMC.
For information regarding the aircraft and aircraft engines owned by the Company, refer to Note 3 to the Company’s
financial statements in Item 8 of this Annual Report on Form 10-K.
Item 3.
Legal Proceedings.
The Company from time to time engages in ordinary course litigation relating to lease collection matters against
defaulting lessees and mechanic’s lien claims by vendors hired by lessees. None of the current litigation, if resolved
adverse to the Company, is anticipated to have a material adverse effect on the Company’s financial condition or
results of operations.
Item 4.
Mine Safety Disclosures.
Not applicable.
6
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
The shares of the Company’s Common Stock are traded on the NYSE MKT exchange ("NYSE MKT") under the
symbol “ACY.”
Market Information
The Company’s Common Stock has been traded on the NYSE MKT since January 16, 1998. The following table
sets forth the high and low sales prices reported on the NYSE MKT for the Company’s Common Stock for the
periods indicated:
Fiscal year ended December 31, 2014:
Period
High
Low
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fiscal year ended December 31, 2013:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$11.82
16.40
18.90
19.00
20.60
22.30
21.50
18.31
$ 8.05
10.90
15.25
15.03
14.65
19.10
17.53
14.20
On March 10, 2015, the closing sale price of the Company’s Common Stock on the NYSE MKT exchange was
$13.50 per share.
Number of Security Holders
According to the Company’s transfer agent, the Company had approximately 1,400 stockholders of record as of
March 10, 2015. Because brokers and other institutions on behalf of beneficial stockholders hold many of the
Company’s shares of Common Stock, the Company is unable to estimate the total number of beneficial stockholders
represented by those record holders.
Dividends
No dividends have been declared or paid to date. The Company has no plans at this time to declare or pay
dividends, and intends to re-invest any earnings into the acquisition of additional revenue-generating aircraft
equipment.
The terms of the Credit Facility prohibit the Company from declaring or paying dividends on its Common Stock,
except for cash dividends in an aggregate annual amount not to exceed 50% of the Company's net income in the
immediately preceding fiscal year so long as immediately prior to and immediately following such dividend the
Company is not in default under the Credit Facility.
Stockholder Rights Plan
For information regarding the Company’s stockholder rights plan, refer to Note 8 to the Company’s financial
statements in Item 8 of this Annual Report on Form 10-K.
7
Item 6.
Selected Financial Data.
This report does not include information described under Item 301 of Regulation S-K pursuant to the rules of the
SEC that permit “smaller reporting companies” to omit such information.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The Company owns regional aircraft and engines, which are typically leased to customers under triple net leases
with terms that are less than the useful life of the assets. A “triple net operating lease” is an operating lease under
which, in addition to monthly rental payments, the lessee is generally responsible for the taxes, insurance and
maintenance and repair of the aircraft arising from the use and operation of the aircraft during the term of the lease.
The acquisition of such equipment is generally made using debt financing. The Company’s profitability and cash
flow are dependent in large part upon its ability to acquire equipment, obtain and maintain favorable lease rates on
such equipment, and re-lease or sell equipment that comes off lease. The Company is subject to the credit risk of its
lessees, both as to collection of rental payments and as to performance by lessees of their obligations to maintain the
equipment. Since lease rates for assets in the Company’s portfolio generally decline as assets age, the Company’s
ability to maintain and grow revenue and earnings is primarily dependent upon the Company’s ability to acquire and
lease additional assets.
The Company’s primary uses of cash are for purchases of aircraft and engines, maintenance, debt service payments,
management fees, insurance and professional fees.
The Company's most significant non-cash expenses include aircraft and engine depreciation, amortization of costs
associated with the Company’s indebtedness, which is included in interest expense, and, in some years, impairment
provisions, which are affected by significant estimates.
Critical Accounting Policies, Judgments and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are based upon its
financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires management to make estimates and
judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and the related disclosure
of contingent assets and liabilities at the date of the financial statements. In the event that actual results differ from
these estimates or the Company adjusts these estimates in future periods, the Company’s operating results and
financial position could be materially affected. For a discussion of Critical Accounting Policies, Judgments and
Estimates, refer to Note 1 to the Company’s financial statements in Item 8 of this Annual Report on Form 10-K.
For a discussion of the Company’s accounting policies regarding maintenance reserves, refer to Note 4 to the
Company’s financial statements in Item 8 of this Annual Report on Form 10-K. For a discussion of the Company's
change in method of accounting for certain maintenance reserves and lessor maintenance obligations and its
application to prior periods, refer to Note 2 to the Company's financial statements in Item 8 of this Annual Report on
Form 10-K.
Results of Operations
The Company recorded a net loss of $11.3 million in 2014 compared to net income of $8.3 million in 2013,
primarily as a result of recording impairment charges totaling $18.2 million for its seven Fokker 100 aircraft, as well
as impairment charges of $0.5 million for three of its Fokker 50 aircraft in 2014. There were no recorded
impairment charges of long-lived assets during 2013.
Operating lease revenue increased 17% from $18.8 million in 2013 to $21.9 million in 2014, primarily as a result of
assets purchased during 2013 and 2014. The effect of these increases was partially offset by the effect of assets that
were on lease in the 2013 period but off lease in the 2014 period and asset sales during 2013 and 2014.
8
Maintenance reserves revenue decreased 77% from $14.9 million in 2013 to $3.4 million in 2014. The amount
recorded in 2013 period was comprised of $6.5 million, which was received from the prior lessee of two of the
Company’s aircraft when the leases were assigned to a new lessee in 2012 and recognized as maintenance reserves
revenue upon termination of those leases in the first quarter of 2013, and $8.4 million from maintenance reserves
retained at lease end for five other aircraft. The amount recorded in 2014 period includes approximately $1.7
million of maintenance reserves retained at lease end for one aircraft and approximately $1.7 million of maintenance
reserves retained when six aircraft were returned to the Company prior to lease expiration.
During 2014, the Company recorded $3.1 million of net gains on the sale of nine aircraft and an aircraft engine, as
compared to 2013, when the Company recorded $3.8 million in net gains from the sale of five aircraft and an engine,
as well as the disposal of a spare engine.
During 2014, the Company recorded $0.1 million of other income from retention of a non-refundable security
deposit when a potential buyer of one of the Company's aircraft did not complete the planned purchase. During
2013, the Company recorded $0.5 million of other income from security deposits retained upon early termination of
two leases following the lessee's bankruptcy.
During 2014 and 2013, the Company added equipment to its lease portfolio of approximately $81.0 million and
$24.7 million, respectively. The Company sold equipment with book values of approximately $14.5 million and
$8.7 million million during 2014 and 2013, respectively. As a result of the timing of these asset acquisitions and
sales, as well as changes in residual value assumptions from year to year, depreciation decreased by 1% in 2014 over
the previous year. Management fees, which are based on the net asset value of the Company's aircraft and engines,
increased by 12% in 2014 as compared to 2013. Due to a waiver by JMC of its fourth quarter management fees of
approximately $1.2 million, management fees incurred by the Company were less by that amount than they would
have been without such waiver.
The average net book value of assets held for lease during 2014 and 2013 was approximately $171.7 million and
$143.3 million, respectively, representing an increase of 20%. The average portfolio utilization during 2014 and
2013 was 82% and 76%, respectively.
The Company's maintenance expense increased by 7% from $7.0 million in 2013 to $7.5 million in 2014, primarily
as a result of an increase in maintenance performed by the Company on off-lease aircraft.
The Company’s interest expense increased by 26% from $4.1 million in 2013 to $5.1 million in 2014, primarily as a
result of a higher average Credit Facility balance.
The Company’s professional fees, general and administrative and other expenses increased by 46% from $1.2
million in 2013 to $1.7 million in 2014, primarily as a result of expenses incurred in connection with the return of
six aircraft and two engines by one of the Company’s customers when it ceased operations in 2014.
The Company's other taxes expense increased by $0.4 million in 2014 compared to 2013 as a result of the accrual of
goods and service tax related to four of the Company's aircraft that are leased to a customer in Papua New Guinea.
Liquidity and Capital Resources
The Company is currently financing its assets primarily through debt financing and excess cash flows.
(a)
Credit Facility
In May 2014, the Company’s $130 million Credit Facility was increased to $180 million and extended through May
31, 2019. The Credit Facility is provided by a syndicate of banks and is secured by all of the assets of the Company,
including its aircraft and engine portfolio.
In November 2013, the Company obtained a waiver of compliance with a lessee concentration covenant under its
Credit Facility agreement at the September 30, 2013 and December 31, 2013 calculation dates. The Company was in
9
compliance with all covenants other than the waived covenant under the Credit Facility agreement at December 31,
2013.
Although the Company previously had letters of intent for the lease of five of its Fokker 100 aircraft, the prospective
lessees decided not to lease the aircraft during the second quarter of 2014. Therefore, at June 30, 2014, the
Company reevaluated the recoverability of the net book value of these assets and consequently obtained current
market value appraisals, which resulted in aircraft impairment charges totaling $6.8 million being recorded for these
aircraft during the second quarter of 2014. As a result of the impairment charges, the Company was out of
compliance with a profitability covenant at June 30, 2014. In August 2014, the Company and the Credit Facility
banks agreed to an amendment to the profitability covenant which cured the June 30, 2014 non-compliance.
During the third quarter of 2014, based on management's assessment of the market for Fokker 100 aircraft and the
estimated costs associated with preparing the Company's five off-lease Fokker 100 aircraft for re-lease, the
Company recorded additional impairment charges of $8.5 million for these aircraft to write them down to their
estimated liquidation values. The Company also recorded impairment charges of $0.3 million for an off-lease
Fokker 50 aircraft and reclassified these six aircraft as held for sale. The Company sold the Fokker 50 aircraft in
March 2015. The Company also recorded an impairment charge of $2.9 million, based on the appraised market
values, for its two other Fokker 100 aircraft that were leased in September and October 2014.
As a result of the third quarter impairment charges, the Company was out of compliance with the profitability,
interest coverage and debt service coverage covenants of its Credit Facility at September 30, 2014. In November
2014, the Company and the Credit Facility banks agreed to an amendment to the Credit Facility that: cured the
September 30, 2014 non-compliance; revised the compliance requirements through September 30, 2015; decreased
the amount of the Credit Facility to $150 million due to the departure of two participant lenders; and decreased the
maximum amount to which the Credit Facility can be expanded from $200 million to $180 million. The Company
was in compliance with all covenants at December 31, 2014.
Based on its current projections, the Company believes that it will be in compliance with all of its Credit Facility
covenants at future calculation dates. Although the Company believes that the assumptions it has made in
forecasting its compliance with the Credit Facility covenants are reasonable in light of experience, actual results
could deviate from such assumptions and there can be no assurance the Company's beliefs will prove to be correct.
Among the more significant factors that could have an impact on the accuracy of the Company's covenant
compliance forecasts are (i) unanticipated decreases in the market value of the Company’s assets, or in the rental
rates deemed achievable for such assets that cause the Company to record an impairment charge against earnings;
(ii) lessee non-compliance with lease obligations, (iii) inability to locate new lessees for returned equipment within a
reasonable remarketing period, or at a rent level consistent with projected rates, (iv) inability to locate and acquire a
sufficient volume of additional assets at prices that will produce acceptable net returns, (v) increases in interest rates,
or (vi) inability to timely dispose of off-lease assets at prices commensurate with their market value.
Although the Company believes it will continue to be in compliance with all of the Credit Facility covenants, there
can be no assurance of such compliance and, in the event of any non-compliance, the Company will need to seek
further waivers or amendment of applicable covenants from its lenders if such compliance failure is not timely
cured. Any default under the Credit Facility, if not cured in the time permitted under the facility or waived by the
lenders, could result in foreclosure upon any or all of the assets of the Company.
For additional information regarding the Company’s Credit Facility, refer to Note 7 to the Company’s financial
statements in Item 1 of this Annual Report on Form 10-K.
(b)
Cash flow
The Company’s primary sources of cash are (i) rent payments due under the Company’s operating and finance
leases, (ii) maintenance reserves billed monthly to lessees based on asset usage, and (iii) proceeds from the sale of
aircraft and engines.
10
The Company’s primary uses of cash are for purchase of assets, maintenance expense and reimbursement to lessees
from collected maintenance reserves, management fees, professional fees, insurance, and Credit Facility fees,
interest and principal payments. The amount of interest paid by the Company depends on the outstanding balance of
its Credit Facility, which carries a floating interest rate as well as an interest rate margin, and is therefore also
dependent on changes in prevailing interest rates.
The timing and amount of the Company’s payments for maintenance vary, depending on the timing of lessee-
performed maintenance that is eligible for reimbursement, the aggregate amount of such claims and the timing and
amount of maintenance incurred in connection with preparation of off-lease assets for re-lease to new customers.
The Company’s maintenance payments typically constitute a large portion of its cash needs, and the Company may
from time to time borrow additional funds under the Credit Facility to provide funding for such payments.
Management believes that the Company will have adequate cash flow to meet its ongoing operational needs,
including any required repayments under the Credit Facility due to borrowing base limitations, based upon its
estimates of future revenues and expenditures, which include assumptions regarding (i) revenues for assets to be re-
leased, (ii) the cost and anticipated timing of maintenance to be performed, (iii) required debt payments, (iv) timely
use of proceeds of unused debt capacity toward additional acquisitions of income producing assets and (v) interest
rates. There can be no assurance, however, that the Company's beliefs will prove to be correct.
Although the Company believes that the assumptions it has made in forecasting its cash flow are reasonable in light
of experience, actual results could deviate from such assumptions. As discussed above, in “Liquidity and Capital
Resources – (a) Credit Facility” above, there are a number of factors that may cause actual results to deviate from
such forecasts.
(i)
Operating activities
The Company’s cash flow from operations decreased by $1.6 million in 2014 compared to 2013. As discussed
below, the change in cash flow was primarily a result of a decrease in payments received for maintenance reserves
and increases in payments for maintenance, interest, management fees and professional fees and general and
administrative expenses, the effects of which were partially offset by an increase in payments received for operating
lease revenue and a decrease in payments for aircraft insurance.
Payments for operating lease revenue and maintenance reserves
Rent receipts from lessees increased by $2.9 million in 2014 compared to 2013, primarily due to rent from assets
purchased during late 2013 and early 2014. Receipts from lessees for maintenance reserves decreased by $1.8
million in 2014 compared to 2013, primarily as a result of asset sales and returns, as well as lower utilization of
some assets for which the Company collects maintenance reserves. In addition, the Company does not collect
maintenance reserves for most of the aircraft it acquired in 2013 and 2014.
As of the date of this filing, the Company is receiving no lease revenue for six aircraft and five engines that are off
lease, with a total book value of $22.3 million, representing 12% of the Company's total assets held for lease. One
of the off-lease engines is being held as a spare and used in connection with required maintenance on the Company’s
Fokker 100 aircraft. In addition, five off-lease Fokker 100 aircraft, with a total book value of $5.0 million, are being
held for sale and not lease.
Payments for maintenance
Payments for maintenance increased by $0.7 million in 2014 compared to 2013, primarily as a result of an increase
in maintenance costs for off-lease aircraft. The amount of payments for maintenance in future periods will depend
on the amount and timing of maintenance paid as reimbursement to lessees for maintenance reserves claims, which
are dependent upon utilization and required maintenance intervals, as well as maintenance paid for off-lease assets.
11
Payment for interest
Payments for interest increased by $1.1 million in 2014 compared to 2013 as a result of a higher Credit Facility
balance.
Payments for management fees
Although JMC waived its management fees of approximately $1.2 million for the fourth quarter of 2014, payments
for management fees increased by $0.4 million in 2014 compared to 2013 as a result of asset purchases in 2013 and
2014. No assurance can be given that JMC will waive any management fees in the future.
Payment for professional fees, general and administrative and other expenses and aircraft insurance
Payments for professional fees, general and administrative and other expenses increased by $0.6 million in 2014
compared to 2013 primarily as a result of expenses incurred in connection with the early return of six aircraft and
two engines by one of the Company’s customers in 2014 period when it ceased operations. Payments for aircraft
insurance decreased by $0.7 million in 2014 compared to 2013 primarily as a result of a difference in the timing of
premium payments that are made on a semi-annual basis.
(ii)
Investing activities
During 2014 and 2013, the Company received cash of $16.2 million and $10.9 million, respectively, from the sale of
assets. During the same time periods, the Company used cash of $74.5 million and $25.0 million, respectively, for
purchases and capital improvement of aircraft.
(iii)
Financing activities
The Company borrowed $71.1 million and $19.0 million under the Credit Facility during 2014 and 2013,
respectively. In these same time periods, the Company repaid $15.2 million and $9.3 million, respectively, of its
total outstanding debt under the Credit Facility. Such repayments were funded by excess cash flow and the sale of
assets. During 2014 and 2013, the Company paid $3.0 million and $2.1 million of fees, respectively, in connection
with the extension and administration of the Company’s Credit Facility, as well as the waiver obtained from the
banks during the fourth quarter of 2014. Such fees are being amortized over the term of the Credit Facility.
Outlook
(a)
General
While in certain areas of the world the air carrier industry is now beginning to experience growth after a period of
contraction following the global downturn of recent years, other areas of the world continue to experience slow
recovery and failures of weaker air carrier competitors that were unable to survive the aftermath of the global
downturn. Overall, the Company continues to experience a reduction in the number of aircraft and aircraft engines
needed for operation by carriers in nearly all geographic areas, especially in Western Europe, as compared to periods
before the global downturn.
The Company has identified three areas that could challenge the Company's growth and operating results by
negatively affecting its collateral base and, therefore, its ability to access sources of financing:
(cid:78)
(cid:78)
The Company could experience (i) a delay in remarketing its off-lease assets, as well as (ii) lower rental
rates for assets that are remarketed. The Company expects that the customers for several of the leases that
expire in 2015 and after will choose to return the assets rather than renew the leases, notwithstanding that
any such customer may incur significant expenses to satisfy return conditions.
Lessees that are located in low- or no- growth areas of the world carry heightened risk of an unanticipated
lessee default. A lessee’s default and the unscheduled return of an asset to the Company for remarketing
could result not only in reduced operating lease revenue but also in unanticipated, unrecoverable expenses
12
arising from the lessee’s default on its maintenance and return condition obligations. The Company
monitors the performance of all of its customers and has noted that several of the Company’s customers
continue to experience weakened operating results and have not yet achieved financial stability.
(cid:78)
Competition in the Company's market niche has increased recently as a result of new entrants to the
acquisition and leasing market. The increased competition has put downward pressure on lease rates,
resulting in lower margins.
(b)
Operating Segments
The Company operates in one business segment, the leasing of regional aircraft to foreign and domestic regional
airlines, and therefore does not present separate segment information for lines of business.
At February 28, 2015, the dominant types of aircraft in the Company’s portfolio of assets held for lease were as
follows:
Model
Bombardier Dash-8-300
Bombardier CRJ-700
Bombardier CRJ-900
Bombardier Dash-8-Q400
Number
owned
% of net
book value
8
3
2
3
17%
16%
16%
13%
For the month ended February 28, 2015, the Company’s sources of operating lease revenue were from the following
regions:
Region
Europe
North America
Africa
Asia
Central and South America
Australia
(c)
Remarketing Efforts
% of
operating
lease
revenue
Number
of lessees
3
2
2
3
1
1
29%
22%
17%
14%
9%
9%
At December 31, 2014, five Fokker 100 aircraft and one Fokker 50 aircraft were classified as held for sale. In
March 2015, the Company sold the Fokker 50 aircraft. The Company is seeking sales opportunities for the Fokker
100 aircraft.
The Company is seeking remarketing opportunities for six aircraft and five engines that are held for lease. The
Company is considering selling some or all of these assets. The Company is analyzing the amount and timing of
maintenance required to remarket the assets, the amount of which may differ significantly if the assets are sold
rather than re-leased.
The leases for seven of the Company’s aircraft will expire during the first half of 2015. The Company believes that
three of the aircraft will be returned at lease-end in 2015 after meeting the return conditions of the leases, and the
Company believes that the leases for the remaining four aircraft will be extended.
13
(d)
Credit Facility
In August 2014 and November 2014, the Company and the Credit Facility banks agreed to amendments to the Credit
Facility, which cured non-compliance with certain of the covenants under the Credit Facility at June 30, 2014 and
September 30, 2014. The November 2014 amendment also revised the compliance requirements through September
30, 2015, decreased the amount of the Credit Facility to $150 million due to the departure of two participant lenders,
and decreased the maximum amount to which the Credit Facility can be expanded from $200 million to $180
million.
The unused amount of the Credit Facility was $16,600,000 as of March 12, 2015. Based on its current projections,
the Company believes that it will be in compliance with all of its Credit Facility covenants at future calculation
dates. The Company also believes that available borrowings under the Credit Facility will be sufficient to meet its
continuing obligations and, if it is expanded to the maximum of $180 million, to fund anticipated acquisitions.
However, there can be no assurance the Company's beliefs will prove to be correct.
Factors that May Affect Future Results
Noncompliance with Credit Facility Financial Covenants. The Company’s use of debt as the primary form of
acquisition financing subjects the Company to increased risks associated with leverage. In addition to payment
obligations, the Credit Facility agreement includes financial covenants, including some requiring the Company to
have positive earnings, meet minimum net worth standards and be in compliance with certain other financial ratios.
As discussed above in “Outlook – Credit Facility,” the Company was out of compliance with a number of covenants
under its Credit Facility at June 30, 2014 and September 30, 2014. The Credit Facility was amended in August
2014 to cure the June 30, 2014 non-compliance and in November 2014 to cure the September 30, 2014 non-
compliance, revise certain compliance requirements and decrease the amount of the Credit Facility from $180
million to $150 million. The November amendment also reduced the amount to which the Credit Facility can be
expanded from $200 million to $180 million.
Although the Company believes it will continue to be in compliance with all of the Credit Facility covenants, there
can be no assurance of such compliance, and in the event of any non-compliance, the Company will need to seek
further waivers or amendment of applicable covenants from its lenders if such compliance failure is not timely
cured. Any default under the Credit Facility, if not cured in the time permitted under the facility or waived by the
lenders, could result in foreclosure upon any or all of the assets of the Company.
Ownership Risks. The Company’s leases typically are for a period shorter than the entire, anticipated, remaining
useful life of the leased assets. The Company’s ability to recover its investment in an asset subject to such a lease is
dependent upon the Company’s ability to profitably re-lease or sell the asset after the expiration of the lease term.
This ability is dependent on worldwide economic conditions, general aircraft market conditions, regulatory changes
that may make an asset’s use more expensive or preclude use due to the age of the aircraft or unless the asset is
modified, changes in the supply or cost of aircraft equipment and technological developments that cause the asset to
become obsolete. If the Company is unable to remarket its assets on favorable terms when the leases for such assets
expire, the Company’s financial condition, cash flow, ability to service debt and results of operations could be
adversely affected.
The Company typically acquires used aircraft equipment. The market for used aircraft equipment has been cyclical,
and generally reflects economic conditions and the strength of the travel and transportation industry. The demand
for and value of many types of used aircraft in the recent past has been depressed by such factors as airline financial
difficulties, the number of new aircraft on order and the number of aircraft coming off lease, as well as introduction
of new aircraft models and types that may be more technologically advanced, more fuel efficient and/or less costly
to maintain and operate. Values may also increase or decrease for certain aircraft types that become more or less
desirable based on market conditions and changing airline capacity.
In addition, a successful investment in an asset subject to a lease depends in part upon having the asset returned by
the lessee in the condition as required under the lease. Each lease typically obligates a customer to return an asset to
the Company in a specified condition, which generally requires it be returned in equal or better condition than at
14
delivery to the lessee. If the lessee were to become insolvent during the term of its lease and the Company had to
repossess the asset, it is unlikely that the lessee would have the financial ability to meet these return obligations and
it is likely that the Company would be required to expend funds in excess of any maintenance reserves collected to
return the asset to a remarketable condition. If the lessee filed for bankruptcy and rejected the aircraft lease, the
lessee would be required to return the aircraft but would be relieved from further lease obligations, including return
conditions specified in the lease. In that case, it is also likely that the Company would be required to expend funds
in excess of any maintenance reserves collected to return the asset to a remarketable condition.
Several of the Company’s leases do not require payment of monthly maintenance reserves, which serve as the
lessee’s advance payment for its future repair and maintenance obligations. If repossession due to lessee default or
bankruptcy occurred under such a lease, the Company would be left with the costs of unperformed repair and
maintenance under the applicable lease and the Company would likely incur an unanticipated expense in order to re-
lease or sell the asset.
Furthermore, the occurrence of unexpected adverse changes that impact the Company’s estimates of expected cash
flows generated from an asset could result in an asset impairment charge against the Company’s earnings. The
Company periodically reviews long-term assets for impairment, in particular, when events or changes in
circumstances indicate the carrying value of an asset may not be recoverable. An impairment charge is recorded
when the carrying amount of an asset is estimated to be not recoverable and exceeds its fair value. The Company
recorded impairment charges for some of its aircraft in 2014 and may be required to record asset impairment charges
in the future as a result of a prolonged weak economic environment, challenging market conditions in the airline
industry, events related to particular lessees, assets or asset types or other factors affecting the value of aircraft or
engines.
Lessee Credit Risk. The Company carefully evaluates the credit risk of each customer and attempts to obtain a third
party guaranty, letters of credit or other credit enhancements, if it deems them necessary in addition to customary
security deposits. There can be no assurance, however, that such enhancements will be available, or that, if
obtained, will fully protect the Company from losses resulting from a lessee default or bankruptcy.
If a lessee that is a certified U.S. airline were in default under a lease and sought protection under Chapter 11 of the
United States Bankruptcy Code, Section 1110 of the Bankruptcy Code would automatically prevent the Company
from exercising any remedies against such lessee for a period of 60 days. After the 60-day period had passed, the
lessee would have to agree to perform the lease obligations and cure any defaults, or the Company would have the
right to repossess the equipment. However, this procedure under the Bankruptcy Code has been subject to
significant litigation, and it is possible that the Company’s enforcement rights would be further adversely affected
by a bankruptcy filing by a defaulting lessee.
Several of the Company’s customers have experienced significant financial difficulties, become insolvent, or have
been declared or have filed for bankruptcy. An insolvency or bankruptcy of a customer usually results in a total loss
of those receivables. The Company closely monitors the performance of all of its lessees and its risk exposure to
any lessee that may be facing financial difficulties, in order to guide decisions with respect to such lessee that would
mitigate losses in the event the lessee is unable to meet or rejects its lease obligations. There can be no assurance
that additional customers will not become insolvent or file for bankruptcy or that the Company will be able to
mitigate any of the resultant losses.
Risks Related to Regional Air Carriers. The Company’s continued focus on its customer base of regional air
carriers subjects the Company to additional risks. Some of the lessees in the regional air carrier market are
companies that are start-up, low-capital, and/or low-margin operators. Often, the success of such carriers depends
on contractual arrangements with major trunk carriers or franchises from governmental agencies that provide
subsidies for operating essential air routes, both of which may be subject to termination or cancellation on short
notice. Regional carriers, even if financially strong, that are affiliated with an established major carrier can also be
swept into bankruptcy if the major carrier files for bankruptcy or becomes insolvent. Four of the Company's
regional air carrier customers filed for bankruptcy in 2012 and 2013, and a Thai regional carrier that leased six
aircraft and two engines from the Company ceased operations in May of 2014.
15
Credit Facility Debt Limitations. The amount available to be borrowed under the Credit Facility is limited by the
asset-specific advance rates. Lessee arrearages or asset off-lease periods may reduce the advance rate for the related
assets and, therefore, the permitted borrowing under the facility. Amounts subject to payment deferral agreements
also reduce the amount of permitted borrowing. The Company believes it will have sufficient cash funds to make
any required principal repayment that arises due to any such borrowing limitations.
Availability of Financing. The Company’s continued growth will depend on its ability to continue to obtain capital,
either through debt or equity financings. There can be no assurance that the Company will succeed in obtaining
capital in the future at terms favorable to the Company.
General Economic Conditions and Lowered Demand for Travel. The Company’s business is dependent upon
general economic conditions and the strength of the travel and transportation industry. The industry is continuing to
experience financial difficulty due to the slow recovery in the global economy. The spread of a disease epidemic,
the threat or execution of a terrorist attack against aviation, a worsening financial/bank crisis in Europe, a natural
event that interrupts air traffic, military conflict, political crises or other events that cause a prolonged spike in fuel
prices, or other like events could exacerbate an already weakened condition and lead to widespread failures in the air
carrier industry. If lessees experience financial difficulties and are unable to meet lease obligations, this will, in
turn, negatively affect the Company’s financial performance.
Airline reductions in capacity in response to lower passenger loads have resulted in reduced demand for aircraft and
aircraft engines and a corresponding decrease in market lease rental rates and aircraft values for many aircraft types.
This reduced market value could affect the Company’s results if the market value of an asset or assets in the
Company’s portfolio falls below carrying value, and the Company determines that a write-down of the value on its
balance sheet is appropriate. Furthermore, if older, expiring leases are replaced with leases at decreased lease rates,
the lease revenue from the Company’s existing portfolio is likely to decline, with the magnitude of the decline
dependent on the length of the downturn and the depth of the decline in market rents.
Economic downturns can affect certain regions of the world more than others. As the Company’s portfolio is not
entirely globally diversified, a localized downturn in one of the key regions in which the Company leases assets
could have a significant adverse impact on the Company. The Company’s significant sources of operating lease
revenue by region are summarized in “Outlook - Operating Segments,” above.
In past years, several of the Company’s customers have experienced financial difficulties arising from a combination
of the weakened air carrier market and their own unique financial circumstances and have requested and been
granted deferral of certain overdue and/or future rental or maintenance reserve payment obligations. It is possible
that the Company may enter into additional deferral agreements if the current weakened air carrier environment
continues. When a customer requests a deferral of lease obligations, the Company evaluates the lessee’s financial
plan, the likelihood that the lessee can remain a viable carrier, and whether the deferral will be repaid according to
the agreed schedule. The Company may elect to record the deferred rent and reserve payments from the lessee on a
cash basis, which could have a material effect on the Company’s financial results in the applicable periods. Deferral
agreements with lessees also reduce the Company's borrowing capacity under its Credit Facility.
International Risks. The Company leases assets in overseas markets. Leases with foreign lessees, however, may
present different risks than those with domestic lessees. Most of the Company’s expected growth is outside of North
America.
A lease with a foreign lessee is subject to risks related to the economy of the country or region in which such lessee
is located, which may be weaker than the U.S. economy. An economic downturn in a particular country or region
may impact a foreign lessee’s ability to make lease payments, even if the U.S. and other foreign economies remain
stable.
Foreign lessees are subject to risks related to currency conversion fluctuations. Although the Company’s current
leases are all payable in U.S. dollars, the Company may agree in the future to leases that permit payment in foreign
currency, which would subject such lease revenue to monetary risk due to currency fluctuations. In addition, if the
Company undertakes certain obligations under a lease to contribute to a repair or improvement and if the work is
performed in a foreign jurisdiction and paid for in foreign currency, currency fluctuations resulting in a weaker
16
dollar between the time such agreement is made and the time payment for the work is made may result in an
unanticipated increase in U.S. dollar-denominated cost for the Company.
Even with U.S. dollar-denominated lease payment provisions, the Company could still be affected by a devaluation
of the lessee’s local currency that would make it more difficult for a lessee to meet its U.S. dollar-denominated
payments, increasing the risk of default of that lessee, particularly if its revenue is primarily derived in the local
currency.
Foreign lessees that operate internationally may also face restrictions on repatriating foreign revenue to their home
country. This could create a cash flow crisis for an otherwise profitable carrier, affecting its ability to meet its lease
obligations. Foreign lessees may also face restrictions on payment of obligations to foreign vendors, including the
Company, which may affect their ability to timely meet lease obligations to the Company.
Foreign lessees are not subject to U.S. bankruptcy laws, although there may be debtor protection similar to U.S.
bankruptcy laws available in some jurisdictions. Certain countries do not have a central registration or recording
system with which to locally establish the Company’s interest in equipment and related leases. This could make it
more difficult for the Company to recover an aircraft in the event of a default by a foreign lessee. In any event,
collection and enforcement may be more difficult and complicated in foreign countries.
Finally, ownership of a leased asset operating in a foreign country and/or by a foreign carrier may subject the
Company to additional tax liabilities that are not present with aircraft operated in the United States. Depending on
the jurisdiction, laws governing such tax liabilities may be complex, not well formed or not uniformly enforced. In
such jurisdictions, the Company may decide to take an uncertain tax position based on the best advice of the local
tax experts it engages, which position may be challenged by the taxing authority. If the taxing authority later
assesses a liability, the Company may be required to pay penalties and interest on the assessed amount, which
penalties and interest would not give rise to a corresponding foreign tax credit on the Company’s U.S. tax return.
Concentration of Lessees and Aircraft Type. For the month ended February 28, 2015, the Company’s four largest
customers accounted for a total of approximately 54% of the Company’s monthly lease revenue. A lease default by
or collection problem with one or a combination of any of these significant customers could have a disproportionate
negative impact on the Company’s financial results and borrowing base under the Credit Facility, and, therefore, the
Company’s operating results are especially sensitive to any negative developments with respect to these customers
in terms of lease compliance or collection. In addition, if the Company’s revenues become overly concentrated in a
small number of lessees, the Company could fail to comply with certain financial covenants in its Credit Facility
related to customer concentration. In the event of any such failure to be in compliance, the Company will need to
seek waivers or amendment of the applicable covenants from its lenders if such compliance failure is not timely
cured. Any default under the Credit Facility, if not cured in the time permitted under the Credit Facility or waived
by the lenders, could result in foreclosure upon any or all of the assets of the Company.
The dominant types of aircraft in the Company’s portfolio are summarized in “Outlook - Operating Segments,”
above. A change in the desirability and availability of any of these types of aircraft, which would in turn affect
valuations of such aircraft, would have a disproportionately significant impact on the Company’s portfolio value.
Such aircraft type concentration would diminish if the Company acquires assets of other types. Conversely,
acquisition of these types of aircraft will increase the Company’s risks related to its concentration of those aircraft
types.
Investment in New Aircraft Types and Engines. The Company intends to continue to focus solely on regional
aircraft and engines. Although the Company has traditionally invested in a limited number of types of turboprop
aircraft and engines, the Company has also acquired several types of regional jet aircraft and regional jet aircraft
engines, and may continue to seek acquisition opportunities for new types and models of aircraft and engines used in
the Company’s targeted customer base of regional air carriers. Acquisition of aircraft types and engines not
previously acquired by the Company entails greater ownership risk due to the Company's lack of experience
managing those assets. The Company believes, however, that the overall industry experience of JMC’s personnel
and its technical resources should permit the Company to effectively manage such new aircraft types and engines.
Further, the broadening of the asset types in the aircraft portfolio may have a benefit of diversifying the Company’s
portfolio (see “Factors That May Affect Future Results – Concentration of Lessees and Aircraft Type,” above).
17
Engine Leasing Risk. The Company currently has five engines in its portfolio, making up 5% of the Company’s
total net book value of aircraft and aircraft engines held for lease. The Company may from time to time lease one or
more of these engines under industry standard short-term engine leases, which place the risk of an engine failure not
caused by lessee negligence or foreign object damage upon the lessor. It is not economically practicable for an
engine lessor to insure against that risk. If an engine failure occurs and is not covered by a manufacturer’s warranty
or is not otherwise caused by circumstances that the lessee is required to cover, the Company’s investment in the
engine could be a significant loss or the Company might incur a significant maintenance expense.
Interest Rate Risk. The Credit Facility carries a floating interest rate based upon short-term interest rate indices.
Lease rates typically, but not always, move over time with interest rates, but market demand and numerous other
asset-specific factors also affect lease rates. Because the Company’s typical lease rates are fixed at lease origination,
interest rate changes during the lease term have no effect on existing lease rental payments. Therefore, if interest
rates rise significantly and there is relatively little lease origination by the Company following such rate increases,
the Company could experience decreased net income as additional interest expense outpaces revenue growth.
Further, even if significant lease origination occurs following such rate increases, other contemporaneous aircraft
market forces may result in lower or flat rental rates, thereby decreasing net income.
Reliance on JMC. All management of the Company is performed by JMC under the twenty-year Management
Agreement between the Company and JMC that expires in April of 2018 and provides for an asset-based
management fee. JMC is not a fiduciary of the Company or its stockholders. The Company’s Board of Directors
(the “Board”) has ultimate control and supervisory responsibility over all aspects of the Company and owes
fiduciary duties to the Company and its stockholders. The Board has no control over the internal operations of JMC,
but the Board does have the ability and responsibility to manage the Company’s relationship with JMC and the
performance of JMC's obligations to the Company under the Management Agreement, as it would have for any third
party service provider to the Company. While JMC may not owe any fiduciary duties to the Company by virtue of
the Management Agreement, all of the officers of JMC are also officers of the Company, and in that capacity owe
fiduciary duties to the Company and its stockholders. In addition, certain officers of the Company hold significant
ownership positions in the Company and JHC, the parent company of JMC.
The Management Agreement may be terminated if JMC defaults on its obligations to the Company. However, the
agreement provides for liquidated damages in the event of its wrongful termination by the Company. Certain
directors of the Company are also directors of JMC and, as discussed above, the officers of the Company are also
officers of JMC and certain officers hold significant ownership positions in both the Company and JHC, the holding
company for JMC. Consequently, the directors and officers of JMC may have a conflict of interest in the event of a
dispute between the Company and JMC. Although the Company has taken steps to prevent conflicts of interest
arising from such dual roles, such conflicts may still occur.
Management Fee Structure. All decisions regarding acquisitions and disposal of aircraft from the Company’s
portfolio are made by JMC. JMC is paid a management fee based on the net asset value of the Company’s
portfolio. It may also receive a one-time asset acquisition fee upon purchase of an asset by the Company, and a one-
time remarketing fee in connection with the sale or re-lease of an asset. Optimization of the results of the Company
depends on timing of the acquisition, lease yield on the acquired assets, and re-lease or sale of its portfolio
assets. Under the current management fee structure, a larger volume of acquisitions generates acquisition fees and
also increases the periodic management fee by increasing the size of the aircraft portfolio. Since the Company’s
current business strategy involves continued growth of its portfolio and a “buy and hold” strategy, a compensation
structure that results in greater compensation with an increased portfolio size is consistent with that strategy. The
compensation structure does, nonetheless, create a situation where a decision by JMC for the Company to forego an
asset transaction deemed to be an unacceptable business risk due to the lessee or the aircraft type is in conflict with
JMC’s own pecuniary interest. As a result, the compensation structure could act to incent greater risk-taking by
JMC in asset acquisition decision-making. The Company has established objective target guidelines for yields on
acquired assets. Further, the Company’s Board, including a majority of the outside independent directors, must
approve any acquisition that involves a new asset type. While the Company currently believes the foregoing are
effective mitigating factors against undue compensation-incented risk-taking by JMC, there is no assurance that such
mechanisms can entirely and effectively eliminate such risk.
18
Government Regulation. There are a number of areas in which government regulation may result in costs to the
Company. These include aircraft registration safety requirements, required equipment modifications, maximum
aircraft age, and aircraft noise requirements. Although it is contemplated that the burden and cost of complying with
such requirements will fall primarily upon lessees of equipment, there can be no assurance that the cost will not fall
on the Company. Furthermore, future government regulations could cause the value of any non-complying
equipment owned by the Company to decline substantially.
Competition. The aircraft leasing industry is highly competitive. The Company competes with aircraft
manufacturers, distributors, airlines and aircraft operators, equipment managers, leasing companies, equipment
leasing programs, financial institutions and other parties engaged in leasing, managing or remarketing aircraft, many
of which have significantly greater financial resources. Nevertheless, the Company believes that it is competitive
because of JMC’s experience and operational efficiency in identifying and obtaining financing for the transaction
types desired by regional air carriers. This market segment, which in many cases involves customers that are private
companies without well-established third party credit ratings, is not well served by the Company’s larger
competitors. JMC has developed a reputation as a global participant in this segment of the market, and the
Company believes that JMC’s reputation benefits the Company. There is, however, no assurance that competition
from larger aircraft leasing companies will not increase significantly or that JMC’s reputation will continue to be
strong in this market segment.
Casualties, Insurance Coverage. The Company, as owner of transportation equipment, may be named in a suit
claiming damages for injuries or damage to property caused by its assets. As a triple-net lessor, the Company is
generally protected against such claims, since the lessee would be responsible for, insure against and indemnify the
Company for such claims. A “triple net lease” is a lease under which, in addition to monthly rental payments, the
lessee is generally responsible for the taxes, insurance and maintenance and repair of the aircraft arising from the use
and operation of the aircraft during the term of the lease. Although the United States Aviation Act may provide
some protection with respect to the Company’s aircraft assets, it is unclear to what extent such statutory protection
would be available to the Company with respect to its assets that are operated in foreign countries where such
provisions of the United States Aviation Act may not apply.
The Company’s leases generally require a lessee to insure against likely risks of loss or damage to the leased asset,
and liability to passengers and third parties pursuant to industry standard insurance policies and require lessees to
provide insurance certificates documenting the policy periods and coverage amounts. The Company tracks receipt
of the certificates and calendars their expiration dates. Prior to the expiration of an insurance certificate, if a
replacement certificate has not been received, the Company reminds the lessee of its obligation to provide current
insurance certificates to avoid a default under the lease.
Despite these requirements and procedures, there may be certain cases where the loss is not entirely covered by the
lessee or its insurance. The possibility of such an event is remote, but any such uninsured loss with respect to the
equipment or insured loss for which insurance proceeds are inadequate might result in a loss of invested capital in
and any profits anticipated from, such equipment, as well as a potential claim directly against the Company.
Compliance with Future Environmental Regulations. Compliance with future environmental regulations may harm
the Company’s business. Many aspects of aircraft operations are subject to increasingly stringent environmental
regulations, and growing concerns about climate change may result in the imposition by the U.S and foreign
governments of additional regulation of carbon emissions, aimed at either requiring adoption of technology to
reduce the amount of carbon emissions or putting in place a fee or tax system on carbon emitters. It is likely that any
such regulation will be directed at the Company’s customers, as operators of aircraft, or at the Company, as owners
of aircraft. Under the Company’s triple-net lease arrangements, the Company would likely shift responsibility for
compliance to its lessees, but there might be some costs of regulation that the Company could not shift and would
itself have to bear. Although it is not expected that the costs of complying with current environmental regulations
will have a material adverse effect on the Company’s financial position, results of operations, or cash flows, no
assurance can be given that the costs of complying with environmental regulations adopted in the future will not
have such an effect.
Cyber-Security Risks. The Company believes that it has sufficient cyber-security measures in place commensurate
with the risks to the Company of a successful cyber-attack or breach of security. The Company believes that its
19
main vulnerability to a cyber-attack would be interruption of the Company’s email communications internally and
with third parties, loss of customer and lease archives, and loss of document sharing between the Company’s offices
and remote workers. Such an attack could temporarily impede the efficiency of the Company’s operations;
however, the Company believes that sufficient replacement mechanisms exist in the event of such an interruption
that there would not be a material adverse financial impact on the Company’s business.
Warrants. As part of a subordinated debt financing, which was fully repaid in December of 2011, the Company
issued warrants to purchase up to 81,224 shares of the Company’s common stock that are currently exercisable (and
expire on December 31, 2015) and represent approximately 5% of the post-exercise fully diluted capitalization of
the Company. The exercise price of the warrants is $8.75 per share. If the warrants to purchase shares are exercised
at a time when the exercise price is less than the market price of the Company’s common stock, there will be
dilution to the existing holders of common stock. This dilution of the Company’s common stock could depress its
trading price.
Possible Volatility of Stock Price. The market price of the Company’s common stock may be subject to fluctuations
following developments relating to the Company’s operating results, changes in general conditions in the economy,
the financial markets, the airline industry, changes in accounting principles or tax laws applicable to the Company or
its lessees, or other developments affecting the Company, its customers or its competitors, or arising from other
investor sentiment unknown to the Company. Because the Company has a relatively small capitalization of
approximately 1.5 million shares outstanding, there is a correspondingly limited amount of trading and float of the
Company’s shares. Consequently, the Company’s stock price is more sensitive to a single large trade or a small
number of simultaneous trades along the same trend than a company with larger capitalization and higher trading
volume and float.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
This report does not include information described under Item 305 of Regulation S-K pursuant to the rules of the
Securities and Exchange Commission that permit “smaller reporting companies” to omit such information.
20
Item 8.
Financial Statements and Supplementary Data.
(a)
Financial Statements and Schedules
(1)
Financial statements for the Company:
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2014 and 2013
Statements of Operations for the Years Ended December 31, 2014 and 2013
Statements of Stockholders’ Equity for the Years Ended December 31, 2014 and 2013
Statements of Cash Flows for the Years Ended December 31, 2014 and 2013
Notes to Financial Statements
(2)
Schedules:
All schedules have been omitted since the required information is presented in the financial
statements or is not applicable.
21
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
AeroCentury Corp.
Burlingame, California
We have audited the accompanying balance sheets of AeroCentury Corp. (the "Company") as of December 31, 2014
and 2013 and the related statements of operations, stockholders’ equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position
of AeroCentury Corp. at December 31, 2014 and 2013, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the financial statements, the Company changed its method of accounting for non-
refundable maintenance reserves and lessor maintenance obligations during the year ended December 31, 2014.
These changes were applied retrospectively to all periods presented.
San Francisco, California
March 12, 2015
/s/ BDO USA, LLP
22
Item 8.
Financial Statements and Supplementary Data.
AeroCentury Corp.
Balance Sheets
ASSETS
Assets:
Cash and cash equivalents
Accounts receivable, including deferred rent of $111,300 and $217,200 at
December 31, 2014 and December 31, 2013, respectively
Finance leases receivable
Aircraft and aircraft engines held for lease, net of accumulated
depreciation of $38,962,800 and $50,679,300 at
December 31, 2014 and December 31, 2013, respectively
Assets held for sale
Prepaid expenses and other
December 31, December 31,
2014
2013
(As adjusted)
$ 1,840,500
$ 2,112,700
2,128,600
-
3,303,800
1,895,200
186,762,600
6,522,900
4,520,300
152,954,600
735,000
3,633,000
$201,774,900
$164,634,300
Total assets
Liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses
Notes payable and accrued interest
Maintenance reserves
Accrued maintenance costs
Security deposits
Unearned revenues
Deferred income taxes
Total liabilities
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
Paid-in capital
Retained earnings
Treasury stock at cost, 63,300 shares
Total stockholders’ equity
$ 2,818,200
133,590,600
12,927,700
2,115,700
5,218,300
1,642,200
8,621,300
$ 1,202,700
77,527,300
16,671,800
1,612,100
6,265,000
646,700
14,573,800
166,934,000
118,499,400
-
-
1,600
14,780,100
20,563,300
35,345,000
(504,100)
1,600
14,780,100
31,857,300
46,639,000
(504,100)
34,840,900
46,134,900
Total liabilities and stockholders’ equity
$201,774,900
$164,634,300
The accompanying notes are an integral part of these statements.
23
AeroCentury Corp.
Statements of Operations
Revenues and other income:
Operating lease revenue, net
Maintenance reserves revenue, net
Net gain on disposal of assets
Other income
Expenses:
Provision for impairment in value of aircraft
Maintenance
Depreciation
Management fees, net of approximately $1,200,000
of fees waived by JMC in 2014
Interest
Professional fees, general and administrative and other
Insurance
Other taxes
Bad debt expense
For the Years Ended December 31,
2014
2013
(As adjusted)
$21,913,300
3,393,600
3,147,200
252,400
$18,794,200
14,910,400
3,808,200
718,800
28,706,500
38,231,600
18,736,500
7,478,400
7,299,000
3,864,900
5,134,200
1,718,800
1,255,300
465,200
-
-
6,962,400
7,363,100
4,369,300
4,075,000
1,174,500
1,166,400
90,200
357,600
45,952,300
25,558,500
(Loss)/income before income tax provision
(17,245,800)
12,673,100
Income tax (benefit)/provision
Net (loss)/income
(Loss)/earnings per share:
Basic
Diluted
Weighted average shares used in (loss)/earnings per share computations:
Basic
Diluted
The accompanying notes are an integral part of these statements.
(5,951,800)
4,329,200
$(11,294,000)
$ 8,343,900
$ (7.32)
$ 5.41
$ (7.32)
$ 5.26
1,543,257
1,543,257
1,543,257
1,587,036
24
AeroCentury Corp.
Statements of Stockholders’ Equity
For the Years Ended December 31, 2014 and 2013
Common
Stock
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Total
Balance, December 31, 2012 (As
adjusted)
$1,600
$14,780,100
$ 23,513,400
$(504,100) $ 37,791,000
Net income
-
-
8,343,900
-
8,343,900
Balance, December 31, 2013 (As
adjusted)
1,600
14,780,100
31,857,300
(504,100)
46,134,900
Net loss
-
-
(11,294,000)
-
(11,294,000)
Balance, December 31, 2014
$1,600
$14,780,100
$ 20,563,300
$(504,100) $ 34,840,900
The accompanying notes are an integral part of these statements.
25
AeroCentury Corp.
Statements of Cash Flows
Operating activities:
Net (loss)/income
Adjustments to reconcile net income to net cash
provided by operating activities:
Net gain on disposal of assets
Depreciation
Provision for impairment in value of aircraft
Non-cash interest
Deferred income taxes
Changes in operating assets and liabilities:
Accounts receivable
Finance leases receivable
Income taxes receivable
Prepaid expenses and other
Accounts payable and accrued expenses
Accrued interest on notes payable
Maintenance reserves and accrued costs
Security deposits
Unearned revenue
Income taxes payable
Net cash provided by operating activities
Investing activities:
Proceeds from sale of aircraft and aircraft engines held for lease,
net of re-sale fees
Proceeds from sale of assets held for sale, net of re-sale fees
Purchases of aircraft and aircraft engines
Net cash used in investing activities
Financing activities:
Borrowings under Credit Facility
Repayments of Credit Facility
Debt issuance costs
Net cash provided by financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
For the Years Ended December 31,
2014
2013
(As adjusted)
$(11,294,000)
$ 8,343,900
(3,147,200)
7,299,000
18,736,500
950,100
(5,952,600)
(498,000)
1,895,200
-
486,700
(132,400)
163,300
(1,313,700)
(2,167,700)
210,200
-
5,235,400
(3,808,200)
7,363,100
-
1,113,600
4,321,300
(96,100)
246,000
2,000
(772,400)
(23,400)
(38,400)
(9,128,800)
(525,200)
(105,700)
(19,100)
6,872,600
15,854,800
312,100
(74,529,000)
(58,362,100)
10,018,700
945,100
(24,965,500)
(14,001,700)
71,100,000
(15,200,000)
(3,045,500)
52,854,500
19,000,000
(9,300,000)
(2,055,000)
7,645,000
(272,200)
515,900
2,112,700
1,596,800
$ 1,840,500
$ 2,112,700
During the years ended December 31, 2014 and 2013, the Company paid interest totaling $4,117,900 and
$3,077,100, respectively. During the years ended December 31, 2014 and 2013, the Company paid income taxes
totaling $800 and $800, respectively.
The accompanying notes are an integral part of these statements.
26
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
1.
Organization and Summary of Significant Accounting Policies
(a)
The Company and Basis of Presentation
AeroCentury Corp. ("the Company'), a Delaware corporation incorporated in 1997, typically acquires used regional
aircraft and engines for lease to foreign and domestic regional carriers.
As discussed in Note 2, during the first quarter of 2014, the Company changed its method of accounting for non-
refundable maintenance reserves and certain lessor maintenance obligations. The Company has applied this change
in accounting principle retrospectively to all periods presented in accordance with ASC 250, Accounting Changes
and Error Corrections (“ASC 250”).
(b)
Use of Estimates
The Company’s financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company bases its estimates on historical experience and on various other assumptions that are believed to be
reasonable for making judgments that are not readily apparent from other sources.
The most significant estimates with regard to these financial statements are the residual values and useful lives of
the assets, the amount and timing of cash flows associated with each asset that are used to evaluate whether assets
are impaired, accrued maintenance costs, accounting for income taxes, and the amounts recorded as allowances for
doubtful accounts.
(c)
Cash and cash equivalents
The Company considers highly liquid investments readily convertible into known amounts of cash, with original
maturities of 90 days or less from the date of acquisition, as cash equivalents.
(d)
Aircraft Capitalization and Depreciation
The Company’s interests in aircraft and aircraft engines are recorded at cost, which includes acquisition costs. Since
inception, the Company has typically purchased only used aircraft and aircraft engines. It is the Company’s policy
to hold aircraft for approximately twelve years unless market conditions dictate otherwise. Therefore, depreciation
of aircraft is initially computed using the straight-line method over the anticipated holding period, usually twelve
years, to an estimated residual value based on appraisal. For an aircraft engine held for lease as a spare, the
Company estimates the length of time that it will hold the aircraft engine based upon estimated usage, repair costs
and other factors, and depreciates it to the appraised residual value over such period using the straight-line method.
The Company periodically reviews plans for lease or sale of its aircraft and aircraft engines and changes, as
appropriate, the remaining expected holding period for such assets. Estimated residual values are reviewed and
adjusted periodically, based upon updated estimates obtained from an independent appraiser. Decreases in the fair
value of aircraft could affect not only the current value, discussed below, but also the estimated residual value.
Assets that are held for sale are not subject to depreciation and are separately classified on the balance sheet. Such
assets are carried at the lower of their carrying value or estimated fair values, less costs to sell.
27
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
1.
(e)
Organization and Summary of Significant Accounting Policies (continued)
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of
observable inputs and minimize the use of unobservable inputs, to the extent possible. The fair value hierarchy under
GAAP is based on three levels of inputs.
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair
value of the assets or liabilities.
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The carrying amount of the Company's money market funds included in cash and cash equivalents was $1,044,300
and $1,842,000 at December 31, 2014 and December 31, 2013. The fair value of the Company's money market
funds would be categorized as Level 1 under the GAAP fair value hierarchy.
As of December 31, 2014 and December 31, 2013, there were no liabilities that were required to be measured and
recorded at fair value on a recurring basis.
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company determines fair value of long-lived assets held and used, such as aircraft and aircraft engines held for
lease and held for sale, by reference to independent appraisals, quoted market prices (e.g., offers to purchase) and
other factors. An impairment charge is recorded when the Company believes that the carrying value of an asset will
not be recovered through future net cash flows and that the carrying value exceeds its fair value.
During 2014, based on appraised values, the Company recorded impairment charges totaling $3,124,200 for two
Fokker 100 aircraft and two Fokker 50 aircraft that are held for lease, resulting in a carrying value of
$7,837,300. The fair value of such assets would be categorized as Level 2 under the GAAP fair value hierarchy. No
impairments were recorded on the Company's aircraft and aircraft engines held for lease in 2013.
During 2014, based on management's estimate of realizable value, the Company recorded impairment charges
totaling $15,612,300 for five Fokker 100 aircraft and one Fokker 50 aircraft that are held for sale, resulting in a
carrying value of $6,100,000. The fair value of such assets would be categorized as Level 3 under the GAAP fair
value hierarchy. No impairments were recorded on the Company's aircraft and aircraft engines held for sale in 2013.
28
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
1.
Organization and Summary of Significant Accounting Policies (continued)
Fair Value of Other Financial Instruments
The Company’s financial instruments, other than cash and cash equivalents, consist principally of finance leases
receivable and amounts borrowed under its credit facility (the “Credit Facility,” as defined in Note 7). The fair
value of accounts receivable, finance leases receivable, accounts payable and the Company’s maintenance reserves
and accrued maintenance costs approximates the carrying value of these financial instruments.
Borrowings under the Company’s Credit Facility bear floating rates of interest that reset periodically to a market
benchmark rate plus a credit margin. The Company believes the effective interest rate of this debt agreement
approximates current market rates for such indebtedness at the balance sheet date, and therefore that the carrying
amount of its floating rate debt at the balance sheet dates approximates its fair value. The fair value of the
Company’s outstanding balance of its Credit Facility would be categorized as Level 3 under the GAAP fair value
hierarchy.
(f)
Impairment of Long-lived Assets
The Company reviews assets for impairment when there has been an event or a change in circumstances indicating
that the carrying amount of a long-lived asset may not be recoverable. In addition, the Company routinely reviews
all long-lived assets for impairment annually. Recoverability of an asset is measured by comparison of its carrying
amount to the future estimated undiscounted cash flows (without interest charges) that the asset is expected to
generate. Estimates are based on currently available market data and independent appraisals and are subject to
fluctuation from time to time. If these estimated future cash flows are less than the carrying value of an asset at the
time of evaluation, any impairment to be recognized is measured by the amount by which the carrying amount of the
asset exceeds its fair value. Fair value is determined by reference to independent appraisals and other factors
considered relevant by management. Significant management judgment is required in the forecasting of future
operating results that are used in the preparation of estimated future undiscounted cash flows and, if different
conditions prevail in the future, material write-downs may occur. As discussed in (e) Fair Value Measurements
above, the Company recorded impairment provisions totaling $18,736,500 in 2014. No impairment provisions were
recorded in 2013.
(g)
Deferred Financing Costs and Commitment Fees
Costs incurred in connection with debt financing are deferred and amortized over the term of the debt using the
effective interest method or, in certain instances where the differences are not material, using the straight-line
method. Costs incurred in connection with the Company’s Credit Facility are deferred and amortized using the
straight-line method. Commitment fees for unused funds are expensed as incurred.
29
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
1.
Organization and Summary of Significant Accounting Policies (continued)
(h)
Security deposits
The Company’s leases are typically structured so that if any event of default occurs under a lease, the Company may
apply all or a portion of the lessee’s security deposit to cure such default. If such application of the security deposit
is made, the lessee typically is required to replenish and maintain the full amount of the deposit during the remaining
term of the lease. All of the security deposits received by the Company are refundable to the lessee at the end of the
lease upon satisfaction of all lease terms.
(i)
Taxes
As part of the process of preparing the Company’s financial statements, management estimates income taxes in each
of the jurisdictions in which the Company operates. This process involves estimating the Company’s current tax
exposure under the most recent tax laws and assessing temporary differences resulting from differing treatment of
items for tax and GAAP purposes. These differences result in deferred tax assets and liabilities, which are included
in the balance sheet. Management also assesses the likelihood that the Company’s deferred tax assets will be
recovered from future taxable income, and, to the extent management believes it is more likely than not that some
portion or all of the deferred tax assets will not be realized, the Company establishes a valuation allowance. To the
extent the Company establishes a valuation allowance or changes the allowance in a period, the Company reflects
the corresponding increase or decrease within the tax provision in the statement of operations. Significant
management judgment is required in determining the Company’s future taxable income for purposes of assessing the
Company’s ability to realize any benefit from its deferred taxes.
The Company accrues non-income based sales, use, value added and franchise taxes as other tax expense in the
statements of operations.
(j)
Revenue Recognition, Accounts Receivable and Allowance for Doubtful Accounts
Revenue from leasing of aircraft assets is recognized as operating lease revenue on a straight-line basis over the
terms of the applicable lease agreements. Deferred payments are recorded as accrued rent when the cash rent
received is lower than the straight-line revenue recognized. Such receivables decrease over the term of the
applicable leases. Interest income is recognized on finance leases based on the interest rate implicit in the lease and
the outstanding balance of the lease receivable. Maintenance reserves retained by the Company at lease-end are
recognized as maintenance reserves revenue.
In instances where collectability is not reasonably assured, the Company recognizes revenue as cash payments are
received. The Company estimates and charges to income a provision for bad debts based on its experience with
each specific customer, the amount and length of payment arrearages, and its analysis of the lessee’s overall
financial condition. If the financial condition of any of the Company’s customers deteriorates, it could result in
actual losses exceeding any estimated allowances.
The Company had no allowance for doubtful accounts at December 31, 2014 and 2013.
(k)
Comprehensive (Loss)/Income
The Company does not have any comprehensive income other than the revenue and expense items included in the
statements of operations. As a result, comprehensive (loss)/income equals net (loss)/income for the years ended
December 31, 2014 and 2013.
30
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
1.
(l)
Organization and Summary of Significant Accounting Policies (continued)
Finance Leases
The lease for one of the Company’s aircraft contained a lessee purchase option at a price substantially below the
asset's estimated residual value at the exercise date for the option. Consequently, the Company considered the
purchase option to be a “bargain purchase option” and classified the lease as a finance lease for financial accounting
purposes. The Company does not include the value, purchase price or accumulated depreciation of finance lease
assets on its balance sheet. Instead, the discounted present value of (i) future minimum lease payments (including
the bargain purchase option) and (ii) any residual value not subject to a bargain purchase option are reported as a
finance lease receivable. Rental revenue and depreciation expense are not recognized on finance leases. Rather, the
Company accrues interest on the balance of the finance lease receivable based on the interest rate inherent in the
applicable lease. The aircraft that was subject to a finance lease was sold to the lessee during 2014.
Two engines that were previously subject to finance leases were returned to the Company during 2014 and the
finance lease receivable balances were reclassified to aircraft and aircraft engines held for lease on the Company’s
balance sheet.
The Company recognized interest earned on finance leases as “other income” in the amount of $150,000 and
$175,700 in 2014 and 2013, respectively.
(m)
Recent Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No.
2014-09 (the "ASU") that created the new Topic 606 in the Accounting Standards Codification ("ASC"). The ASU
also included numerous conforming additions and amendments to other Topics within the ASC. Topic 606
establishes new rules that affect the amount and timing of revenue recognition for contracts with customers, but does
not affect lease accounting and reporting. As such, adoption of these provisions will not affect the Company's lease
revenues but may affect the reporting of other of the Company's revenues. The provisions included in the ASU are
effective for years commencing after December 15, 2016, cannot be adopted early, and may be reflected using either
a full retrospective method or a simplified method that does not recast prior periods but does disclose the effect of
the adoption on the current period financial statements. The Company has not determined either the potential
impact on its financial statements nor the method it will elect to use in connection with the adoption of the changes
included in the ASU.
On August 27, 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements - Going Concern,"
which added Subtopic 205-40 to the ASC (the "Subtopic"). This Subtopic requires management to determine
whether substantial doubt exists concerning the reporting entity's ability to continue as a going concern, in which
case certain disclosures will be required. The Subtopic affects financial statement presentation but not methods of
accounting, and is effective on a prospective basis for annual periods ending after December 2016 and each
reporting period thereafter, although early adoption is permitted. The Company has not early adopted the Subtopic.
31
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
2.
Change in Accounting Principle
The Company previously adopted the direct expensing method under Financial Accounting Standards Board
(“FASB”) ASC 908, formerly FASB Staff Position AUG AIR-1, Accounting for Planned Major Maintenance
Activities (“FSP AUG AIR-1”) on January 1, 2007. Under FSP AUG AIR-1, non-refundable maintenance reserves
were recorded as maintenance reserves revenue (assuming cash was received or collection was reasonably assured),
and associated maintenance work was recorded as maintenance expense when the work was performed. During the
first quarter of 2014, the Company evaluated its method of accounting for maintenance reserves and lessor
maintenance obligations and elected to change its method of accounting to:
(i) Recognize non-refundable maintenance reserves as liabilities for deposits against future maintenance
reimbursements of maintenance reserves received in the normal course of ongoing leases;
(ii) Recognize reimbursements from such collected reserves as disbursements against the liability when
claims are submitted for payment against previously collected maintenance reserves;
(iii) Reflect as liabilities non-refundable reserves received by the prior lessor upon acquisition of an
aircraft, which are claimable by the lessee when maintenance is performed;
(iv) Recognize as income non-refundable reserves not refunded to lessees upon termination of the lease and
return of the aircraft to the Company in accordance with all lease return requirements; and
(v) Record lessor maintenance obligations as liabilities upon acquisition of an aircraft subject to a lease
under which the Company assumes the prior lessor’s obligation to pay a portion of a first-time
maintenance event.
In management’s judgment, the change to this accounting method is preferable in that it will provide the user of the
Company’s financial statements a better understanding of the underlying business terms of the Company’s leasing
transactions and provide additional clarity with respect to the Company’s sources of income, its non-refundable
reserve obligations, and its lessor maintenance obligations. The Company has applied the change in method of
accounting for maintenance reserves and lessor maintenance obligations to all prior periods presented within the
financial statements in accordance with accounting principles relating to accounting changes. The change in
accounting principle resulted in a cumulative net decrease of $8,088,200 in stockholders’ equity as of January 1,
2013.
32
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
2.
Change in Accounting Principle (continued)
The effects on the Company’s balance sheet at December 31, 2013 as a result of the retroactive application of the
change in accounting principle in accordance with ASC 250 were as follows:
Cash and cash equivalents
Accounts receivable, net
Finance leases receivable
Aircraft and aircraft engines held for lease, net
Assets held for sale
Prepaid expenses and other
Total assets
Accounts payable and accrued expenses
Notes payable and accrued interest
Maintenance reserves and accrued maintenance costs
Security deposits
Unearned revenues
Deferred income taxes
Total liabilities
Preferred stock
Common stock
Paid-in capital
Retained earnings
Treasury stock
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31, 2013
As reported
previously
$ 2,112,700
3,313,700
1,895,200
152,375,200
735,000
3,633,000
$164,064,800
$ 1,175,300
77,527,300
13,254,100
6,265,000
646,700
16,099,700
114,968,100
-
1,600
14,780,100
34,819,100
(504,100)
49,096,700
$164,064,800
As adjusted
$ 2,112,700
3,303,800
1,895,200
152,954,600
735,000
3,633,000
$164,634,300
$ 1,202,700
77,527,300
18,283,900
6,265,000
646,700
14,573,800
118,499,400
-
1,600
14,780,100
31,857,300
(504,100)
46,134,900
$164,634,300
Effect of
change
$ -
(9,900)
-
579,400
-
-
$ 569,500
$ 27,400
-
5,029,800
-
-
(1,525,900)
3,531,300
-
-
-
(2,961,800)
-
(2,961,800)
$ 569,500
33
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
2.
Change in Accounting Principle (continued)
The effects on the Company’s statement of operations for the year ended December 31, 2013 as a result of the
retroactive application of the change in accounting principle in accordance with ASC 250 were as follows:
Operating lease revenue, net
Maintenance reserves income, net
Gain on disposal of assets and other income
Maintenance
Depreciation
Management fees
Interest
Professional fees, general and administrative and other
Insurance
Other taxes
Income before taxes
Tax provision
Net income
Earnings per share:
Basic
Diluted
For the Year Ended
December 31, 2013
As reported
previously
As adjusted
Effect of
change
$ 18,794,200
8,878,300
4,527,000
32,199,500
$18,794,200
14,910,400
4,527,000
38,231,600
$ -
6,032,100
-
6,032,100
8,765,000
7,312,500
4,352,400
4,075,000
1,532,100
1,166,400
90,200
27,293,600
6,962,400
7,363,100
4,369,300
4,075,000
1,532,100
1,166,400
90,200
25,558,500
(1,802,600)
50,600
16,900
-
-
-
-
(1,735,100)
4,905,900
1,688,400
$ 3,217,500
12,673,100
4,329,200
$ 8,343,900
7,767,200
2,640,800
$ 5,126,400
$ 2.08
$ 2.03
$ 5.41
$ 5.26
$ 3.33
$ 3.23
34
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
2.
Change in Accounting Principle (continued)
The effects on the Company’s statement of cash flows for the year ended December 31, 2013 as a result of the
retroactive application of the change in accounting principle in accordance with ASC 250 were as follows:
Operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Net gain on disposal of assets
Depreciation
Non-cash interest
Deferred income taxes
Changes in operating assets and liabilities:
Accounts receivable
Finance lease receivable
Income taxes receivable
Prepaid expenses and other
Accounts payable and accrued expenses
Accrued interest on notes payable
Maintenance reserves and accrued costs
Security deposits
Unearned revenue
Income taxes payable
Net cash provided by operating activities
Investing activities:
Proceeds from sale of aircraft and aircraft
engines held for lease, net of re-sale fees
Proceeds from sale of assets held for sale,
net of re-sale fees
Purchases of aircraft and aircraft engines
Net cash used in investing activities
Financing activities:
Borrowings under Credit Facility
Repayments of Credit Facility
Debt issuance costs
Net cash provided by financing activities
Net increase in cash and cash equivalents
For the Year Ended
December 31, 2013
As reported
previously
As adjusted
Effect of
change
$ 3,217,500
$ 8,343,900
$ 5,126,400
(3,808,200)
7,312,500
1,113,600
1,680,500
(3,808,200)
7,363,100
1,113,600
4,321,300
(106,000)
246,000
2,000
(772,400)
(40,300)
(38,400)
(1,284,200)
(525,200)
(105,700)
(19,100)
6,872,600
(96,100)
246,000
2,000
(772,400)
(23,400)
(38,400)
(9,128,800)
(525,200)
(105,700)
(19,100)
6,872,600
-
50,600
-
2,640,800
9,900
-
-
-
16,900
-
(7,844,600)
-
-
-
-
10,018,700
10,018,700
945,100
(24,965,500)
(14,001,700)
945,100
(24,965,500)
(14,001,700)
19,000,000
(9,300,000)
(2,055,000)
7,645,000
19,000,000
(9,300,000)
(2,055,000)
7,645,000
515,900
515,900
-
-
-
-
-
-
-
-
-
-
Cash and cash equivalents, beginning of year
1,596,800
1,596,800
Cash and cash equivalents, end of year
$ 2,112,700
$ 2,112,700
$ -
35
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
3.
Aircraft and Aircraft Engines Held for Lease or Sale
(a)
Assets Held for Lease
At December 31, 2014 and December 31, 2013, the Company’s aircraft and aircraft engines, which were on lease or
held for lease, consisted of the following:
Model
Bombardier Dash-8-300
Bombardier CRJ-700
Bombardier CRJ-900
Bombardier Dash-8-Q400
ATR 42-600
Bombardier CRJ-705
Saab 340B Plus
Fokker 50
General Electric CF34-8E5 engine
Fokker 100
Saab 340B
Tay 650-15 engine
General Electric CT7-9B engine
Saab 340A
December 31, 2014
% of net
book value
Number
owned
December 31, 2013
% of net
book value
Number
owned
8
3
2
3
1
1
6
6
2
2
1
1
2
-
17%
16%
16%
13%
9%
9%
7%
5%
4%
3%
1%
-
-
-
9
-
-
3
-
1
6
10
3
7
4
1
2
1
23%
-
-
17%
-
12%
8%
10%
6%
19%
4%
1%
-
-
Assets subject to finance leases are not included in the net book value of assets held for lease. Therefore, the
Company’s single Saab 340A aircraft and two General Electric CT7-9B engines, which were subject to finance
leases in 2013, are not included in the net book value calculation as of December 31, 2013.
During 2014, based on appraised values, the Company recorded impairment charges on assets held for lease totaling
$2,906,400 and $217,800 on two Fokker 100 and two Fokker 50 aircraft, respectively.
During 2014 and 2013, the Company used cash of $74,529,000 and $24,965,500, respectively, for the purchase and
capital improvement of aircraft and engines.
During 2014, the Company recorded net gains totaling $3,147,200 from the sale of three Fokker 50 aircraft, five
Saab 340B aircraft, one Bombardier Dash-8-300 aircraft and one General Electric CF34-8E5 engine. During 2013,
the Company recorded net gains totaling $4,504,200 from the sale of three Fokker 50 aircraft, a deHavilland DHC-
8-100 aircraft, a deHavilland DHC-6 aircraft and a General Electric CT7-9B engine. The Company also leased an
engine pursuant to a finance lease in 2013 and recorded a gain of $73,300. In addition, the Company recorded a loss
of $769,300 in 2013 on the disposal of a Tay 650-15 engine, which was replaced by one of the Company's spare
engines.
During 2014, the Company extended the leases for nine of its assets and leased two assets that had been off lease at
December 31, 2013.
In May 2014, six Saab 340B Plus aircraft and two General Electric CT7-9B engines were returned by a customer
when it ceased operations. Two of the aircraft have been re-leased.
36
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
3.
Aircraft and Aircraft Engines Held for Lease or Sale (continued)
(a)
Assets Held for Lease (continued)
Ten of the Company’s assets that are held for lease were off lease at December 31, 2014, representing 10% of the
net book value of the Company’s aircraft and engines held for lease. Such assets were comprised of four Saab 340B
Plus aircraft, one Saab 340B aircraft, and five engines.
(b)
Assets Held for Sale
Assets held for sale include two Saab 340B airframes, which are being sold in parts, as well as five Fokker 100
aircraft and a Fokker 50 aircraft.
During 2014 and 2013, the Company received $312,100 and $945,100, respectively, from the sale of parts belonging
to the two airframes, which proceeds reduced their carrying value.
During 2014, the Company recorded impairment charges totaling $15,278,900 and $333,400 related to five Fokker
100 aircraft and one Fokker 50 aircraft, respectively. At December 31, 2014, five of the Fokker 100 aircraft and one
of the Fokker 50 aircraft were classified as held for sale on the Company's balance sheet. As discussed in Note 13,
the Company sold the Fokker 50 aircraft in March 2015.
4.
Maintenance Reserves and Accrued Maintenance Costs
Maintenance costs under the Company’s triple net leases are generally the responsibility of the lessees. Most of the
Company’s leases require payment of maintenance reserves, which are based upon lessee-reported usage and billed
monthly, and are intended to accumulate and be applied by the Company toward reimbursement of most or all of the
cost of the lessees’ performance of certain maintenance obligations under the leases. Maintenance reserves are
characterized as either refundable or non-refundable depending on their disposition at lease-end. The Company
retains non-refundable maintenance reserves at lease-end, even if the lessee has met all of its obligations under the
lease, including any return conditions applicable to the leased asset, while refundable reserves are returned to the
lessee under such circumstances.
The liabilities for maintenance reserves in the accompanying balance sheets include both refundable and non-
refundable maintenance reserves payments billed to and received from lessees. These amounts are paid out as
related maintenance is performed and, in the case of refundable reserves, at the end of the lease. Such payments
reduce the associated maintenance reserve liability. Any reserves retained by the Company at lease end are recorded
as revenue at that time.
Accrued maintenance costs include (i) maintenance for work performed for off-lease aircraft, which is not related to
the release of reserves received from lessees and (ii) lessor maintenance obligations assumed upon acquisition of
aircraft subject to a lease with such provisions. Maintenance costs are expensed as incurred.
37
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
5.
Operating Segments
The Company operates in one business segment, the leasing of regional aircraft to foreign and domestic regional
airlines, and therefore does not present separate segment information for lines of business.
Approximately 18% and 0% of the Company’s operating lease revenue was derived from lessees domiciled in the
United States during 2014 and 2013, respectively. All revenues relating to aircraft leased and operated
internationally are denominated and payable in U.S. dollars.
The tables below set forth geographic information about the Company’s operating lease revenue for leased aircraft
and aircraft equipment, grouped by domicile of the lessee:
Operating Lease Revenue
North America
Africa
Central and South America
Asia
Europe and United Kingdom
Australia
For the Years Ended December 31,
2014
2013
$ 6,423,700
5,183,600
3,533,300
3,460,400
2,952,300
360,000
$21,913,300
$ 1,542,000
5,454,700
4,233,000
4,149,000
3,415,500
-
$18,794,200
Net Book Value of Aircraft and Aircraft Engines Held for Lease
2014
2013
December 31,
North America
Europe and United Kingdom
Africa
Off lease
Asia
Central and South America
Australia
6.
Concentration of Credit Risk
$ 65,423,400
43,468,700
28,858,200
17,106,000
16,588,900
10,146,100
5,171,300
$186,762,600
$ 17,779,000
20,384,700
29,951,800
34,446,300
31,068,800
19,324,000
-
$152,954,600
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash
deposits and receivables. The Company places its deposits with financial institutions and other creditworthy issuers
and limits the amount of credit exposure to any one party.
For the year ended December 31, 2014 the Company had four significant customers, which accounted for 20%,
18%, 14% and 11%, respectively, of lease revenue. For the year ended December 31, 2013 the Company had four
significant customers, which accounted for 23%, 19%, 11% and 10%, respectively, of lease revenue.
At December 31, 2014, the Company had receivables from two customers totaling $1,130,000, representing 56% of
the Company’s total receivables. The two customers paid the amounts owed in full in early 2015.
38
AeroCentury Corp.
Notes to Financial Statements
December 31, 2013
6.
Concentration of Credit Risk (continued)
At December 31, 2013, the Company had receivables from two customers totaling $1,231,500, representing 40% of
the Company’s total receivables, all of which was paid in 2014.
As of December 31, 2014, minimum future lease revenue payments receivable under noncancelable leases were as
follows:
Years ending
2015
2016
2017
2018
2019
Thereafter
$ 22,938,700
21,300,400
17,937,600
13,719,200
12,860,000
37,596,300
$126,352,200
7.
Notes Payable and Accrued Interest
At December 31, 2014 and December 31, 2013, the Company’s notes payable and accrued interest consisted of the
following:
Credit Facility principal
Credit Facility accrued interest
December 31,
2014
December 31,
2013
$133,400,000
190,600
$77,500,000
27,300
$133,590,600
$77,527,300
The Company's Credit Facility is provided by a syndicate of banks and is secured by all of the assets of the
Company, including its aircraft and engine portfolio.
In November 2013, the Company obtained a waiver of compliance with a customer concentration covenant under its
Credit Facility at the September 30, 2013 and December 31, 2013 calculation dates. The Company was in
compliance with all covenants other than the waived covenant under the Credit Facility agreement at December 31,
2013.
During May 2014, the Company’s Credit Facility was increased from $130 million to $180 million and extended
through May 31, 2019.
The Company was out of compliance with a profitability covenant at June 30, 2014, primarily as a result of the
Company recording aircraft impairment charges on aircraft totaling $6,800,000 during the quarter then ended. In
August 2014, the Company and the Credit Facility banks agreed to an amendment to the profitability covenant,
which cured the June 30, 2014 non-compliance.
39
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
7.
Notes Payable and Accrued Interest (continued)
The Company was out of compliance with the profitability, interest coverage and debt service coverage covenants at
September 30, 2014, resulting primarily from the Company recording additional aircraft impairment charges on
aircraft totaling $11,718,700 during the third quarter of 2014. In November 2014, the Company and the Credit
Facility banks agreed to an amendment to the Credit Facility, which cured the September 30, 2014 non-compliance,
revised the compliance requirements through September 30, 2015, decreased the amount of the Credit Facility to
$150 million due to the departure of two participant lenders, and decreased the maximum amount to which the
Credit Facility can be expanded from $200 million to $180 million.
The unused amount of the Credit Facility was $16,600,000 and $52,500,000 as of December 31, 2014 and
December 31, 2013, respectively.
The weighted average interest rate on the Credit Facility was 3.58% and 3.94% at December 31, 2014 and
December 31, 2013, respectively.
8.
Stockholder Rights Plan
In December 2009, the Company’s Board of Directors adopted a stockholder rights plan granting a dividend of one
stock purchase right for each share of the Company’s common stock outstanding as of December 18, 2009 and the
Company entered into a rights agreement dated December 1, 2009 in connection therewith. The rights become
exercisable only upon the occurrence of certain events specified in the rights agreement, including the acquisition of
15% of the Company’s outstanding common stock by a person or group in certain circumstances. Each right allows
the holder, other than an “acquiring person,” to purchase one one-hundredth of a share (a unit) of Series A Preferred
Stock at an initial purchase price of $97.00 under circumstances described in the rights agreement. The purchase
price, the number of units of preferred stock and the type of securities issuable upon exercise of the rights are subject
to adjustment. The rights expire at the close of business December 1, 2019 unless earlier redeemed or exchanged.
Until a right is exercised, the holder thereof, as such, has no rights as a stockholder of the Company, including the
right to vote or to receive dividends.
9.
Income Taxes
The items comprising the income tax provision are as follows:
Current tax provision:
Federal
State
Foreign
Current tax provision
Deferred tax (benefit)/provision:
Federal
State
Decrease in valuation allowance
Deferred tax (benefit)/provision
For the Years Ended December 31,
2014
2013
(As adjusted)
$ -
800
-
800
$ -
800
7,100
7,900
(5,854,400)
(98,200)
-
(5,952,600)
4,478,800
1,100
(158,600)
4,321,300
Total income tax (benefit)/provision
$(5,951,800)
$4,329,200
40
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
9.
Income Taxes (continued)
Total income tax expense differs from the amount that would be provided by applying the statutory federal income
tax rate to pretax earnings as illustrated below:
For the Years Ended December 31,
2014
2013
(As adjusted)
Income tax (benefit)/provision at statutory federal income tax rate
State tax (benefit)/provision, net of federal benefit
Prior year withholding tax adjustment
Decrease in valuation allowance
Other
Total income tax (benefit)/provision
$(5,863,600)
(97,500)
-
-
9,300
$(5,951,800)
$4,308,900
19,400
174,600
(158,600)
(15,100)
$4,329,200
Temporary differences and carry-forwards that give rise to a significant portion of deferred tax assets and liabilities
as of December 31, 2014 and 2013 were as follows:
Deferred tax assets:
Maintenance reserves
Foreign tax credit carryover
Alternative minimum tax credit
Bad debt allowance and other
Deferred tax assets
Deferred tax liabilities:
Accumulated depreciation on aircraft and aircraft engines
Minimum lease payments receivable
Deferred income
Net deferred tax liabilities
December 31,
2014
2013
(As adjusted)
$ 2,138,900
-
10,800
961,100
3,110,800
$ 1,813,900
1,210,900
100,800
490,100
3,615,700
(10,450,000)
-
(1,282,100)
$ (8,621,300)
(17,540,000)
(649,500)
-
$(14,573,800)
All foreign tax credit carryovers were used to offset federal tax expense in 2014. The foreign tax credit carryovers
are expected to expire between 2016 and 2022. A significant portion of the alternative minimum tax credit was used
to offset federal tax expense in the current year. The remaining alternative minimum tax credit will be available to
offset federal tax expense in excess of the alternative minimum tax in future years and does not expire.
At December 31, 2014 and December 31, 2013, the Company had no material uncertain tax positions.
The Company accounts for interest related to uncertain tax positions as interest expense, and for income tax
penalties as tax expense.
All of the Company's tax years remain open to examination other than as barred in the various jurisdictions by
statutes of limitation.
41
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
10.
Computation of Earnings Per Share
Basic and diluted earnings per share are calculated as follows:
Net (loss)/income
Weighted average shares outstanding for the period
Dilutive effect of warrants
Weighted average diluted shares used in calculation
of diluted (loss)/earnings per share
Basic (loss)/earnings per share
Diluted (loss)/earnings per share
For the Years Ended December 31,
2014
2013
(As adjusted)
$(11,294,000)
$8,343,900
1,543,257
-
1,543,257
43,779
1,543,257
1,587,036
$ (7.32)
$ (7.32)
$ 5.41
$ 5.26
Basic earnings per common share is computed using net income and the weighted average number of common
shares outstanding during the period. Diluted earnings per common share are computed using net income and the
weighted average number of common shares outstanding, assuming dilution. Weighted average common shares
outstanding, assuming dilution, include potentially dilutive common shares outstanding during the period.
Potentially dilutive common shares include the assumed exercise of warrants using the treasury stock method. For
the year ended December 31, 2014, warrants for 81,224 shares were not included in the calculation of diluted loss
per share because the effect would have been anti-dilutive.
11.
Related Party Transactions
The Company’s portfolio of leased aircraft assets is managed and administered under the terms of a management
agreement with JetFleet Management Corp. (“JMC”), which is an integrated aircraft management, marketing and
financing business and a subsidiary of JetFleet Holding Corp. ("JHC"). Certain officers of the Company are also
officers of JHC and JMC and hold significant ownership positions in both JHC and the Company.
Under the management agreement, JMC receives a monthly management fee based on the net asset value of the
assets under management. Such fee, totaling approximately $1,200,000, was waived by JMC for the fourth quarter
of 2014. JMC also receives an acquisition fee for locating assets for the Company. Acquisition fees are included in
the cost basis of the asset purchased. JMC may receive a remarketing fee in connection with the re-lease or sale of
the Company’s assets. Remarketing fees are amortized over the applicable lease term or included in the gain or loss
on sale.
Fees incurred during 2014 and 2013 were as follows:
Management fees, net of approximately $1,200,000
of fees waived by JMC in 2014
Acquisition fees
Remarketing fees
42
For the Years Ended December 31,
2014
2013
$3,864,900
2,100,000
64,000
$4,369,300
799,000
589,300
AeroCentury Corp.
Notes to Financial Statements
December 31, 2014
12.
Warrants
As part of a previous subordinated debt financing, which was fully repaid in December 2011, the Company issued
warrants to purchase up to 81,224 shares of the Company’s common stock that are currently exercisable (and expire
on December 31, 2015) and represent approximately 5% of the post-exercise fully diluted capitalization of the
Company. The exercise price of the warrants is $8.75 per share.
13.
Subsequent Events
In March 2015, the Company sold a Fokker 50 aircraft that had been classified as held for sale at December 31,
2014 and recorded a gain of approximately $475,000.
43
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Controls and Procedures.
CEO and CFO Certifications. Attached as exhibits to this Annual Report on Form 10-K (the “Report”) are
certifications of the Company’s Chief Executive Officer (the “CEO”) and the Company’s Chief Financial Officer
(the “CFO”), which are required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302
Certifications”). This section of the Report includes information concerning the evaluation of disclosure controls and
procedures referred to in the Section 302 Certifications and this should be read in conjunction with the Section 302
Certifications for a more complete understanding of the topics presented.
Evaluation of the Company’s Disclosure Controls and Procedures. Disclosure controls and procedures
(“Disclosure Controls”) are controls and other procedures that are designed to ensure that information required to be
disclosed in the Company’s reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”), such as
this Report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission (“SEC”) and that such information is accumulated and communicated
to the Company’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding
required disclosure.
The Company’s management, with the participation of the CEO and CFO, evaluated the effectiveness of the design
and operation of the Company’s Disclosure Controls and concluded that the Company’s Disclosure Controls were
effective as of December 31, 2014.
Management’s Annual Report on the Company’s Internal Control Over Financial Reporting. Internal control
over financial reporting (“Internal Control”) is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes policies and procedures that (1) pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the
Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures
are being made only in accordance with authorizations of management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on the financial statements. The Company’s management is responsible for
establishing and maintaining adequate Internal Control. Management evaluated the Company’s Internal Control
based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control – Integrated Framework (1992) and concluded that the Company’s Internal Control was effective
as of December 31, 2014. This report does not include an attestation report on Internal Control by the Company’s
independent registered public accounting firm since the Company is a smaller reporting company under the rules of
the SEC.
Changes in Internal Control Over Financial Reporting. No change in Internal Control occurred during the fiscal
quarter ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, the
Company’s Internal Control.
Item 9B.
Other Information.
None.
44
Item 10.
Directors, Executive Officers and Corporate Governance.
PART III
The information required by this item is included under (i) “Proposal 1: Election of Directors” as it relates to
members of the Company’s Board of Directors, including the Company’s Audit Committee and the Company’s
Audit Committee financial experts, any changes to procedures by which security holders may recommend nominees
to the Company’s Board of Directors, (ii) “Information Regarding the Company’s Directors and Officers” as it
relates to the Company’s executive officers, and (iii) “Section 16(a) Beneficial Ownership Reporting Compliance”
as it relates to information concerning Section 16(a) beneficial ownership reporting compliance, in the Company’s
definitive proxy statement (“Proxy Statement”), to be filed in connection with the Company’s 2015 Annual Meeting
of Stockholders, and is incorporated herein by reference.
The Company has adopted a code of business conduct and ethics, or code of conduct. The code of conduct qualifies
as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules
promulgated thereunder. A copy of the code of conduct is available on the Company’s website at
http://www.aerocentury.com or upon written request to the Investor Relations Department, 1440 Chapin Avenue,
Suite 310, Burlingame, California 94010. To the extent required by law, any amendments to, or waivers from, any
provision of the code will be promptly disclosed publicly. To the extent permitted by such requirements, the
Company intends to make such public disclosure on its website in accordance with SEC rules.
Item 11.
Executive Compensation.
Incorporated by reference to the section of the Proxy Statement entitled “Information Regarding the Company’s
Directors and Officers — Employee Compensation.”
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Incorporated by reference to the section of the Proxy Statement entitled “Security Ownership of Certain Beneficial
Owners and Management.”
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Incorporated by reference to the section of the Proxy Statement entitled “Related Party Transactions.”
Item 14.
Principal Accountant Fees and Services.
Incorporated by reference to the section of the Proxy Statement entitled “Information Regarding Auditors – Audit
Fees.”
45
Item 15.
Exhibits.
(b)
Exhibits
PART IV
Exhibit
Number
10.19
10.20
10.21
10.22
10.23
31.1
31.2
32.1*
32.2*
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
Description
Second Amended and Restated Loan and Security Agreement, between
the Company and MUFG Union Bank, N.A., as agent and lender
(“Union”), and the other lenders under its credit facility, California
Bank and Trust, First Bank, Umpqua Bank, U.S. Bank National
Association, and Cathay Bank (collectively,
the “Participants”),
incorporated by reference to Exhibit 10.19 to the Quarterly Report on
Form 10-Q of the Company, filed with the Securities and Exchange
Commission (“SEC”) on August 13, 2014
Modification and Limited Waiver to Second Amended and Restated
Loan and Security Agreement between Union, the Participants and the
Company, dated as of August 26, 2014, incorporated by reference to
Exhibit 10.1 to the Report on Form 8-K of the Company, filed with the
SEC on September 2, 2014
Second Modification Agreement between Union, Participants and the
Company, dated as of November 13, 2014, incorporated by reference to
Exhibit 10.21 to the Report on Form 10-Q of the Company, filed with
the SEC on November 14, 2014
Form of Aircraft Sale Agreement (SN 15128) between the Company
and Adria Airways d.d., dated December 5, 2014
Form of Aircraft Sale Agreement (SN15129) between the Company and
Adria Airways d.d., dated December 5, 2014
Certification of Neal D. Crispin, Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Toni M. Perazzo, Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Neal D. Crispin, Chief Executive Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Toni M. Perazzo, Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
XBRL Instance Document
XBRL Schema Document
XBRL Calculation Linkbase Document
XBRL Label Linkbase Document
XBRL Presentation Linkbase Document
XBRL Definition Linkbase Document
* These certificates are furnished to, but shall not be deemed to be filed with, the Securities and Exchange
Commission.
46
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.
SIGNATURES
AEROCENTURY CORP.
By
/s/ Toni M. Perazzo
-------------------------------
Toni M. Perazzo
Senior Vice President-Finance and
Chief Financial Officer
Date March 12, 2015
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Neal D. Crispin and Toni M. Perazzo, and each of them, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K and to file
the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated.
Signature
Title
Dated
/s/ Neal D. Crispin
----------------------
Neal D. Crispin
/s/ Toni M. Perazzo
----------------------
Toni M. Perazzo
/s/ Roy E. Hahn
----------------------
Roy E. Hahn
/s/ Thomas W. Orr
----------------------
Thomas W. Orr
/s/ Evan M. Wallach
----------------------
Evan M. Wallach
/s/ David P. Wilson
----------------------
David P. Wilson
Director, President and Chairman of the Board of
Directors of the Registrant (Principal Executive Officer)
March 12, 2015
Director, Senior Vice President-Finance and Secretary of the
Registrant (Principal Financial and Accounting Officer)
March 12, 2015
Director
Director
Director
Director
47
March 12, 2015
March 12, 2015
March 12, 2015
March 12, 2015
CORPORATE INFORMATION
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Neal D. Crispin
President and Chairman of the Board
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Toni M. Perazzo
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Morrison & Foerster LLP
755 Page Mill Road
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Christopher B. Tigno
General Counsel
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Managing Director of Marbridge Group, LLC
Thomas W. Orr, Director, Audit Committee Chair
Accounting Consultant
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AeroCentury Corp.
1440 Chapin Ave., Suite 310
Burlingame, CA 94010
650-340-1888
Fax: 650-696-3929
www.aerocentury.com