UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549





FORM
10-Q


(Mark
One)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended September 30, 2009





o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from ____________ to ____________





Commission
File Number:001-13387









AeroCentury
Corp.


(Exact
Name of Registrant as Specified in Its Charter)





Delaware
            
            94-3263974(State
      or Other Jurisdiction of Incorporation or Organization)
            
            (I.R.S.
      Employer Identification No.)


1440
Chapin Avenue, Suite 310


Burlingame,
California 94010


(Address
of Principal Executive Offices)





(650)
340-1888


(Issuer’s
Telephone Number Including Area Code)





None


(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes xNo  o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required submit and post such files).


Yes  oNo  o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):





Large accelerated
filer  oAccelerated
filer  o


Non-accelerated filer  oSmaller reporting
company  x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  oNo  x





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:  As of November 16, 2009 the
Issuer had 1,606,557Shares of Common Stock,
par value $0.001 per share, issued, of which 63,300 are held as Treasury Stock.





- 1
-





PART
I


FINANCIAL
INFORMATION


Forward-Looking
Statements





This
Quarterly Report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as
amended (“the Exchange Act”). All statements in this Report other than
statements of historical fact are "forward-looking statements" for purposes of
these provisions, including any statements of plans and objectives for future
operations and any statements of assumptions underlying any of the foregoing.
Statements that include the use of terminology such as "may," "will," "expects,"
"plans," "anticipates," "estimates," "potential," or "continue," or the negative
thereof, or other comparable terminology are forward-looking statements.
Forward-looking statements include: (i) in Item 1 “Financial Statements,” the
Company’s statements regarding its expectation that a damaged spare turboprop
engine will be replaced in the fourth quarter; and that the new lessee of a
Fokker 50 aircraft will accept delivery in December 2009;  (ii) in
Item 2 “Management’s Discussion and Analysis of Financial Condition and Results
of Operations – Liquidity and
Capital Resources,” the Company’s statements regarding its belief that it
will remain in compliance with the covenants of its Credit Facility; that it
will continue to be in compliance with all covenants of its Subordinated Notes
agreement; that the Company will incur significant maintenance expense in order
to prepare its off-lease aircraft for remarketing; that the Company will be
successful in extending a majority of the aircraft leases that expire during the
remainder of 2009; that the Company will receive insurance proceeds for a
damaged spare engine and replace the spare engine in the fourth quarter of 2009;
and that the Company will have adequate cash flow to meet its ongoing
operational needs, including required repayments under its Credit Facility and
Subordinated Notes financings; (iii) in Item 2 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Outlook,” the Company’s
statements regarding its belief that there will be few acquisition opportunities
for the Company for the remainder of 2009 and into 2010; that the Company’s
asset portfolio will grow at a slower rate than in prior years; that the Company
expects to deliver two off-lease Saab aircraft and a spare engine to a new
lessee in early 2010; and that approximately $625,000 in maintenance expense
will be incurred in future periods to prepare off-lease aircraft for re-lease;
and (iv) in Item 2 “Management’s Discussion and Analysis of Financial Condition
and Results of Operations – Factors that May Affect Future
Results,” the Company’s statements regarding its belief that the Company
will have sufficient cash funds to make any payment that arises due to borrowing
base limitations caused by assets scheduled to come off lease in the near term;
that the Company intends to focus on regional aircraft and engines; that JMC
personnel's overall industry experience and its technical resources should
permit the Company to effectively manage new aircraft types and engines; that
the Company intends to focus on the regional air carrier market; that most of
the Company’s current and expected growth is outside of the United States; that
certain factors are effective in mitigating against JMC taking undue
compensation-incented risk-taking; that the Company is competitive because of
JMC’s experience and operational efficiency in identifying and obtaining
financing for the transaction types desired by regional air carriers and that it
benefits from JMC’s reputation.  These forward-looking statements
involve risks and uncertainties, and it is important to note that the Company's
actual results could differ materially from those projected or assumed in such
forward-looking statements. Among the factors that could cause actual results to
differ materially are the factors detailed under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Factors That May Affect Future
Results," including the continued availability of Credit Facility
financing at levels comparable to the current level; the compliance of the
Company's lessees with obligations under their respective leases; a sudden
worsening in demand for regional aircraft or severe reduction in regional
airline capacity; general economic conditions, particularly those that affect
the air travel industry; the Company’s success in finding additional financing
and appropriate assets to acquire with such financing; deviations from the
assumption that future major maintenance expenses will be relatively evenly
spaced over the entire portfolio; and future trends and results which cannot be
predicted with certainty. The cautionary statements made in this Report should
be read as being applicable to all related forward-looking statements wherever
they appear herein. All forward-looking statements and risk factors included in
this document are made as of the date hereof, based on information available to
the Company as of the date hereof, and the Company assumes no obligation to
update any forward-looking statement or risk factor. You should consult the risk
factors listed from time to time in the Company's filings with the Securities
and Exchange Commission.


- 2
-


Item
1.Financial
Statements.


AeroCentury
Corp.


Condensed
Consolidated Balance Sheets


Unaudited





ASSETSSeptember
      30,
              2009
            
            
            December
      31,
              2008Assets:Cash
      and cash equivalents
            
            $
            2,838,600
            
            
            $
            2,169,700Accounts
      receivable, including deferred rent of $147,000 and $244,100
      at
              September
      30, 2009 and December 31, 2008, respectively
            
            
            3,466,000
            
            
            
            2,022,800Aircraft
      and aircraft engines held for lease, net of accumulated
              depreciation
      of $38,946,100 and $33,385,300 at
              September
      30, 2009 and December 31, 2008, respectively
            
            
            124,227,100
            
            
            
            124,913,600Taxes
      receivable
            
            
            3,600
            
            
            
            1,626,800Prepaid
      expenses and other
            
            
            581,700
            
            
            
            1,000,600Total
      assets
            
            $
            131,117,000
            
            
            $
            131,733,500LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Accounts
      payable and accrued expenses
            
            $
            632,900
            
            
            $
            503,000Notes
      payable and accrued interest
            
            
            63,830,300
            
            
            
            72,411,300Maintenance
      reserves and accrued costs
            
            
            10,694,600
            
            
            
            8,190,700Security
      deposits
            
            
            5,409,300
            
            
            
            5,498,800Prepaid
      rent
            
            
            948,600
            
            
            
            1,072,900Deferred
      income taxes
            
            
            11,013,400
            
            
            
            9,169,400Taxes
      payable
            
            
            1,300
            
            
            
            52,300Total
      liabilities
            
            
            92,530,400
            
            
            
            96,898,400Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $0.001 par value, 2,000,000 shares
              authorized,
      no shares issued and outstanding
            
            
            -
            
            
            
            -Common
      stock, $0.001 par value, 10,000,000 shares
              authorized,
      1,606,557 shares issued and outstanding
            
            
            1,600
            
            
            
            1,600Paid-in
      capital
            
            
            14,780,100
            
            
            
            14,780,100Retained
      earnings
            
            
            24,309,000
            
            
            
            20,557,50039,090,700
            
            
            
            35,339,200Treasury
      stock at cost, 63,300 shares
            
            
            (504,100
            )
            
            
            (504,100
            )Total
      stockholders’ equity
            
            
            38,586,600
            
            
            
            34,835,100Total
      liabilities and stockholders’ equity
            
            $
            131,117,000
            
            
            $
            131,733,500





The
accompanying notes are an integral part of these statements.


- 3
-





AeroCentury
Corp.


Condensed
Consolidated Statements of Operations


Unaudited





For
      the Nine Months
              Ended
      September 30,
            
            
            For
      the Three Months
              Ended
      September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Revenues
      and other income:Operating
      lease revenue
            
            $
            19,762,600
            
            
            $
            17,995,300
            
            
            $
            6,852,400
            
            
            $
            6,342,200Maintenance
      reserves income
            
            
            4,708,200
            
            
            
            5,534,000
            
            
            
            1,597,400
            
            
            
            1,883,900Other
      income
            
            
            487,800
            
            
            
            214,900
            
            
            
            223,700
            
            
            
            10,10024,958,600
            
            
            
            23,744,200
            
            
            
            8,673,500
            
            
            
            8,236,200Expenses:Maintenance
      costs
            
            
            5,917,300
            
            
            
            4,555,500
            
            
            
            2,701,900
            
            
            
            920,800Depreciation
            
            
            5,727,900
            
            
            
            5,326,400
            
            
            
            1,912,300
            
            
            
            1,876,700Interest
            
            
            4,066,800
            
            
            
            4,979,900
            
            
            
            1,275,700
            
            
            
            1,749,800Management
      fees
            
            
            2,758,500
            
            
            
            2,730,000
            
            
            
            918,200
            
            
            
            957,300Professional
      fees and general and administrative
            
            
            498,100
            
            
            
            585,500
            
            
            
            117,500
            
            
            
            150,500Insurance
            
            
            298,600
            
            
            
            287,800
            
            
            
            99,700
            
            
            
            116,600Other
      taxes
            
            
            (24,200
            )
            
            
            (92,600
            )
            
            
            (103,800
            )
            
            
            (47,300
            )19,243,000
            
            
            
            18,372,500
            
            
            
            6,921,500
            
            
            
            5,724,400Income
      before income tax provision
            
            
            5,715,600
            
            
            
            5,371,700
            
            
            
            1,752,000
            
            
            
            2,511,800Income
      tax provision
            
            
            1,964,100
            
            
            
            1,919,100
            
            
            
            606,400
            
            
            
            940,400Net
      income
            
            $
            3,751,500
            
            
            $
            3,452,600
            
            
            $
            1,145,600
            
            
            $
            1,571,400Earnings
      per share:Basic
            
            $
            2.43
            
            
            $
            2.24
            
            
            $
            0.74
            
            
            $
            1.02Diluted
            
            $
            2.42
            
            
            $
            2.16
            
            
            $
            0.73
            
            
            $
            1.00Weighted
      average shares used in
              earnings
      per share computations:Basic
            
            
            1,543,257
            
            
            
            1,543,257
            
            
            
            1,543,257
            
            
            
            1,543,257Diluted
            
            
            1,547,647
            
            
            
            1,596,850
            
            
            
            1,567,073
            
            
            
            1,572,420





The
accompanying notes are an integral part of these statements.











- 4
-


AeroCentury
Corp.


Condensed
Consolidated Statements of Cash Flows


Unaudited





For
      the Nine Months
              Ended
      September 30,2009
            
            
            2008Net
      cash provided by operating activities
            
            $
            14,357,300
            
            
            $
            11,975,000Investing
      activities:Proceeds
      from sale of aircraft engine
            
            
            -
            
            
            
            15,000Purchases
      of aircraft
            
            
            (5,011,400
            )
            
            
            (13,883,800
            )Net
      cash used by investing activities
            
            
            (5,011,400
            )
            
            
            (13,868,800
            )Financing
      activities:Borrowings
      under Credit Facility
            
            
            4,000,000
            
            
            
            12,500,000Net
      proceeds received from issuance of subordinated notes
    payable
            
            
            -
            
            
            
            3,960,000Debt
      issuance costs
            
            
            -
            
            
            
            285,800Repayments
      of the Credit Facility, Subordinated Notes and notes
    payable
            
            
            (12,677,000
            )
            
            
            (15,223,700
            )Net
      cash (used)/provided by financing activities
            
            
            (8,677,000
            )
            
            
            1,522,100Net
      increase/(decrease) in cash and cash equivalents
            
            
            668,900
            
            
            
            (371,700
            )Cash
      and cash equivalents, beginning of period
            
            
            2,169,700
            
            
            
            2,843,200Cash
      and cash equivalents, end of period
            
            $
            2,838,600
            
            
            $
            2,471,500





During
the nine months ended September 30, 2009 and 2008, the Company paid interest
totaling $3,592,400 and $4,554,300, respectively.





During
the nine months ended September 30, 2009, the Company paid income taxes totaling
$5,300 and received a federal tax refund of $1,625,100.  During the
nine months ended September 30, 2008, the Company paid income taxes totaling
$3,700 and received federal tax refunds totaling
$210,500.





The
accompanying notes are an integral part of these statements.





- 5
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


September
30, 2009





1.Organization and Summary of Significant
Accounting Policies





(a)
The Company and Basis of
Presentation





AeroCentury
Corp., a Delaware corporation incorporated in 1997 (the Company, as defined
below) acquires used regional aircraft for lease to foreign and domestic
regional carriers.  Financial information for AeroCentury Corp. and
its wholly-owned subsidiaries, AeroCentury Investments V LLC (“AeroCentury V
LLC”) which was dissolved in August 2008, and AeroCentury Investments VI LLC
(“AeroCentury VI LLC”), which was dissolved in September 2009 (collectively, the
“Company”), is presented on a consolidated basis.  All intercompany
balances and transactions have been eliminated in consolidation.





The
condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”) for interim financial information, the instructions to Form 10-Q and
Article 10 of Regulation S-X.  Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.  In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included.  Operating
results for the three-month and nine-month periods ended September 30, 2009, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2009.





For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company’s annual report on Form 10-K for the
year ended December 31, 2008.





(b)Use of Estimates





The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.  The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable for making
judgments that are not readily apparent from other sources.





The most
significant estimates with regard to these financial statements are the residual
values of the aircraft, the useful lives of the aircraft, the estimated fair
value of financial instruments, the amount and timing of cash flow associated
with each aircraft that are used to evaluate impairment, if any, accrued
maintenance costs, accounting for income taxes, and the amounts recorded as
allowances for doubtful accounts.





(c)Fair Value of Financial Instruments and
Accounting for Derivative Instrument





The
Company’s financial instruments, other than cash, consist principally of cash
equivalents, accounts receivable, accounts payable, amounts borrowed under a
credit facility, borrowings under notes payable and a derivative
instrument.  The fair value of cash, cash equivalents, accounts
receivable and accounts payable approximates the carrying value of these
financial instruments because of their short-term nature.





Borrowings
under the Company’s revolving credit facility (the “Credit Facility”) and
certain notes payable bear floating rates of interest that reset periodically to
a market benchmark rate plus a credit margin.  The Company believes
the effective rates of its various debt agreements approximate current market
rates for such indebtedness at the balance sheet date.  The Company
believes the carrying amount of its floating and fixed rate debt approximates
fair value at the balance sheet date. The fair values of the Company’s
obligations are estimated by calculation of the present value of future
repayment obligations using estimates of borrowing rates that would be available
to the Company for such instruments.  As discussed in Note 4, the fair
value of the Company’s interest rate swap derivative instrument is determined by
reference to banker quotations, and is included on the balance sheet at fair
value as a component of Notes payable and accrued interest.




- 6
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


September
30, 2009





1.Organization and Summary of Significant
Accounting Policies (continued)





(d)Reclassifications





Certain
of the prior period financial statement amounts have been reclassified to
conform to the current year presentation.  These reclassifications had
no impact on previously reported net income or cash flows.





(e)Recent Accounting
Pronouncements





Application of New Accounting
Standards.In June 2009, the Financial Accounting Standards
Board (“FASB”) issued rules that established the “FASB Accounting Standards
Codification,” which is applicable commencing with financial statements for
periods ending after September 15, 2009.   Under this
codification, there is a single, substantive source of GAAP rather than the
hierarchical structure previously in place.  Codification is not
intended to change GAAP, but will require that references to GAAP be made under
this new codification rather than the various sources of GAAP that applied
previously.





Disclosures About Derivative
Instruments and Hedging Activities.In March 2008, the FASB
issued guidance that is effective for fiscal years and interim periods beginning
after November 15, 2008 and this guidance requires enhanced disclosure about
derivatives and hedging transactions.  This guidance requires that
objectives for using derivative instruments be disclosed in terms of the
underlying risk and accounting designation, better conveying the purpose
underlying the derivatives’ use in terms of the risk the reporting entity is
intending to manage.  It further requires disclosure of the fair value of
derivative instruments and their gains or losses in tabular format, information
about credit risk-related contingent features providing information on the
potential effect on the reporting entity’s liquidity from using derivatives, and
cross-referencing within footnotes.  The Company adopted this guidance
effective January 1, 2009, which adoption did not impact the amount of gain or
loss recognized or the condensed consolidated financial position of the
Company.





Fair Value Measurements and
Disclosures.The Company adopted guidance on the use of fair
value measurements in generally accepted accounting standards, on January 1,
2008, except with respect to non-financial assets and liabilities, discussed
below.  Information regarding the Company’s fair value measurements is
presented in Note 4.





During
February 2008, FASB issued guidance that excludes fair value measures for lease
classification or measurement from the general fair value measurements
principles applicable to most assets and liabilities.  (This scope
exception does not apply to assets acquired and liabilities assumed in a
business combination that are required to be measured at fair
value.)  Adoption had no material effect on the Company’s condensed
consolidated financial statements.





FASB had
delayed the effective date of standards for fair value measurements and
disclosures for non-financial assets and liabilities that are not recognized or
disclosed at fair value to fiscal years beginning after November 15, 2008 and
interim periods within such years.  The Company’s adoption of
standards relating to fair value measurements and disclosures with respect to
such assets and liabilities on January 1, 2009, did not have a material effect
on the Company’s condensed consolidated financial statements.


- 7
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


September
30, 2009





1.Organization and Summary of Significant
Accounting Policies (continued)





(e)Recent Accounting Pronouncements
(continued)





Equity-Linked Financial Instruments
and Embedded Features.In June 2008, the FASB issued guidance
that an entity should use a two-step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instrument's contingent exercise and settlement
provisions.  This guidance is effective for fiscal years beginning
after December 15, 2008. Adoption did not have any effect on the Company’s
condensed consolidated financial statements.





Interim Disclosures about Fair Value
of Financial Instruments.  In April 2009, the FASB issued
guidance effective for reporting periods after June 15, 2009 and requiring
disclosure of the fair value of financial instruments for interim reporting
periods and additional footnote disclosures.  The guidance does not
affect accounting measurement procedures for financial instruments, although it
does provide guidance on determination of the fair value of assets and
liabilities in circumstances in which the activity of trading has significantly
declined and in identifying transactions in such assets and liabilities that are
not orderly.  Adoption of these provisions did not have a material
effect on the Company’s condensed consolidated financial
statements.





Subsequent
Events.  In May 2009, the FASB issued guidance, effective for
periods ending after June 15, 2009, that bifurcates subsequent events into two
categories – those which provide additional evidence about conditions that
existed at the balance sheet date of presented financial statements, and those
that provide evidence about conditions that did not exist at such balance sheet
date.  In the first case, additional evidence about conditions
existing at the balance sheet date are recorded as appropriate in the presented
financial statements; in the second case, appropriate disclosures about
post-balance sheet events are made in the disclosures related to the financial
statements, although the effects are not recorded in the financial statements
themselves.  The issuer of financial statements is required to
disclose the date through which subsequent events have been evaluated and the
date upon which the financial statements are issued.  Adoption of
these provisions had no material effect on the Company’s condensed consolidated
financial statements.





Fair Value Measurement of
Liabilities.In August of 2009, the FASB issued additional
guidance for the fair value measurement of liabilities.  This guidance
was effective upon issuance. Since the Company does not record its liabilities
based upon their fair market values, this guidance did not have any effect on
the Company’s condensed consolidated financial statements.  However,
this guidance was considered in estimating the fair value of the Company’s
liabilities discussed above in Note 1 (c).





- 8
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


September
30, 2009





2.Aircraft and Aircraft Engine Held for
Lease





During
the three months and nine months ended September 30, 2009, the Company purchased
two General Electric CF34-8E aircraft engines, which are on lease to a U.S.
regional carrier until December 10, 2009.  The lessee has indicated an
interest in extending the leases to March 31, 2010, but there is no binding
agreement at this time.





In
September 2009, the Company recorded a gain on expected insurance proceeds for
damage to a spare turboprop engine.  The Company expects to replace
the engine during the quarter ending December 31, 2009.





In May
2009, the Company and the lessee of one of the Company’s Fokker 50 aircraft with
a lease expiring in mid-May 2009 agreed in principle, but not in a binding
agreement, to a two-year re-lease at the same rent, with an option for a
one-year extension.   The Company and the lessee subsequently
continued discussions regarding the lease extension while the lease continued on
a month-to-month basis.  During the third quarter, the lessee notified
the Company that it would return the aircraft in late
2009.





The
Company is negotiating with two customers, each of which leases two Fokker 50
aircraft pursuant to lease expiring in December 2009, for the possible extension
of the leases.   However, there is no assurance that the negotiations
will be successful.





In June
2009, the Company extended the lease for one of its Fokker 50 aircraft for two
months, to mid-August, while a long-term extension was negotiated with the
lessee.  As discussed in Note 7, the lease was subsequently extended
to mid-May 2010.





In July
2009, the Company extended the leases for two of its DHC-6 aircraft for 60
months.





In
September 2009, the Company re-leased one of its Saab 340B aircraft to a U.S.
regional carrier for 12 months.  The lease contains options to extend
the lease for three additional one-year terms.





At
September 30, 2009, two Saab 340A aircraft and one Fokker 50 aircraft were off
lease.  The Company has a signed term sheet and a deposit for the
re-lease of the two Saab 340A aircraft and a spare engine.  Delivery
to the lessee is expected to occur in early 2010.  As discussed in
Note 7, the Company has a signed term sheet for re-lease of the Fokker 50
aircraft and delivery to the new lessee is expected in December
2009.  At December 31, 2008, the same aircraft and engine were off
lease. All three aircraft are completing maintenance in preparation for delivery
to lessees.





3.Maintenance Reserves and Accrued
Costs





The
accompanying condensed consolidated balance sheets reflect liabilities for
maintenance reserves and accrued costs, which include refundable maintenance
payments received from lessees based on usage.  At September 30, 2009,
and December 31, 2008, the Company’s maintenance reserves and accruals consisted
of the following:





September
      30,
              2009
            
            
            December
      31,
              2008Refundable
      maintenance reserves
            
            $
            7,221,200
            
            
            $
            5,746,600Accrued
      costs
            
            
            3,473,400
            
            
            
            2,444,100$
            10,694,600
            
            
            $
            8,190,700





- 9
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


September
30, 2009





3.Maintenance Reserves and Accrued Costs
(continued)





Additions
to and deductions from the Company’s accrued costs during the nine months ended
September 30, 2009, and 2008, for aircraft maintenance were as
follows:





For
      the Nine Months Ended
              September
      30,2009
            
            
            2008Balance,
      beginning of period
            
            $
            2,444,100
            
            
            $
            1,591,300Additions:Charged
      to expense
            
            
            6,036,400
            
            
            
            4,556,800Reversals
      of previously accrued maintenance costs
            
            
            (119,100
            )
            
            
            (1,300
            )Total
      maintenance expense
            
            
            5,917,300
            
            
            
            4,555,500Accrued
      claims related to refundable maintenance reserves
            
            
            69,200
            
            
            
            667,500Total
      additions
            
            
            5,986,500
            
            
            
            5,223,000Deductions:Payments
            
            
            4,957,200
            
            
            
            4,488,700Other
            
            
            -
            
            
            
            (4,700
            )Total
      deductions
            
            
            4,957,200
            
            
            
            4,484,000Net
      increase in accrued maintenance costs
            
            
            1,029,300
            
            
            
            739,000Balance,
      end of period
            
            $
            3,473,400
            
            
            $
            2,330,300





4.Notes Payable and Accrued
Interest





At
September 30, 2009, and December 31, 2008, the Company’s notes payable and
accrued interest consisted of the following:





September
      30,
              2009
            
            
            December
      31,
              2008Credit
      Facility principal
            
            $
            53,000,000
            
            
            $
            58,096,000Credit
      Facility accrued interest
            
            
            35,600
            
            
            
            39,500Subordinated
      Notes principal
            
            
            11,167,000
            
            
            
            14,000,000Subordinated
      Notes discount
            
            
            (637,700
            )
            
            
            (1,166,500
            )Special
      purpose financing principal
            
            
            -
            
            
            
            748,000Special
      purpose financing accrued interest
            
            
            -
            
            
            
            700Swap
      valuation
            
            
            196,100
            
            
            
            645,800Swap
      accrued interest
            
            
            69,300
            
            
            
            47,800$
            63,830,300
            
            
            $
            72,411,300





- 10
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


September
30, 2009





4.Notes Payable and Accrued Interest
(continued)





(a)Credit Facility





The total
amount available under the Credit Facility, which expires on March 31, 2010, is
$80 million.  During the nine months ended September 30, 2009, the
Company borrowed $4,000,000 and repaid $9,096,000 of the outstanding principal
under the Credit Facility. At September 30, 2009 and December 31, 2008, there
was $27,000,000 and $21,904,000, respectively, in borrowing capacity
remaining.  The weighted average interest rate on the Credit Facility
at September 30, 2009 and December 31, 2008 was 3.00% and 3.42%, respectively.
As of September 30, 2009 and December 31, 2008, the Company was in compliance
with all covenants under the Credit Facility agreement.





(b)Derivative instrument





In
December 2007, the Company entered into a two-year interest rate swap (the
“Swap”) with a notional amount of $20 million, under which it committed to make
or receive a net settlement for the difference in interest receivable computed
monthly on the basis of 30-day LIBOR and interest payable monthly on the basis
of a fixed rate of 4.04% per annum.   The Company entered into
the Swap with the objective of economically converting a portion of its floating
rate debt into a fixed rate for the term of the Swap, thereby reducing the
volatility of cash flow associated with its debt obligations.





At
September 30, 2009, and December 31, 2008, the Company recorded the fair value
of the Swap of $196,100 and $645,800, respectively, as a liability on its
condensed consolidated balance sheet as a component of notes payable and accrued
interest.  Gains and losses on the Swap are recorded as a component of
interest expense.  The Company recorded a gain on the Swap of $170,000
and $50,200 for the three months ended September 30, 2009, and 2008,
respectively.  The Company recorded a gain on the Swap of $449,700 and
a loss on the Swap of $64,500 for the nine months ended September 30, 2009, and
2008, respectively.  The Company also recognized additional interest
expense on the net settlement of the Swap of $191,900 and $80,200 in the three
months ended September 30, 2009, and 2008, respectively, and $554,400 and
$165,000 in the nine months ended September 30, 2009, and 2008,
respectively.





For GAAP
purposes, fair value measurements can be made using several valuation
techniques, such as the market approach (comparable market prices), the income
approach (present value of future income or cash flow), and the cost approach
(cost to replace the service capacity of an asset or replacement cost). GAAP
utilizes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. The following is
a brief description of those three levels:





Level
      1:  Observable inputs such as quoted prices (unadjusted) in
      active markets for identical assets or
  liabilities.


Level
      2:  Inputs, other than quoted prices, that are observable for
      the asset or liability, either directly or indirectly. These include
      quoted prices for similar assets or liabilities in active markets and
      quoted prices for identical or similar assets or liabilities in markets
      that are not active.


Level
      3: Unobservable inputs that reflect the reporting entity’s own
      assumptions.





The Swap
agreement effectively converts $20 million of the Company’s short-term variable
rate debt to a fixed rate.  Under this agreement, the Company pays a
fixed rate and receives a variable rate of LIBOR.  The fair value of
this interest rate derivative is based on quoted prices for similar instruments
from a commercial bank and, therefore, the interest rate derivative is
considered a Level 2 input.





- 11
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


September
30, 2009





4.Notes Payable and Accrued Interest
(continued)





(c)Senior unsecured subordinated
debt





As of
September 30, 2009, and December 31, 2008, the Company was in compliance with
all covenants under the securities purchase agreement pursuant to which the
Company issued its currently outstanding subordinated notes (the “Subordinated
Notes”).





(d)Special purpose financing





In March
2009, the Company repaid the outstanding principal of $646,800 owed by
AeroCentury VI LLC under its special purpose financing and paid a prepayment
penalty of $1,300.  At the same time, the Company transferred
ownership of the aircraft that served as collateral for the financing from
AeroCentury VI LLC to AeroCentury Corp., whereupon the aircraft became eligible
as collateral under the Credit Facility.  AeroCentury VI LLC was
dissolved in September 2009.





5.Computation of Earnings Per
Share





Basic and
diluted earnings per share are calculated as follows:





For
      the Nine Months
              Ended
      September 30,
            
            
            For
      the Three Months
              Ended
      September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Net
      income
            
            $
            3,751,500
            
            
            $
            3,452,600
            
            
            $
            1,145,600
            
            
            $
            1,571,400Weighted
      average shares outstanding for the period
            
            
            1,543,257
            
            
            
            1,543,257
            
            
            
            1,543,257
            
            
            
            1,543,257Dilutive
      effect of warrants
            
            
            4,390
            
            
            
            53,593
            
            
            
            23,816
            
            
            
            29,163Weighted
      average diluted shares outstanding
            
            
            1,547,647
            
            
            
            1,596,850
            
            
            
            1,567,073
            
            
            
            1,572,420Basic
      earnings per share
            
            $
            2.43
            
            
            $
            2.24
            
            
            $
            0.74
            
            
            $
            1.02Diluted
      earnings per share
            
            $
            2.42
            
            
            $
            2.16
            
            
            $
            0.73
            
            
            $
            1.00





Basic
earnings per common share is computed using net income and the weighted average
number of common shares outstanding during the period.  Diluted
earnings per common share is computed using net income and the weighted average
number of common shares outstanding, assuming dilution.  Weighted
average common shares outstanding, assuming dilution, includes potentially
dilutive common shares outstanding during the period. Potentially dilutive
common shares include the assumed exercise of warrants using the treasury stock
method.





- 12
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


September
30, 2009





6.Related
Party Transactions





The
Company’s portfolio of leased aircraft assets is managed and administered under
the terms of a management agreement with JetFleet Management Corp. (“JMC”),
which is an integrated aircraft management, marketing and financing business and
a subsidiary of JetFleet Holding Corp. ("JHC").   Certain
officers of the Company are also officers of JHC and JMC and hold significant
ownership positions in both JHC and the Company. The Company recorded management
fees of $2,758,500 and $2,730,000 during the nine months ended September 30,
2009, and 2008, respectively. The Company paid acquisition fees totaling
$200,000 and $437,000 to JMC during the nine months ended September 30, 2009,
and 2008, respectively, which are included in the cost basis of the aircraft
purchased. No remarketing fees were paid to JMC during the nine months ended
September 30, 2009, or 2008.





7.Subsequent Events





In
October 2009, the Company and a customer that leases two of its Fokker 50
aircraft agreed to defer payment of rent and reserves totaling approximately
$399,000 to April 2010.  In addition, the lease for one of the
aircraft was extended to mid-May 2010 in anticipation of negotiations for a
longer-term extension.





In
November 2009, the Company and a new customer in Peru signed a term sheet for
re-lease of the Company’s off-lease Fokker 50 aircraft for a three-year
term.   Delivery is expected in December 2009.





Subsequent
events have been evaluated through November 16, 2009,the
date on which these financial statements were issued.


- 13
-


Item
2.Management’s Discussion and
Analysis of Financial Condition and Results of Operations.





The
following discussion should be read in conjunction with the Company’s Form 10-K
for the year ended December 31, 2008, and the unaudited financial statements and
the related notes that appear elsewhere in this report.





Results
of Operations





Quarter
ended September 30, 2009 compared to the quarter ended September 30,
2008





Operating
lease revenue increased by $510,200 in the quarter ended September 30, 2009,
compared to the same period in 2008, primarily because of an increase in
operating lease revenue from aircraft and aircraft engines purchased during 2008
and 2009, as well as increases related to re-leases of aircraft that were off
lease for part of the 2008 periods, and re-leases of several of the Company’s
aircraft during 2008 at increased rental rates. The aggregate effect of these
increases was partially offset by a decrease in revenue related to aircraft that
were off lease for all or part of the 2009 quarter.





Maintenance
reserves revenue, comprised of non-refundable reserves which are earned based on
lessee aircraft usage, decreased by $286,500 in the 2009 quarter, compared to
the same period in 2008, primarily as a result of lower average usage of
aircraft by some the Company’s lessees in the 2009 period.





Other
income increased by $213,600 in the quarter ended September 30, 2009, compared
to the same period in 2008, principally because the 2009 period included a gain
on expected insurance proceeds for damage to the Company’s spare Saab 340A
aircraft engine.





Interest
expense decreased by $474,100 in the quarter ended September 30, 2009, compared
to the quarter ended September 30, 2008, primarily because of lower average
Credit Facility rates and balances and a greater gain in fair value related to
the Swap, the effects of which were partially offset by an increase in net
settlement interest related to the Swap and an increase in Subordinated Notes
fee amortization as a result of the issuance of additional Subordinated Notes in
July 2008.





In early
2009, the Company obtained new residual values for its aircraft from a
third-party appraiser.  As a result of the net effect of changes in
several residual values, depreciation increased by $35,600 in the quarter ended
September 30, 2009, compared to the same period in 2008.





Management
fees decreased by $39,100 in the quarter ended September 30, 2009, compared to
the same period in 2008 because of monthly depreciation, the effect of which was
only partially offset by the purchase of two aircraft engines in August 2009.





The
Company’s incurs maintenance expense when lessees perform maintenance on leased
assets using non-refundable maintenance reserves previously collected by the
Company pursuant to the lease agreements for such assets.  The Company
also incurs maintenance when it performs maintenance on off-lease
aircraft.  As a result, the Company’s maintenance expense is dependent
on the aggregate amount of maintenance incurred by lessees using non-refundable
reserves and expenses incurred in connection with off-lease aircraft, and,
therefore, can vary greatly between periods.  In the quarter ended
September 30, 2009, the Company recognized $1,781,100 more in maintenance
expense compared to the 2008 period.





During
the quarters ended September 30, 2009 and 2008, $1,333,100 and $454,900,
respectively, of the Company’s maintenance expense was funded by non-refundable
maintenance reserves, which were recorded as income when accrued.





The
Company’s effective tax rates for the quarter ended September 30, 2009 and 2008
were approximately 35% and 37%, respectively.  The 2009 rate was lower
as a result of the Company’s recognition in 2008 of the effect of a
difference for GAAP and tax purposes in the valuation of warrants issued in
connection with the Company’s issuance of Subordinated Notes.





- 14
-


Nine
months ended September 30, 2009 compared to the nine months ended September 30,
2008





Operating
lease revenue increased by $1,767,300 in the nine months ended September 30,
2009, compared to the same period in 2008, primarily because of an increase in
operating lease revenue from aircraft and aircraft engines purchased during 2008
and 2009, as well as increases related to re-leases of aircraft that were off
lease for part of the 2008 periods, and re-leases of several of the Company’s
aircraft during 2008 at increased rental rates. The aggregate effect of these
increases was partially offset by a decrease in revenue related to aircraft that
were off lease for all or part of the 2009 period.





Maintenance
reserves revenue decreased by $825,800 in the 2009 period, compared to the same
period in 2008, primarily as a result of lower average usage of aircraft by some
the Company’s lessees and because there were more aircraft off lease in the 2009
period compared to the 2008 period.





Other
income increased by $272,900 in the nine months ended September 30, 2009,
compared to the same period in 2008, principally because the 2009 period
included interest income related to a federal tax refund and a gain on expected
insurance proceeds for damage to the Company’s spare Saab 340A aircraft
engine.  The 2008 period included compensation related to a re-lease
transaction that was not consummated.





Interest
expense decreased by $913,100 in the nine months ended September 30, 2009,
compared to the nine months ended September 30, 2008, primarily because of lower
average Credit Facility rates and balances and a greater gain in fair value
related to the Swap, the effects of which were partially offset by an increase
in net settlement interest related to the Swap and an increase in Subordinated
Notes interest and fee amortization as a result of the issuance of additional
Subordinated Notes in July 2008.





Depreciation
increased by $401,500 in the nine months ended September 30, 2009, compared to
the same period in 2008, primarily because of purchases of aircraft and aircraft
engines during July 2008 and August 2009, as well as changes in residual values
for several of the Company’s aircraft.





Management
fees, which are calculated on the net book value of the aircraft, increased by
$28,500 in the nine months ended September 30, 2009, compared to the same period
in 2008 because of a higher total aircraft net book value as a result of
acquisitions of aircraft and aircraft engines in mid-2008 and August
2009.  The effect of this increase was partially offset by the effect
of depreciation.





In the
nine months ended September 30, 2009, the Company recognized $1,361,800 more in
maintenance expense than in the same period of 2008.  The increase was
due to the net effect of an increase in expense related to off-lease aircraft
and a decrease in maintenance performed by lessees using non-refundable
reserves.





During
the nine months ended September 30, 2009 and 2008, $2,726,800 and $1,887,400,
respectively, of the Company’s maintenance expense was funded by non-refundable
maintenance reserves that were recorded as income when accrued.





The
Company’s effective tax rates for the nine months ended September 30, 2009 and
2008 were approximately 34% and 36%, respectively. The 2009 rate was lower as a
result of the Company’s recognition in 2008 of the effect of a
difference for GAAP and tax purposes in the valuation of warrants issued in
connection with the Company’s issuance of Subordinated Notes.





Liquidity
and Capital Resources





The
Company is currently financing its assets primarily through debt borrowings and
excess cash flows.





(a)Credit Facility





The total
amount available under the Credit Facility is $80 million.  During the
nine months ended September 30, 2009, the Company borrowed $4,000,000 and repaid
$9,096,000 of the outstanding principal under the Credit
Facility.  The balance of the principal amount owed under the Credit
Facility at September 30, 2009, was $53,000,000 and interest of $35,600 was
accrued.





The
Company was, at September 30, 2009, and currently is in compliance with all
covenants of the Credit Facility.  Based on its current projections,
the Company believes it will continue to be in compliance with all covenants of
its Credit Facility, but there can be no assurance of such compliance in the
future.  The Credit Facility expires in
March 2010.  The Company is currently in discussions for a renewal of
the Credit Facility, but there is no assurance that it will be renewed on
favorable terms to the Company or at all, or that, if renewed, the amount of
credit available under the facility will remain at current levels.See "Factors That May Affect Future
Results –  'Risks of Debt Financing’ and 'Credit Facility
Obligations,’”below.





The
Company's interest expense in connection with the Credit Facility generally
increases and decreases with prevailing interest rates, although the Company did
enter into the Swap in December 2007 that expires in December 2009, as discussed
in Note 4 above and paragraph (b) below. Because aircraft
owners seeking financing generally can obtain financing through either leasing
transactions or traditional secured debt financings, prevailing interest rates
are a significant factor in determining market lease rates, and market lease
rates generally move up or down with prevailing interest rates, assuming supply
and demand of the desired equipment remain constant.  However, because
lease rates for the Company’s assets typically are fixed under existing leases,
the Company normally does not experience any positive or negative impact in
revenue from changes in market lease rates due to interest rate changes until
existing leases have terminated and new lease rates are set as aircraft are
re-leased.





(b)Derivative instrument





In
December 2007, the Company entered into the Swap, a two-year interest rate swap
with a notional amount of $20 million, under which it committed to make or
receive a net settlement for the difference in interest receivable computed
monthly on the basis of 30-day LIBOR and interest payable monthly on the basis
of a fixed rate of 4.04% per annum. The Swap is designed to limit exposure to
interest rate increases on $20 million of the Company’s Credit Facility debt by
fixing the net interest payable over the term of the Swap.





The
Company recognized net settlement expense related to the Swap of $191,900 and
$554,400 for the three months and nine months ended September 30, 2009,
respectively, as a component of interest expense.  Short-term interest
rates are currently below the fixed rate of the Swap. If short-term interest
rates remain below the fixed rate of the Swap, the Company will incur additional
interest expense as a result.





At
September 30, 2009, the Company also recognized a $196,100 liability for the
Swap on its condensed consolidated balance sheet as a component of notes payable
and accrued interest, which reflects market expectations concerning the “spread”
between fixed and variable interest rates over the remaining term of the
Swap.  The Company also recognized gains on the Swap of $170,000 and
$449,700 for the three months and nine months ended September 30, 2009,
respectively, as a component of interest expense for the change in fair value of
the Swap contract.  Market expectations of increasing interest rates
will tend to decrease the fair value of the Swap, and expectations of decreasing
interest rates will tend to increase the fair value of the Swap.  The
term of the Swap ends on December 31, 2009.





(c)Senior unsecured subordinated
debt





As of
September 30, 2009, the carrying amount of the Subordinated Notes was
$10,529,300 (outstanding principal amount of $11,167,000 less unamortized debt
discount of $637,700) and accrued interest payable was $0.  The
Company is currently, and at September 30, 2009 was, in compliance with all
covenants under the securities purchase agreement pursuant to which the Company
issued the Subordinated Notes.  Based on its current projections, the
Company believes it will continue to be in compliance with all covenants of the
securities purchase agreement pursuant to which the Company issued the
Subordinated Notes, but there can be no assurance of such compliance in the
future.  See "Factors That May Affect Future
Results –  'Risks of Debt Financing’ and 'Credit Facility
Obligations,’”below.





(d)Special purpose financing





In March
2009, the Company repaid the outstanding principal of $646,800 owed by
AeroCentury VI LLC under its special purpose financing and paid a prepayment
penalty of $1,300. At the same time, the Company transferred ownership of the
aircraft that served as collateral for the financing from AeroCentury VI LLC to
AeroCentury Corp., whereupon the aircraft became eligible as collateral under
the Credit Facility.  AeroCentury VI LLC was dissolved in September
2009.





(e)Cash flow





The
Company's primary sources of cash are aircraft lease rentals and maintenance
reserves billed monthly to lessees based on aircraft
usage.  Maintenance reserves collected by the Company are not required
by the leases to be segregated and are included in cash and cash equivalents on
the Company’s condensed consolidated balance sheet.





The
Company is currently not receiving lease revenue for its off-lease assets,
comprised of one Fokker 50 and two Saab 340A aircraft.  The Company
has and will continue to incur significant maintenance expense in order to
prepare these aircraft for re-lease.  In addition to the Fokker 50
lease that has continued on a month-to-month basis since its expiration in May
2009, fiveof the
Company’s leases expire during the fourth quarter of 2009.  The
Company believes that it will be successful in extending the leases for a
majority of these aircraft, given preliminary indications from current
lessees.





The
Company expects to receive insurance proceeds for a damaged spare aircraft
engine and replace it during the fourth quarter. In September 2009, the Company
recorded a gain on the expected insurance proceeds.





The
Company’s primary uses of cash are for servicing principal and interest payments
due under the Company’s debt obligations, maintenance expense, management fees,
professional fees, and insurance.The debt repayment
obligations increased in April 2009, when the Subordinated Notes debt repayment
schedule began to require principal amortization in addition to
interest.  The amount of interest paid by the Company is dependent on
the outstanding balance of its Credit Facility and Subordinated Notes debt.
Although the Subordinated Notes debt bears a fixed interest rate, the amount of
interest owed under the Credit Facility is dependent on changes in prevailing
interest rates, since the Credit Facility debt carries a floating interest
rate.  The amount and timing of the Company’s maintenance payments are
dependent on the aggregate amount of the maintenance claims submitted by lessees
for reimbursement from reserves and expenses incurred in connection with
off-lease aircraft and preparation of such aircraft for re-lease to new
customers.





Management
believes that the Company will have adequate cash flow to meet its ongoing
operational needs, including required repayments under its Credit Facility and
Subordinated Notes, based upon its estimates of future revenues and
expenditures, which include assumptions regarding (i) renewal of the Credit Facility when it expires in March
2010 under terms that permit borrowing in an amount and under terms
substantially equivalent to the existing Credit Facility; (ii)rents
on assets to be re-leased, (iii) timely use
of proceeds of unused debt capacity toward additional acquisitions of income
producing assets, (iv) required debt
payments, (v) interest rate increases and decreases, and (vi) the cost and
anticipated timing of maintenance to be performed.





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.  Among the more significant factors outside the
Company’s control that could have an impact on the accuracy of cash flow
assumptions are (i) an increase in interest rates that negatively affects the
Company’s profitability and causes the Company to violate covenants of its
Credit Facility or its Subordinated Notes, which may in turn require repayment
of some or all of the amounts outstanding under the Credit Facility or the
Subordinated Notes, (ii) lessee non-performance or non-compliance with lease
obligations which may affect Credit Facility collateral limitations and
Subordinated Notes covenants, as well as revenue and expenses, (iii) inability
to locate and acquire a sufficient volume of additional aircraft assets at
prices that will produce acceptable net returns, (iv) lessee performance of
maintenance earlier than anticipated, (v) inability to locate new lessees for
returned equipment within a reasonable remarketing period, or at a rent level
consistent with projected rental rates for the asset; (vi) failure to renew the
Credit Facility on terms favorable to the Company or at all, and (vii) if the
Credit Facility is renewed, a reduction in participation by lender participants
that reduces the Company’s ability to borrow.





- 15
-


(i)Operating activities





The
Company’s cash flow from operations increased by $2,382,300 in the nine months
ended September 30, 2009 compared to the same period in 2008.  As
discussed below, the change in cash flow from period to period was primarily a
result of an increase in payments received for rent, security deposits and tax
refunds and a decrease in expenditures for interest, the effects of which were
partially offset by an increase in expenditures for maintenance and a decrease
in payments received for maintenance reserves.





Lease rents, maintenance
reserves and security deposits





Payments
received from lessees for rent increased by $420,900 in the nine months ended
September 30, 2009, compared to the same period in 2008, due primarily to rent
payments for aircraft and aircraft engines acquired during 2008 and 2009, and
re-leases during 2008 at increased rental rates for several of the Company’s
aircraft. The aggregate effect of these increases was partially offset by a
decrease in revenue related to aircraft that were off lease for all or part of
the 2009 period.





Payments
received for refundable and non-refundable maintenance reserves are based on
usage of the Company’s aircraft.  Such payments were $1,155,300 lower
in the nine months ended September 30, 2009 compared to the comparable period in
2008 primarily as a result of lower average usage of aircraft by some the
Company’s lessees.





The
Company received security deposits in the amount of $184,000 during the first
nine months of 2009.  During the first nine months of 2008, the
Company returned a $308,000 security deposit to a lessee upon return of an
aircraft at lease end and received security deposits totaling
$210,000.





Payments for
interest





Payments
for interest decreased by $961,900 in the first nine months of 2009 compared to
the same period of 2008.  The Company paid $1,598,100 less interest
related to the Company’s Credit Facility and special purpose financing debt in
the 2009 period compared to the same period in 2008 as a result of lower average
outstanding balances and lower average index rates upon which the Credit
Facility and special purpose financing interest rates were based. The Company
also paid $19,100 more in commitment fees related to the unused portion of its
Credit Facility in the 2009 period.  The Company paid $45,500 less in
commitment fees related to its Subordinated Notes debt in the 2009 period
because no such fees were payable after the Company’s issuance of Subordinated
Notes in July 2008. The aggregate effect of these decreases was partially offset
by an increase of $266,700 in interest payments related to the Company’s
Subordinated Notes in the nine months ended September 30, 2009, compared to the
same period in 2008 as a result of a higher average principal
balance.  During the first nine months of 2009, the Company also paid
$395,900 more of net settlement interest related to the Swap than during the
2008 period.





Payments for
maintenance





Payments
for maintenance increased by $193,600 in the first nine months of 2009 compared
to the 2008 period, as a result of payments for off-lease aircraft which were
$1,206,600 greater in 2009, offset partially by $1,013,000 of lower payments for
lessee maintenance claims in 2009. The amount of payments for maintenance in
future periods will be dependent on the amount and timing of maintenance paid as
reimbursement to lessees from maintenance reserves, which are dependent upon
utilization and required maintenance intervals, and maintenance paid for
off-lease aircraft.





Income
taxes





During
the nine months ended September 30, 2009 the Company received $1,625,100 of
Federal tax refunds and paid taxes of $5,300.  The Company received
$210,500 of Federal tax refunds and paid taxes of $3,700 in the nine months
ended September 30, 2008.








- 16
-


(ii)Investing activities





During
the first nine months of 2009 and 2008, the Company used cash of $5,011,400 and
$13,883,800, respectively, for aircraft purchases and capital equipment
installed on aircraft.





(iii)Financing activities





The
Company borrowed $4,000,000 and $12,500,000 during the first nine months of 2009
and 2008, respectively.  The Company repaid $12,677,000 and
$15,223,700 of its outstanding debt in the nine months ended September 30, 2009
and 2008, respectively.  Such payments were funded by excess cash
flow.  In the first nine months of 2008, the Company also issued
$4,000,000 of principal amount of Subordinated Notes, the net proceeds of which
were used to repay a portion of the Company’s Credit Facility debt.





Outlook





(a)General





The
current global downturn has resulted in a significant reduction in airline
passenger volume and in reaction to that, a reduction in the number of aircraft
needed for operation by large and small carriers in nearly all geographic areas.
The Company therefore anticipates that there will be few acquisition
opportunities for the Company for the remainder of 2009 and into early
2010.  Furthermore, while this period of industry contraction
continues, it is likely that the Company’s asset portfolio will grow at a slower
rate than in prior years.  In addition, prolonged reduction in
aircraft demand without improvement for a significant period of time may have a
materially adverse impact on the Company’s profitability.





The
continued reduction in the demand for aircraft may also increase the possibility
that lessees will choose to return leased aircraft at lease expiration rather
than renew the existing leases.  It also increases the risk of a lease
default, particularly by less-established carriers.  If the Company
experiences an unanticipated increase in the number of its aircraft being
returned at lease end or if it experiences significant lessee defaults, this
combined with the lack of other carriers seeking aircraft in this environment of
contraction may make finding replacement lessees more challenging for the
Company, and require a larger proportion of the Company’s operational focus than
in years past.  A significant increase in the number of aircraft
off-lease, or a significant increase in the time that returned aircraft are off
lease, will have an adverse impact on the Company’s results.





As the
industry downturn has continued, however, except for the lease termination and
payment deferrals discussed in more detail below, the Company has yet to
experience significant changes in any of its customers’ payment
timeliness.  The Company does, however, see indications of a weakening
in both the financial condition and operating results of the majority of its
customers.  The Company is closely monitoring the performance of all
of its lessees.





To date
in 2009, the Company has agreed to lease payment deferrals for four of its
lessees, to assist them through a difficult financial situation related to each
carrier’s specific situation but in some cases exacerbated by the global
economic situation.





In
February 2009, the Company and the lessee of two of the Company’s Fokker 100
aircraft agreed to defer a portion of the rent and maintenance reserves due from
the lessee.  The agreement required payment in four, equal monthly
installments beginning in March 2009; the Company has received all four
payments.





In June
2009, the Company and the lessee for three of the Company’s Fokker 100 aircraft
entered into an agreement which deferred payment of three months of rent for
each aircraft, totaling $990,000, and allowed for the application of a portion
of the security deposits held by the Company to maintenance reserves owed to the
Company.  The deferred rent is to be paid in monthly installments
beginning January 2010 and continuing through the expiration date of each
lease.





In June
2009, the Company also agreed to defer payment of rent and reserves due from the
lessee of two of the Company’s DHC-8-100 and one DHC-8-300
aircraft.  The agreement allows for the deferred amount of
approximately $492,000 to be paid in monthly installments beginning in August
2009.  The Company has received all deferral payments due
to-date.  The deferral balance as of October 31, 2009, including
accrued interest, was approximately $416,000.





In
October 2009, the Company and a customer that leases two of its Fokker 50
aircraft agreed to defer payment of rent and reserves totaling approximately
$399,000 to April 2010.





- 17
-


(b)Pending Transactions and Remarketing
Efforts





The
Company has a signed term sheet and received a deposit for the re-lease of its
two off-lease Saab 340A aircraft and one spare engine.  Delivery of
both aircraft to the lessee is expected to occur in early 2010. The Company also
has a signed term sheet for the re-lease of a Fokker 50 aircraft that was
returned by its previous lessee in August 2008.  The amount of
maintenance expense that will be incurred in future periods for remaining work
necessary to prepare the currently off-lease aircraft for re-lease is estimated
to total approximately $625,000.





During
the nine-month period ended September 30, 2009, the Company has extended the
terms of six leases and re-leased an aircraft that was returned in February
2009.  The lessee of three of the Company’s Fokker 50 aircraft has
notified the Company that it will return one of the aircraft in late
2009.  The leases for the two engines that the Company purchased in
August 2009 expire in December 2009. The lessee has indicated an interest in
extending the leases to March 31, 2010.  The Company is currently
negotiating the extension of the four other leases that expire in the remainder
of 2009.If the aircraft
that are currently off lease, for which the Company has executed or is
negotiating term sheets, are not delivered and remain off lease for an extended
period of time and the Company is not successful in extending the leases for a
majority of the leases expiring in 2009, the Company may not have sufficient
cash flow to meet its operational needs or remain in compliance with the terms
of its Credit Facility and Subordinated Notes.





Factors
that May Affect Future Results





Availability of Financing.The current term of the Company’s $80
million Credit Facility expires in March 2010.  As of November 16, 2009,
the balance due under the Credit Facility was $52 million.  The
Company may not be able to renew the Credit Facility on terms favorable to the
Company, or at all.  If the Credit Facility is renewed, there can be
no assurance that the current lenders participating in the facility will remain
as participants, and if they do remain, that they will participate in the amount
for which they are currently committed.  If one or more participants does
not continue or reduces its participation amount, then the Company may either
need to pay off such participant by obtaining additional commitment amounts from
the remaining lenders, finding new replacement lenders, selling assets, or doing
a combination of any of the foregoing.





In the longer term, the Company’s continued growth will
depend on its ability to obtain capital, either through debt or equity
financings. The financial markets have experienced significant setbacks that
have made access to capital more costly and difficult. As a result, commercial
lending origination has dramatically decreased, and asset-based debt financing
is now more difficult to obtain. The Company is currently seeking additional
lenders for participation in its Credit Facility and investigating other sources
of debt financing. There is no assurance that the Company will succeed in
finding such additional funding, and if such financing is found, it will likely
be on terms less favorable than the Company’s current debt
financings.





General Economic Conditions and
Lowered Demand for Travel.The Company’s business is dependent upon
general economic conditions and the strength of the travel and transportation
industry.  The industry is in a period of financial difficulty and
contraction due to the global economic downturn.  Passenger volume has
fallen significantly for carriers worldwide, and the loss of revenue has
affected many carriers’ financial condition. This loss of revenue, combined with
the continuing unavailability of additional debt financing relied on by many
regional carriers caused by the ongoing credit crisis, increases the likelihood
of failures.  Events such as the spread of the H1N1 flu epidemic or a
terrorist attack against aviation could exacerbate an already weakened condition
and lead to widespread failures in the air carrier industries.  If
lessees experience financial difficulties and are unable to meet lease
obligations, this will, in turn, negatively affect the Company’s financial
performance.





- 18
-


Ownership
Risks.The Company’s portfolio is leased under operating
leases, with lease terms that are less than the entire anticipated remaining
useful life of an asset.  The Company’s ability to recover its
purchase investment in an asset subject to an operating lease is dependent upon
the Company’s ability to profitably re-lease or sell the asset after the
expiration of the initial lease term.   Some of the factors that
have an impact on the Company’s ability to re-lease or sell include worldwide
economic conditions, general aircraft market conditions, regulatory changes that
may make an asset’s use more expensive or preclude use unless the asset is
modified, changes in the supply or cost of aircraft equipment and technological
developments which cause the asset to become obsolete. If the Company is unable
to remarket its aircraft equipment on favorable terms when the operating leases
for such equipment expire, the Company’s business, financial condition, cash
flow, ability to service debt and results of operations could be adversely
affected.





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.  Typically, a lessee has the obligation to
return an aircraft to the Company in the condition required under a lease, which
generally requires the aircraft be returned in equal or better condition than
that at delivery to the lessee.  If the lessee becomes insolvent
during the term of its lease and the Company has to repossess the aircraft from
the lessee, it is unlikely that the lessee will have the financial ability to
meet these return obligations.  Thus, upon repossession, the Company
will be required to expend its own resources to return the aircraft to a
remarketable condition if maintenance reserves collected from the lessee during
the term of the lease are insufficient to fund the total expense of such repair
and maintenance.





Furthermore,
an asset impairment charge against the Company’s earnings may result from the
occurrence of unexpected adverse changes that impact the Company’s estimates of
expected cash flows generated from such asset. The Company periodically reviews
long-term assets for impairment, in particular, when events or changes in
circumstances indicate the carrying value of an asset may not be recoverable. An
impairment loss is recognized when the carrying amount of an asset is not
recoverable and exceeds its fair value. The Company may be required to recognize
asset impairment charges in the future as a result of a prolonged weak economic
environment, challenging market conditions in the airline industry or events
related to particular lessees, assets or asset types.





In some
cases, anticipated maintenance expenses may result in an asset impairment
charge, and the Company may subsequently be required to recognize those same
costs of maintenance as expense after the impairment charge, which may result in
a required redundancy in recognition of maintenance costs and an asset having a
recorded book value lower than its fair value.





Several
of the Company’s leases do not require payment of monthly maintenance reserves,
and if a repossession due to lessee default occurs, the Company will not have
received payment for the costs of unperformed repair and maintenance under the
applicable lease.





Credit Facility Obligations.
The Company is obligated to make repayments of principal under the Credit
Facility in order to maintain certain debt ratios with respect to its assets in
the borrowing base.  Assets that come off lease and remain off-lease
for a period of time, as well as assets with lease payments more than 30 days
past due, are excluded from the borrowing base.  The Company believes
it will have sufficient cash funds to make any payment that arises due to
borrowing base limitations caused by assets scheduled to come off lease in the
near term.   The Company’s belief is based on certain assumptions
regarding renewal of existing leases, interest rates, profitability, lessee
defaults or bankruptcies, and certain other matters that the Company deems
reasonable in light of its experience in the industry. There can be no assurance
that the Company’s assumptions will prove to be correct.  If the
assumptions are incorrect (for example, if an asset in the collateral base
unexpectedly is off lease for an extended period of time) and the Company has
not obtained an applicable waiver or amendment of applicable covenants from its
lenders to mitigate the situation, the Company may have to sell a significant
portion of its portfolio in order to avoid a default under the Credit Facility
agreement.





During
periods of economic contraction, carriers generally reduce capacity in response
to lower passenger loads, and as a result, there is a reduced demand for
aircraft and a corresponding decrease in market lease rental rates and aircraft
values.  This reduced market value for aircraft could affect the
Company’s results if the market value of an asset or assets in the Company’s
aircraft portfolio falls below carrying value, and the Company determines that a
write-down of the value on the Company’s balance sheet is appropriate.
Furthermore, as older leases expire and are replaced by lease renewals or
re-leases at decreasing lease rates, the lease revenue from the Company’s
existing portfolio is likely to decline, with the magnitude of the decline
dependent on the length of the downturn and the depth of the decline in market
rents.





Economic
downturns can affect specific regions of the world exclusively.  As
the Company’s portfolio is not entirely globally diversified, a localized
downturn in one of the key regions in which the Company leases aircraft could
have a significant adverse impact on the Company.





- 19
-


Risks of Debt
Financing.  The Company’s use of debt as the primary form of
acquisition financing subjects the Company to increased risks of
leveraging.  Indebtedness owed under the Credit Facility and the
Subordinated Notes carries a higher cost of capital relative to equity
financing, resulting in relatively higher expense and reduced free cash flow.
 Debt financing is secured by the Company’s assets.  In addition
to payment obligations, the Credit Facility and Subordinated Notes also require
the Company to comply with certain financial covenants, including a requirement
of positive earnings and compliance with interest coverage and net worth
ratios.  Any default under the Credit Facility, if not waived by the
lenders, could result in foreclosure upon any or all of the existing assets of
the Company securing the loan.  Any such default could also result in a
cross default under the Subordinated Notes.





Lessee Credit
Risk.If a customer defaults upon its lease
obligations, the Company may be limited in its ability to enforce
remedies.  Most of the Company’s lessees are small, regional passenger
airlines, which may be even more sensitive to airline industry market conditions
than the major airlines.  As a result, the Company’s inability to
collect payments under a lease or to repossess equipment in the event of a
lessee default could have a material adverse effect on the Company’s
revenue.  Most of the Company’s lessees are foreign and not subject to
U.S. bankruptcy laws, although there may be debtor protection similar to U.S.
bankruptcy laws available in some jurisdictions.  If a lessee that is
a certified U.S. airline is in default 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 for a
period of 60 days.  After the 60-day period has passed, the lessee
must agree to perform the lease obligations and cure any defaults, or the
Company will have the right to repossess the equipment.  This
procedure under the Bankruptcy Code has been subject to significant litigation,
however, and it is possible that the Company’s enforcement rights may be further
adversely affected by a declaration of bankruptcy by a defaulting lessee.





Investment in New Aircraft
Types.  The Company has traditionally invested in a limited
number of types of turboprop aircraft and engines. While the Company intends to
continue to focus solely on regional aircraft and engines, beginning in 2007,
the Company has acquired several Fokker 100 regional jet aircraft, and may
continue to seek acquisition opportunities for new types and models of regional
jet and turboprop aircraft and engines used in the Company's targeted customer
base of regional air carriers.  Acquisition of other aircraft types
and engines not previously acquired by the Company entails greater ownership
risk due to the Company's lack of experience managing those aircraft and engine
types. The Company believes, however, that the overall industry experience of
JMC’s personnel and its technical resources should permit the Company to
effectively manage such new aircraft types and engines.  Further, the
broadening of the asset types in the aircraft portfolio may have a benefit of
diversifying the Company's portfolio (see "Factors That May Affect Future
Results – Concentration of Lessees and Aircraft Type,”
below).





Warrant
Issuance.  As part of the Subordinated Notes financing, as
revised upon the second and final closing in July 2008, the holders of
Subordinated Notes hold warrants to purchase up to 81,224 shares of the
Company’s common stock, which represents 5% of the post-exercise fully diluted
capitalization of the Company as of the initial closing of the Subordinated
Notes financing.  The exercise price under the warrants is $8.75 per
share.  If the warrants to purchase shares are exercised at a time
when the exercise price is less than the fair market value of the Company’s
common stock, there would be dilution to the existing holders of common
stock.  This dilution of the Company’s common stock could depress its
trading price.





Concentration of Lessees and
Aircraft Type.  For the month ended October 31, 2009, the
Company’s two largest customers were located in Mexico and Antigua and accounted
for approximately 14% and 12%, respectively, of the Company’s monthly lease
revenue.A lease
default by or collection problem with one or a combination of any of these
significantcustomers could have a
disproportionate negative impact on the Company’s financial results, and,
therefore, the Company’s operating results are especially sensitive to any
negative developments with respect to these customers in terms of lease
compliance or collection. Such concentration of lessee credit risk decreases as
the Company leases additional assets to new lessees.





As of
October 31, 2009, the Company owned fourteen Fokker 50, eight DHC-8-300 and
seven Fokker 100 aircraft, making these three aircraft types the dominant types
in the portfolio and representing 21%, 25% and 33%, respectively, of net book
value, respectively. As a result, a change in the desirability and availability
of any of these types of aircraft, which would in turn affect valuations of such
aircraft, would have a disproportionately significant impact on the Company’s
portfolio value. Such aircraft type concentration will diminish if the Company
acquires additional assets of other types. Conversely, acquisition of these
types of aircraft will increase the Company’s risks related to its concentration
of those aircraft types.





- 20
-


Leasing Risks.  The
Company’s successful negotiation of lease extensions, re-leases and sales is
critical to its ability to achieve its financial objectives, and involves a
number of risks.  Demand for lease or purchase of the assets depends
on the economic condition of the airline industry, which is, in turn, sensitive
to general economic conditions.  The ability to re-lease equipment at
acceptable rates may depend on the demand and market values at the time of
remarketing.  The Company 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, increased fuel costs, the number of new aircraft on
order and the number of aircraft coming off lease.  Values may also
increase for certain aircraft types that become desirable based on market
conditions and changing airline capacity.  If the Company were to
purchase an aircraft during a period of increasing values, it would in turn need
to lease such aircraft at a corresponding higher lease rate to compensate for
its higher purchase price.





Risks Related to Regional Air
Carriers.Because the Company’s customer base is regional air
carriers and the Company continues to focus on this market, it is subject to
additional risks.  Some of the lessees in the regional air carrier
market are companies that are start-up, low-capital, and/or low-margin
operations.  Often, the success of such carriers is dependent upon
contractual arrangements with major trunk carriers or franchises from
governmental agencies that provide subsidies for operating essential air routes,
both of which may be subject to termination or cancellation with short notice
periods.  Because of this exposure, the Company typically is able to
obtain generally higher lease rates from these types of lessees.  In
the event of a business failure or bankruptcy of the lessee, the Company can
generally regain possession of its aircraft, but the aircraft could be in
substantially worse condition than would be the case if the aircraft were
returned in accordance with the lease provisions at lease
expiration.





The
Company evaluates the credit risk of each lessee carefully, and attempts to
obtain a third party guaranty, letters of credit or other credit enhancements,
if it deems them necessary in addition to customary security
deposits.  There is no assurance, however, that such enhancements will
be available or that, if obtained, they will fully protect the Company from
losses resulting from a lessee default or bankruptcy.  Also, most of
the Company’s current and expected growth is outside of the United States, where
collection and enforcement are often more difficult and complicated than in the
United States. If any of the Company's current or future lessees are unable to
meet their lease obligations, the Company's future results could be materially
impacted.





Interest Rate
Risk.  The Credit Facility carries a floating interest rate
based upon short-term interest rate indices. Lease rates typically, but not
always, move over time with interest rates, but market demand and numerous other
factors for the asset also affect lease rates. Because the Company’s typical
lease rates are fixed at the origination of leases, interest rate changes during
the term of a lease have no effect on existing lease
payments.  Therefore, if interest rates rise significantly, and there
is relatively little lease origination by the Company following such rate
increases, the Company could experience lower net income.  Further,
even if significant lease origination occurs following such rate increases,
other contemporaneous aircraft market forces may result in lower or flat rental
rates, and the Company could also experience lower net income.





In
December 2007, the Company entered into the Swap, a two-year interest rate swap
with a notional amount of $20 million, under which it committed to make or
receive a net settlement for the difference in interest receivable computed
monthly on the basis of 30-day LIBOR and interest payable monthly on the basis
of a fixed rate of 4.04% per annum. The Swap was designed to limit exposure to
interest rate increases on $20 million of the Company’s Credit Facility debt by
fixing the net interest payable over the term of the
Swap.  Nonetheless, if an interest rate increase were great enough,
the Company might not be able to generate sufficient lease revenue to meet its
interest payments and obligations on the Credit Facility balance that is not
subject to the Swap and to comply with the other covenants of its Credit
Facility.  If the one-month LIBOR rate applicable for an interest
period is below the fixed swap rate set in the Swap contract, as has been the
case in recent months, the Company will be obligated to pay the swap
counterparty the difference between the fixed swap rate of 4.04% and that
one-month LIBOR rate, resulting in a negative impact on the Company’s
results.  As of November 13, 2009, the one-month LIBOR rate was 0.25%.





- 21
-


International
Risks.  The Company has focused on leases in overseas
markets.  Leases with foreign lessees, however, may present different
risks than those with domestic lessees.





Foreign
laws, regulations and judicial procedures may be more or less protective of
lessor rights than those which apply in the United States.  The
Company could experience collection or repossession problems related to the
enforcement of its lease agreements under foreign local laws and remedies in
foreign jurisdictions. The protections potentially offered by Section 1110 of
the Bankruptcy Code do not apply to non-U.S. carriers, and applicable local law
may not offer similar protections.  Certain countries do not have a
central registration or recording system with which to locally establish the
Company’s interest in equipment and related leases.  This could make
it more difficult for the Company to recover an aircraft in the event of a
default by a foreign lessee.





A lease
with a foreign lessee is subject to risks related to the economy of the country
or region in which such lessee is located, which may be weaker than the U.S.
economy.  A foreign economic downturn may impact a foreign lessee’s
ability to make lease payments, even though the U.S. and other economies remain
stable.





In
addition, foreign lessees are subject to risks related to currency conversion
fluctuations.  Although the Company’s current leases are all payable
in U.S. dollars, the Company may agree in the future to leases that permit
payment in foreign currency, which would subject such lease revenue to monetary
risk due to currency fluctuations.  In addition, if the Company
undertakes certain obligations under a lease to contribute to a repair or
improvement and if the work is performed in a foreign jurisdiction and paid for
in foreign currency, currency fluctuations causing a weaker dollar between the
time such agreement is made and the time payment for the work is made may result
in an unanticipated increase in U.S. dollar-denominated cost for the
Company.





Even with
U.S. dollar-denominated lease payment provisions, the Company could still be
affected by a devaluation of the lessee’s local currency that would make it more
difficult for a lessee to meet its U.S. dollar-denominated payments, increasing
the risk of default of that lessee, particularly if its revenue is primarily
derived in the local currency.





Finally,
ownership of a leased asset operating in a foreign country and/or by a foreign
carrier may subject the Company to additional tax liabilities that are not
present with domestically-operated aircraft.  Depending on the
jurisdiction, laws governing such tax liabilities may be complex, not well
formed or not uniformly enforced. In such jurisdictions, the Company may decide
to take an uncertain tax position based on the best advice of the local tax
experts it engages, which position may be challenged by the taxing
authority.  If the taxing authority later assesses a liability, the
Company may be required to pay penalties and interest on the assessed amount,
which penalties and interest would not give rise to a corresponding foreign tax
credit on the Company’s U. S. tax return.





Reliance on
JMC.All management of the Company is performed by JMC under a
Management Agreement between the Company and JMC, which is in the twelfth year
of a 20-year term and provides for an asset-based management fee. JMC is not a
fiduciary to the Company or its stockholders. The Company’s Board of Directors
(the “Board”) has ultimate control and supervisory responsibility over all
aspects of the Company and owes fiduciary duties to the Company and its
stockholders. The Board has no control over the internal operations of JMC, but
the Board does have the ability and responsibility to manage the Company's
relationship with JMC and the performance of JMC's obligations to the Company
under the Management Agreement, as it would have for any third party service
provider to the Company.  While JMC may not owe any fiduciary duties
to the Company by virtue of the Management Agreement, all of the officers of JMC
are also officers of the Company, and in that capacity owe fiduciary duties to
the Company and its stockholders.  In addition, certain officers of
the Company hold significant ownership positions in the Company and JHC, the
parent company of JMC.





The
Management Agreement may be terminated if JMC defaults on its obligations to the
Company.  However, the agreement provides for liquidated damages in
the event of its wrongful termination by the Company.  All of the
officers of JMC are also officers of the Company, and certain directors of the
Company are also directors of JMC.  Consequently, the directors and
officers of JMC may have a conflict of interest in the event of a dispute
between the Company and JMC.  Although the Company has taken steps to
prevent conflicts of interest arising from such dual roles, such conflicts may
still occur.





JMC has
acted as the management company for two other aircraft portfolio owners,
JetFleet III, which raised approximately $13,000,000 in bond issuance proceeds,
and AeroCentury IV, Inc. (“AeroCentury IV”), which raised approximately
$5,000,000 in bond issuance proceeds.  In the first quarter of 2002,
AeroCentury IV defaulted on certain bond obligations.  In June 2002,
the indenture trustee for AeroCentury IV’s bondholders repossessed AeroCentury
IV’s assets and took over management of AeroCentury IV’s remaining
assets.  JetFleet III defaulted on its bond obligation of $11,076,400
in May 2004.  The indenture trustee for JetFleet III bondholders
repossessed JetFleet III’s unsold assets in late May
2004.





Management Fee Structure.All
decisions regarding acquisitions and disposal of aircraft from the Company’s
portfolio are made by JMC.  JMC is paid a management fee based on the net
asset value of the Company’s portfolio.  It also receives a one-time asset
acquisition fee upon purchase of an aircraft by the Company, and a one-time sale
fee upon disposal of an aircraft.  Optimization of the results of the
Company depends on timing of the acquisition, lease yield on the acquired
assets, and re-lease or sale of its portfolio assets.  Under the current
management fee structure, a larger volume of acquisitions inures to JMC’s
benefit as it generates acquisition fees and also increases the periodic
management fee by increasing the size of the aircraft portfolio.  Since the
Company’s current business strategy involves continued growth of its portfolio
and a “buy and hold” strategy, a compensation structure that results in greater
compensation with an increased portfolio size is not inherently inconsistent
with that strategy.  The compensation structure does, nonetheless, create a
situation where a decision by JMC for the Company to forego an asset transaction
deemed to be an unacceptable business risk due to the lessee or the aircraft
type is in conflict with JMC's own pecuniary interest.  As a result, the
compensation structure could act to incent greater risk-taking by JMC in asset
acquisition decision-making.  All acquisition decisions by JMC on behalf of
the Company, however, currently require Credit Facility lender approval of the
asset acquired and the lessee, and the Company has established objective target
guidelines for yields on acquired assets.  Further, any acquisition
that involves a new asset type must be approved by the Board of the Company,
including the outside independent directors.  While the Company currently
believes the foregoing are effective mitigating factors against undue
compensation-incented risk-taking by JMC, there is no assurance that such
mechanisms can entirely and effectively eliminate such risk.


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Government
Regulation.  There are a number of areas in which government
regulation may result in costs to the Company.  These include aircraft
registration, safety requirements, required equipment modifications, and
aircraft noise requirements.  Although it is contemplated that the
burden and cost of complying with such requirements will fall primarily upon
lessees of equipment, there can be no assurance that the cost will not fall on
the Company.  Furthermore, future government regulations could cause
the value of any non-complying equipment owned by the Company to decline
substantially.





Competition.  The
aircraft leasing industry is highly competitive.  The Company competes
with aircraft manufacturers, distributors, airlines and other operators,
equipment managers, leasing companies, equipment leasing programs, financial
institutions and other parties engaged in leasing, managing or remarketing
aircraft, many of which have significantly greater financial
resources.  However, the Company believes that it is competitive
because of JMC’s experience and operational efficiency in identifying and
obtaining financing for the transaction types desired by regional air
carriers.  This market segment, which is characterized by transaction
sizes of less than $10 million and in many cases privately-held lessees, without
well-established third party credit ratings, is not well served by the Company’s
larger competitors.  JMC has developed a reputation as a global
participant in this segment of the market, and the Company believes that JMC’s
reputation benefits the Company.  There is, however, no assurance that
competition from larger aircraft leasing companies will not increase
significantly or that JMC’s reputation will continue to be strong in this market
segment.





Casualties, Insurance
Coverage.  The Company, as owner of transportation equipment,
may be named in a suit claiming damages for injuries or damage to property
caused by its assets.  As a triple net lessor, the Company is
generally protected against such claims, since the lessee would be responsible
for, and insure against and indemnify the Company for such
claims.  Although some protection may be provided by the United States
Aviation Act 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 most of the Company’s aircraft, which are operated in foreign
countries, where such provisions of the United States Aviation Act may not
apply.   Also, although the Company’s leases generally require a
lessee to insure against likely risks, there may be certain cases where the loss
is not entirely covered by the lessee or its insurance.  Though this
is a remote possibility, an uninsured loss with respect to the equipment, or an
insured loss for which insurance proceeds are inadequate, would result in a
possible loss of invested capital in and any profits anticipated from, such
equipment, as well as a potential claim directly against the Company.





Possible Volatility of Stock
Price.  The market price of the Company’s common stock may be
subject to fluctuations following developments relating to the Company’s
operating results, changes in general conditions in the economy, the financial
markets, the airline industry, changes in accounting principles or tax laws
applicable to the Company or its lessees, or other developments affecting the
Company, its customers or its competitors, or arising from other investor
sentiment unknown to the Company.  Because the Company has a
relatively small capitalization of approximately 1.5 million shares outstanding,
there is a correspondingly limited amount of trading and float of the Company’s
shares.  Consequently, the Company’s stock price is more sensitive to
a single large trade or a small number of simultaneous trades along the same
trend than a company with larger capitalization and higher trading volume and
float.





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Item
3.Quantitative and Qualitative
Disclosures About Market Risk.





This
report does not include information described under Item 3 of Form 10-Q pursuant
to the rules of the Securities and Exchange Commission that permit “smaller
reporting companies” to omit such information.





Item
4T.Controls and
Procedures.





Quarterly evaluation of the Company’s
Disclosure Controls and Procedures. As of the end of the period covered
by this report, the Company evaluated the effectiveness of the design and
operation of its “disclosure controls and procedures” (“Disclosure
Controls”).  This evaluation (the “Controls Evaluation”) was done
under the supervision and with the participation of management, including the
Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”).  Rules adopted by the Securities and Exchange Commission
(“SEC”) require that in this section of the report, the Company present the
conclusions of the CEO and the CFO about the effectiveness of the Company’s
Disclosure Controls as of September 30, 2009.





Disclosure Controls.
Disclosure Controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in the Company’s reports
filed under the Securities Exchange Act of 1934 (the “Exchange Act”), such as
this report, is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. Disclosure Controls are also
designed with the objective of ensuring that such information is accumulated and
communicated to the Company’s management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.





Limitations on the Effectiveness of
Disclosure Controls. The Company’s management, including the CEO and CFO,
does not expect that its Disclosure Controls will prevent all errors and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.





Scope of the Controls
Evaluation. The CEO/CFO evaluation of the Company’s Disclosure Controls
included a review of the controls objectives and design, the controls
implementation by the Company and the effect of the controls on the information
generated for use in this report. In the course of the Controls Evaluation, the
CEO and CFO sought to identify data errors, controls problems or acts of fraud
and to confirm that appropriate corrective action, including process
improvements, were being undertaken. This type of evaluation is being done on a
quarterly basis so that the conclusions concerning controls effectiveness can be
reported in the Company’s quarterly reports on Form 10-Q and annual report on
Form 10-K. The overall goals of these various evaluation activities are to
monitor the Company’s Disclosure Controls and to make modifications as
necessary; the Company’s intent in this regard is that the Disclosure Controls
and the Internal Controls will be maintained as dynamic systems that change
(reflecting improvements and corrections) as conditions warrant.





Conclusions. Based upon the
Controls Evaluation, the Company’s CEO and CFO have concluded that, as of
September 30, 2009, the Company’s Disclosure Controls are effective to ensure
that the information required to be disclosed by the Company in the reports that
it files under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Commission’s rules and forms and then
accumulated and communicated to Company management, including the CEO and CFO,
as appropriate to make timely decisions regarding required
disclosures.





Changes in Internal Controls Over
Financial Reporting.  In accordance with SEC requirements, the
CEO and CFO note that there has been no significant change in the Company’s
internal controls over financial reporting that occurred during the quarter
ended September 30, 2009 that has materially affected or is reasonably likely to
materially affect the Company’s internal control over financial reporting.





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PART
II


OTHER
INFORMATION





Item
6.Exhibits





Exhibit
              Number
            Description31.1
            Certification
      of Neal D. Crispin, Chief Executive Officer, pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.31.2
            Certification
      of Toni M. Perazzo, Chief Financial Officer, pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.32.1*
            Certification
      of Neal D. Crispin, Chief Executive Officer, pursuant to
              Section
      906 of the Sarbanes-Oxley Act of 2002.32.2*
            Certification
      of Toni M. Perazzo, Chief Financial Officer, pursuant to
              Section
      906 of the Sarbanes-Oxley Act of
2002.





* These
certificates are furnished to, but shall not be deemed to be filed with, the
Securities and Exchange Commission.








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SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.




AEROCENTURY
    CORP.Date:
      November 16, 2009
              By:
              /s/ Toni
      M. PerazzoName:
      Toni M. PerazzoTitle:
      Senior Vice President-Finance and Chief Financial Officer