ANNUAL
REPORT
2018
AeroCentury Corp.
1440 Chapin Avenue
Suite 310
Burlingame, CA 94010
Phone: 650.340.1888
www.AeroCentury.com
WORLDWIDE REGIONAL
AIRCRAFT LEASING
Annual
Report
2018
This Annual Report contains forward-looking statements
within the “safe harbor” provisions of the Private
Securities Litigation Reform Act of 1995. All statements
in this Annual Report other than purely historical
statements are forward-looking statements. Forward-
looking statements in this Annual Report include,
without
limitation, statements that the Company
using its existing organization can manage a larger
portfolio without adding more resources; that good
acquisition opportunities will be available even in the
midst of an economic downturn; that the Company’s
recent moves have positioned it well to respond and
thrive in changing economic times; that major steps
taken during 2018 have positioned the Company well
for further growth and success in the coming year and
beyond; that the Company aims to grow its presence
in the regional airline market with its focus on mid-life
turboprops and regional jets; that the Company’s goal
is to have a balance between jets and turboprops while
transitioning from older to newer generation aircraft;
that the average value of the Company’s portfolio of
aircraft will increase; that the Company aims to maintain
a diverse customer base and be a reliable long-term
partner for regional airlines; that the Company’s long
term vision should create value for shareholders and
a continued role as a trusted supplier to customers.
The Company’s beliefs, expectations, forecasts, objectives
and strategies for the future are not guarantees of future
performance and are subject to risks and uncertainties that
could cause actual results to differ materially from the results
contemplated by the forward-looking statements, including
but not limited to the continued availability of financing
for its acquisitions; the Company’s ability to comply with
the covenants under its loan agreements and other debt
instruments; the potential impact on the Company’s
debt obligations of developments regarding LIBOR,
including the potential phasing out of this metric; the
Company’s ability to locate and acquire appropriate
and revenue-producing assets; deterioration of the
market for or appraised values of aircraft owned by the
Company; a surge in interest rates; any noncompliance
by the Company’s lessees with obligations under their
respective leases, including payment obligations; any
economic downturn or other financial crisis; the timing,
rate and amount of maintenance expenses for the
Company’s asset portfolio, as well as the distribution
of these expenses among the assets in the portfolio;
the Company’s ability to internalize the management
services previously performed by JetFleet Management
Corp.; the lack of unanticipated increases in costs and
expenses required to manage the Company’s aircraft
portfolio; the lack of unanticipated changes in the
status of its lessees that would require more intensive
oversight and expense in monitoring and managing its
assets leased to such lessee; the Company’s ability to
raise capital on acceptable terms when needed and in
desired amounts, or at all; and future trends and results
that cannot be predicted with certainty. The forward-
looking statements in this Annual Report and the
Company’s future results of operations are subject
to additional risks and uncertainties set forth under
the heading “Factors that May Affect Future Results” in
documents filed by the Company with the Securities and
Exchange Commission, including the Company’s quarterly
reports on Form 10-Q, and the Company’s latest annual
report on Form 10-K included with this Annual Report, and
are based on information available to the Company on
the date hereof. The Company does not intend, and assumes
no obligation, to update any forward-looking statements
made in this Annual Report. Readers are cautioned not to
place undue reliance on forward-looking statements, which
speak only as of the date of this Annual Report.
1
AeroCentury 2018 Annual Report “Our portfolio is now much
better positioned. We have
a unified Company structure,
and the priority for 2019
will be to attract
additional
equity and grow
the Company
because we
see many
opportunities in
the market.”
Michael Magnusson
CHIEF EXECUTIVE OFFICER
2
AeroCentury 2018 Annual Report Message
from Michael Magnusson, Chief Executive Officer
Dear Shareholder,
This past year was a challenging one, as we had to implement several actions to better position the
Company for the future.
AeroCentury has been in existence for over 20 years, and up until this year, its aircraft portfolio was managed
by the affiliated private company that founded it, JetFleet Management Corp. (“JetFleet”). The third party
management structure made sense when AeroCentury was one of a number of investment vehicles managed
by JetFleet, but over time JetFleet concluded the other investment vehicles, and AeroCentury remained the
only portfolio it managed. Meanwhile, in discussions with potential equity sources for AeroCentury, concern
was expressed over the lack of transparency with the third party management structure.
Therefore, AeroCentury and JetFleet agreed to merge, and on October 1, 2018, AeroCentury acquired Jet-
Fleet from its private shareholders, with AeroCentury issuing shares of its common stock and cash to the
JetFleet shareholders, and JetFleet becoming a wholly-owned subsidiary of AeroCentury.
In line with our previously stated ambitions, in 2018 we continued to renew the fleet and move to larger,
higher-value aircraft. The average value of our leased aircraft is now approximately $8 million compared to
approximately $3 million in 2010. This involved selling older assets that had lost value due to an increase in
availability of certain types. We sold two Q400s, two Saab 340s, two Fokker 50s, and a DHC8-300, incur-
ring a net loss in 2018. We now only have three aircraft for sale (one DHC8-300 and two Saab 340BPlus).
At the same time, consistent with our strategy to buy higher value newer regional aircraft, we bought two
Q400s on lease in Croatia. We also further trimmed overhead expenses.
Our portfolio is now much better positioned. Our existing organization can still manage a larger portfolio
without adding more resources. We have a unified Company structure, and the priority of 2019 will be to
attract additional equity and grow the Company because we see many opportunities in the market.
Some have expressed concerns that a possible recession is looming, and if this is borne out, we may be
heading into more challenging market conditions. But even in the midst of an economic downturn, we
believe that good acquisition opportunities will be available for AeroCentury.
Whatever the future holds, we believe the Company’s recent moves have positioned us well to respond
and thrive through changing economic times.
We are excited about 2019, and the opportunities it may present for AeroCentury.
Michael Magnusson
CHIEF EXECUTIVE OFFICER
3
AeroCentury 2018 Annual Report In February 2019, AeroCentury closed
two debt facilities totaling $189.3 million.
4
AeroCentury 2018 Annual Report
Message
from Toni Perazzo, Chief Financial Officer
Dear Shareholder,
During 2018, we launched a major effort to renew our revolving credit facility, which was due to expire at
the end of May 2019. At the same time, in order to free up borrowing capacity on our credit facility, we
embarked on an effort to move some of our assets from the credit facility to a non-recourse term loan
vehicle with amortizations matched to the various lease terms.
Both debt financings closed in February 2019. Our credit facility was renewed for a four-year term and
has a current availability of $145 million which can be increased to $160 million. Through our new $44.3
million term loan vehicle, we refinanced the debt on six regional jet aircraft.
Consistent with our fleet renewal program, we wrote down and sold some of our older assets during the
year. These efforts, in addition to the costs incurred in connection with the acquisition of our manage-
ment company, are the major factors contributing to our net loss in 2018.
With these one-time costs now behind us, we believe the major steps forward we have taken during
2018 with the acquisition of our management company and negotiating our new debt facilities have
positioned the Company well for further growth and success in the coming year and beyond.
Toni M. Perazzo
CHIEF FINANCIAL OFFICER
AeroCentury 2018 Annual Report
5
Corporate Profile
AeroCentury was formed in 1997 by the
consolidation of predecessor compa-
nies and was listed on the American
(now New York) Stock Exchange in Jan-
uary 1998 (NYSE American: ACY).
AeroCentury Corp. is an aircraft operating
lessor and finance company specializing in
leasing regional turboprop and jet aircraft
to regional airlines. The Company’s assets
consist of a variety of aircraft on lease to
operators and other commercial users in
North America, Europe, Africa, and Asia.
The Company utilizes triple net leases of
5 to 10 years in duration.
Our Management Experience
AeroCentury is proud of its 21 years of
aircraft experience with over 80 aircraft
purchased and 50 sold.
Vision Going Forward
AeroCentury aims to grow its presence
in the regional airline market with its
main focus on mid-life turboprops and
regional jets. Our goal is to have a bal-
ance between turboprops and regional
jets while transitioning from older gen-
eration to newer generation aircraft. This
will result in a portfolio of aircraft with a
higher average value.
AeroCentury remains committed to be-
ing a small opportunistic player in the
aircraft leasing market. The Company
aims to maintain a diverse customer
base and be a reliable long-term partner
for regional airlines.
This long-term vision should result in creating
value for our shareholders and a continued
role as a trusted supplier to our customers.
AeroCentury Board Members (L to R)
Roy Hahn, Evan Wallach, David Wilson, Toni Perazzo, Michael Magnusson
6
AeroCentury 2018 Annual Report Our Team
Michael Magnusson
CHIEF EXECUTIVE OFFICER
Toni Perazzo
CHIEF FINANCIAL OFFICER
& SECRETARY
Christopher Tigno
GENERAL COUNSEL
Frank Pegueros
SENIOR VICE PRESIDENT
OPERATIONS
Glenn Roberts
VICE PRESIDENT
CONTROLLER
Brian Ginna
VICE PRESIDENT
CORPORATE DEVELOPMENT
Christopher Hughes
MANAGER OF TAXATION
& ACCOUNTING
Harold Lyons
VICE PRESIDENT
FINANCE
Hans Middelkoop
VICE PRESIDENT
TECHNICAL SERVICES
Tom Stevens
VICE PRESIDENT
TECHNICAL SERVICES
Zoya Chittum
EXECUTIVE ASSISTANT
Janet Ratto
EXECUTIVE ASSISTANT
Our Independent Board Members
Evan Wallach
CHAIRMAN
Roy Hahn
AUDIT COMMITTEE
CHAIRMAN
David Wilson
COMPENSATION COMMITTEE
CHAIRMAN
7
AeroCentury 2018 Annual Report Growing Portfolio
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
Revenue
$30.7m $24.6m $29.4m $38.2m $28.7m $38.5m $28.7m $35.6m $27.1m
Net Income
$1.6m ($1.5)m $5.2m
$8.3m ($11.3)m $6.4m
$1.2m
$7.4m ($8.1m)
Portfolio(1)
$127m $124m $144m $152m $187m $155m $193m $195m $184m
Credit Facility
$90m
$130m
$150m
Term Loans
$170m $145m(2)
$44.3m(2)
Invested
$9m
$8m
$31m
$25m
$76m
0
$54m
$40m
Q400
340B+
Q400
S340B+
CRJ705
S340B+
CRJ700
CRJ900
ATR42
CRJ900
CRJ1000
E145
E175
$25m
Q400
Average
Utilization
78%
86%
76%
82%
92%
93%
93%
92%
(1) Operating leases
(2) Closed in February 2019
l
l
u
h
S
l
l
i
B
©
One of two Croatian Q400s we acquired in 2018 unloading in Frankfurt
8
AeroCentury 2018 Annual Report
Portfolio Evolution
Year:
2010
2011
2012
2013
2014
2015
2016
2017
2018
3
4
4
2
8
1
1
3
4
2
2
8
1
1
2
4
4
1
9
3
2
3
6
9
3
14
14
13
10
7
7
7
7
1
1
6
8
3
7
1
7
1
3
2
1
5
6
3
6
1
6
1
3
2
TURBOPROPS
DHC-6
S340A
S340B
S340BPlus
DHC8-100
DHC8-300
Q400
F50
ATR42-600
JETS
F100
CRJ705 (900)*
CRJ701ER
CRJ900
CRJ1000
E145
E175LR
* In 2018, the aircraft was converted to a CRJ900
ENGINES
3
3
4
6
5
5
1
5
6
3
3
2
1
3
4
2
4
1
4
6
2
3
1
3
4
2
3
3
1
2
5
2
1
3
5
2
3
3
1
Total Aircraft
% JET Value
43
30%
42
28%
44
22%
41
31%
39
45%
34
46%
30
66%
32
76%
26
76%
Average Value
$2.7m $2.8m $3.1m $3.5m $4.7m $4.8m $6.8m $6.8m $7.8m
For many years the Fokker F50 was an important part of our business, but now only one is left
9
AeroCentury 2018 Annual Report AeroCentury Current Customers
(26 aircraft and 11 customers as of 12/31/18)
Our technical team regularly inspects our owned aircraft
10
AeroCentury 2018 Annual Report AeroCentury Past Customers
In early 2019, bmi regional shut down, but our three E145s have been transferred to Loganair
11
AeroCentury 2018 Annual Report Aerocentury Fleet Focus
Leased Regional Aircraft – 2018
Outside
Focus
ACY Focus
Outside
Focus
ACY Focus
REGIONAL JETS
CRJ100/200
CRJ700/900/1000
ERJ
E170/175
E190/195
BAe 146/RJ
Fokker 100
SuperJet
Total
179
101
376
240
146
24
15
90
TURBOPROPS
ATR
BAe
DHC-8
Q400
Embraer/Fokker
Saab
Total
36
165
125
157
483
481
160
640
515
656
Source: Airline Business
Air Nostrum CRJ1000
Business Strategy
AeroCentury’s strategy is to focus on four groups of aircraft types—the Bombardier Q400
(high-speed turboprop for 76-90 passengers), the Bombardier CRJ700/900/1000
(regional jets for 70-100 passengers), the ATR 42/72 (46-72 seat turboprops), and
the Embraer E-jet(E170/175/190 70-100 seat regional jets). Today this fleet makes up
about 3,600 aircraft with regional airlines of which 1,300 are leased. All these types
are still in production, so the fleets are growing.
Between carriers expanding their regional aircraft fleet and aircraft being sold by other
leasing companies, we see many opportunities to grow our portfolio.
12
AeroCentury 2018 Annual Report
The CRJ 700/900/1000
family makes up the largest
part of our portolio.
AEROCENTURY PROFITABILITY HISTORY
M$
50
40
30
20
10
0
-10
-20
Revenue
Net Income/Loss
Lost new
ATR42
income
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
2018
September 11
Financial crisis Mexican
deregulation
*
!"#$%&#'()
*Write down and sale of older aircraft and merger costs
AeroCentury
is monitoring
new aircraft
developments
such as the
Mitsubishi MRJ
and Embraer E2.
13
AeroCentury 2018 Annual Report Summary of 201 8
During 2018, AeroCentury acquired its management company through a re-
verse triangular merger. The Company also negotiated a four-year extension
of its credit facility, as well as term loan financing for six assets. Both debt
arrangements closed in February 2019.
AeroCentury’s total revenue was down 24% to $27.1 million in 2018 compared
to $35.6 million in 2017, primarily due to decreased operating lease revenue,
maintenance reserves revenue and losses on sale. Expenses increased 13% to
$36.2 million, primarily as a result of higher interest expense, asset impairment
charges and a one-time settlement loss related to AeroCentury’s acquisition of
its management company. However, maintenance costs and salaries, benefits
and general and administrative expenses were reduced.
The net loss in 2018 was $8.1 million, which included $6.4 million of asset im-
pairments and net losses on sale of older aircraft. Although the Company in-
vested $25 million in two newer Bombardier Q400 aircraft during 2018, the
portfolio’s net book value decreased to $209 million, as a result of asset sales
and depreciation.
The utilization of the portfolio was 92%.
14
AeroCentury 2018 Annual Report 10-K Filing
16
AeroCentury 2018 Annual Report UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from ____________ to ____________
Commission File Number: 001-13387
AeroCentury Corp.
(Exact name of Registrant as Specified in Its Charter)
Delaware
(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 American Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes o No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted 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 such files).
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”
17
AeroCentury 2018 Annual Report
“accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer o
Non-accelerated filer x
Emerging growth company o
Accelerated filer o
Smaller reporting company x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of
the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 29, 2018,
the last business day of the registrant’s most recently completed second fiscal quarter (based upon the closing sale
price of the registrant’s common stock as of such date, as reported by the NYSE American Exchange) was
$19,051,000. Shares of common stock held by the registrant's officers and directors and beneficial owners of 10% or
more of the outstanding shares of the registrant's common stock have been excluded from the calculation of this
amount because such persons may be deemed to be affiliates of the registrant; however, the treatment of these persons
as affiliates of the registrant for purposes of this calculation is not, and shall not be considered, a determination as to
whether any such person is an affiliate of the registrant for any other purpose.
The number of shares of the registrant’s common stock outstanding as of March 18, 2019 was 1,545,884.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates information by reference to the registrant’s Proxy Statement
for its 2019 Annual Meeting of Stockholders. Except as expressly incorporated by reference, such Proxy Statement
shall not be deemed to be a part of this Annual Report on Form 10-K.
18
2
AeroCentury 2018 Annual Report
As used in this report, unless the context indicates otherwise, “AeroCentury” refers to AeroCentury Corp. and the
“Company” refers to AeroCentury together with its consolidated subsidiaries.
Forward-Looking Statements
This Annual Report on Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). All statements in this report other than statements of historical fact are forward-
looking statements for purposes of these provisions, including any statements of the Company’s plans and objectives
for future operations, the Company’s future financial or economic performance (including known or anticipated
trends), and the assumptions underlying or related to 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 in this report include statements about the following matters, although this list is not
exhaustive:
• The Company’s business plans and strategies, including its continued focus on acquiring used regional
aircraft, any potential for acquiring and managing new types and models of regional aircraft, and its
expectation that most of its future growth will be outside of North America;
• Matters related to the Company’s merger with JetFleet Holding Corp. ("JHC"), which was completed on
October 1, 2018, and the anticipated impact of the merger on the Company and its performance, including
any changes to the Company’s risk profile now that the Company has internalized the management services
previously performed for the Company by JetFleet Management Corp. ("JMC"), a subsidiary of JHC, and
the expectation that the combination effected by the merger could be accretive to the Company and create
value for the stockholders of the combined post-merger company;
• Certain industry trends and their impact on the Company and its performance, including: increasing
competition that results in higher acquisition prices for many of the aircraft types that the Company has
targeted to buy and, at the same time, downward pressure on lease rates for these aircraft; relatively lower
market demand for older aircraft types that are no longer in production, which could cause certain of the
Company’s aircraft to remain off lease for significant periods of time; and expectations of shakeouts of
weaker carriers in economically troubled regions, which could impact the financial condition and viability of
certain of the Company’s customers, and as a result, their demand for the Company’s aircraft and their ability
to fulfill their lease commitments and other obligations to the Company under existing leases;
• Expectations about the Company’s future liquidity, cash flow and capital requirements;
• The Company’s ability to comply with its credit facility (the “Credit Facility”), recently established term
loans (the “Term Loans”) and other outstanding debt instruments, including making payments of principal
and interest thereunder as and when required and complying with the financial and other covenants included
in these instruments;
• The Company’s ability to access additional sources of capital in the future as and when needed, in the
amounts desired, on terms favorable to the Company, or at all;
• The expected impact of existing or known threatened legal proceedings;
• The effect on the Company and its customers of complying with applicable government and regulatory
requirements in the numerous jurisdictions in which the Company and its customers operate;
• The Company’s cyber vulnerabilities and the anticipated effects on the Company if a cybersecurity threat or
incident were to materialize;
• General economic, market, political and regulatory conditions, including anticipated changes in these
conditions and the impact of such changes on customer demand and other facets of the Company’s business;
and
3
19
AeroCentury 2018 Annual Report
• The impact of the foregoing on the prevailing market price and trading volume of the Company’s common
stock.
All of the Company’s forward-looking statements involve risks and uncertainties that could cause the Company's
actual results to differ materially from those projected or assumed by such forward-looking statements. Among the
factors that could cause such differences are: the continued availability of financing under the Credit Facility or
otherwise; the Company’s ability to comply with the covenants under its Credit Facility, Term Loans and other debt
instruments; the potential impact on the Company’s debt obligations of developments regarding LIBOR, including
the potential phasing out of this metric; the Company's ability to locate and acquire appropriate and revenue-producing
assets; deterioration of the market for or appraised values of aircraft owned by the Company; a surge in interest rates;
any noncompliance by the Company's lessees with obligations under their respective leases, including payment
obligations; any economic downturn or other financial crisis; the timing, rate and amount of maintenance expenses
for the Company’s asset portfolio, as well as the distribution of these expenses among the assets in the portfolio;
following completion of the merger with JHC, the Company's ability to internalize the management services
previously performed by JMC and the costs to the Company to internally perform these services; the Company's ability
to raise capital on acceptable terms when needed and in desired amounts, or at all; limited trading volume in the
Company's stock; and the other factors detailed under "Factors That May Affect Future Results and Liquidity" in
Item 7 of this report. In addition, the Company operates in a competitive and evolving industry in which new risks
emerge from time to time, and it is not possible for the Company to predict all of the risks it may face, nor can it assess
the impact of all factors on its business or the extent to which any factor or combination of factors could cause actual
results to differ from expectations. As a result of these and other potential risks and uncertainties, the Company’s
forward-looking statements should not be relied on or viewed as predictions of future events.
This cautionary statement should be read as qualifying all forward-looking statements included in this report, wherever
they appear. All forward-looking statements and descriptions of risks included in this report are made as of the date
hereof based on information available to the Company as of the date hereof, and except as required by applicable law,
the Company assumes no obligation to update any such forward-looking statement or risk for any reason. You should,
however, consult the risks and other disclosures described in the reports the Company files from time to time with the
(“SEC”) after the date of this report for updated information.
20
4
AeroCentury 2018 Annual Report
Table of Contents
PART I
................................................................................................................................................ 22
Item 1.
Item 1A.
Item 1B.
Item 3.
Item 4.
Business. ............................................................................................................................................... 22
Risk Factors. .......................................................................................................................................... 24
Unresolved Staff Comments. ..................................................................................................................24
Legal Proceedings. ................................................................................................................................24
Mine Safety Disclosures. .......................................................................................................................25
PART II
................................................................................................................................................ 25
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Item 6.
Item 7.
Purchases of Equity Securities. ............................................................................................................. 25
Selected Financial Data. ....................................................................................................................... 25
Management’s Discussion and Analysis of Financial Condition and Results of Operations................25
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk. .............................................................42
Item 8.
Item 9.
Item 9A.
Item 9B.
Financial Statements and Supplementary Data. ................................................................................... 42
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. .............66
Controls and Procedures. ......................................................................................................................66
Other Information. ................................................................................................................................. 67
PART III
....................................................................................................................................67
Item 10.
Directors, Executive Officers and Corporate Governance....................................................................67
Item 11.
Executive Compensation. ...................................................................................................................... 67
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Item 13.
Item 14.
Related Stockholder Matters. ................................................................................................................ 68
Certain Relationships and Related Transactions, and Director Independence. ................................... 68
Principal Accountant Fees and Services. ..............................................................................................68
PART IV
....................................................................................................................................68
Item 15.
Item 16.
Exhibits, Financial Statements Schedules. ............................................................................................ 68
Form 10-K Summary. ............................................................................................................................ 69
21
AeroCentury 2018 Annual Report
Item 1.
Business.
Business of the Company
PART I
The Company is engaged in the business of investing in used regional aircraft equipment and leasing it to foreign and
domestic regional air carriers. The Company’s aircraft portfolio consists of 17 aircraft and one engine held for lease
as of December 31, 2018, most of which are mid-life regional aircraft, and its globally diverse customer base consists
of eleven airlines operating in nine countries.
On October 1, 2018, AeroCentury acquired JHC in a reverse triangular merger (“Merger”) for consideration of
approximately $2.9 million in cash and 129,217 shares of common stock. JHC is the sole shareholder of JMC, which
is an integrated aircraft management, marketing and financing business that manages and administers the Company's
portfolio of aircraft assets. Before the Merger, such management and administration were performed pursuant to the
terms of a management agreement (the "Management Agreement") between the Company and JMC. Post-Merger,
the management and administration services provided under the Management Agreement have become internalized
and under the control and management of the Company itself.
The Company’s principal business objective is to acquire aircraft assets and manage those assets in order to provide
a return on investment through lease revenue and, eventually, sale proceeds. The Company strives to achieve this
objective by reinvesting cash flow from operations and using short-term and long-term debt and/or equity financing.
The Company believes its ability to achieve this objective depends in large part on its success in three areas: asset
selection and acquisition, lessee selection and obtaining financing to acquire aircraft and engines.
Asset Selection and Acquisition. 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.
The Company locates customers through marketing efforts utilizing website listings, attendance and sponsorship of
industry conferences, referrals from existing industry contacts and current customers, and focused advertising.
The Company generally targets used regional aircraft with purchase prices between $10 million and $20 million and
lease terms of three to ten years. In identifying and selecting 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
the Company has extensive experience in purchasing, leasing and selling used regional aircraft, it believes it has the
expertise and industry knowledge to purchase these assets at appropriate prices and maintain an acceptable overall on-
lease rate for them.
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 either 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.
Lessee Selection. The Company’s customer base primarily consists of regional commercial aircraft operators located
in globally diverse markets and seeking to access aircraft under operating leases. The Company expects to continue
to target these customer markets for the foreseeable future, and expects any customer growth in the near term would
be from lessees operating outside of North America. 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
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AeroCentury 2018 Annual Report
of its “hands-on” approach to portfolio management, the Company believes it is able to enter into transactions with
lessees in a wider range of markets than may be possible for traditional, large lending institutions and leasing
companies.
Availability of Financing. 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 the Credit Facility, which
is a secured credit facility provided by a syndicate of banks that was extended in February 2019 to expire in
February 2023. In addition, during 2016, the Company financed the purchase of two aircraft using special purpose
subsidiary financing, and in February 2019, the Company refinanced those two aircraft and four other aircraft assets
that previously served as collateral under the Credit Facility using financing under new non-recourse Term Loans.
The Company’s portfolio of assets has historically generated lease and sale revenues that have exceeded the
Company’s cash expenses, which have consisted mainly of maintenance costs, principal and interest payments on
debt, professional fees, insurance premiums, management fees (before the Merger) and salaries and employee benefits
(after the Merger). This historical excess cash from operations has aided in the Company’s ability to continue to add
to its aircraft portfolio over time; however, the Company’s performance and cash flow are subject to fluctuations and
a number of risks and uncertainties, and as a result, free cash flow may not serve as a viable source of funding in some
periods. See Item 7 of this report for more information about trends in and expectations about the Company’s
performance and liquidity.
Competition
The Company competes with other leasing companies, banks, financial institutions, private equity firms, aircraft
leasing syndicates, aircraft manufacturers, distributors, airlines and aircraft operators, equipment managers, equipment
leasing programs and other parties for its regional air carrier customers. Many of these competitors have longer
operating histories, more experience, larger customer bases, more expansive brand recognition, deeper market
penetration and significantly greater financial resources. Competition has increased significantly recently as
competitors who have traditionally neglected the regional air carrier market have recently focused on this market. The
industry has also experienced a number of consolidations of smaller leasing companies, creating a handful of very
large companies operating in this market, as well as new entrants to the market.
Competition in this industry is based on a number of factors, including price, lease terms, variety of product selection
(in other words, the type(s) of aircraft available for lease), reputation, ability to execute transactions as committed,
and customer service. Among these, the Company believes price and lease terms may be the most important
competitive factors, and as a result, the entry of new competitors into the market, the creation of larger competitors
due to consolidation, and/or the entry of traditional large aircraft lessors into the regional aircraft niche, particularly
those with greater access to capital than the Company, could lead to fewer acquisition opportunities for the Company
and/or lease terms that are less favorable to the Company, as well as fewer renewals of existing leases or new leases
of existing aircraft.
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.
Dependence on Significant Customers
For the year ended December 31, 2018, the Company’s four largest customers accounted for 30%, 21%, 15%, and
13% of operating lease revenue. For the year ended December 31, 2017, the Company’s four largest customers
accounted for 28%, 20%, 14%, and 11% of operating lease revenue. This concentration of credit risk with respect to
lease receivables will diminish in the future only if the Company is able to expand its customer base by re-leasing
assets currently on lease to significant customers to new customers at lease-end and/or acquiring assets for lease to
new customers.
Environmental Matters
Compliance with federal, state and local environmental laws, including provisions regulating the discharge of
greenhouse gas emissions (including carbon dioxide (CO2)) into the environment, aircraft noise regulations, and
remedial agreements or other actions relating to these provisions or the environment otherwise, has not had, and is not
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AeroCentury 2018 Annual Report
expected to have, a material effect on the Company’s capital expenditures, financial condition, results of operations
or competitive position.
Employees
Prior to the Merger, JMC was responsible for all administration and management of the Company pursuant to the
terms of the Management Agreement. Consequently, the Company did not have any employees. With the acquisition
of JHC by the Company on October 1, 2018, the Company assumed the role of employer (through its JMC subsidiary)
of the staff of such subsidiary at the time of the Merger. As a result, as of December 31, 2018, the Company had 12
total employees, including 11 full-time employees.
Patents, Trademarks and Licenses
The Company has a registered trademark for the “AeroCentury” name. The Company relies primarily on trademark
and trade secrets law, as well as non-disclosure contracts, to protect its intellectual property and proprietary
information.
Available Information
AeroCentury is a Delaware corporation incorporated in 1997. Its headquarters is located at 1440 Chapin Avenue,
Suite 310, Burlingame, California 94010. The main telephone number is (650) 340-1888. The Company’s website
is located at: http://www.aerocentury.com.
The Company files and furnishes periodic reports, proxy statements and other information with the SEC. Copies of
these materials are made available free of charge on the Company’s website through the Investor Relations link (SEC
Filings) as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. 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, including the Company.
Item 1A.
Risk Factors.
Disclosure under this item has been omitted pursuant to the rules of the SEC that permit smaller reporting companies
to omit this information. However, please see the description of certain risks and uncertainties that could impact the
Company’s performance, liquidity and stock price and volume set forth under Factors that May Affect Future Results
and Liquidity in Item 7 of this report.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
As of December 31, 2018, the Company did not own any real property, plant or materially important physical
properties. The Company leases its principal executive office space at 1440 Chapin Avenue, Suite 310, Burlingame,
California 94010 under a lease agreement that expires on June 30, 2020.
For information regarding the aircraft and aircraft engines owned by the Company, refer to the information under
“Fleet Summary” in Item 7 of this report and Note 3 to the Company’s consolidated financial statements in Item 8 of
this report.
Item 3.
Legal Proceedings.
The Company from time to time engages in ordinary course litigation incidental to the business, typically relating to
lease collection matters against defaulting lessees and mechanic’s lien claims by vendors hired by lessees. Although
the Company cannot predict the impact or outcome of any of these proceedings, including, among other things, the
amount or timing of any liabilities or other costs it may incur, none of the pending legal proceedings to which the
Company is a party or any of its property is subject is anticipated to have a material effect on the Company’s business,
financial condition or results of operations.
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AeroCentury 2018 Annual Report
Item 4.
Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Market Information
The Company’s common stock is traded on the NYSE American Exchange under the symbol “ACY.”
Number of Holders
According to the Company’s transfer agent, the Company had approximately 1,300 stockholders of record as of March
15, 2019. Because brokers and other institutions and nominees hold many of the Company’s shares of Common Stock
on behalf of beneficial owners, the Company is unable to estimate the total number of beneficial owners represented
by those nominees.
Dividends
Although the Company’s earnings in some periods may indicate an ability to pay cash dividends, the Company has
not declared or paid any such dividends to date, and has no plans to do so in the foreseeable future because it intends
to re-invest any earnings into the acquisition of additional revenue-generating aircraft and equipment.
Item 6.
Selected Financial Data.
Disclosure under this item has been omitted pursuant to the rules of the SEC that permit smaller reporting companies
to omit this information.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read together with the Company’s audited consolidated financial
statements and the related notes included in this report. This discussion and analysis contains forward-looking
statements. Please see the cautionary note regarding these statements at the beginning of this report.
Overview
The Company provides leasing and finance services to regional airlines worldwide. The Company is principally
engaged in leasing its aircraft portfolio, primarily consisting of mid-life regional aircraft, through operating leases and
finance leases to its globally diverse customer base of eleven airlines in nine countries. In addition to leasing activities,
the Company sells aircraft from its operating lease portfolio to third parties, including other leasing companies,
financial services companies, and airlines. Its operating performance is driven by the composition of its aircraft
portfolio, the terms of its leases, the interest rate of its debt, as well as asset sales.
During 2018, the Company purchased two aircraft subject to operating leases. During the same period, the Company
sold five aircraft for cash, and reclassified three aircraft from held for lease to held for sale. The Company ended the
year with a total of seventeen aircraft and one engine held for lease, with a net book value of approximately $184
million. This represents a 6% decrease compared to the net book value of the Company’s aircraft and engines held
for lease at December 31, 2017. In addition to the aircraft and engine held for lease, at year-end, the Company held
six aircraft subject to finance leases and three aircraft held for sale.
Average portfolio utilization was approximately 92% and 93% during 2018 and 2017, respectively. The year-to-year
decrease was due to asset sales of previously-leased assets during 2017 and 2018, as well as the return of several
aircraft at lease end in 2017.
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AeroCentury 2018 Annual Report
In July 2017, the Company expanded its Credit Facility from $150 million to $170 million. The unused amount of
the Credit Facility was $47.6 million as of December 31, 2018, and the weighted average interest rate was 5.92% at
December 31, 2018. In February 2019, the Credit Facility, which was to expire on May 31, 2019, was extended to
February 19, 2023 and was amended in certain other respects as described under Liquidity and Capital Resources
below. Also in February 2019, the Company refinanced, using new non-recourse Term Loans with an aggregate
principal of $44.3 million, four aircraft that previously served as collateral under the Credit Facility and two aircraft
previously subject to special purpose subsidiary financing.
Net loss for 2018 was $8.1 million, compared to net income of $7.4 million in 2017, resulting in basic and diluted
(loss)/earnings per share of $(5.58) and $5.10 respectively. Pre-tax profit margin (which the Company calculates as
its (loss)/income before income tax (benefit)/provision as a percentage of its revenues and other income) was (33%)
in 2018 compared to 10% in 2017.
On October 1, 2018, the Company acquired JHC by way of the Merger. JHC is the owner of JMC, the integrated
aircraft management, marketing and financing business that manages and administers the Company's portfolio of
aircraft assets. Before the Merger, such management and administration were performed pursuant to the terms of the
Management Agreement between the Company and JMC. Post-Merger, the management and administration services
provided under the Management Agreement have become internalized and under the control and management of the
Company itself. Expenses incurred by JMC in providing services under the Management Agreement are, as of
October 1, 2018, expenses of the Company reflected in the Company’s financial statements. In addition, after October
1, 2018, the management, acquisition and remarketing fees previously paid by the Company to JMC as an
unconsolidated third party are no longer be reflected in the Company’s financial statements; rather, the expenses
incurred by JMC in managing and administering the Company’s assets are borne by the Company directly and
reflected in its financial statements accordingly.
Fleet Summary
(a)
Assets Held for Lease
Key portfolio metrics of the Company’s aircraft held for lease as of December 31, 2018 and December 31, 2017 were
as follows:
Number of aircraft and engines held for lease
Weighted average fleet age
Weighted average remaining lease term
Aggregate fleet net book value
Average portfolio utilization
December 31,
2018
December 31,
2017
18
24
11.1 years
58 months
$184,019,900
11.4 years
58 months
$195,098,200
For the Years Ended December 31,
2018
92%
2017
93%
The decrease in average portfolio utilization between 2017 and 2018 was due to asset sales during late 2017 and 2018,
as well as the return of several aircraft at lease-end in 2017.
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AeroCentury 2018 Annual Report
The following table sets forth the net book value and percentage of the net book value, by type, of the Company’s
assets that were held for lease at December 31, 2018 and December 31, 2017:
Type
Turboprop aircraft:
Bombardier Dash-8-400
Bombardier Dash-8-300
Saab 340B Plus
Saab 340B
Regional jet aircraft:
Canadair 900 (*)
Embraer 175
Canadair 1000
Canadair 700
Engines:
Pratt & Whitney 150A
December 31, 2018
December 31, 2017
Number
owned
% of net
book value
Number
owned
% of net book
value
2
2
-
-
5
3
2
3
1
13%
5%
-%
-%
39%
16%
14%
12%
1%
2
3
4
1
5
3
2
3
1
7%
6%
3%
1%
38%
16%
15%
13%
1%
(*) Amounts for December 31, 2017 include a Canadair 705 that was converted to a Canadair 900 in 2018.
During 2018, the Company purchased two aircraft subject to operating leases, and sold five aircraft and certain aircraft
parts. During 2017, the Company purchased three aircraft subject to operating leases and three aircraft that the
Company leased pursuant to direct financing leases in a sale and leaseback transaction, and sold two aircraft, three
spare engines and parts from two assets that are held for sale, and one aircraft pursuant to a sales-type finance lease.
The following table sets forth the net book value and percentage of the net book value of the Company’s assets that
were held for lease at December 31, 2018 and December 31, 2017 in the indicated regions (based on the domicile of
the lessee):
Region
Europe
North America
Asia
Off lease
December 31, 2018
% of
net book
value
Net book
value
December 31, 2017
% of
net book
value
Net book
value
$110,069,000
68,485,400
5,465,500
-
$184,019,900
60%
37%
3%
-%
100%
$ 92,108,500
72,270,700
6,082,100
24,636,900
$195,098,200
47%
37%
3%
13%
100%
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AeroCentury 2018 Annual Report
For the year ended December 31, 2018, approximately 30%, 28% and 21% of the Company’s operating lease revenue
was derived from customers in Slovenia, the United States and Spain, respectively. For the year ended December 31,
2017, approximately 28%, 21%, 20% and 11% of the Company’s operating lease revenue was derived from customers
in Slovenia, the United States, Spain and Mozambique, respectively. Operating lease revenue does not include interest
income from the Company’s finance leases. The following table sets forth geographic information about the
Company’s operating lease revenue for leased aircraft and aircraft equipment, grouped by domicile of the lessee:
Region
Europe
North America
Africa
Asia
Australia
For the Years Ended December 31,
2018
2017
Number
of lessees
% of
operating
lease revenue
Number
of lessees
% of
operating
lease revenue
4
4
-
1
-
59%
37%
-
4%
-
4
5
1
1
1
52%
29%
12%
4%
3%
At December 31, 2018 and December 31, 2017, the Company also had six aircraft and nine aircraft, respectively,
subject to finance leases. For the year ended December 31, 2018, approximately 67% and 33% of the Company’s
finance lease revenue was derived from customers in Africa and Europe, respectively. For the year ended December
31, 2017, approximately 75% and 25% of the Company’s finance lease revenue was derived from customers in Africa
and Europe, respectively.
(b)
Assets Held for Sale
Assets held for sale at December 31, 2018 consisted of two off-lease Saab 340B Plus turboprop aircraft, one off-lease
Bombardier Dash-8-300 aircraft and airframe parts from two turboprop aircraft. Assets held for sale at December 31,
2017 consisted of airframe parts from two aircraft.
Results of Operations
(a)
Revenues and Other Income
Revenues and other income decreased by 24% to $27.1 million in 2018 from $35.6 million in 2017. The decrease
was primarily a result of losses incurred on the sale of older assets, decreased operating lease revenues, and decreased
maintenance reserves revenues.
Operating lease revenue decreased by 5% to $27.6 million in 2018 from $29.0 million in 2017, primarily due to the
loss of revenue from assets that were on lease in 2017 but off lease in 2018 and aircraft that were sold during 2017.
Such decreases were partially offset by revenue from assets purchased in mid-2017 and in the second quarter of 2018.
Finance lease revenue decreased by 20% to $1.3 million in 2018 from $1.6 million in 2017, primarily due to a lower
finance lease receivables balance in the 2018 period and the purchase by the lessee of three aircraft subject to finance
leases during the third quarter of 2018.
Maintenance reserves that are retained by the Company at lease end are recorded as revenue at that time. The
Company recorded $1.6 million of such revenue during 2018, arising from cash received from the former lessee of
three aircraft after such aircraft were returned to the Company by the lessee during 2017. Such amounts were not
accrued at lease termination based on management’s evaluation of the creditworthiness of the lessee. During 2017,
the Company recorded maintenance reserves revenue of $3.9 million related to retained maintenance reserves at the
time of lease termination for seven aircraft.
During 2018, the Company recorded gains totaling approximately $0.1 million on the sale of an aircraft and aircraft
parts and losses totaling approximately $3.5 million on the sale of four aircraft. During 2017, the Company recorded
a gain of $0.3 million on the sale of an aircraft pursuant to a sales-type finance lease, gains totaling $1.2 million on
the sale of two aircraft and aircraft parts, and losses totaling $0.4 million on the sale of three spare engines. During
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AeroCentury 2018 Annual Report
2017, the Company also exchanged one of its spare engines for 150,000 shares of the Company’s common stock held
by a stockholder, and recorded no gain or loss related to the exchange.
(b)
Expenses
Total expenses increased by 13% to $36.2 million in 2018 from $32.1 million in 2017. The increase was primarily a
result of increases in asset impairment provisions, interest expense, salaries and employee benefits and professional
fees, general and administrative and other expenses, as well as a settlement loss recorded in connection with the
acquisition of JHC. These increases were partially offset by decreases in management fees and maintenance fees.
The Company’s interest expense increased by 23% to $9.5 million in 2018 from $7.8 million in 2017, primarily as a
result of a higher average debt balance, a higher average interest rate and higher loan fee amortization.
The average net book value of assets held for lease during 2018 and 2017 was approximately $195.1 million and
$196.5 million, respectively. Until the acquisition of JHC on October 1, 2018, management fees paid to JMC were
based on the net book value of the Company’s aircraft and engines as well as finance lease receivable balances. After
the Merger, JMC’s operating expenses, including salaries and employee benefits, became the responsibility of the
Company. The total of management fees, salaries and employee benefits and professional fees, general and
administrative and other expenses decreased by 8% to $7.4 million in 2018 from $8.1 million in 2017.
In 2018 and 2017, the Company’s professional fees, general and administrative and other expenses included $485,000
and $619,400, respectively, incurred in connection with the acquisition of JHC.
During 2018, the Company recorded impairment charges totaling $3.0 million on four aircraft held for sale, based on
appraised values. During 2017, the Company recorded impairment charges of $0.7 million for two turboprop aircraft,
based on their appraised values, $0.1 million for an asset based on its net sales value, which was subsequently sold in
2017, and $0.2 million for an asset that was written down to its net sales value and sold in early 2018.
The Company's maintenance expense decreased by 78% to $0.6 million in 2018 from $2.9 million in 2017, as a result
of a decrease in maintenance work performed by the Company on off-lease aircraft to prepare them for sale or re-
lease.
The Company’s insurance expense increased by 41% to $0.4 million in 2018 from $0.3 million in 2017. Insurance
expense includes amounts paid for directors’ and officers’ liability, business personal property, premises liability and
product liability insurance, as well as aircraft hull insurance for periods when an aircraft is off-lease.
During 2018, the Company recorded a settlement loss of $2.5 million related to the Merger. See Note 8 to the
Company’s consolidated financial statements in Item 8 of this report for more information about this settlement loss.
(c)
Income Tax Benefit
The Company’s benefit for income taxes decreased from $4.0 million in 2017 to $1.0 million in 2018. This change
was primarily attributable to the Company recognizing the deferred tax benefit of lower U.S. corporate income tax
rates enacted in December 2017.
Liquidity and Capital Resources
The Company is currently financing its assets and operations primarily through debt financing and excess cash flow
from operations.
(a)
Credit Facility
The Company has a Credit Facility, as described in Notes 6(a) and 14 to the Company’s consolidated financial
statements in Item 8 of this Annual Report on Form 10-K. In February 2019, the Credit Facility, which had availability
of $170 million (with the ability for the Company to request an increase up to $180 million) and was to mature on
May 31, 2019, was extended to February 19, 2023, reduced to $145 million (with the ability for the Company to
request an increase up to $160 million) and amended in certain other respects, including with respect to certain of the
Company’s financial covenants thereunder.
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AeroCentury 2018 Annual Report
In addition to payment obligations (including principal and interest payments on outstanding borrowings and
commitment fees based on the amount of any unused portion of the Credit Facility), the Credit Facility contains
financial covenants with which the Company must comply, including, but not limited to, positive earnings
requirements, minimum net worth standards and certain ratios, such as debt to equity ratios.
The Company was not in compliance with the interest coverage, debt service coverage and revenue concentration
covenants under the Credit Facility at September 30, 2018. The Company obtained a waiver from the Credit Facility
lenders in November 2018 for the September 30, 2018 noncompliance. There were no fees or penalties related to the
waiver. In addition, based on appraisals obtained in October 2018 for four assets held for sale, the Company had a
borrowing base deficiency of approximately $1,400,000 at September 30, 2018. The Company cured the deficiency
in October 2018 by making a principal payment of $2,000,000 on the Credit Facility.
The Company was also not in compliance with the interest coverage, debt service coverage, no-net-loss and revenue
concentration covenants under the Credit Facility at December 31, 2018. The December 31, 2018 noncompliance was
cured by the February 2019 amendment and extension to the Credit Facility, which also revised certain of these
financial covenants requirements through the February 2023 maturity date of the extended Credit Facility.
If the Company is out of compliance with any of its Credit Facility covenants at future calculation dates, it would need
to request waivers or amendments of applicable covenants from the lenders if such compliance failure is not timely
cured. Any such future noncompliance that is not timely cured or waived would result in a default under the Credit
Facility, which could have material negative consequences, as described further below.
The Company’s ability to regain and maintain compliance with its covenants in the Credit Facility is subject to a
variety of factors, including, among others (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 noncompliance with lease obligations, (iii) inability to locate new lessees for returned
aircraft or 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, and (vi) inability to timely dispose of off-lease assets at prices commensurate with their
market value.
Any default under the Credit Facility, if not cured in the time permitted or waived by the lenders, could result in the
Company’s inability to borrow any further amounts under the Credit Facility, the acceleration of the Company’s
obligation to repay amounts borrowed under the Credit Facility, or foreclosure upon any or all of the assets of the
Company.
(b)
Special Purpose Financing
In August 2016, the Company acquired, using wholly-owned special purpose entities, two regional jet aircraft, using
cash and third-party financing (referred to as “special purpose financing” or “UK LLC SPE Financing”) separate from
the Credit Facility, as described in Note 6(b) to the Company’s consolidated financial statements in Item 8 of this
Annual Report on Form 10-K.
In February 2019, the UK LLC SPE Financing was repaid as part of a refinancing involving the Term Loans, which
were made to special purpose subsidiaries of the Company. Under the Term Loans, four aircraft that previously served
as collateral under the Credit Facility were moved into newly formed special purpose subsidiaries and, along with the
aircraft owned by the two existing special purpose subsidiaries, were pledged as collateral under the Term Loans.
All of the Term Loans contain cross-default provisions, so that any default by a lessee of any of the subject aircraft
could result in the Term Loan lender exercising its remedies under the Term Loan agreement, including, but not
limited to, possession of the aircraft that is subject to a lessee default. In addition, a default under the Term Loan
agreement would be a default under the Credit Facility agreement.
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AeroCentury 2018 Annual Report
(c)
Cash Flow
The Company’s primary sources of cash from operations are payments due under the Company’s operating and
finance leases, maintenance reserves, which are billed monthly to lessees based on asset usage, and proceeds from the
sale of aircraft and engines.
The Company’s primary uses of cash are for (i) purchases of assets, (ii) Credit Facility and Term Loan financing
interest, principal and interest swap payments, (iii) maintenance expense and reimbursement to lessees from collected
maintenance reserves, (iv) before completion of the Merger, management fees and expense reimbursement owed to
JMC, (v) after completion of the Merger, salaries and employee benefits and (vi) professional fees, including legal,
accounting and directors’ fees costs.
The Company’s payments for maintenance consist of reimbursements to lessees for eligible maintenance costs under
their leases and maintenance incurred directly by the Company for preparation of off-lease assets for re-lease to new
customers. The timing and amount of such payments may vary widely between quarterly and annual periods, as the
required maintenance events can vary greatly in magnitude and cost, and the performance of the required maintenance
events by the lessee or the Company, as applicable, are not regularly scheduled calendar events and do not occur at
uniform intervals. 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, if available, or seek alternative
sources of financing to provide funding for these payments.
Prior to the Company’s acquisition of JHC on October 1, 2018, the Company’s portfolio of aircraft assets was managed
and administered under the terms of the Management Agreement with JMC. Under the Management Agreement, JMC
received a monthly management fee based on the net asset value of the Company’s assets under management. JMC
also received an acquisition fee for locating assets for the Company to acquire. Acquisition fees were included in the
cost basis of the asset purchased. JMC also received a remarketing fee in connection with the re-lease or sale of the
Company’s assets. Remarketing fees were amortized over the applicable lease term or included in the gain or loss on
sale.
In April 2018, subsequent to the execution of the merger agreement for the acquisition of JHC (the “Merger
Agreement”), which was signed in October 2017, the Company, JHC and JMC entered into a waiver and
reimbursement agreement (the “Waiver/Reimbursement Agreement”), pursuant to which JHC and JMC agreed to
waive their right to receive management and acquisition fees (“Contract Fees”) otherwise owed by the Company to
JMC pursuant to the Management Agreement for all periods after March 31, 2018 and until the consummation of the
Merger, and in return, the Company agreed to reimburse JMC for expenses incurred in providing management services
set forth under the Management Agreement. As a result, the Company has been responsible for all expenses incurred
by JMC in managing the Company beginning April 1, 2018 and will continue to be responsible for all such expenses
in all periods after the Merger (“Management Expense”), and no Contract Fees were paid by the Company to JMC for
the period from April 1 through September 30, 2018. Notwithstanding the Waiver/Reimbursement Agreement, the
Company accrued as an expense the Contract Fees that would have been due under the Management Agreement
through September 30, 2018. For the nine months ended September 30, 2018, Contract Fees exceeded the
reimbursement for JMC expenses by $1,023,100 of management fees and $494,400 of acquisition fees (collectively,
the “JMC Margin”). The amount of the JMC Margin was considered in the acquisition accounting for the calculation
of the settlement loss that the Company recognized upon closing the Merger.
Following the Merger, the risk of increased Management Expense, including employee salaries and benefits,
worldwide travel related to the management of the Company's aircraft portfolio, office rent, outside technical experts
and other overhead expenses, is now the responsibility of the Company. In addition, because the management and
administrative services previously performed by JMC are now internalized, the Company is no longer paying
management or acquisition fees to JMC in exchange for the performance of these services. As a result, the Company
expects the types, timing and amounts of, and patterns and trends with respect to, its recorded expenses to change as
a result of the Merger, but the manner and extent of these changes remains uncertain until the Company has performed
and controlled these functions for some period of time.
The amount of interest paid by the Company depends primarily on the outstanding balance of its Credit Facility.
Although the amounts owed under the Credit Facility accrue interest at a floating rate plus an interest rate margin, and
are thus dependent on fluctuations in prevailing interest rates, in March 2019 the Company entered into an interest
rate swap transaction for approximately 50% of the variable interest rate payment amounts due under the Credit
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AeroCentury 2018 Annual Report
Facility. As a result, although the amount of interest paid by the Company under the Credit Facility will fluctuate
depending on prevailing interest rates, the swap will offset some of this variability such that the Company will be
affected by interest rate fluctuations under the Credit Facility only to the extent of any excess of the outstanding
balance under the Credit Facility over the amount covered by the related interest rate swap. Interest related to the
Company’s Term Loans also accrues at variable rates, but the Company has entered into interest rate swaps that
effectively convert the Term Loan interest payments to fixed rate payments.
The Credit Facility and the Term Loans, as well as their related interest rate swap transactions, use LIBOR as a
benchmark for establishing the rates at which interest accrues. LIBOR is the subject of recent national, international
and other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to
disappear entirely or to perform differently than in the past. Although the consequences of these developments cannot
be entirely predicted, they could include an increase in the cost to the Company of its LIBOR debt or even an
acceleration of maturity of such debt if a suitable replacement index cannot be agreed upon or is not available.
Management believes that the Company will have adequate cash flow to meet its ongoing operational needs, including
any required repayments under the Credit Facility and Term Loans, for at least the next 12 months from the issuance
of this Annual Report, based upon its current estimates of future revenues and expenditures. These estimates reflect
assumptions about, among other things, (i) revenues from assets to be re-leased, (ii) the amount, timing and patterns
of management and administrative expenses being borne by the Company after the Merger rather than a third -party
management company, (iii) cost and anticipated timing of aircraft maintenance to be performed, (iv) required debt
payments, (v) timely use of proceeds of unused debt capacity for additional acquisitions of income-producing assets,
and (vi) interest rates. 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, and below in Outlook and Factors that May Affect Future
Results and Liquidity, there are a number of factors that may cause actual results to deviate from these forecasts. If
these assumptions prove to be incorrect and the Company’s cash requirements exceed its cash flow, the Company
would need to pursue additional sources of financing to satisfy these requirements, which may not be available when
needed, on acceptable terms or at all. See Factors that May Affect Future Results and Liquidity below for more
information about financing risks and limitations.
(i)
Operating activities
The Company’s cash flow from operations increased by $3.4 million in 2018 compared to 2017. As discussed below,
the increase in cash flow was primarily a result of increases in payments received for maintenance reserves, as well
as a decrease in payments made for management fees and maintenance. This positive effect was partially offset by
increases in payments made for interest, salaries and employee benefits, professional fees and general and
administrative expenses and income taxes.
(A)
Payments for maintenance reserves
Receipts from lessees for maintenance reserves increased by $0.4 million in 2018 compared to 2017, primarily due to
cash received from the former lessee of three aircraft that were returned to the Company during 2017. Such payments
were for unpaid maintenance reserves, as well as amounts due pursuant to the return conditions of the applicable
leases. The Company did not accrue unpaid reserves or return condition amounts at the time of lease termination based
on management’s evaluation of the creditworthiness of the lessee. Therefore, the Company is accounting for payments
as they are received and recording the amount in maintenance reserves revenue in the period in which a payment is
received.
(B)
Payments for management fees, salaries and employee benefits and JMC expense reimbursement
Payments made for management fees decreased by $3.2 million in 2018 compared to 2017, primarily as a result of the
Waiver/Reimbursement Agreement, as well as a difference in the timing of payments from year to year. Payments
made for salaries and employee benefits, which became the responsibility of the Company after the Merger, were $0.7
million in 2018.
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(C)
Payments for maintenance
Payments made for maintenance decreased by $3.5 million in 2018 compared to 2017 as a result of decreased
maintenance performed by the Company on off-lease aircraft to prepare them for sale or re-lease.
(D)
Payments for interest
The Company’s interest payments increased by $1.5 million in 2018 compared to 2017 as a result of a higher average
debt balance and higher interest rates during 2018.
(E)
Payments for income taxes
Payments made for income taxes increased by $1.1 million in 2018 compared to 2017 as a result of foreign income
taxes related to the Company’s UK LLC SPE Financing entities.
(ii)
Investing activities
During 2018 and 2017, the Company received net cash of $16.6 million and $12.9 million, respectively, from the sale
of assets. During 2018 and 2017, the Company used cash of $22.8 million and $32.1 million, respectively, for
acquisitions of aircraft. During 2017, the Company also used $7.6 million for the acquisition of three aircraft that are
subject to direct financing leases. During 2018, the Company also used $2.9 million related to AeroCentury’s
acquisition of JHC.
(iii)
Financing activities
During 2018 and 2017, the Company borrowed $21.0 million and $35.9 million, respectively, under the Credit
Facility. In 2018 and 2017, the Company repaid $32.6 million and $12.0 million, respectively, of its total outstanding
debt under the Credit Facility. Such repayments were funded by excess cash flow and, in 2018, the sale of assets.
During 2018 and 2017, the Company’s special purpose entities repaid $4.3 million and $4.1 million, respectively, of
UK LLC SPE Financing principal. During 2018 and 2017, the Company paid $0.1 million and $1.2 million,
respectively, for debt issuance and amendment fees.
(iv)
Off balance sheet arrangements
The Company has no material off balance sheet arrangements.
Outlook
The Company has identified four principal factors that it believes may materially affect the Company’s growth and
operating results in the near term. These and other factors that could impact the Company’s business, performance
and liquidity are described in more detail under Factors that May Affect Future Results and Liquidity below.
•
•
The Company must source additional capital, though equity financings, additional debt financings or other
alternatives, in order to grow. One of the motivations for AeroCentury’s acquisition of JHC was to remove
the outside management structure of the Company, which was believed to be an impediment to attracting
capital sources. There can be no assurance that the Company will be able to obtain additional capital when
needed, in the amounts desired or on favorable terms, as a successful capital -raising transaction depends on
many factors, some of which are outside the Company’s control.
On October 1, 2018, the Company acquired JHC, the parent of JMC, which has acted as the management
company for the Company since the Company’s inception. The Company believes that the combination of
the management function performed by JMC and the portfolio held by the Company could be accretive to
the Company and could create value for the stockholders of the combined post-Merger company, but such
accretion may not be realized until after transaction and integration costs in connection with the Merger have
been incurred, or at all. Most of the one-time costs associated with the Merger, including a settlement loss
of $2.5 million, were recognized by the Company in 2018, though there may be some additional costs
recognized in future periods.
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AeroCentury 2018 Annual Report
•
•
Increased production of aircraft types in the Company’s market niche of worldwide regional aircraft has
resulted in some manufacturers offering more competitive pricing for new aircraft to regional aircraft
customers. In addition, notwithstanding recent interest rate increases in the United States, competition for
assets in this market niche has continued to increase. Some of the Company’s newer competitors are funded
by investment banks and private equity firms seeking higher yields on investment assets than are currently
available from traditional income investment types. The increased competition has resulted in higher
acquisition prices for many of the aircraft types that the Company has targeted to buy and, at the same time,
downward pressure on lease rates for these aircraft, resulting in lower revenues and margins and, therefore,
fewer acceptable acquisition opportunities for the Company. The Company anticipates this trend will
continue for the short- to medium-term, but could change if and when yields on alternative investments return
to a more normal historical range.
The Company has not identified sale customers for three turboprop aircraft that are currently off lease and
classified as held for sale. These aircraft are older types that are no longer in production, and as a result, the
Company does not view it as unusual that market demand for these aircraft is weak and expects that they
may remain unsold for a significant period of time.
Critical Accounting Policies, Judgments and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are based upon the
consolidated financial statements included in this report, 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 or during
the applicable reporting period. 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 further 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.
Factors that May Affect Future Results and Liquidity
The Company’s business, financial condition, results of operations, liquidity, prospects and reputation could be
affected by a number of factors. In addition to matters discussed elsewhere in this discussion, the Company believes
the following are the most significant factors that may impact the Company; however, additional or other factors not
presently known to the Company or that management presently deems immaterial could also impact the Company and
its performance and liquidity.
Availability of Financing. As described above, the Company must source additional capital, through equity
financings, additional debt financings or other alternatives, in order to grow. One of the current primary limiters on
the Company’s ability to draw under its Credit Facility or incur any other additional debt financing is the covenant
limitation on the Company’s maximum debt to equity ratio. As a result, unless this ratio changes due to equity
financing or otherwise, the Company’s ability to rely upon the Credit Facility as a capital resource will remain limited.
Additionally, although one of the motivations for AeroCentury’s acquisition of JHC was to remove the outside
management structure of the Company, which was believed to be an impediment to attracting capital sources, there
could be other material factors, some of which are outside of the Company’s control, that prevent or limit the
Company’s ability to access additional capital. As a result, there can be no assurance that the Company will be able
to obtain additional capital when needed, in the amounts desired or on favorable terms in the future.
Noncompliance with Debt Financial Covenants. The Company’s use of debt as its primary form of acquisition
financing subjects the Company to increased risks associated with leverage. In addition to payment obligations, the
Company’s debt agreements include financial covenants, including some requiring the Company to have positive
earnings, meet minimum net worth standards and comply with certain other financial ratios. The Company was not
in compliance with certain of these standards and ratios under the Credit Facility as of December 31, 2018. Although
this noncompliance was cured with the February 2019 amendments to the Credit Facility, which revised certain of
these financial covenants to better accommodate the Company’s financial circumstances as a post-Merger entity with
unified asset and portfolio management and to position the Company for future growth, the Company may be subject
to additional compliance failures of these or other debt covenants at future calculation dates, and the lenders are under
no obligation to forbear or waive any such future noncompliance. Any default under the Credit Facility or any other
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debt agreement, if not cured in the time permitted or waived by the respective lender, could result in the Company’s
inability to borrow under the debt instrument, the acceleration of the Company’s debt obligations, or the foreclosure
upon any or all of the assets of the Company.
Credit Facility Debt Limitations. The amount available to be borrowed under the Credit Facility is limited by asset-
specific advance rates. Lease arrearages or off-lease periods for a particular asset that serves as collateral under the
Credit Facility may reduce the loan advance rate permitted with respect to that asset and, therefore, reduce the
permitted borrowing under the facility or require repayments. Amounts subject to payment deferral agreements also
reduce the amount of permitted borrowing. The Company believes it will have sufficient borrowing availability under
the Credit Facility to meet its anticipated capital needs in the near term in spite of these limitations and it will have
sufficient cash funds to make any required principal repayment that arises due to any such borrowing limitations, but
actual cash levels could deviate from these assumptions.
Term Loan Debt Limitations. The special purpose subsidiaries, ACY 19002 Limited, ACY 19003 Limited, ACY SN
15129 LLC, and ACY E-175 LLC, that own the six aircraft serving as collateral for the Term Loans are the named
borrowers (“Borrower LLCs”) under the Term Loans, and each Term Loan is secured by the corresponding aircraft
owned by the applicable Borrower LLC. AeroCentury, as the parent corporation of each Borrower LLC, is not a party
to the Term Loan agreements, but has entered into agreements with lessees of the Borrower LLCs to guarantee certain
obligations to such lessees under each lessee’s lease agreement with a Borrower LLC and with the Term Loan lender
to guarantee certain representations, warranties and covenants delivered by the Borrower LLCs to the Term Loan
lender in connection with the refinancing transaction. As a result, although the Term Loans are non-recourse to
AeroCentury, AeroCentury could become directly responsible for the Borrower LLCs’ obligations under the Term
Loans and the related lease agreements pursuant to these guaranty arrangements. Moreover, any noncompliance under
the Term Loans by a Borrower LLC could negatively affect the liquidity, aircraft portfolio and reputation of the
Company as a whole.
The required payments under each Term Loan are expected to be funded by the operating lease rental revenue received
from the lessee of the corresponding aircraft, and each Borrower LLC’s continued compliance with its Term Loan
will depend upon the lessee’s compliance with its lease payment obligations. Failure by a lessee to make timely
payments could result in a default under the applicable Term Loan and could result in an acceleration of all Term
Loan indebtedness of the applicable Borrower LLC or foreclosure by the Term Loan lender on the applicable aircraft.
Furthermore, a default by any Borrower LLC under its Term Loan would also constitute a default under the Credit
Facility, and therefore any failure by a Borrower LLC’s lessee to comply with its lease payment obligations or any
other compliance failure by a Borrower LLC under its Term Loan could result in the Company’s noncompliance under
several of its debt agreements, which could have a material negative adverse effect on the Company’s liquidity and
capital resources.
Consummation of Merger May Subject the Company to Additional Risks. On October 1, 2018 the Company acquired
JHC, the parent of the Company’s management company, JMC. The acquisition of JHC subjects the Company to
certain risks, including the following:
•
Assumption of Expenses Covered under Management Agreement. Under the Management Agreement with
JMC, the Company paid management fees to JMC based upon the book value of the Company’s aircraft
assets, an acquisition fee for each asset purchased by the Company, and a remarketing/re-lease fee for each
sale or re-lease transaction entered into with respect to the Company’s aircraft. In return, JMC provided the
Company with comprehensive management services, under which JMC had full responsibility for payment
of all employee salaries and benefits, outside technical services, worldwide travel needed to promote the
Company's business, office space, utilities, IT and communications, furniture and fixtures, and other general
administrative and overhead costs. Under the Management Agreement, if the fees collected were not enough
to cover JMC’s expenses in managing the Company’s portfolio, such losses were borne entirely by JMC.
As a result of the Waiver/Reimbursement Agreement, the Company has been responsible for all expenses
incurred by JMC in managing the Company beginning April 1, 2018 and will continue to be responsible for
all such expenses in all periods after the Merger. The risk of increased costs for these expenses is now the
responsibility of the Company, and such costs are no longer limited to the amount of the management fee, as
was the case under the third -party management structure with JMC. Consequently, the risk of any cost
overruns or unanticipated expenses in asset management since April 1, 2018 have been borne solely by the
Company and are no longer shifted to an unconsolidated third party. As a result, the Company’s expense
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AeroCentury 2018 Annual Report
•
•
categories, amounts, timing and patterns could change significantly in post-Merger periods and could be
subject to increased period-to-period fluctuations.
Internalization of Management. JHC is now a wholly-owned subsidiary of the Company, and sole
responsibility for management of the combined company now falls upon the Company’s management. If the
Company is dissatisfied with management services, the Company will have to address the shortcomings
internally, and if they cannot be resolved with existing management and personnel, the Company may be
required to reorganize its management structure and/or replace personnel or seek new third -party
management services, either of which could result in the Company incurring significant expense and use of
resources.
Assumption of JHC Liabilities. By acquiring JHC in the Merger, JHC has become a wholly-owned subsidiary
of the Company. To the extent that JHC or any of its subsidiaries have liabilities, these have become
liabilities of the Company on a consolidated basis. While the Merger Agreement provides for limited
indemnification by JHC shareholders for certain liabilities of JHC or its subsidiaries that arise from pre-
Merger occurrences and the Company performed due diligence reviews of the liabilities of JHC and its
subsidiaries before completion of the Merger, the indemnification is limited to the consideration paid by the
Company to JHC’s shareholders and such due diligence reviews are inherently non-exhaustive and may not
have uncovered all known or contingent liabilities or presently unknown liabilities that may emerge after the
Merger’s completion.
Ownership Risks. The Company’s leases typically are for a period shorter than the entire, anticipated, remaining
useful life of the leased assets. As a result, the Company’s recovery of its investment and realization of its expected
yield in such a leased asset is dependent upon the Company’s ability to profitably re-lease or sell the asset following
the expiration of the lease. This ability is affected by worldwide economic conditions, general aircraft market
conditions, regulatory changes, changes in the supply or cost of aircraft equipment, and technological developments
that may 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, airline consolidations, the number of new aircraft on order, an excess supply of newly manufactured
aircraft or used 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. Declines in the value of the Company’s aircraft and any resulting decline in market demand for these aircraft
could materially adversely affect the Company’s revenues, performance and liquidity. Also, because the Company’s
ability to borrow under the current terms of its Credit Facility is subject to a covenant setting forth a maximum ratio
of (i) the outstanding debt under the facility to (ii) the appraised value of the collateral base of aircraft assets securing
the Credit Facility, a significant drop in the appraised market value of the portfolio could require the Company to
make a substantial prepayment of outstanding principal under the Credit Facility in order to avoid a default under the
Credit Facility and limit the utility of the Credit Facility as a source of future funding.
In addition, a successful investment in an asset subject to an operating lease depends in part upon having the asset
returned by the lessee in the condition as required under the lease. Each operating lease obligates a customer to return
an asset to the Company in a specified condition, generally in a condition that will allow the aircraft to be readily re-
leased to a new lessee, and/or pay an economic settlement for redelivery that is not in compliance with such specified
conditions. The Company strives to ensure this result through onsite management during the return process. However,
if a lessee becomes insolvent during the term of its lease and the Company has to repossess the asset, it is unlikely
that the lessee would have the financial ability to meet these return obligations. In addition, if a lessee files for
bankruptcy and rejects 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 either case, 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.
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AeroCentury 2018 Annual Report
Several of the Company’s leases with financially strong lessees 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 need to pay the
costs of unperformed repair and maintenance under the applicable lease and 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
flow from an asset could result in an asset impairment charge against the Company’s earnings. The Company
periodically reviews long-term assets for impairment, particularly 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 2017 and 2018, 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.
Interest Rate Risk. While the debt under the Term Loans is fully covered by interest rate swaps that effectively convert
the variable interest rate Term Loan payments to fixed rate payments, only approximately half of the Credit Facility
debt is subject to such an interest rate swap. As a result, the amount of interest paid by the Company under the Credit
Facility will fluctuate depending on prevailing interest rates to the extent of any excess of the outstanding balance
under the Credit Facility over the amount covered by the related interest rate swap. Consequently, interest rate
increases could materially increase the Company’s interest payment obligations under the Credit Facility and thus
could have a material adverse effect on the Company’s liquidity and financial condition. Further, because the interest
rates under the Credit Facility and the Term Loans are based on LIBOR, which is the subject of recent national,
international and other regulatory guidance and proposals for reform, the amount of the Company’s interest payments
under these arrangements could increase if LIBOR is phased out or performs differently than in the past.
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.
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,
they will fully protect the Company from losses resulting from a lessee default or bankruptcy.
If a lessee that is a certified U.S. airline defaults under a lease and seeks protection under Chapter 11 of the United
States Bankruptcy Code, Section 1110 of the Bankruptcy Code would automatically prevent the Company from
exercising any remedies 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 in the event of
a bankruptcy filing by a defaulting lessee.
Lessees located in low-growth or no-growth areas of the world carry heightened risk of lessee default. The Company
has had customers that have experienced significant financial difficulties, become insolvent, or have entered
bankruptcy proceedings. A customer’s insolvency or bankruptcy usually results in the Company’s total loss of the
receivables from that customer, as well as additional costs in order to repossess and, in some cases, repair the aircraft
leased by the customer. 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 in an attempt
to mitigate losses in the event the lessee is unable to meet or rejects its lease obligations. There can be no assurance,
however, that additional customers will not become insolvent, file for bankruptcy or otherwise fail to perform their
lease obligations, or that the Company will be able to mitigate any of the resultant losses.
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AeroCentury 2018 Annual Report
It is possible that the Company may enter into deferral agreements for overdue lessee obligations. 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 is likely to be repaid according to the agreed schedule. The
Company may elect to record the deferred rent and reserves 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.
Concentration of Lessees and Aircraft Type. For the year ended December 31, 2018, the Company’s four largest
customers accounted for a total of approximately 79% of the Company’s monthly operating lease revenue. A lease
default by or collection problem with one or a combination of any of these significant customers could have a
disproportionately 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, which could result in the negative effects of such a default as
described under Noncompliance with Debt Financial Covenants, above.
The Company’s aircraft portfolio is currently focused on a small number of aircraft types and models relative to the
variety of aircraft used in the commercial air carrier market. A change in the desirability and availability of any of
the particular types and models of aircraft owned by the Company could affect valuations and future rental revenues
of such aircraft, and would have a disproportionately significant impact on the Company’s portfolio value. In addition,
the Company is dependent on the third-party companies that manufacture and provide service for the aircraft types in
the Company’s portfolio. The Company has no control over these companies, and they could decide to curtail or
discontinue production of or service for these aircraft types at any time or significantly increase their costs, which
could negatively impact the Company’s prospects and performance. These effects would diminish if the Company
acquires assets of other types. Conversely, acquisition of additional aircraft of the types currently owned by the
Company will increase the Company’s risks related to its concentration of those aircraft types.
Competition. The aircraft leasing industry is highly competitive. The Company competes with other leasing
companies, banks, financial institutions, private equity firms, aircraft leasing syndicates, aircraft manufacturers,
distributors, airlines and aircraft operators, equipment managers, equipment leasing programs and other parties
engaged in leasing, managing or remarketing aircraft. Many of these competitors have longer operating histories,
more experience, larger customer bases, more expansive brand recognition, deeper market penetration and
significantly greater financial resources. Further, competition in the Company's market niche of regional aircraft has
increased significantly recently as a result of increased focus on regional air carriers by competitors who have
traditionally neglected this market, new entrants to the acquisition and leasing market and consolidation of certain
competitors. If and as competition continues to increase, it has and will likely continue to create upward pressure on
acquisition prices for many of the aircraft types that the Company has targeted to buy and, at the same time, create
downward pressure on lease rates, resulting in lower revenues and margins for the Company and, therefore, fewer
acceptable acquisition opportunities for the Company.
Risks Related to Regional Air Carriers. The Company’s continued focus on its customer base of regional air carriers
subjects the Company to certain risks. Many regional airlines rely heavily or even exclusively on a code-share or other
contractual relationship with a major carrier for revenue, and can face financial difficulty or failure if the major carrier
terminates or fails to perform under the relationship or files for bankruptcy or becomes insolvent. Some regional
carriers may depend on contractual arrangements with industrial customers such as mining or oil companies, or
franchises from governmental agencies that provide subsidies for operating essential air routes, which may be subject
to termination or cancellation on short notice. Furthermore, many lessees in the regional air carrier market are start-
up, low-capital, and/or low-margin operators. A current concern for regional air carriers is the supply of qualified
pilots. Due to recently imposed regulations of the U.S. Federal Aviation Administration requiring a higher minimum
number of hours to qualify as a commercial passenger pilot, many regional airlines have had difficulty meeting their
business plans for expansion. This could in turn affect demand for the aircraft types in the Company’s portfolio and
the Company’s business, performance and liquidity.
General Economic Conditions and Lowered Demand for Travel. While the global economy has seen substantial
improvement since the 2008 financial crisis and global recession, not all global regions are experiencing growth, and
some have not fully recovered. There are indications that after recent periods of economic growth, major world
economies may be headed into a period of slower growth or even recession. The Company does not anticipate any
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AeroCentury 2018 Annual Report
worsening of the financial condition of its overall customer base in the near term, but believes that there may be further
shakeouts of weaker carriers in economically troubled regions, particularly if the world economy experiences a
slowdown. Any such shakeouts or any continued or new economic recession or downturn in the regions in which the
Company’s lessees operate could negatively impact the financial condition and viability of certain of the Company’s
customers and, in turn, the Company’s business and performance.
A growing concern arises from the fact that much of the recent growth in demand for regional aircraft in developing
countries has been driven by mining or other resource extraction operations by Chinese enterprises in these countries.
A downturn in the Chinese domestic economy that continues to reduce demand for imported raw materials could have
a significant negative impact on the demand for business and regional aircraft in these developing countries, including
in some of the markets in which the Company does, or seeks to do, business.
Furthermore, instability in Europe due to newly imposed U.S. sanctions against Russia and Iran, and the Russian,
Iranian and European reaction to such sanctions, or due to other factors, could have a negative impact on intra-
European carriers with which the Company does business. Also, Brexit and any further departures from the European
Union (“EU”) could threaten “open-sky” policies under which EU -based carriers operate freely within the EU. Losing
open-sky flight rights could have a significant negative impact on the health of the Company’s European lessees and,
as a result, the financial performance and condition of the Company.
If international conflicts erupt into military hostilities, heightened visa requirements make international travel more
difficult, terrorist attacks involving aircraft or airports occur, or a major flu outbreak occurs, passengers may avoid air
travel altogether, and global air travel worldwide could be significantly affected. Any such occurrence would have an
adverse impact on many of the Company’s customers.
Airline reductions in capacity in response to lower passenger loads can result in reduced demand for aircraft and
aircraft engines and a corresponding decrease in market lease rental rates and aircraft values. 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 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 disproportionately significant adverse impact on the Company. The Company’s significant sources of
operating lease revenue by region are summarized in Fleet Summary – Assets Held for Lease, above.
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 or less stable 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 strong and stable.
Foreign lessees are subject to risks related to currency conversion fluctuations. The Company currently has one
customer with rent obligations payable in Euros, and the Company may, from time to time, agree to additional leases
that permit payment in foreign currency, which would subject such lease revenue to monetary risk due to currency
exchange rate fluctuations. During the periods covered by this report, the Company considers the estimated effect on
its revenues of foreign currency exchange rate fluctuations to be immaterial; however, the impact of these fluctuations
may increase in future periods if additional rent obligations become payable in foreign currencies.
Even with U.S. dollar-denominated lease payment provisions, the Company could still be negatively affected by a
devaluation of a foreign lessee’s local currency relative to the U.S. dollar, which would make it more difficult for the
lessee to meet its U.S. dollar-denominated payments and increase the risk of default of that lessee, particularly if its
revenue is primarily derived in its local currency.
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AeroCentury 2018 Annual Report
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 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 which can be used to locally record 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.
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. Any such challenge could result in increased tax obligations
in these jurisdictions going forward or assessments of liability by the taxing authority, in which case the Company
may be required to pay penalties and interest on the assessed amount that would not give rise to a corresponding
foreign tax credit on the Company’s U.S. tax returns.
The Trump administration and members of the U.S. Congress have made public statements about significant changes
in U.S. trade policy and have taken certain actions that materially impact U.S. trade, including terminating,
renegotiating or otherwise modifying U.S. trade agreements with countries in various regions and imposing tariffs on
certain goods imported into the United States. These changes in U.S. trade policy have triggered and could continue
to trigger retaliatory actions by affected countries, including China, resulting in “trade wars” with these countries.
These trade wars could generally increase the cost of aircraft, aircraft and engine components and other goods
regularly imported by the Company’s customers, thereby increasing costs of operations for its air carrier customers
that are located in the affected countries. The increased costs could materially and adversely impact the financial
health of affected air carriers, which in turn could have a negative impact on the Company’s business opportunities,
and if the Company’s lessees are significantly affected, could have a direct impact on the Company’s financial results.
Furthermore, the Company often incurs maintenance or repair expenses not covered by lessees in foreign countries,
which expenses could increase if such countries are affected by such a trade war.
Level of Portfolio Diversification. The Company intends to continue to focus solely on regional aircraft. Although
the Company invested in a limited number of turboprop aircraft types in the past, including two in the second quarter
of 2018, the Company has also acquired several regional jet aircraft types, which now comprise a larger percentage
of the Company’s portfolio based on number of aircraft and net book value. The Company may continue to seek
acquisition opportunities for new types and models of aircraft used by the Company’s targeted customer base of
regional air carriers. Acquisition of aircraft types not previously owned by the Company entails greater ownership risk
due to the Company’s lack of experience managing those assets and the potentially different types of customers that
may lease them. Conversely, the Company’s focus on a more limited set of aircraft types and solely on regional
aircraft subjects the Company to risks that disproportionately impact these aircraft markets, which are described
elsewhere in this discussion. As a result, the level of asset and market diversification the Company chooses to pursue
could have a significant impact on its performance and results.
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, there can be no assurance that the cost will not fall on the Company.
Additionally, even if lessees are responsible for the costs of complying with these requirements, changes to the
requirements to make them more stringent or otherwise increase these costs could negatively impact the Company’s
customers’ businesses, which could result in nonperformance under their lease agreements or decreased demand for
the Company’s aircraft. Furthermore, future government regulations could cause the value of any noncomplying
equipment owned by the Company to decline substantially. Moreover, any failure by the Company to comply with
the government regulations applicable to it could result in sanctions, fines or other penalties, which could harm the
Company’s reputation and performance.
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AeroCentury 2018 Annual Report
Casualties and Insurance Coverage. The Company, as an 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, because 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
additional 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 the provisions
of this law 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 has adopted measures
designed to ensure these insurance policies continue to be maintained, including tracking receipt of the insurance
certificates, calendaring their expiration dates, and reminding lessees of their obligations to maintain such insurance
and provide current insurance certificates to the Company if a replacement certificate is not timely received prior to
the expiration of an existing certificate.
Despite these requirements and procedures, there may be certain cases where losses or liabilities are not entirely
covered by the lessee or its insurance. Although the Company believes the possibility of such an event is remote, any
such uninsured loss or liability, or insured loss or liability for which insurance proceeds are inadequate, might result
in a loss of invested capital in and any profits anticipated from the applicable aircraft, as well as potential claims
directly against the Company.
Compliance with Environmental Regulations. Compliance with 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, including requirements to adopt technology to reduce the amount of carbon emissions
or imposing a fee or tax system on carbon emitters. Any such regulation could be directed at the Company’s customers,
as operators of aircraft, at the Company, as an owner of aircraft, and/or on the manufacturers of aircraft. Under the
Company’s triple-net lease arrangements, the Company would likely try to shift responsibility for compliance to its
lessees; however, it may not be able to do so due to competitive or other market factors, and there might be some
compliance costs that the Company could not pass through to its customers 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 liquidity, there is no assurance that the costs of
complying with environmental regulations as amended or adopted in the future will not have such an effect.
Cybersecurity Risks. The Company believes that its main vulnerabilities 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 and backup
mechanisms exist in the event of such an interruption such that there would not be a material adverse financial impact
on the Company’s business. A cyber-hacker could also gain access to and release proprietary information of the
Company, its customers, suppliers and employees stored on the Company’s data network. Such a breach could harm
the Company’s reputation and result in competitive disadvantages, litigation, lost revenues, additional costs, or
liability to third parties. While the Company believes that it has sufficient cybersecurity measures in place
commensurate with the risks to the Company of a successful cyber-attack or breach of its data security, its resources
and technical sophistication may not be adequate to prevent or adequately respond to and mitigate all types of cyber-
attacks.
Possible Volatility of Stock Price. The market price of the Company’s common stock is subject to fluctuations
following developments relating to the Company’s operating results, changes in general conditions in the economy,
the financial markets or 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
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AeroCentury 2018 Annual Report
volume and float. This stock price and trading volume volatility could limit the Company’s ability to use its capital
stock to raise capital, if and when needed or desired, or as consideration for other types of transactions, including
strategic collaborations, investments or acquisitions. Any such limitation could negatively affect the Company’s
performance, growth prospects and liquidity.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Disclosure under this item has been omitted pursuant to the rules of the SEC that permit smaller reporting companies
to omit this information.
Item 8.
Financial Statements and Supplementary Data.
Disclosure of certain supplementary financial data has been omitted pursuant to the rules of the SEC that permit smaller
reporting companies to omit such information.
The following financial statements and schedules are included in this report below:
(1)
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017
Notes to Consolidated Financial Statements
(2)
Schedules:
All schedules have been omitted because the required information is presented in the consolidated
financial statements or is not applicable.
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AeroCentury 2018 Annual Report
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
AeroCentury Corp.
Burlingame, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of AeroCentury Corp. (the “Company”) and
subsidiaries as of December 31, 2018 and 2017, the related consolidated statements of operations, stockholders’
equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company and subsidiaries at December 31, 2018 and 2017, and the results of their operations
and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the
United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that
our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2006.
San Francisco, California
March 18, 2019
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AeroCentury 2018 Annual Report
AeroCentury Corp.
Consolidated Balance Sheets
ASSETS
Assets:
Cash and cash equivalents
Securities
Accounts receivable, including deferred rent of $869,600 and $707,300 at
December 31, 2018 and December 31, 2017, respectively
Finance leases receivable
Aircraft and aircraft engines held for lease, net of accumulated
depreciation of $36,675,500 and $33,234,200 at
December 31, 2018 and December 31, 2017, respectively
Assets held for sale
Property, equipment and furnishings, net of accumulated
depreciation of $2,200 at December 31, 2018
Favorable lease acquired, net of accumulated amortization of $61,700 at
December 31, 2018
Deferred tax asset
Prepaid expenses and other assets
December 31,
2018
December 31,
2017
$ 1,542,500
121,000
$ 8,657,800
-
3,967,200
15,250,900
3,825,100
23,561,000
184,019,900
10,223,300
195,098,200
4,966,500
69,100
863,300
254,900
840,100
-
-
301,300
$217,152,200
$236,409,900
Total assets
Liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses
Accrued payroll
Notes payable and accrued interest, net of unamortized debt issuance
costs of $674,300 and $2,216,000 at December 31, 2018 and
December 31, 2017, respectively
Maintenance reserves
Accrued maintenance costs
Security deposits
Unearned revenues
Deferred income taxes
Income taxes payable
Total liabilities
Commitments and contingencies (Note 9)
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,
1,545,884 and 1,416,699 outstanding at December 31, 2018 and
December 31, 2017, respectively
Paid-in capital
Retained earnings
Treasury stock at cost, 213,332 and 213,300 shares at December 31, 2018
and December 31, 2017, respectively
Total stockholders’ equity
$ 1,025,600
78,600
$ 645,200
-
131,092,200
28,527,500
463,300
3,367,800
3,274,800
7,537,100
497,400
145,598,200
26,942,800
1,275,300
3,147,900
2,447,500
8,533,700
452,600
175,864,300
189,043,200
-
-
1,800
16,782,800
27,540,600
44,325,200
1,600
14,780,100
35,621,800
50,403,500
(3,037,300)
(3,036,800)
41,287,900
47,366,700
Total liabilities and stockholders’ equity
$217,152,200
$236,409,900
The accompanying notes are an integral part of these consolidated financial statements.
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AeroCentury 2018 Annual Report
AeroCentury Corp.
Consolidated Statements of Operations
For the Years Ended December 31,
2018
2017
Revenues and other income:
Operating lease revenue
Maintenance reserves revenue, net
Finance lease revenue
Net (loss)/gain on disposal of assets
Net gain on sales-type finance leases
Other income
Expenses:
Depreciation
Interest
Management fees
Provision for impairment in value of aircraft
Professional fees, general and administrative and other
Maintenance
Salaries and employee benefits
Insurance
Other taxes
Settlement loss
(Loss)/income before income tax benefit
Income tax benefit
Net (loss)/income
(Loss)/earnings per share:
Basic
Diluted
Weighted average shares used in
(loss)/earnings per share computations:
Basic
Diluted
$27,637,500
1,629,000
1,251,000
(3,408,700)
-
7,600
$29,002,700
3,886,900
1,571,500
791,500
297,400
3,800
27,116,400
35,553,800
12,637,100
9,506,000
4,482,800
2,971,500
2,343,800
636,000
592,300
383,700
90,200
2,527,000
12,025,600
7,753,200
6,109,200
1,002,100
1,945,100
2,924,300
-
271,300
90,300
-
36,170,400
32,121,100
(9,054,000)
3,432,700
(972,800)
(3,966,500)
$(8,081,200)
$ 7,399,200
$ (5.58)
$ 5.10
$ (5.58)
$ 5.10
1,449,261
1,449,261
1,449,576
1,449,576
The accompanying notes are an integral part of these consolidated financial statements.
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AeroCentury 2018 Annual Report
AeroCentury Corp.
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2018 and 2017
Number of
Common
Stock Shares
Outstanding
Common
Stock
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Total
Balance, December 31, 2016
1,566,699
$1,600
$14,780,100
$28,222,600 $ (504,100)
$42,500,200
Repurchase of shares
(150,000)
Net income
-
-
-
-
-
-
(2,532,700)
(2,532,700)
7,399,200
-
7,399,200
Balance, December 31, 2017
Acquisition of JHC by
AeroCentury
Common stock shares held
by JHC prior to the
acquisition of JHC and
retained as treasury stock
Net loss
1,416,699
1,600
14,780,100
35,621,800
(3,036,800)
47,366,700
129,217
200
2,002,700
(32)
-
-
-
-
-
-
-
-
2,002,900
(500)
(500)
(8,081,200)
-
(8,081,200)
Balance December 31, 2018
1,545,884
$1,800
$16,782,800
$27,540,600 $(3,037,300)
$41,287,900
The accompanying notes are an integral part of these consolidated financial statements.
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AeroCentury 2018 Annual Report
AeroCentury Corp.
Consolidated Statements of Cash Flows
Operating activities:
Net (loss)/income
Adjustments to reconcile net (loss)/income to net cash
provided by operating activities:
Net loss/(gain) on disposal of assets
Net gain on sales-type finance leases
Non-cash income
Depreciation
Amortization
Provision for impairment in value of aircraft
Non-cash interest
Settlement loss
Deferred income taxes
Changes in operating assets and liabilities:
Accounts receivable
Finance leases receivable
Prepaid expenses and other
Taxes receivable
Accounts payable and accrued expenses
Accrued payroll
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
Investment in direct financing leases
Purchases of aircraft and aircraft engines
Acquisition of JHC, net of cash acquired
Net cash used in investing activities
Financing activities:
Issuance of notes payable – Credit Facility
Repayment of notes payable – Credit Facility
Debt issuance costs
Repayment of notes payable – special purpose financing
Net cash (used in)/provided by financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
For the Years Ended December 31,
2018
2017
$ (8,081,200)
$ 7,399,200
3,408,700
-
(42,700)
12,637,100
61,700
2,971,500
1,615,500
2,527,000
(1,390,000)
(537,400)
(133,100)
(457,800)
22,500
1,802,700
(14,800)
(147,100)
3,552,600
(4,100)
827,300
(677,200)
17,941,200
11,688,400
4,945,200
-
(22,844,300)
(2,875,100)
(9,085,800)
21,000,000
(32,600,000)
(70,000)
(4,300,700)
(15,970,700)
(7,115,300)
8,657,800
(791,500)
(297,400)
-
12,025,600
-
1,002,100
1,012,300
-
(4,296,800)
1,000,700
(510,700)
(123,500)
-
(572,000)
-
188,100
(2,171,000)
(232,300)
608,500
329,400
14,570,700
12,741,200
193,000
(7,614,200)
(32,063,100)
-
(26,743,100)
35,900,000
(12,000,000)
(1,152,500)
(4,111,700)
18,635,800
6,463,400
2,194,400
Cash and cash equivalents, end of year
$ 1,542,500
$ 8,657,800
During the years ended December 31, 2018 and 2017, the Company paid interest totaling $8,173,900 and $6,642,300,
respectively. The Company paid income taxes of $1,063,200, including $627,000 of pre-Merger taxes payable by
JHC and assumed by the Company as a result of the Merger, and $800 in 2018 and 2017, respectively. During 2018,
AeroCentury issued 129,217 shares valued at $2,002,900 related to its acquisition of JHC. During 2017, the Company
repurchased 150,000 shares of its common stock in exchange for an aircraft engine with a value of $2,532,700.
The accompanying notes are an integral part of these consolidated financial statements.
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AeroCentury 2018 Annual Report
AeroCentury Corp.
Notes to Consolidated Financial Statements
December 31, 2018
1.
Organization and Summary of Significant Accounting Policies
(a)
The Company and Basis of Presentation
AeroCentury Corp. (“AeroCentury”) is a Delaware corporation incorporated in 1997. AeroCentury together with its
consolidated subsidiaries is referred to as the “Company.”
In August 2016, AeroCentury formed two wholly-owned subsidiaries, ACY 19002 Limited (“ACY 19002”) and ACY
19003 Limited (“ACY 19003”) for the purpose of acquiring aircraft using a combination of cash and third-party
financing (“UK LLC SPE Financing” or “special purpose financing”) separate from AeroCentury’s credit facility (the
“Credit Facility”). The UK LLC SPE Financing was repaid in full in February 2019 as part of a refinancing involving
new non-recourse term loans totaling approximately $44.3 million (“Term Loans”) made to ACY 19002, ACY 19003
and two other newly formed special purpose subsidiaries of AeroCentury. See Note 14 for more information about
the Term Loans.
On October 1, 2018, AeroCentury acquired JetFleet Holding Corp. (“JHC”) in a reverse triangular merger (“Merger”)
for consideration of approximately $2.9 million in cash and 129,217 shares of common stock of AeroCentury, as
determined pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) entered into by AeroCentury,
JHC and certain other parties in October 2017. JHC is the sole shareholder of JetFleet Management Corp. (“JMC”),
which is an integrated aircraft management, marketing and financing business and the manager of the assets owned
by the Company. Upon completion of the Merger, JHC became a wholly-owned subsidiary of the Company, and as
a result, JHC's results are included in the Company's consolidated financial statements beginning on October 1, 2018.
In November 2018, AeroCentury formed two wholly-owned subsidiaries, ACY SN 15129 LLC (“ACY 15129”) and
ACY E-175 LLC (“ACY E-175”), for the purpose of refinancing four of the Company’s aircraft using the Term Loans.
Because the Term Loans did not close until February 2019, the subject aircraft remained as collateral under the Credit
Facility as of December 31, 2018, and ACY 15129 and ACY E-175 had no activity in 2018.
Financial information for AeroCentury and its consolidated subsidiaries is presented on a consolidated basis in
accordance with accounting principles generally accepted in the United States of America (“GAAP”) based upon the
continuation of the business as a going concern. All intercompany balances and transactions have been eliminated in
consolidation.
(b)
Use of Estimates
The Company’s consolidated financial statements have been prepared in accordance with GAAP. The preparation of
consolidated 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 consolidated 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 consolidated financial statements are the residual values and useful
lives of the Company’s long-lived assets, the amount and timing of future 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.
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AeroCentury 2018 Annual Report
(d)
Securities
At December 31, 2018, the Company owned 121 shares of non-voting preferred stock in a non-public company. The
stock has a cumulative preferred annual dividend of 10% and a liquidation value of $1,000 per share, but may not be
liquidated before January 1, 2019. Because the Company owns a minority share of the non-voting preferred stock,
the company’s results are not consolidated with those of the Company. The Company has elected to measure equity
investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes
resulting from observable price changes in orderly transactions for the identical or a similar investment of the same
issuer.
(e)
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 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.
(f)
Favorable Lease Acquired
In connection with the Company’s acquisition of JHC, as discussed in Note 8, the Company recognized that the current
lease of its office facilities had rents that are substantially below the market for such office space. Consequently, the
Company recorded $925,000 as the value of below-market rents at the October 1, 2018 date of the JHC acquisition,
and is amortizing such amount on a level basis over the remaining term of the office lease, including two one-year
bargain renewal options. The Company recorded $61,700 of amortization in 2018 and will recognize $246,700 of
amortization annually through 2021 and $123,200 in the first half of 2022.
(g)
Property, Equipment and Furnishings
The Company’s interests in equipment are recorded at cost and depreciated using the straight-line method over five
years. The Company’s leasehold improvements are recorded at cost and amortized using the straight-line method over
the shorter of the lease term or the estimated useful lives of the respective assets.
(h)
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 semi-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 Note 7, the Company recorded impairment provisions totaling $2,971,500
and $1,002,100 in 2018 and 2017, respectively.
AeroCentury 2018 Annual Report
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49
(i)
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 Credit Facility are deferred and amortized using the straight-line method.
Commitment fees for unused funds are expensed as incurred.
(j)
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
lease term. 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.
(k)
Taxes
As part of the process of preparing the Company’s consolidated 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. After considering the Company’s significant amounts of net
deferred tax liabilities which are future reversing taxable temporary differences, the Company has determined that no
valuation allowance is required for its deferred tax assets.
The Company accrues non-income based sales, use, value added and franchise taxes as other tax expense in the
statement of operations.
(l)
Revenue Recognition, Accounts Receivable and Allowance for Doubtful Accounts
Revenue from leasing of aircraft assets pursuant to operating leases is recognized 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, 2018 and 2017.
(m)
Comprehensive Income
The Company does not have any comprehensive income other than the revenue and expense items included in the
statement of operations. As a result, comprehensive income equals net income for the years ended December 31, 2018
and 2017.
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AeroCentury 2018 Annual Report
(n)
Finance Leases
As of December 31, 2018, the Company had three aircraft subject to sales-type finance leases and three aircraft subject
to direct financing leases. All six leases contain lessee bargain purchase options at prices substantially below the
subject assets’ estimated residual values at the exercise date for the options. Consequently, the Company has classified
each of these six leases as finance leases for financial accounting purposes. For such finance leases, the Company
reports 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, as a finance lease receivable on its balance sheet,
and accrues interest on the balance of the finance lease receivable based on the interest rate inherent in the applicable
lease over the term of the lease. For each of the three sales-type finance leases, the Company recognized as a gain or
loss the amount equal to (i) the net investment in the sales-type finance lease plus any initial direct costs and lease
incentives less (ii) the net book value of the subject aircraft at inception of the applicable lease.
The Company recognized interest earned on finance leases in the amount of $1,251,000 and $1,571,500 in 2018 and
2017, respectively.
(o)
Maintenance Reserves and Accrued Maintenance Costs
Maintenance costs under the Company’s triple net leases are generally the responsibility of the lessees. Some 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. Such reimbursements reduce the
associated maintenance reserve liability.
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. 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 maintenance reserves received from lessees and which is expensed as incurred, and (ii) lessor
maintenance obligations assumed and recognized as a liability upon acquisition of aircraft subject to a lease with such
provisions.
(p)
Interest Rate Hedging
The Company periodically enters into various derivative instruments to mitigate its exposure to variable interest rate
obligations, although it was not a party to any such instruments in 2017 or 2018. Although all such transactions are
entered into for such a purpose, hedge accounting is only applied where specific criteria have been met and the
transaction is highly effective and has been designated as a hedge at inception. Generally, the effects of derivative
transactions are recorded in earnings for the period in which they arise, although the effective portion of a hedged
transaction is reported as a component of other comprehensive income and is reclassified into earnings in the period
in which the transaction being hedged affects earnings.
(q)
Recent Accounting Pronouncements
Topic 606
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09 that created the new Topic 606 (“Topic 606”) in the Accounting Standards Codification (“ASC”). Topic
606 also included numerous conforming additions and amendments to other Topics within the ASC. Topic 606
established 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 has not affected the Company's lease
revenues. The Company adopted Topic 606 as of January 1, 2018 using the modified retrospective method of
transition. Since most of the Company’s revenues arise from its lease contracts, which are not affected by the new
standard, and since the Company’s revenue recognition for other sources of revenue is generally the same as it was
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AeroCentury 2018 Annual Report
under previous accounting standards, adoption of Topic 606 in the current year, using the modified retrospective
approach, has had no effect on its consolidated financial statements.
ASU 2016-01
In January 2016, the FASB issued ASU 2016-01, Income Statement - Financial Instruments - Overall (Subtopic 825-
10): Recognition and Measurement of Financial Assets and Liabilities ("ASU 2016-01"). ASU 2016-01 was issued to
enhance the reporting model for financial instruments to provide the users of financial statements with more useful
information for decisions. Effective January 1, 2018, the Company adopted ASU 2016-01 and applied the provisions
of the standard prospectively within the consolidated financial statements for the year ended December 31, 2018,
which includes the Company no longer disclosing the method or significant assumptions used to estimate the fair
value for its securities measured at amortized cost on the consolidated balance sheet. The adoption of the ASU did
not have an effect on the Company's consolidated financial statements.
ASU 2016-02
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 is effective
for public companies for years beginning after December 15, 2018, although early adoption is permitted. The
Company has not adopted ASU 2016-02 early. ASU 2016-02 substantially modifies lessee accounting for leases,
requiring that lessees recognize lease assets and liabilities for leases extending beyond one year. Leases will be
classified as either finance or operating, with classification affecting the pattern of expense recognition in the income
statement.
The new standard requires a lessor to classify leases as sales-type, finance, or operating. A lease will be treated as
sales-type if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks
and rewards are conveyed without the transfer of control, the lease is treated as a finance lease. If the lessor does not
convey risks and rewards or control, an operating lease results.
The Company adopted the standard on January 1, 2019, electing to apply its provisions on the date of adoption and to
record the cumulative effect as an adjustment to retained earnings. The Company evaluated the guidance and noted
that lessor accounting is similar to the current model; however, the guidance does impact the Company’s existing
operating lease obligation. In addition, the Company has elected to apply practical expedients permitted by the
standard, under which the Company will not have to reevaluate the classification of its existing leases or its capitalized
initial direct costs.
As a result of application of the practical expedients, the Company was not required to alter the classification or
carrying value of its leased or finance lease assets. The Company was required to record a lease obligation of
approximately $600,000 in connection with the lease of its headquarters, and to increase the capitalized leasehold
interest / right of use asset by a similar amount upon adoption. There was no effect on retained earnings recorded as
a result of adoption of the standard.
ASU 2016-13
The FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), in June of 2016 (“ASU 2016-
13”). ASU 2016-13 provides that financial assets measured at amortized cost are to be presented as a net amount,
reflecting a reduction for a valuation allowance to present the amount expected to be collected (the “current expected
credit loss” model of reporting). As such, expected credit losses will be reflected in the carrying value of assets and
losses will be recognized before they become probable, as is required under the Company’s present accounting
practice. In the case of assets held as available for sale, the amount of the valuation allowance will be limited to an
amount that reflects the marketable value of the debt instrument. This amendment to GAAP is effective for fiscal
years beginning after December 15, 2019 (for the Company, its 2020 year) unless elected earlier, and adoption is to
be reflected as a cumulative effect on the first date of adoption. The Company does not expect to early adopt ASU
2016-13.
ASU 2017-12
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 is effective for public companies for years
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AeroCentury 2018 Annual Report
beginning after December 15, 2018, and will therefore be effective for the Company’s 2019 year and interim periods.
The revised guidance includes reduced limitations on items that can be hedged to more closely align hedge accounting
with entities’ risk management activities through changes to designation and measurement guidance as well as new
disclosure requirements of balance sheet and income statement information designed to increase the transparency of
the impact of hedging. Since the Company has not entered into in any derivative transactions in 2017 and 2018,
adoption of ASU 2017-12 will not have any material effect on the Company’s financial statements. The Company is
continuing to evaluate the impact of any transactions entered into in 2019.
SAB 118
In December of 2017, the United States enacted the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), which had
numerous effects on U.S. corporate taxation, including reducing the federal corporate tax rate to 21%, substantially
modifying the U.S. taxation of international investments and transactions, and repealing the alternative minimum tax.
In December of 2017, the Staff of the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides
that companies should reflect in their financial statements the effects of the change in tax law in which the accounting
is complete, as such completion occurs; provisional amounts for such effects for which the company can determine a
reasonable estimate, as such estimates can be made; and continued accounting under the provisions of the law as it
existed before enactment of the Tax Act for such effects for which no reasonable estimate under the new law can be
made, until such a reasonable estimate is available and a provisional amount can be reported. Under SAB 118, in no
event should the period during which a company is obtaining, preparing, and analyzing the information needed to
complete the accounting for the effects of the change in tax law exceed one year from enactment (the “measurement
period”), or the fourth quarter of 2018. The Company has reflected the effects of the Tax Act in these consolidated
financial statements and the Company did not record any additional amounts in 2018 for the year ended December
31, 2017 to account for the effects of the change in tax law due to the Tax Act.
2.
Finance Leases Receivable
During 2018, a customer that leased six of the Company’s aircraft under sales-type finance leases purchased three of
those aircraft in amounts equal to the outstanding balance under the applicable finance leases. The purchase price was
paid in the form of (i) $1,088,700 in cash, (ii) $1,675,100 of maintenance reserves previously paid to the Company
for one of the purchased aircraft and (iii) $2,618,100 of maintenance reserves previously paid to the Company for two
aircraft that remain under sales-type finance leases with the customer. Such reserves are no longer available to the
customer for reimbursement of maintenance claims under the applicable lease provisions pursuant to which the
reserves were paid. The Company did not record a gain or loss on the sale of the aircraft.
At December 31, 2018 and December 31, 2017, the net investment included in sales-type finance leases and direct
financing leases receivable were as follows:
Gross minimum lease payments receivable
Less unearned interest
Finance leases receivable
December 31,
2018
December 31,
2017
$17,107,100
(1,856,200)
$27,074,400
(3,513,400)
$15,250,900
$23,561,000
As of December 31, 2018, minimum future payments receivable under finance leases were as follows:
Years ending December 31
2019
2020
2021
2022
$ 4,885,500
4,208,600
4,805,000
3,208,000
$17,107,100
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AeroCentury 2018 Annual Report
3.
Aircraft and Aircraft Engines Held for Lease or Sale
(a)
Assets Held for Lease
At December 31, 2018 and December 31, 2017, the Company’s aircraft and aircraft engines held for lease consisted
of the following:
Type
Regional jet aircraft
Turboprop aircraft
Engines
December 31, 2018
% of net
book value
Number
Owned
December 31, 2017
% of net
book value
Number
owned
13
4
1
81%
18%
1%
13
10
1
82%
17%
1%
During 2018 and 2017, the Company used cash of $22,844,300 and $32,063,100, respectively, for the purchase and
capital improvement of aircraft.
During 2018, the Company purchased two aircraft subject to operating leases. During the same period, the Company
sold four aircraft held for lease for cash and recorded net losses totaling $2,426,600. The Company also reclassified
four aircraft from held for lease to held for sale.
During 2018, the Company recorded $1,629,000 in maintenance reserves revenue resulting from cash received from
the former lessee of three aircraft that were returned to the Company during 2017. Such payments were for unpaid
maintenance reserves, as well as amounts due pursuant to the return conditions of the applicable leases. The Company
did not accrue unpaid reserves or return condition amounts at the time of lease termination based on management’s
evaluation of the creditworthiness of the lessee and, therefore, accounted for them as income when received.
None of the Company’s aircraft and engines held for lease were off lease at December 31, 2018. As discussed below,
the Company has three off-lease aircraft that were reclassified as held for sale during 2018.
As of December 31, 2018, minimum future lease revenue payments receivable under noncancelable operating leases
were as follows:
Years ending December 31
2019
2020
2021
2022
2023
Thereafter
(b)
Assets Held for Sale
$ 28,357,100
25,773,700
18,672,300
16,714,700
13,031,900
21,610,600
$124,160,300
During 2018, the Company sold an aircraft that was previously held for lease and for which the Company had recorded
an impairment provision of $1,835,800 during 2018. The Company recorded a loss of $1,072,400 related to the sale.
Assets held for sale at December 31, 2018 consist of three off-lease turboprop aircraft and airframe parts from two
turboprop aircraft. During 2018, the Company recorded impairment provisions totaling $1,135,700 for the three
aircraft and reclassified them from assets held for lease to assets held for sale.
During 2018, the Company received $1,280,100 in cash and accrued $133,100 in receivables for parts sales. These
amounts were accounted for as follows: $779,700 reduced accounts receivable for parts sales accrued in 2017,
$543,200 reduced the carrying value of the parts, and $90,300 was recorded as gains in excess of the carrying value
of the parts. During 2017, the Company received $193,100 from the sale of parts and accrued receivables totaling
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AeroCentury 2018 Annual Report
$779,700 for 2017 parts sales, payment for which was received in 2018. Of such amounts, $885,400 reduced the
carrying value of the parts and $87,400 was recorded as gains in excess of the carrying value of the parts.
4.
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 28% and 21% of the Company’s operating lease revenue was derived from lessees domiciled in the
United States during 2018 and 2017, respectively. All revenues relating to aircraft leased and operated internationally,
with the exception of rent payable in Euros for two of the Company’s aircraft, are denominated and payable in U.S.
dollars.
The tables below set forth geographic information about the Company’s operating lease revenue and net book value
for leased aircraft and aircraft equipment, grouped by domicile of the lessee:
Operating Lease Revenue
Europe and United Kingdom
North America
Africa
Asia
Australia
For the Years Ended December 31,
2018
2017
$16,258,800
10,119,100
-
1,259,600
-
$27,637,500
$14,941,100
8,506,700
3,306,100
1,251,300
997,500
$29,002,700
December 31,
Net Book Value of Aircraft and Aircraft Engines Held for Lease
2018
2017
Europe and United Kingdom
North America
Off lease
Asia
$110,069,000
68,485,400
-
5,465,500
$184,019,900
$92,108,500
72,270,700
24,636,900
6,082,100
$195,098,200
The table below sets forth geographic information about the Company’s finance lease revenue, grouped by domicile
of the lessee:
Finance Lease Revenue
Africa
United Kingdom
For the Years Ended December 31,
2018
2017
$ 832,800
418,200
$ 1,180,600
390,900
$1,251,000
$ 1,571,500
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AeroCentury 2018 Annual Report
5.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash
deposits and receivables. The Company places its deposits with financial institutions and other creditworthy issuers
and limits the amount of credit exposure to any one party.
For the year ended December 31, 2018, the Company had five significant customers, four of which individually
accounted for 30%, 21%, 15% and 13%, respectively, of operating lease revenue and one of which accounted for 67%
of finance lease revenue. For the year ended December 31, 2017, the Company had five significant customers, four
of which individually accounted for 28%, 20%, 14% and 11%, respectively, of operating lease revenue and one of
which accounted for 75% of finance lease revenue.
At December 31, 2018, the Company had receivables from three customers totaling $3,413,500 and representing 87%
of the Company’s total accounts receivable. In early 2019 through the date of this report, the Company has received
payments totaling $1,564,800 related to these receivables.
At December 31, 2017, the Company had receivables from four customers totaling $2,959,200 and representing 77%
of the Company’s total accounts receivable, as well as receivables totaling $779,700 for parts sales related to its aircraft
held for sale.
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AeroCentury 2018 Annual Report
6.
Notes Payable and Accrued Interest
At December 31, 2018 and December 31, 2017, the Company’s notes payable and accrued interest consisted of the
following:
Credit Facility:
Principal
Unamortized debt issuance costs
Accrued interest
Special purpose financing:
Principal
Accrued interest
December 31,
2018
December 31,
2017
$122,400,000
(674,300)
139,300
$134,000,000
(2,216,000)
278,900
9,211,200
16,000
13,511,900
23,400
$131,092,200
$145,598,200
(a)
Credit Facility
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, except for the aircraft that serve as collateral for the Company’s UK LLC
SPE Financing. As discussed in Note 14, in February 2019, the Credit Facility, which had availability of $170 million
(with the ability for the Company to request an increase up to $180 million) and was to mature on May 31, 2019, was
extended to February 19, 2023, reduced to $145 million (with the ability for the Company to request an increase up
to $160 million) and amended in certain other respects, including with respect to certain of the Company’s financial
covenants thereunder. Also in February 2019, the Company refinanced, with new non-recourse Term Loans totaling
$44,310,000, four aircraft that previously served as collateral under the Credit Facility and two aircraft that served as
collateral for the UK LLC SPE Financing, as discussed in (b) UK LLC SPE Financing below.
As of September 30, 2018, the Company was not in compliance with the interest coverage, debt service coverage and
revenue concentration covenants under the Credit Facility. The Company obtained a waiver from the Credit Facility
lenders in November 2018 for the September 30, 2018 noncompliance. There were no fees or penalties related to the
waiver. In addition, based on appraisals obtained in October 2018 for four assets held for sale, the Company had a
borrowing base deficiency of approximately $1,400,000 at September 30, 2018. The Company cured the deficiency
in October 2018 by making a principal payment of $2,000,000 on the Credit Facility.
As of December 31, 2018, the Company was not in compliance with the interest coverage, debt service coverage, no
net loss and revenue concentration covenants under the Credit Facility. The noncompliance resulted primarily from
the Company recording aircraft impairment charges on aircraft and losses on sale of aircraft totaling $3,408,700 during
2018. The February 2019 amendment to the Credit Facility discussed above and in Note 14 cured the December 31,
2018 noncompliance and revised the compliance requirements through the extended maturity date of the Credit
Facility.
The unused amount of the Credit Facility was $47,600,000 and $36,000,000 as of December 31, 2018 and December
31, 2017, respectively. The weighted average interest rate on the Credit Facility was 5.92% and 5.21% at December
31, 2018 and December 31, 2017, respectively.
(b)
UK LLC SPE Financing
In August 2016, the Company acquired two regional jet aircraft using cash and financing separate from the Credit
Facility. The separate UK LLC SPE Financing resulted in note obligations of $9,805,600 and $9,804,300, which were
being paid from a portion of the rent payments on the related aircraft leases through October 3, 2020 and November
7, 2020, respectively, and which bore interest at the rate of 4.455% per annum. The borrower under each note
obligation was the special purpose subsidiary of AeroCentury that owns each aircraft. The notes were collateralized
by the aircraft and were recourse only to the special purpose entity borrower and its aircraft asset, subject to standard
exceptions for this type of financing. Payments due under the notes consisted of quarterly principal and interest. The
combined balance of the principal amount and accrued interest owed on these notes at December 31, 2018 and
December 31, 2017 was $9,227,200 and $13,535,300, respectively.
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AeroCentury 2018 Annual Report
As discussed in Note 14, in February 2019, the UK LLC SPE Financing was repaid and cancelled in full when the
Company refinanced the aircraft securing the UK LLC SPE Financing with the proceeds from the Term Loans.
7.
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 following table shows, by level within the fair value hierarchy, the Company’s assets at fair value as of
December 31, 2018 and December 31, 2017:
Total
December 31, 2018
Level 2
Level 1
Level 3
Total
Level 1
Level 2 Level 3
December 31, 2017
Money
market
funds
$656,400 $656,400
$ -
$ -
$6,151,900 $6,151,900
$ -
$ -
There were no transfers between Level 1 and Level 2 in either 2018 or 2017, and there were no transfers into or out
of Level 3 during 2018 or 2017.
As of December 31, 2018, and December 31, 2017, 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 these and other assets held for sale, by reference to independent appraisals, quoted market prices (e.g., offers
to purchase) and other factors. These are considered Level 3 within the fair value hierarchy. 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 asset’s carrying value exceeds its fair value. The Company recorded impairment charges
totaling $2,673,300 on four of its aircraft held for sale in 2018, which had an aggregate fair value of $9,900,000. The
Company also recorded an impairment charge of $298,200 on one of its aircraft held for lease in 2018. The Company
recorded impairment charges of $1,002,100 on five of its assets held for lease in 2017.
Fair Value of Other Financial Instruments
The Company’s financial instruments, other than cash and cash equivalents, consist principally of finance leases
receivable, amounts borrowed under the Credit Facility and notes payable under special purpose financing. The fair
value of accounts receivable, accounts payable and the Company’s maintenance reserves and accrued maintenance
costs approximates the carrying value of these financial instruments because of their short-term maturities. The fair
value of finance lease receivables approximates the carrying value as discussed in Note 1(n).
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AeroCentury 2018 Annual Report
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 under the Credit Facility
approximates current market rates for such indebtedness at the dates of the consolidated balance sheets, and therefore
that the outstanding principal and accrued interest of $122,539,300 and $134,278,900 at December 31, 2018 and
December 31, 2017, respectively, approximate their fair values on such dates. The fair value of the Company’s
outstanding balance of its Credit Facility is categorized as Level 3 under the GAAP fair value hierarchy.
Before their repayment in February 2019 in connection with the Term Loans refinancing (see Note 14), the amounts
payable under the Company’s UK LLC SPE Financing were payable through the fourth quarter of 2020 and bore a
fixed rate of interest, as described in Note 6(b). The Company believes the effective interest rate under the special
purpose financing approximates current market rates for such indebtedness at the dates of the consolidated balance
sheets, and therefore that the outstanding principal and accrued interest of $9,227,200 and $13,535,300 approximate
their fair values at December 31, 2018 and December 31, 2017, respectively. Such fair value is categorized as Level
3 under the GAAP fair value hierarchy.
8.
Acquisition of Management Company
In October 2017, AeroCentury, JHC and certain other parties entered into the Merger Agreement for the acquisition
of JHC by AeroCentury for consideration of approximately $2.9 million in cash and 129,217 shares of common stock
of AeroCentury, as determined pursuant to the Merger Agreement. JHC is the sole shareholder of JMC, which is the
manager of the Company’s assets as described in Note 13 below. The Merger was consummated on October 1, 2018.
AeroCentury’s common stock issued as consideration in the Merger was offered and sold pursuant to an exemption
from registration under Section 3(a)(10) of the Securities Act of 1933, as the California Department of Business
Oversight (the “DBO”) had issued a permit for the issuance of such securities to JHC’s shareholders on February 22,
2018 after a fairness hearing before the DBO.
As a subsidiary of the Company, JHC’s results are included in the Company’s consolidated financial statements
beginning on October 1, 2018. In April 2018, subsequent to the execution of the Merger Agreement for the acquisition
of JHC, which was signed in October 2017, the Company, JHC and JMC entered into a waiver and reimbursement
agreement (the “Waiver/Reimbursement Agreement”), pursuant to which JHC and JMC agreed to waive their right to
receive management and acquisition fees (“Contract Fees”) otherwise owed by the Company to JMC pursuant to the
Management Agreement for all periods after March 31, 2018 and until the consummation of the Merger, and in return,
the Company agreed to reimburse JMC for expenses incurred in providing management services set forth under the
Management Agreement. As a result of the Waiver/Reimbursement Agreement, the Company became responsible
for all expenses incurred by JMC in managing the Company as of April 1, 2018, including employee salaries, office
rent and all other general and administrative expenses. As a result of the Merger, the Company assumed all of JHC’s
assets, comprised primarily of securities, prepaid expenses and an office lease, as well as liabilities of approximately
$0.9 million.
During the years ended December 31, 2018 and 2017, the Company accrued $485,000 and $619,400, respectively, of
expenses related to the Merger transaction. Such expenses are included in professional fees, general and
administrative and other in the Company’s consolidated statements of operations.
During the fourth quarter of 2018, the Company also recorded a settlement loss of $2,527,000 related to the Merger.
The settlement loss amount was estimated using an income approach. The Company assessed the contractual terms
and conditions of the previous management agreement between the company and JMC (the “Management
Agreement”) as compared to current market conditions and the historical and expected financial performance of the
Company and JMC. Based on the analysis performed, the Company determined that the contractual payment terms
were above market rates. The present value of the expected differential between payments previously required by the
Management Agreement and those that would be required if the contract reflected current market terms was calculated
over the Management Agreement contractual term. As the management fee previously paid by the Company was
deemed to be above market and the settlement of this pre-existing relationship resulted in a loss, the loss was
recognized in the consolidated statement of operations at the acquisition date and reduced the estimated purchase
consideration transferred.
The Company did not recognize any goodwill on its acquisition of JHC because the only customer relationship JHC
had was through its contract with the Company for management of the Company’s assets and the Company cannot
recognize goodwill attributable to its relationship with itself.
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AeroCentury 2018 Annual Report
The following table shows the allocation of the purchase price paid by the Company for its acquisition of JHC, the
assets and liabilities that were assumed as a result of the Merger and calculation of the settlement loss.
10.
Stockholder Rights Plan
Consideration paid in the merger:
Cash consideration
ACY stock consideration
Fair value of assets acquired/(liabilities assumed):
Cash
Securities
Accounts & note receivable
Prepaid expenses
Property, equipment and furnishings
Office leasehold
Accounts payable
Accrued vacation
Taxes payable
Deferred taxes
Excess of consideration paid over net assets acquired
Waiver of JMC Margin payable
Settlement of payable to JMC
Settlement Loss on Management Agreement with JMC
9.
Commitments and Contingencies
$ 2,915,000
2,003,000
4,918,000
40,000
121,000
28,000
157,000
79,000
925,000
(85,000)
(93,000)
(722,000)
(138,000)
312,000
4,606,000
(1,517,000)
(562,000)
$ 2,527,000
The Company leases its office space under a lease expiring June 30, 2020 and a storage facility on a monthly basis.
Effective June 1, 2018, the Company agreed to amend its office lease to reduce the size of the rented office space
and to provide two consecutive, 1-year renewal options. The amended monthly lease commitment for the office
space includes an amount for base rent and operating expenses (including utilities and insurance costs). The
Company estimates that the future minimum lease commitments for its office space, including both the base rent and
operating expenses, and storage facility are as follows:
Years ending December 31
2019
2020
2021
2022
$193,500
196,400
199,300
101,100
$690,300
The projected annual rent expenses shown above are based on periodic increases to the base rental rate provided in
the amended lease for the office space. Total rent expense for the post-Merger period in 2018, which included rent
for a storage facility rented on a monthly basis, was $82,300. Total rent expense was $0 in 2017.
In the ordinary course of the Company’s business, the Company may be subject to lawsuits, arbitrations and
administrative proceedings from time to time. The Company believes that the outcome of any existing or known
threatened proceedings, even if determined adversely, should not have a material adverse effect on the Company's
business, financial condition, liquidity or results of operations.
In December 2009, AeroCentury’s Board of Directors adopted a stockholder rights plan granting a dividend of one
stock purchase right for each share of AeroCentury’s common stock outstanding as of December 18, 2009, and
AeroCentury 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 AeroCentury’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 of AeroCentury 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 on 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 AeroCentury,
including the right to vote or to receive dividends.
11.
Income Taxes
The items comprising the Company’s income tax provision are as follows:
Current tax provision:
Current tax provision
Deferred tax (benefit)/provision:
Federal
State
Foreign
Federal
State
Foreign
Net legislative change in corporate tax rate
Deferred tax benefit
Total income tax benefit
Income tax provision at statutory federal income tax rate
State tax (benefit)/provision, net of federal benefit
Non-deductible Merger expenses
Non-deductible management and acquisition fees
Net legislative change in corporate tax rate
Total income tax benefit
For the Years Ended
December 31,
2018
2017
$ -
$ -
3,200
414,000
417,200
800
329,500
330,300
(1,270,400)
(26,100)
(93,500)
1,159,700
35,100
(111,300)
(1,390,000)
-
(5,380,300)
(4,296,800)
$ (972,800)
$(3,966,500)
For the Years Ended
December 31,
2018
2017
$(1,901,400)
$ 1,167,100
(44,500)
647,200
325,900
33,100
213,500
-
-
(5,380,200)
$ (972,800)
$(3,966,500)
Total income tax (benefit)/expense differs from the amount that would be provided by applying the statutory federal
income tax rate to pretax earnings as illustrated below:
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AeroCentury 2018 Annual Report
10.
Stockholder Rights Plan
In December 2009, AeroCentury’s Board of Directors adopted a stockholder rights plan granting a dividend of one
stock purchase right for each share of AeroCentury’s common stock outstanding as of December 18, 2009, and
AeroCentury 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 AeroCentury’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 of AeroCentury 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 on 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 AeroCentury,
including the right to vote or to receive dividends.
11.
Income Taxes
The items comprising the Company’s income tax provision are as follows:
Current tax provision:
Federal
State
Foreign
Current tax provision
Deferred tax (benefit)/provision:
Federal
State
Foreign
Net legislative change in corporate tax rate
Deferred tax benefit
Total income tax benefit
For the Years Ended
December 31,
2018
2017
$ -
3,200
414,000
417,200
$ -
800
329,500
330,300
(1,270,400)
(26,100)
(93,500)
-
(1,390,000)
1,159,700
35,100
(111,300)
(5,380,300)
(4,296,800)
$ (972,800)
$(3,966,500)
Total income tax (benefit)/expense differs from the amount that would be provided by applying the statutory federal
income tax rate to pretax earnings as illustrated below:
Income tax provision at statutory federal income tax rate
State tax (benefit)/provision, net of federal benefit
Non-deductible Merger expenses
Non-deductible management and acquisition fees
Net legislative change in corporate tax rate
Total income tax benefit
For the Years Ended
December 31,
2018
2017
$(1,901,400)
(44,500)
647,200
325,900
-
$ (972,800)
$ 1,167,100
33,100
213,500
-
(5,380,200)
$(3,966,500)
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AeroCentury 2018 Annual Report
Temporary differences and carry-forwards that give rise to a significant portion of deferred tax assets and liabilities
as of December 31, 2018 and 2017 were as follows:
Deferred tax assets:
Current and prior year tax losses
Maintenance reserves
Foreign tax credit
Deferred interest expense
Deferred maintenance, bad debt allowance and other
Alternative minimum tax credit
Deferred tax assets
Deferred tax liabilities:
Accumulated depreciation on aircraft and aircraft engines
Deferred income
Favorable lease
Net deferred tax liabilities
December 31,
2018
2017
$ 4,065,100
3,100,800
611,900
81,800
92,500
45,500
7,997,600
$3,362,100
2,810,200
295,800
-
38,800
45,500
6,552,400
(14,773,800)
(320,600)
(185,400)
$ (7,282,200)
(14,591,000)
(495,100)
-
$(8,533,700)
Consolidated deferred federal income taxes arise from temporary differences between the valuation of assets and
liabilities as determined for financial reporting purposes and federal income tax purposes and are measured at enacted
tax rates. On December 22, 2017, the Tax Act was signed into law. Among other things, the Tax Act reduced the
Company’s corporate federal tax rate to a flat 21% for years after 2017. As a result, the Company’s deferred tax items
are measured at an effective federal tax rate of 21% as of December 31, 2018 and December 31, 2017. Although
realization is not assured, management believes it is more likely than not that the entire deferred federal income tax
asset will be realized. The amount of the deferred federal income tax assets considered realizable could be reduced in
the near term if estimates of future taxable income are reduced.
Beginning in 2018, the Tax Act also imposes a new provision designed to tax global intangible low-taxed income
("GILTI"), which requires the inclusion, in the Company’s U.S. income tax return, of foreign subsidiary earnings in
excess of an allowable return on the foreign subsidiary’s tangible assets. Per guidance issued by the FASB, companies
can either account for deferred taxes related to GILTI or treat tax arising from GILTI as a period cost. Both are
acceptable methods subject to an accounting policy election. On December 31, 2018, the Company finalized its policy
and has elected to use the period cost method for GILTI. In 2018, the Company did not account for any GILTI
inclusion as its Canadian subsidiary was not material.
The federal operating loss carryovers totaled approximately $19 million, of which $16 million will be available to
offset 100% of annual taxable income in future years and may be carried over through 2035 and $3 million will be
available to offset 80% of annual taxable income in future years and may be carried forward indefinitely. The current
year state operating loss carryovers of approximately $327,000 will be available to offset taxable income in the two
preceding years and in future years through 2038. The Company expects to utilize the net operating loss carryovers
remaining at December 31, 2018 in future years.
During the year ended December 31, 2018, the Company had pre-tax loss from domestic sources of approximately
$6.0 million and pre-tax loss from foreign sources of approximately $3.1 million. The Company had pre-tax income
from domestic sources of approximately $2.2 million and pre-tax income from foreign sources of approximately $1.2
million for the year ended December 31, 2017. The foreign tax credit carryover will be available to offset federal tax
expense in future years through 2028.
The Tax Act repealed the corporate alternative minimum tax for tax years beginning after 2017. In addition, beginning
in 2018, the Company’s alternative minimum tax credit (“MTC”) will be available to offset federal tax expense and
is refundable in an amount equal to 50% of the excess MTC for the tax year over the amount of the credit allowable
for the year against regular tax liability. In 2021, any remaining MTC will be fully refundable.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign
jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S.
income tax examinations by tax authorities for years before 2014. At December 31, 2018, the Company had a balance
of accrued tax, penalties and interest in accounts payable and taxes payable totaling $85,400 related to unrecognized
tax benefits on its non-U.S. operations. The Company does not anticipate any significant changes to the unrecognized
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AeroCentury 2018 Annual Report
tax benefits within twelve months of this reporting date. A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
Balance at January 1
Additions for prior years’ tax positions
Balance at December 31
December 31,
2018
$ -
85,400
$ 85,400
2017
-
-
-
The Company accounts for interest related to uncertain tax positions as interest expense, and for income tax
penalties as tax expense.
12.
Computation of (Loss)/Earnings Per Share
Basic and diluted earnings per share are calculated as follows:
Net (loss)/income
Weighted average shares outstanding for the period used in computation of
basic and diluted (loss)/earnings per share
Basic (loss)/earnings per share
Diluted (loss)/earnings per share
For the Years Ended December 31,
2018
2017
$(8,081,200)
$7,399,200
1,449,261
1,449,576
$ (5.58)
$ (5.58) $ 5.10
$ 5.10
Basic (loss)/earnings per common share is computed using net (loss)/income and the weighted average number of
common shares outstanding during the period. Diluted (loss)/earnings per common share is computed using net
(loss)/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.
13.
Related Party Transactions
See the description of the Merger Agreement between the Company and JHC in Note 8 above, pursuant to which the
Company acquired JHC in the Merger and JHC became a wholly owned subsidiary of the Company on October 1,
2018.
Before completion of the Merger, the Company’s portfolio of aircraft assets were managed and administered under
the terms of a management agreement with JMC (the “Management Agreement”), which is an integrated aircraft
management, marketing and financing business. Certain officers of the Company were also officers of JHC and JMC
and held significant ownership positions in both JHC and the Company, and JHC was also a significant stockholder
of AeroCentury. Under the Management Agreement, JMC received a monthly management fee based on the net asset
value of the Company’s assets under management. JMC also received an acquisition fee for locating assets for the
Company. Acquisition fees were included in the cost basis of the asset purchased. JMC also received a remarketing
fee in connection with the re-lease or sale of the Company’s assets. Remarketing fees were amortized over the
applicable lease term or included in the gain or loss on sale.
In April 2018, subsequent to the execution of the Merger Agreement, the Company, JHC and JMC entered into a
waiver and reimbursement agreement (the “Waiver/Reimbursement Agreement”), pursuant to which JHC and JMC
agreed to waive their right to receive Contract Fees otherwise owed by the Company to JMC pursuant to the
Management Agreement for all periods after March 31, 2018 and until the consummation of the Merger, and in return,
the Company agreed to reimburse JMC for expenses (“Management Expense”) incurred in providing management
services set forth under the Management Agreement. As a result, the Company has been responsible for all expenses
incurred by JMC in managing the Company’s assets beginning April 1, 2018 and will continue to be responsible for
all such expenses in all periods after the Merger, and no Contract Fees have been or will be payable by the Company
to JMC for the period from April 1 through September 30, 2018.
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AeroCentury 2018 Annual Report
The borrowings under the Credit Facility are secured by a first priority lien in all of the Company's assets, including
the Company’s aircraft portfolio, except those aircraft that are subject to the Term Loans. The Credit Facility requires
the Company to comply with certain covenants relating to payment of taxes, preservation of existence, maintenance
of property and insurance, and periodic financial reporting, as well as compliance with several financial ratio
covenants. The Credit Facility restricts the Company with respect to certain corporate level transactions and
transactions with affiliates or subsidiaries without consent of the lenders. Events of default under the Loan Agreement
include failure to make a required payment within three business days of a due date or to comply with other obligations
under the Credit Facility (subject to specified cure periods for certain events of default), a default under other
indebtedness of the Company, and a change in control of the Company. Remedies for default under the Credit Facility
include acceleration of the outstanding debt and exercise of any remedies available under applicable law, including
foreclosure on the collateral securing the borrowings under the Credit Facility.
Notwithstanding the Waiver/Reimbursement Agreement, the Company accrued as an expense the Contract Fees that
would have been due under the Management Agreement through September 30, 2018. For the nine months ended
September 30, 2018, Contract Fees exceeded the Management Expense by $1,023,000 of management fees and
$494,000 of acquisition fees (collectively, the “JMC Margin”). The amount of the JMC Margin payable was waived
and included in the acquisition accounting for the calculation of the settlement loss that the Company recognized upon
closing the Merger (see Note 8).
Contract Fees incurred during the 2018 and 2017 were as follows:
Management fees
Acquisition fees
Remarketing fees
For the Years Ended December 31,
2018
2017
$4,482,800
494,400
-
$6,109,200
850,500
51,100
In March 2017, the Company exchanged one of its engines for 150,000 shares of common stock of AeroCentury held
by a holder of more than 5% of AeroCentury’s then-outstanding common stock. The Company recorded no gain or
loss related to the exchange.
14.
Subsequent Events
On February 8, 2019, the Company, through four wholly owned subsidiary limited liability companies (“LLC
Borrowers”), entered into the Term Loans with Norddeutsche Landesbank Girozentrale, New York Branch (“Term
Loan Lender”) that provides for six separate term loans with an aggregate principal amount of $44.3 million. Each of
the Term Loans is secured by a first priority security interest in a specific aircraft (“Term Loan Collateral Aircraft”)
owned by an LLC Borrower, the lease for such aircraft, and a pledge by the Company of its membership interest in
each of the LLC Borrowers, pursuant to a Security Agreement (the “Security Agreement”) among the LLC Borrowers
and Wilmington Trust Company, as Security Trustee, and certain pledge agreements. The interest rates payable under
the Term Loans vary by aircraft, and are based on a fixed margin above either 30-day or 3-month LIBOR. The proceeds
of the Term Loans were used to pay off Company debt from its purchase of the Term Loan Collateral Aircraft. The
maturity of each Term Loan varies by aircraft, with the first Term Loan maturing in October 2020 and the last Term
Loan maturing in May 2025. The debt under the Term Loans is expected to be fully amortized by rental payments
received by the LLC Borrowers from the lessees of the Term Loan Collateral Aircraft during the terms of their
respective leases and remarketing proceeds.
The Term Loans include covenants that impose various restrictions and obligations on the LLC Borrowers, including
covenants that require the LLC Borrowers to obtain the Lender’s consent before they can take certain specified actions.
Events of default under the Term Loans and the Security Agreement include, among others: any failure by the LLC
Borrowers to make payments thereunder when due; certain defaults by the lessees of the Term Loan Collateral Aircraft
under their lease agreements for such aircraft; any misrepresentation by an LLC Borrower in the Term Loans
agreement or the Security Agreement or failure by an LLC Borrower to perform its obligations thereunder; the
occurrence of certain bankruptcy events; any lapse or failure to maintain insurance coverage on the Term Loan
Collateral Aircraft; and any suspension or cessation of business of an LLC Borrower or the Company. If such an event
of default occurs, subject to certain cure periods for certain events of default, the Lender would have the right to
terminate its obligations under the Term Loans, declare all or any portion of the amounts then outstanding under the
Term Loans to be accelerated and due and payable, and/or exercise any other rights or remedies it may have under
applicable law, including foreclosing on the assets that serve as security for the Term Loans.
On February 19, 2019, the Company entered into a Third Amended and Restated Loan and Security Agreement to the
Credit Facility which, among other things, extended the maturity date of the Credit Facility with the lenders thereunder
from May 31, 2019 to February 19, 2023; decreased the maximum availability thereunder from $170 million (with
the ability for the Company to request an increase up to $180 million) to $145 million (with the ability for the Company
to request an increase to up to $160 million); and modified certain of the Company’s financial ratio
covenants. Borrowings under the Credit Facility will continue to bear interest at floating rates that reset periodically
to a market benchmark rate plus a credit margin, and the Company will also continue to be obligated to pay a quarterly
fee on any unused portion of the Credit Facility at a rate of 0.50%. The Credit Facility requires that within 30 days
after closing of the financing, the Company must enter into an interest rate protection derivative instrument with
respect to $50 million of the outstanding loan balance at closing.
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AeroCentury 2018 Annual Report
The borrowings under the Credit Facility are secured by a first priority lien in all of the Company's assets, including
the Company’s aircraft portfolio, except those aircraft that are subject to the Term Loans. The Credit Facility requires
the Company to comply with certain covenants relating to payment of taxes, preservation of existence, maintenance
of property and insurance, and periodic financial reporting, as well as compliance with several financial ratio
covenants. The Credit Facility restricts the Company with respect to certain corporate level transactions and
transactions with affiliates or subsidiaries without consent of the lenders. Events of default under the Loan Agreement
include failure to make a required payment within three business days of a due date or to comply with other obligations
under the Credit Facility (subject to specified cure periods for certain events of default), a default under other
indebtedness of the Company, and a change in control of the Company. Remedies for default under the Credit Facility
include acceleration of the outstanding debt and exercise of any remedies available under applicable law, including
foreclosure on the collateral securing the borrowings under the Credit Facility.
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AeroCentury 2018 Annual Report
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 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 Item 9A
includes information concerning the evaluation of disclosure controls and procedures referred to in the Section 302
Certifications and 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 or submitted under 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 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.
In the course of the review of the consolidated financial results of the Company for the three months and six months
ended June 30, 2018, the Company identified a material weakness in its internal control over financial reporting
(“Internal Control”) at June 30, 2018 related to the Company’s incorrect accounting for management fees and
acquisition fees associated with the Management Agreement between JHC and the Company. While the Company
implemented controls over identifying the proper accounting treatment over the JHC acquisition and those controls
operated as of December 31, 2018, the Company’s tax review control did not identify a complex component resulting
in an adjustment to the tax expense in 2018 and therefore there continues to be an identified material weakness in the
Company’s internal control over financial reporting as of December 31, 2018.
Management has determined that this deficiency constitutes a material weakness as of December 31,
2018. Management is in the process of enhancing the tax review control related to unusual transactions the Company
may encounter.
The Company’s management, with the participation of the CEO and CFO, evaluated the effectiveness of the
Company’s Disclosure Controls and concluded that the Company’s Disclosure Controls were not effective as of
December 31, 2018 due to the material weakness described above.
Management’s Annual Report on the Company’s Internal Control
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 (2013). Based on such
evaluation, management concluded that the Company's Internal Control was not effective as of December 31, 2018
due to the material weakness described under “Evaluation of the Company’s Disclosure Controls and Procedures”
above.
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This report does not include an attestation report on Internal Control by the Company's independent registered public
accounting firm because such an attestation report is not required for smaller reporting companies pursuant to the rules
of the SEC.
Changes in Internal Control. No change in the Company’s Internal Control occurred during the fiscal quarter ended
December 31, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s Internal
Control.
Inherent Limitations of Disclosure Controls and Internal Control. In designing its Disclosure Controls and
Internal Control, the Company’s management recognizes that any controls and procedures, no matter how well-
designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition,
the design of the Company’s controls and procedures must reflect the fact that there are resource constraints, and
management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to
their costs. Because of these inherent limitations, the Company’s Disclosure Controls and Internal Control may not
prevent or detect all instances of fraud, misstatements or other control issues. In addition, projections of any evaluation
of the effectiveness of disclosure or internal controls to future periods are subject to risks, including, among others,
that controls may become inadequate because of changes in conditions or that compliance with policies or procedures
may deteriorate.
Item 9B.
Other Information.
None.
Item 10.
Directors, Executive Officers and Corporate Governance.
PART III
The information required by this item is included in the Company’s definitive proxy statement (“Proxy Statement”)
to be filed in connection with the Company’s 2019 Annual Meeting of Stockholders, under (i) “Proposal 1: Election
of Directors,” “Information Regarding the Company’s Directors and Executive Officers—Current Board of
Directors,” “Information Regarding the Company’s Directors and Executive Officers—Key Employees” and
“Information Regarding the Company’s Directors and Executive Officers—Family Relationships” as it relates to the
information about the Company’s directors, executive officers and certain key employees required by Item 401 of
Regulation S-K, (ii) “Section 16(a) Beneficial Ownership Reporting Compliance” as it relates to the information
concerning Section 16(a) beneficial ownership reporting compliance required by Item 405 of Regulation S-K,
(iii) “Information Regarding the Company’s Directors and Executive Officers—Board Meetings and Committees—
Audit Committee” as it relates to the information about the Audit Committee of the Board of Directors and the “audit
committee financial expert” required by Item 407(d)(4) and (d)(5) of Regulation S-K, and (iv) “Information Regarding
the Company’s Directors and Executive Officers—Director Nominations” as it relates to any changes to procedures
by which security holders may recommend nominees to the Board of Directors as required by Item 407(c)(3) of
Regulation S-K, and all such information is incorporated herein by reference.
The Company has adopted a code of business conduct and ethics, or the “code of conduct.” The code of conduct
applies to all of the Company’s employees, including its executive officers, and non-employee directors, and it
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/code-of-conduct.php 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 of conduct 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.
The information required by this item is included in the Proxy Statement under “Information Regarding the
Company’s Directors and Officers—Director Compensation” and “Information Regarding the Company’s Directors
and Officers—Executive Compensation” and is incorporated herein by reference.
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AeroCentury 2018 Annual Report
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information required by this item is included in the Proxy Statement under “Security Ownership of Certain
Beneficial Owners and Management” and is incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is included in the Proxy Statement under “Related Party Transactions” and
“Information Regarding the Company’s Directors and Officers—Board Independence” and is incorporated herein by
reference.
Item 14.
Principal Accountant Fees and Services.
The information required by this item is included in the Proxy Statement under “Information Regarding Auditor” and
is incorporated herein by reference.
Item 15.
Exhibits, Financial Statements Schedules.
PART IV
(a)(1) The following financial statements of the Company are filed in Item 8 of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017
Notes to Consolidated Financial Statements
(a)(2) All financial statement schedules have been omitted because the required information is presented in the
consolidated financial statements or is not applicable.
(a)(3) The following exhibits are filed with or incorporated by reference in this report:
Exhibit
Number
Description
2.1§
3.1.1^
3.1.2^
3.1.3
3.1.4
3.2
4.1
Agreement and Plan of Merger, dated as of October 26, 2017, by and among the AeroCentury
Corp., Falcon Landing, Inc., JHC Holding Corp., and Fortis Advisors LLC, incorporated herein
by reference to Exhibit 2.1 to the registrant’s Report on Form 8-K filed with the SEC on
October 30, 2017
Certificate of Incorporation of AeroCentury Corp., incorporated by reference to Exhibit 3.08 to
the registrant’s registration statement on Form S-4/A filed with the SEC on July 24, 1997 (SEC
File No. 333-24743, Film No. 97644740)
Form of Certificate of Amendment of Certificate of Incorporation of AeroCentury Corp.,
incorporated by reference to Exhibit 3.07 to the registrant’s registration statement on Form S-
4/A filed with the SEC on June 10, 1997 (SEC File No. 333-24743, Film No. 97622056)
Certificate of Amendment to Amended and Restated Certificate of Incorporation of
AeroCentury Corp., dated May 6, 2008, incorporated by reference to Exhibit 99.1 to the
registrant’s Report on Form 8-K filed with the SEC on May 7, 2008
Amended and Restated Certificate of Designation of AeroCentury Corp. dated December 1,
2009, incorporated by reference to Exhibit 3.1 to the registrant’s Report on Form 8-K filed with
the SEC on December 7, 2009
Amended and Restated Bylaws of AeroCentury Corp., incorporated herein by reference to
Exhibit 3.1 of the registrant’s Report on Form 8-K filed with the SEC on November 22, 2016
Reference is made to Exhibit 3.1.4.
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AeroCentury 2018 Annual Report
4.2
10.1+
10.2
10.3
10.4
10.5
10.6
21.1
24.1
31.1
31.2
32.1*
32.2*
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
Rights Agreement by and between AeroCentury Corp. and Continental Stock Transfer & Trust
Company dated December 1, 2009, incorporated by reference to Exhibit 4.1 to the registrant’s
Report on Form 8-K filed with the SEC on December 7, 2009
Employment Agreement dated September 1, 2016 between Michael G. Magnusson and JetFleet
Management Corp., incorporated by reference to Exhibit 10.1 to the registrant’s Report on
Form 10-Q filed with the SEC on November 8, 2018
Credit Agreement, dated February 8, 2019, among ACY SN 15129 LLC, ACY E-175 LLC,
ACY SN 19002 Limited, and ACY SN 19003 Limited, Wilmington Trust Company, as
Security Trustee, Norddeutsche Landesbank Girozentrale, New York Branch, as Agent, and
Norddeutsche Landesbank Girozentrale, as swap counterparty, incorporated by reference to
Exhibit 10.1 to the registrant’s Report on Form 8-K filed with the SEC on February 14, 2019
Security Agreement, dated February 8, 2019, among ACY SN 15129 LLC, ACY E-175 LLC,
ACY SN 19002 Limited, and ACY SN 19003 Limited, Wilmington Trust Company, as
Security Trustee, and certain other parties, incorporated by reference to Exhibit 10.2 to the
registrant’s Report on Form 8-K filed with the SEC on February 14, 2019
Form of ISDA Master Agreements, Schedules and Confirmations of Interest Rate Swaps
between Norddeutsche Landesbank Girozentrale, as swap counterparty, and each of ACY SN
15129 LLC, ACY E-175 LLC, ACY SN 19002 Limited, and ACY SN 19003 Limited,
incorporated by reference to Exhibit 10.3 to the registrant’s Report on Form 8-K filed with the
SEC on February 14, 2019
Third Amended and Restated Loan and Security Agreement dated February 19, 2019, between
AeroCentury Corp., MUFG Union Bank, N.A., as Agent and Lender, and certain other
financial institution parties thereto
ISDA Master Agreements, Schedules and Confirmations of Interest Rate Swaps between
MUFG Bank, Ltd., as swap counterparty, and AeroCentury Corp.
Subsidiaries of the AeroCentury Corp.
Power of Attorney (included on the signature page hereto)
Certification of Michael G. Magnusson, 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 Michael G. Magnusson, 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 SEC.
§
+
^
Schedules and other similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K
promulgated by the SEC. The signatory hereby undertakes to furnish supplemental copies of any of the
omitted schedules and attachments upon request by the SEC.
Management contract or compensatory plan or arrangement.
Originally filed in paper format.
Item 16.
Form 10-K Summary.
The Company has elected not to provide summary information.
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AeroCentury 2018 Annual Report
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 18, 2019
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Toni M. Perazzo, or her attorneys-in-fact, with the power of substitution, for 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 said
attorneys-in-fact, 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/ Michael G. Magnusson
Michael G. Magnusson
Director and President of the Registrant (Principal Executive
Officer)
March 18, 2019
/s/ Toni M. Perazzo
Toni M. Perazzo
/s/ Evan M. Wallach
Evan M. Wallach
Director and Senior Vice President-Finance and Secretary of the
Registrant (Principal Financial and Accounting Officer)
March 18, 2019
Director and Chairman of the Board of Directors of the Registrant
March 18, 2019
/s/ Roy E. Hahn
Roy E. Hahn
Director
/s/ David P. Wilson
David P. Wilson
Director
March 18, 2019
March 18, 2019
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AeroCentury 2018 Annual Report
CORPORATE INFORMATION
Officers and Directors
Michael G. Magnusson
President and Director
Toni M. Perazzo
Senior Vice President-Finance, Secretary and Director
Christopher B. Tigno
General Counsel
Roy E. Hahn
Director, Audit Committee Chair
Managing Director of Marbridge Group, LLC
Evan M. Wallach
Chairman of the Board
President and Chief Executive Officer of
Global Airfinance Corporation
David P. Wilson
Director, Compensation Committee Chair
Retired Senior Vice President of
GE Capital Aviation Services
Transfer Agent and Registrar
Continental Stock Transfer & Trust Company
1 State Street, 30th Floor
New York, NY 10004
Legal Counsel
Morrison & Foerster LLP
755 Page Mill Road
Palo Alto, CA 94304
Registered Independent Public Accountants
BDO USA, LLP
One Bush Street, Suite 1800
San Francisco, CA 94104
Corporate Headquarters
AeroCentury Corp.
1440 Chapin Ave., Suite 310
Burlingame, CA 94010
Annual Meeting
The Annual Meeting of Stockholders will be held at:
The Hiller Aviation Museum
601 Skyway Road
San Carlos, CA, on May 9, 2019 at 12:00 P.M.
Form 10-K
The Company’s Annual Report on Form 10-K
for 2018 may be obtained by writing:
AeroCentury Corp.
1440 Chapin Ave., Suite 310
Burlingame, CA 94010
Stock Price and Shareholder Data
The Company’s common stock is traded on
the NYSE American exchange under
the symbol ACY.
ANNUAL
REPORT
2018
AeroCentury Corp.
1440 Chapin Avenue
Suite 310
Burlingame, CA 94010
Phone: 650.340.1888
www.AeroCentury.com
WORLDWIDE REGIONAL
AIRCRAFT LEASING