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.
(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.
(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.
(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 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 stat
ements.
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 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:
|
|
December 31
,
2018
|
|
|
December 31,
2017
|
|
Gross minimum lease payments receivable
|
|
$
|
17,107,100
|
|
|
$
|
27,074,400
|
|
Less unearned interest
|
|
|
(1,856,200
|
)
|
|
|
(3,513,400
|
)
|
Finance leases receivable
|
|
$
|
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
|
|
$
|
4,885,500
|
|
2020
|
|
|
4,208,600
|
|
2021
|
|
|
4,805,000
|
|
2022
|
|
|
3,208,000
|
|
|
|
$
|
17,107,100
|
|
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:
|
|
December 31
, 2018
|
|
|
December 31
, 2017
|
|
Type
|
|
Number
Owned
|
|
|
% of net book value
|
|
|
Number
owned
|
|
|
% of net book value
|
|
Regional jet aircraft
|
|
|
13
|
|
|
|
81
|
%
|
|
|
13
|
|
|
|
82
|
%
|
Turboprop aircraft
|
|
|
4
|
|
|
|
18
|
%
|
|
|
10
|
|
|
|
17
|
%
|
Engines
|
|
|
1
|
|
|
|
1
|
%
|
|
|
1
|
|
|
|
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
|
|
$
|
28,357,100
|
|
2020
|
|
|
25,773,700
|
|
2021
|
|
|
18,672,300
|
|
2022
|
|
|
16,714,700
|
|
2023
|
|
|
13,031,900
|
|
Thereafter
|
|
|
21,610,600
|
|
|
|
$
|
124,160,300
|
|
(b)
Assets
Held for Sale
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 $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:
|
|
For the Years Ended December 31,
|
|
Operating Lease Revenue
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Europe and United Kingdom
|
|
$
|
16,258,800
|
|
|
$
|
14,941,100
|
|
North America
|
|
|
10,119,100
|
|
|
|
8,506,700
|
|
Africa
|
|
|
-
|
|
|
|
3,306,100
|
|
Asia
|
|
|
1,259,600
|
|
|
|
1,251,300
|
|
Australia
|
|
|
-
|
|
|
|
997,500
|
|
|
|
$
|
27,637,500
|
|
|
$
|
29,002,700
|
|
|
|
December 31,
|
|
Net Book Value of Aircraft and Aircraft Engines Held for Lease
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Europe and United Kingdom
|
|
$
|
110,069,000
|
|
|
$
|
92,108,500
|
|
North America
|
|
|
68,485,400
|
|
|
|
72,270,700
|
|
Off lease
|
|
|
-
|
|
|
|
24,636,900
|
|
Asia
|
|
|
5,465,500
|
|
|
|
6,082,100
|
|
|
|
$
|
184,019,900
|
|
|
$
|
195,098,200
|
|
The table below sets forth geographic information about the Company’s finance lease revenue, grouped by domicile of the
lessee:
|
|
For the Years Ended December 31,
|
|
Finance Lease Revenue
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Africa
|
|
$
|
832,800
|
|
|
$
|
1,180,600
|
|
United Kingdom
|
|
|
418,200
|
|
|
|
390,900
|
|
|
|
$
|
1,251,000
|
|
|
$
|
1,571,500
|
|
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.
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:
|
|
December 31
,
2018
|
|
|
December 31
,
2017
|
|
Credit Facility:
|
|
|
|
|
|
|
Principal
|
|
$
|
122,400,000
|
|
|
$
|
134,000,000
|
|
Unamortized debt issuance costs
|
|
|
(674,300
|
)
|
|
|
(2,216,000
|
)
|
Accrued interest
|
|
|
139,300
|
|
|
|
278,900
|
|
Special purpose financing:
|
|
|
|
|
|
|
|
|
Principal
|
|
|
9,211,200
|
|
|
|
13,511,900
|
|
Accrued interest
|
|
|
16,000
|
|
|
|
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.
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:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
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)
.
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 Comapny
cannot recognize goodwill attributable to its relationship with itself.
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.
Consideration paid in the merger:
|
|
|
|
Cash consideration
|
|
$
|
2,915,000
|
|
ACY stock consideration
|
|
|
2,003,000
|
|
|
|
|
4,918,000
|
|
|
|
|
|
|
Fair value of assets acquired/(liabilities assumed):
|
|
|
|
|
Cash
|
|
|
40,000
|
|
Securities
|
|
|
121,000
|
|
Accounts & note receivable
|
|
|
28,000
|
|
Prepaid expenses
|
|
|
157,000
|
|
Property, equipment and furnishings
|
|
|
79,000
|
|
Office leasehold
|
|
|
925,000
|
|
Accounts payable
|
|
|
(85,000
|
)
|
Accrued vacation
|
|
|
(93,000
|
)
|
Taxes payable
|
|
|
(722,000
|
)
|
Deferred taxes
|
|
|
(138,000
|
)
|
|
|
|
312,000
|
|
|
|
|
|
|
Excess of consideration paid over net assets acquired
|
|
|
4,606,000
|
|
|
|
|
|
|
Waiver of JMC Margin payable
|
|
|
(1,517,000
|
)
|
Settlement of payable to JMC
|
|
|
(562,000
|
)
|
Settlement Loss on Management Agreement with JMC
|
|
$
|
2,527,000
|
|
9.
Commitments
and Contingencies
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
|
|
$
|
193,500
|
|
2020
|
|
|
196,400
|
|
2021
|
|
|
199,300
|
|
2022
|
|
|
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.
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:
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current tax provision:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
3,200
|
|
|
|
800
|
|
Foreign
|
|
|
414,000
|
|
|
|
329,500
|
|
Current tax provision
|
|
|
417,200
|
|
|
|
330,300
|
|
Deferred tax (benefit)/provision:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,270,400
|
)
|
|
|
1,159,700
|
|
State
|
|
|
(26,100
|
)
|
|
|
35,100
|
|
Foreign
|
|
|
(93,500
|
)
|
|
|
(111,300
|
)
|
Net legislative change in corporate tax rate
|
|
|
-
|
|
|
|
(5,380,300
|
)
|
Deferred tax benefit
|
|
|
(1,390,000
|
)
|
|
|
(4,296,800
|
)
|
Total income tax benefit
|
|
$
|
(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:
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Income tax provision at statutory federal income tax rate
|
|
$
|
(1,901,400
|
)
|
|
$
|
1,167,100
|
|
State tax (benefit)/provision, net of federal benefit
|
|
|
(44,500
|
)
|
|
|
33,100
|
|
Non-deductible Merger expenses
|
|
|
647,200
|
|
|
|
213,500
|
|
Non-deductible management and acquisition fees
|
|
|
325,900
|
|
|
|
-
|
|
Net legislative change in corporate tax rate
|
|
|
-
|
|
|
|
(5,380,200
|
)
|
Total income tax benefit
|
|
$
|
(972,800
|
)
|
|
$
|
(3,966,500
|
)
|
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:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Current and prior year tax losses
|
|
$
|
4,065,100
|
|
|
$
|
3,362,100
|
|
Maintenance reserves
|
|
|
3,100,800
|
|
|
|
2,810,200
|
|
Foreign tax credit
|
|
|
611,900
|
|
|
|
295,800
|
|
Deferred interest expense
|
|
|
81,800
|
|
|
|
-
|
|
Deferred maintenance, bad debt allowance and other
|
|
|
92,500
|
|
|
|
38,800
|
|
Alternative minimum tax credit
|
|
|
45,500
|
|
|
|
45,500
|
|
Deferred tax assets
|
|
|
7,997,600
|
|
|
|
6,552,400
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Accumulated depreciation on aircraft and aircraft engines
|
|
|
(14,773,800
|
)
|
|
|
(14,591,000
|
)
|
Deferred income
|
|
|
(320,600
|
)
|
|
|
(495,100
|
)
|
Favorable Lease
|
|
|
(185,400
|
)
|
|
|
-
|
|
Net deferred tax liabilities
|
|
$
|
(7,282,200
|
)
|
|
$
|
(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 tax benefits within twelve
months of this reporting date. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Balance at January 1
|
|
$
|
-
|
|
|
|
-
|
|
Additions for prior years’ tax positions
|
|
|
85,400
|
|
|
|
-
|
|
Balance at December 31
|
|
$
|
85,400
|
|
|
|
-
|
|
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:
|
|
For the Years Ended
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Net (loss)/income
|
|
$
|
(8,081,200
|
)
|
|
$
|
7,399,200
|
|
Weighted average shares outstanding for the period used in computation of basic and diluted (loss)/earnings per share
|
|
|
1,449,261
|
|
|
|
1,449,576
|
|
Basic (loss)/earnings per share
|
|
$
|
(5.58
|
)
|
|
$
|
5.10
|
|
Diluted (loss)/earnings per share
|
|
$
|
(5.58
|
)
|
|
$
|
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.
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:
|
|
For the Years Ended
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Management fees
|
|
$
|
4,482,800
|
|
|
$
|
6,109,200
|
|
Acquisition fees
|
|
|
494,400
|
|
|
|
850,500
|
|
Remarketing fees
|
|
|
-
|
|
|
|
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.
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.