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, 2010





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


(Registrant’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 12, 2010 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.











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 Part I, Item 1, “Financial Statements,” the Company’s statements regarding additional expenditures of approximately $300,000 to complete maintenance on two off-lease Fokker 50 aircraft; (ii) Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources,” the Company’s statements that it will remain in compliance with the covenants of its New Credit Facility; that the higher variable margin on its New Credit Facility debt will not have a significant impact on the Company’s results; and that the Company will have adequate cash flow to fund operational needs and payments required under its New Credit Facility and the Subordinated Notes and that this belief is based on reasonable assumptions;  (iii) in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations –– Outlook,” the Company’s statements that the Company may experience lower on-lease utilization rates and longer lead times for remarketing returned aircraft; that the Company’s portfolio growth may be slower in the near future; and that the higher margin under the New Credit Facility will not have a significant impact on the Company’s results; and (iv) in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors that May Affect Future Results,” that the Company will have significant additional unanticipated expenses that would been otherwise paid for by the lessee in order to prepare certain aircraft for remarketing to a new lessee; that most of the Company’s current and expected growth is outside of the United States; that the availability under the New Credit Facility will be sufficient to fund projected acquisitions through 2011; that the Company will have sufficient 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 has the industry experience and technical resources necessary to effectively manage new aircraft types and engines; that there are effective mitigating factors against undue compensation-incented risk-taking by JMC; and that the costs of complying with environmental regulations will not have a material adverse effect on the Company. These forward-looking statements involve risks and uncertainties, and it is important to note that the Company's actual results could differ materially from those projected or assumed in such forward-looking statements. Among the factors that could cause actual results to differ materially are the factors detailed under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations–– Factors That May Affect Future Results," including the impact of the current economic downturn on the Company’s customer base of regional air carriers; the continued availability of financing for acquisitions; the compliance of the Company's lessees with obligations under their respective leases; risks related to use of debt financing for acquisitions; the Company’s success in finding appropriate assets to acquire with such financing; deviations from the assumption that future major maintenance expenses will be relatively evenly spaced over the entire portfolio; and future trends and results which cannot be predicted with certainty. The cautionary statements made in this Report should be read as being applicable to all related forward-looking statements wherever they appear herein. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward-looking statement or risk factor. You should consult the risk factors listed from time to time in the Company's filings with the Securities and Exchange Commission.





Item 1.Financial Statements.





AeroCentury Corp.


Condensed Consolidated Balance Sheets


(Unaudited)





ASSETSSeptember 30,


December 31,2010


2009Assets:Cash and cash equivalents

$
1,717,100


$
1,252,500Accounts receivable, including deferred rent of $567,400 and $131,500

and net of allowance for doubtful accounts of $0 and $470,000 at

September 30, 2010 and December 31, 2009, respectively


2,003,800



3,165,200Aircraft and aircraft engines held for lease, net of accumulated

depreciation of $45,306,200 and $40,862,500 at

September 30, 2010 and December 31, 2009, respectively


119,934,700



127,203,700Prepaid expenses and other


2,156,100



557,800Total assets

$
125,811,700


$
132,179,200LIABILITIES AND STOCKHOLDERS’ EQUITYLiabilities:Accounts payable and accrued expenses

$
469,100


$
629,700Notes payable and accrued interest


56,833,300



62,581,700Maintenance reserves and accrued maintenance costs


6,535,800



9,912,700Security deposits


4,781,500



5,565,900Unearned revenues


749,100



1,009,000Deferred income taxes


13,286,100



11,987,700Total liabilities


82,654,900



91,686,700Commitments 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


28,879,200



26,214,90043,660,900



40,996,600Treasury stock at cost, 63,300 shares


(504,100
)


(504,100
)Total stockholders’ equity


43,156,800



40,492,500Total liabilities and stockholders’ equity

$
125,811,700


$
132,179,200





The accompanying notes are an integral part of these statements.








AeroCentury Corp.


Condensed Consolidated Statements of Operations


(Unaudited)





For the Nine Months Ended

September 30,


For the Three Months Ended

September 30,2010


2009


2010


2009Revenues and other income:Operating lease revenue, net

$
17,738,700


$
19,762,600


$
5,271,200


$
6,852,400Maintenance reserves revenue, net


6,270,300



4,708,200



1,567,300



1,597,400Recovery of bad debt


208,000



-



-



-Other income


605,400



487,800



88,000



223,70024,822,400



24,958,600



6,926,500



8,673,500Expenses:Maintenance costs


7,757,800



5,917,300



2,256,200



2,701,900Depreciation


5,515,900



5,727,900



1,857,600



1,912,300Interest


3,306,000



4,066,800



1,109,200



1,275,700Management fees


2,754,200



2,758,500



904,100



918,200Professional fees, general and

administrative and other


678,300



498,100



285,600



117,500Insurance


406,400



298,600



132,500



99,700Bad debt expense


283,800



-



-



-Other taxes


66,500



(24,200
)


22,500



(103,800
)20,768,900



19,243,000



6,567,700



6,921,500Income before income tax provision


4,053,500



5,715,600



358,800



1,752,000Income tax provision


1,389,200



1,964,100



117,800



606,400Net income

$
2,664,300


$
3,751,500


$
241,000


$
1,145,600Earnings per share:Basic

$
1.73


$
2.43


$
0.16


$
0.74Diluted

$
1.68


$
2.42


$
0.15


$
0.73Weighted average shares used in

earnings per share computations:Basic


1,543,257



1,543,257



1,543,257



1,543,257Diluted


1,585,367



1,547,647



1,582,477



1,567,073





The accompanying notes are an integral part of these statements.

















AeroCentury Corp.


Condensed Consolidated Statements of Cash Flows


(Unaudited)





For the Nine Months

Ended September 30,2010


2009Net cash provided by operating activities

$
4,765,200


$
14,357,300Investing activities:Proceeds from insurance


2,380,700



-Purchase of aircraft engines and equipment additions to aircraft


(575,800
)


(5,011,400
)Net cash provided/(used) by investing activities


1,804,900



(5,011,400
)Financing activities:Borrowings under Credit Facility


2,000,000



4,000,000Repayments of the Credit Facility and special purpose financing


(3,500,000
)


(9,844,000
)Repayments of the Subordinated Notes


(4,605,500
)


(2,833,000
)Net cash used by financing activities


(6,105,500
)


(8,677,000
)Net increase in cash and cash equivalents


464,600



668,900Cash and cash equivalents, beginning of period


1,252,500



2,169,700Cash and cash equivalents, end of period

$
1,717,100


$
2,838,600





During the nine months ended September 30, 2010 and 2009, the Company paid interest totaling $3,630,300 and $3,592,400, respectively.





During the nine months ended September 30, 2010 the Company paid income taxes totaling $12,200.  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.





The accompanying notes are an integral part of these statements.





AeroCentury Corp.


Notes to Condensed Consolidated Financial Statements (Unaudited)


September 30, 2010





1.Organization and Summary of Significant Accounting Policies





(a) The Company and Basis of Presentation





AeroCentury Corp., a Delaware corporation incorporated in 1997, acquires used regional aircraft and engines for lease to foreign and domestic regional carriers.  Financial information for AeroCentury Corp. and its wholly-owned subsidiary, AeroCentury Investments VI LLC (“AeroCentury VI LLC” and, together with AeroCentury Corp., the “Company”), which was dissolved in September 2009, 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, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.





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, 2009.





(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 whether assets are impaired, 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 (until December 31, 2009) 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.








AeroCentury Corp.


Notes to Condensed Consolidated Financial Statements (Unaudited)


September 30, 2010





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





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





Borrowings under the Company’s revolving credit facility bear floating rates of interest that reset periodically to a market benchmark rate plus a credit margin.  The Company believes the effective interest 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 at the balance sheet date approximates their fair values, which were 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 was determined by reference to banker quotations.  The Swap expired on December 31, 2009 and, therefore, had no value on or after such date.





(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.





2.Aircraft and Aircraft Engines Held for Lease





At September 30, 2010 and December 31, 2009, the Company’s aircraft and aircraft engines, which were on lease or held for lease, consisted of the following:





September 30, 2010


December 31, 2009Number


% of net


Number


% of netModel

owned


book value


owned


book valueFokker 100


7



32
%


7



32
%deHavilland DHC-8-300


8



25
%


8



24
%Fokker 50


14



20
%


14



20
%General Electric CF34-8E5 engine


3



9
%


3



8
%Saab 340B


6



7
%


6



7
%deHavilland DHC-8-100


2



4
%


3



6
%Saab 340A


2



2
%


2



2
%deHavilland DHC-6


3



1
%


3



1
%





During the nine months ended September 30, 2010, the Company did not purchase any aircraft, but paid $575,800 for equipment that has been or will be installed on several aircraft.  During the nine months ended September 30, 2009, the Company purchased two General Electric CF34-8E5 aircraft engines.





In January 2010, one of the Company’s DHC-8-100 aircraft sustained significant damage. The insurer deemed the aircraft a total loss, and, in March and April 2010, the Company received insurance proceeds that resulted in a net gain of $331,000.  The Company also recorded a gain of $85,000 on the sale of parts from an engine that was replaced on another of the Company’s DHC-8-100 aircraft.





In July 2010, the Company delivered its two Saab 340A aircraft to a customer in Argentina.  The Company also leased two of its CF34-8E5 engines to a German maintenance provider during July and August for terms of four years and three months, respectively. In September 2010, the Company leased its third CF34-8E5 engine to a Canadian carrier for a term of five months.





AeroCentury Corp.


Notes to Condensed Consolidated Financial Statements (Unaudited)


September 30, 2010





2.Aircraft and Aircraft Engines Held for Lease (continued)





During the third quarter, a customer that leases six of the Company’s Fokker 50 aircraft extended the leases for all six aircraft to lease-end dates during 2013 and 2014.  The Company also extended the leases for a Saab 340B aircraft and a Dash-8-300 aircraft for one year and 2.5 years, respectively. As discussed in Note 7, in October 2010, the lease for another Saab 340B was extended for three years.





At September 30, 2010, four of the Company’s Fokker 50 aircraft were off lease.





In February 2010, the lessee of two of the off-lease Fokker 50 aircraft, the leases for which were to expire on March 1, 2010, declared bankruptcy, and the Company took possession of the aircraft.  The Company held a total of approximately $3.2 million from cash security deposits, a letter of credit and refundable maintenance reserves for the two aircraft.  The letter of credit and maintenance reserves were reclassified to security deposits and have been, used to fulfill return conditions. The two aircraft are undergoing maintenance to prepare them for re-lease.  As of September 30, 2010, the amount incurred for maintenance on the two aircraft exceeded the amounts held as security deposits by approximately $352,000.  The Company expects to incur additional expenditures of approximately $300,000 to complete maintenance on the aircraft.





As discussed in Note 7, two additional Fokker 50 aircraft have been returned to the Company and three Fokker 100 aircraft are in the process of being returned.  Both lessees have experienced severe financial difficulties, and the Company has written off all receivables from the two lessees. The Company will recognize maintenance expense as work is performed to prepare the aircraft for re-lease to new customers.  The Company is in the process of estimating the total of such expenses.





3.Maintenance and Accrued Costs





Maintenance costs under the Company’s triple net operating leases are generally the responsibility of the lessees.  Most of the Company’s leases require payment of “maintenance reserves” (based upon usage) that are intended to accumulate funds that are expected to cover most or all of the cost of the lessees’ performance of certain maintenance obligations under the leases.  Some of these payments for maintenance reserves are refundable, and some are non-refundable.





Refundable maintenance reserves received by the Company are accounted for as a liability, which is reduced when maintenance work is performed during the lease. Maintenance reserves that are refundable to the lessee are refunded after all return conditions specified in the lease and, in some cases, any other payments due under the lease, are satisfied.  Any refundable reserves retained by the Company to satisfy return conditions are recorded as income when the aircraft is returned.





Non-refundable maintenance reserves billed to lessees are recorded monthly as maintenance reserves income (assuming cash is received or collections are reasonably assured) based on the lessee-reported asset usage during the applicable month.





The Company uses the direct expensing method to account for maintenance costs that are either incurred by the Company directly (usually associated with off-lease aircraft) or which are paid pursuant to non-refundable maintenance reserve provisions of its leases. Maintenance costs incurred by the Company are expensed as maintenance is performed.  Maintenance costs associated with non-refundable reserves are expensed in the period in which sufficient information is received from the lessee to estimate maintenance costs, or when a reimbursement claim is made by the lessee for maintenance incurred where no earlier estimate was possible.





The timing difference between recording maintenance reserves income as usage occurs and recording maintenance expense as maintenance is performed can have material effects on the volatility of reported earnings.








AeroCentury Corp.


Notes to Condensed Consolidated Financial Statements (Unaudited)


September 30, 2010





3.Maintenance and Accrued Costs (continued)





The accompanying condensed consolidated balance sheets reflect liabilities for maintenance reserves, which include refundable maintenance payments billed to lessees based on usage, as well as accrued maintenance costs.  At September 30, 2010 and December 31, 2009, the Company’s maintenance reserves and accruals consisted of the following:





September 30,

2010


December 31,

2009Refundable maintenance reserves

$
4,005,400


$
7,479,000Accrued maintenance costs


2,530,400



2,433,700$
6,535,800


$
9,912,700





Additions to and deductions from the Company’s accrued maintenance costs during the nine months ended September 30, 2010 and 2009 for aircraft maintenance were as follows:





For the Nine Months Ended

September 30,2010


2009Balance, beginning of period

$
2,433,700


$
2,444,100Additions:Charged to expense


9,501,500



6,036,400Reversals of previously accrued maintenance costs


(1,743,700
)


(119,100
)Total maintenance expense


7,757,800



5,917,300Capital equipment


151,700



-Accrued claims related to refundable maintenance reserves


2,721,300



-Other


(441,900
)


69,200Total additions


10,188,900



5,986,500Deductions -Payments


10,091,800



4,957,200Prepaid maintenance


400



-10,092,200



4,957,200Net increase in accrued maintenance costs


96,700



1,029,300Balance, end of period

$
2,530,400


$
3,473,400








AeroCentury Corp.


Notes to Condensed Consolidated Financial Statements (Unaudited)


September 30, 2010





4.Notes Payable and Accrued Interest





At September 30, 2010 and December 31, 2009, the Company’s notes payable and accrued interest consisted of the following:





September 30,

2010


December 31,

2009Credit Facility principal

$
52,000,000


$
53,500,000Credit Facility accrued interest


126,200



40,000Subordinated Notes principal


4,856,500



9,462,000Subordinated Notes discount


(149,400
)


(485,800
)Swap accrued interest


-



65,500$
56,833,300


$
62,581,700





(a)Credit Facility





The Company’s $80 million credit facility (the “Former Credit Facility”), which was collateralized by all of the assets of AeroCentury Corp., was to expire on March 31, 2010, but was extended by written amendments to April 30, 2010.  On April 28, 2010, the Former Credit Facility was replaced with a new, two-year $75 million credit facility (the “New Credit Facility”).  On June 4, 2010, the New Credit Facility was increased to $90 million, with the addition of a new participant bank’s commitment of $15 million.





During the nine months ended September 30, 2010, under the Former Credit Facility and New Credit Facility in the aggregate, the Company borrowed $2,000,000 and repaid $3,500,000 of the outstanding principal.  As of September 30, 2010, and December 31, 2009, the Company was in compliance with all covenants under the New Credit Facility and Former Credit Facility agreements, respectively.  Subject to collateral limitations, the borrowing capacity remaining under the New Credit Facility was $38,000,000 as of September 30, 2010 and was $26,500,000 as of December 31, 2009, under the Former Credit Facility.  The weighted average interest rate on the New Credit Facility was 4.06% at September 30, 2010 and was 3.06% at December 31, 2009 on the Former Credit Facility.





(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.





The Swap expired on December 31, 2009 and, therefore, had no value on or after that date.  Gains and losses on the Swap were recorded as a component of interest expense. The Company recorded a gain on the Swap of $170,000 and $449,700 for the three months and nine months ended September 30, 2009, respectively. The Company also recognized additional interest expense on the net settlement of the Swap of $191,900 and $554,400 in the three months and nine months ended September 30, 2009, respectively.








AeroCentury Corp.


Notes to Condensed Consolidated Financial Statements (Unaudited)


September 30, 2010





4.Notes Payable and Accrued Interest (continued)





(b)Derivative instrument (continued)





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





(c)Senior unsecured subordinated debt (“Subordinated Notes”)





As of September 30, 2010, the carrying amount of the Subordinated Notes was approximately $4,707,100 (outstanding principal amount of $4,856,500 less unamortized debt discount of approximately $149,400), and accrued interest payable was $0.  As of December 31, 2009, the carrying amount of the Subordinated Notes was approximately $8,976,200 (outstanding principal amount of $9,462,000 less unamortized debt discount of approximately $485,800) and accrued interest payable was $0.  As of September 30, 2010 and December 31, 2009, the Company was in compliance with all covenants under the securities purchase agreement that governs its Subordinated Notes.








AeroCentury Corp.


Notes to Condensed Consolidated Financial Statements (Unaudited)


September 30, 2010





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 MonthsEnded September 30,2010


2009


2010


2009Net income

$
2,664,300


$
3,751,500


$
241,000


$
1,145,600Weighted average shares outstanding for the period


1,543,257



1,543,257



1,543,257



1,543,257Dilutive effect of warrants


42,110



4,390



39,220



23,816Weighted average diluted shares outstanding


1,585,367



1,547,647



1,582,477



1,567,073Basic earnings per share

$
1.73


$
2.43


$
0.16


$
0.74Diluted earnings per share

$
1.68


$
2.42


$
0.15


$
0.73





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.





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. Under the Management Agreement, JMC receives a monthly management fee based on the net asset value of the assets under management. JMC also receives an acquisition fee for locating assets for the Company, provided that the aggregate purchase price, including chargeable acquisition costs and any acquisition fee, does not exceed the fair market value of the asset based on appraisal, and may receive a remarketing fee in connection with the sale or re-lease of the Company’s assets. The Company recorded management fees of $904,100 and $918,200 during the three months ended September 30, 2010 and 2009, respectively, and $2,754,200 and $2,758,500 during the nine months ended September 30, 2010 and 2009, respectively. The Company paid acquisition fees totaling $0 and $200,000 to JMC during the three months ended September 30, 2010 and 2009, respectively, which are included in the cost basis of the assets purchased.  No other acquisition fees were paid in the first six months of 2010 and 2009.  The Company paid no remarketing fees to JMC during the nine-month period of 2010 or 2009.





7.Subsequent Events





Two of the Company’s customers that leased two Fokker 50 and three Fokker 100 aircraft, respectively, have experienced severe financial difficulties.  As a result, in October 2010, the two Fokker 50 aircraft were returned to the Company.  The Company subsequently signed a term sheet with and received a deposit from a regional carrier in Asia for three-year leases of the two Fokker 50 aircraft. The three Fokker 100 aircraft are in the process of being returned, and the Company is seeking lessees for the aircraft.





In October 2010, the Company extended the lease for one of its Saab 340B aircraft for three years.








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, 2009 and the unaudited financial statements and related notes that appear elsewhere in this report.





Results of Operations





Quarter ended September 30, 2010 compared to the quarter ended September 30, 2009





The Company’s net income decreased by $904,600 in the quarter ended September 30, 2010 compared to the same period in 2009, due primarily to decreased operating lease revenue, the aggregate effect of which was partially offset by decreased maintenance expense and interest expense.





Operating lease revenue decreased by $1,581,200 in the quarter ended September 30, 2010, compared to the same period in 2009, primarily because of a $897,000 decrease in revenue related to aircraft that were off lease for all or part of the 2010 quarter and a $336,000 decrease related to assets that were re-leased at lower rates, the effects of which were partially offset by a $266,000 increase in revenue related to aircraft that were on lease in the 2010 quarter, but were off lease in the 2009 quarter. In the 2010 quarter, the Company also recorded a $504,000 reduction in operating lease revenue due to uncertainty about the collectibility of the related receivables.





Maintenance reserves revenue decreased by $30,100 in the quarter ended September 30, 2010 compared to the same period in 2009.  The Company recorded lessmaintenance reserves revenue because of lower average usage by some lessees in the 2010 quarter and also recorded a $223,300 reduction in maintenance reserves revenue due to uncertainty about the collectibility of the related receivables.  The effect of these decreases was substantially offset by maintenance reserves revenue of $902,400 related to refundable maintenance reserves retained by the Company when two aircraft were returned in early 2010; these reserves are being used to fund maintenance required by the return conditions of the leases.





Other income decreased by $135,700 in the quarter ended September 30, 2010, compared to the same period in 2009, primarily because the 2009 period included a gain on insurance proceeds for damage to the Company’s spare Saab 340A aircraft engine.





Interest expense decreased by $166,500 in the quarter ended September 30, 2010, compared to the quarter ended September 30, 2009, primarily as a result of a lower average Subordinated Notes balance and the resulting reduction in interest payments and lower discount amortization.  The effects of these decreases were partially offset by an increase in the applicable LIBOR rate from year to year.  In addition, the margin and fee amortization related to the Company’s New Credit Facility were higher than under the Former Credit Facility.





The Company recognized $445,700 less in maintenance expense in the quarter ended September 30, 2010 than in the same period of 2009 due to a decrease in expense for off-lease aircraft, the effect of which was partially offset by an increase in maintenance performed by lessees using non-refundable reserves.  During the quarters ended September 30, 2010 and 2009, $2,219,000 and $1,333,100, respectively, of the Company’s maintenance expense was funded by non-refundable maintenance reserves that had been recorded as income when accrued.





Nine months ended September 30, 2010 compared to the nine months ended September 30, 2009





The Company’s net income decreased by $1,087,200 in the nine months ended September 30, 2010 compared to the same period in 2009, due primarily to decreased operating lease revenue and increased maintenance expense, the aggregate effect of which was partially offset by increased maintenance reserves income and decreased interest expense.





Operating lease revenue decreased by $2,023,900 in the nine months ended September 30, 2010 compared to the same period in 2009, primarily because of a $1,638,000 decrease in revenue related to aircraft that were off lease for all or part of the 2010 period, a $302,000 decrease related to assets that were re-leased at lower rates, and a $967,000 reduction in operating lease revenue due to uncertainty about the collectibility of the related receivables.  The effects of these reductions were partially offset by a $635,000 increase in revenue related to aircraft engines purchased in the second half of 2009 and a $520,000 increase related to aircraft that were on lease in 2010, but were off lease in the 2009 period.





Maintenance reserves revenue increased by $1,562,100 in the nine months ended September 30, 2010 compared to the same period in 2009. The 2010 period included maintenance reserves revenue of $3,263,300 related to refundable maintenance reserves retained by the Company when two aircraft were returned in early 2010 and which are being used to fund maintenance required by the return conditions of the leases. The Company also recorded a $494,600 reduction in maintenance reserves revenue due to uncertainty about the collectibility of the related receivables.





Other income increased by $117,600 in the nine months ended September 30, 2010, compared to the same period in 2009, primarily because the 2010 period included a net gain on insurance proceeds that the Company received for one of its DHC-8-100 aircraft that had sustained significant damage in January 2010, as well as the sale of spare parts and an engine that was replaced on another of the Company’s DHC-8-100 aircraft. The 2009 period included interest on a Federal tax refund, as well as a gain on expected insurance proceeds for damage to the Company’s spare Saab 340A aircraft engine.





In the nine months ended September 30, 2010, the Company recorded $208,000 for the recovery of a bad debt that accrued in 2009 for a receivable from a lessee that the Company had determined to be uncollectible.





Interest expense decreased by $760,800 in the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009, primarily as a result of a lower average Subordinated Notes balance and the resulting reduction in interest payments and lower discount amortization, as well as a decrease in interest expense as a result of the expiration of the Company’s interest rate swap in December 2009. The effects of these decreases were partially offset by an increase in the applicable LIBOR rate from year to year.  In addition, the margin and fee amortization related to the Company’s New Credit Facility were higher than under the Former Credit Facility.





The Company recognized $1,840,500 more in maintenance expense in the nine months ended September 30, 2010 than in the same period of 2009.  The increase was due to an increase in maintenance performed by lessees using non-refundable reserves, the effect of which was partially offset by a decrease in expense for off-lease aircraft.  During the nine months ended September 30, 2010 and 2009, $5,980,400 and $2,726,800 respectively, of the Company’s maintenance expense was funded by non-refundable maintenance reserves that had been recorded as income when earned.





During the nine months ended September 30, 2010, due to uncertainty about the collectibility of the related receivables, the Company recorded $283,800 of bad debt expense related to maintenance paid on behalf of a lessee.








Liquidity and Capital Resources





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





(a)Credit Facility and New Credit Facility





During the nine months ended September 30, 2010, under the Former Credit Facility and New Credit Facility in the aggregate, the Company borrowed $2,000,000 and repaid $3,500,000 of the outstanding principal.  As of September 30, 2010 and December 31, 2009, the Company was in compliance with all covenants under the New Credit Facility and Former Credit Facility agreements, respectively.





On April 28, 2010, the Former Credit Facility expired after two short term-extensions, and the Company entered into the New Credit Facility.  The Company used its initial borrowing under the New Credit Facility, which has a two-year term, to pay off the outstanding balance of $50,000,000 due under the Former Credit Facility at that time.  As with the Former Credit Facility, the New Credit Facility is secured by all of the assets of the Company, including its aircraft portfolio.





As of November 12, 2010, the Company has an outstanding balance of $52,000,000 under the New Credit Facility. The Company is currently in compliance with all covenants of its New Credit Facility, and based on its current projections, the Company believes it will continue to be in compliance with those covenants, but there can be no assurance of future compliance.





The Company's interest expense in connection with the New Credit Facility will generally increase and decrease with prevailing interest rates. The Company’s New Credit Facility has a fixed interest rate margin that is higher than the highest variable margin that was applicable to the Company’s Former Credit Facility, but the Company does not anticipate that the higher margin will have a significant impact on the Company’s results. The Company has the ability to enter into interest rate swaps to economically hedge against interest rate increases in its floating rate debt under the New Credit Facility and has done so in the past with respect to debt owed under the Former Credit Facility.  (See Note 4 to the Company’s financial statementsand paragraph (b) below).





(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.





The Swap expired on December 31, 2009 and, therefore, had no value on or after that date.  Gains and losses on the Swap were recorded as a component of interest expense. The Company recorded gains on the Swap of $170,000 and $449,700 for the three months and nine months ended September 30, 2009, respectively. The Company also recognized additional interest expense on the net settlement of the Swap of $191,900 and $554,400 in the three months and nine months ended September 30, 2009, 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 converted $20 million of the Company’s short-term variable rate debt to a fixed rate.  Under this agreement, the Company paid a fixed rate and received a variable rate of LIBOR.  The fair value of this interest rate derivative was based on quoted prices for similar instruments from a commercial bank and, therefore, the interest rate derivative was considered a Level 2 input.





(c)Senior unsecured subordinated debt





As of September 30, 2010, the carrying amount of the Subordinated Notes was approximately $4,707,100 (outstanding principal amount of $4,856,500 less unamortized debt discount of approximately $149,400), and accrued interest payable was $0.  As of December 31, 2009, the carrying amount of the Subordinated Notes was approximately $8,976,200 (outstanding principal amount of $9,462,000 less unamortized debt discount of approximately $485,800), and accrued interest payable was $0.  As of September 30, 2010, December 31, 2009 and the date of this filing, the Company was in compliance with all covenants under the Subordinated Notes Agreement.








(d)Cash flow





The Company's primary sources of cash are aircraft lease rent 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 six Fokker 50 and three Fokker 100 aircraft.In October 2010, the Company signed a term sheet with and received a deposit from a regional carrier in Asia for three-year leases of two of the Fokker 50 aircraft.  Threeof the Company’s leases expire during the remainder of 2010.





The Company’s primary uses of cash are for servicing principal and interest payments due under its debt obligations, maintenance expense, management fees, professional fees, and insurance.Debt repayment obligations increased in April 2009, when the Subordinated Notes debt repayment schedule began to require repayment of principal in addition to interest.  The amount of interest paid by the Company depends on the outstanding balances of its Subordinated Notes debt, which bears a fixed interest rate, and its credit facilities, which carried or carry a floating interest rate as well as an interest rate margin.  The interest rate margin is higher under the New Credit Facility than under the Former Credit Facility, and the amount of interest owed under both facilities was and will continue to depend on changes in prevailing interest rates.





The timing and amount of the Company’s maintenance payments vary, depending on when lessees submit claims for reimbursement from reserves, the aggregate amount of such claims and the timing and amount of expenses incurred in connection with preparation of off-lease aircraft for re-lease to new customers.  The Company’s maintenance payments constitute a large portion of its cash needs, and the Company may from time to time borrow additional funds under the New Credit Facility to provide funding for such payments.





In June and July 2010, the Company executed letters of intent related to the Company’s proposed purchase of two deHavilland Dash-8-Q400 aircraft for an aggregate purchase price of approximately $17 million.





Management believes that the Company will have adequate cash flow to meet its ongoing operational needs, including required repayments under the New Credit Facility and Subordinated Notes, based upon its estimates of future revenues and expenditures, which include assumptions regarding (i) rents on assets to be re-leased, (ii) timely use of proceeds of unused debt capacity toward additional acquisitions of income producing assets, (iii) required debt payments, (iv) interest rates, and (v) 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 the New Credit Facility agreement or the Subordinated Notes Agreement, which may in turn require repayment of some or all of the amounts outstanding under the New Credit Facility or the Subordinated Notes, (ii) lessee non-performance or non-compliance with lease obligations which may affect the New Credit Facility collateral limitations and covenants, Subordinated Notes covenants, and revenue and expenses, (iii) inability to locate and acquire a sufficient volume of additional aircraft assets at prices that will produce acceptable net returns, (iv) lessee performance of maintenance earlier than anticipated, and (v) 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.





(i)Operating activities





The Company’s cash flow from operations decreased by $9,592,100 from the nine months ended September 30, 2009 compared to the same period in 2010. As discussed below, the change in cash flow was primarily a result of an increase in expenditures for maintenance, decreases in payments received for rent and maintenance reserves, and a tax refund received in the prior year, the effects of which were partially offset by an increase in payments received for security deposits.








Lease rents, maintenance reserves and security deposits





Several aircraft that were on lease in 2009 were off lease for all or part of the nine months ended September 30, 2010.  As a result, payments received from lessees for rent and maintenance reserves, which are based on usage of the Company’s aircraft, decreased by $1,513,800 and $2,028,400, respectively, in the nine months ended September 30, 2010 compared to the same period in 2009. In addition, a portion of the rent and maintenance reserves that were due for several aircraft was deferred during the 2010 period.





The Company received $1,571,500 more for security deposits during the nine months ended September 30, 2010 than in the same period of 2009.  The increase was primarily due to funds received when the Company drew on a letter of credit that served as security for two aircraft leases that were terminated early in 2010 as a result of the lessee’s bankruptcy.  The security deposit was used to fund maintenance required by the return conditions of the leases.





Payments for maintenance





Payments for maintenance increased by $5,416,800 in the nine months ended September 30, 2010, compared to the same period in 2009, as a result of payments related to off-lease aircraft. The majority of the Company’s maintenance expenditures during the nine months ended September 30, 2010 were related to two aircraft that were returned in early 2010, the maintenance for which was partially funded by security deposits, including a letter of credit, received from the previous lessee.  The amount of payments for maintenance in future periods will depend 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, 2010, the Company paid taxes of $12,200.  During the nine months ended September 30, 2009 the Company paid taxes of $5,300 and received $1,625,100 of Federal tax refunds.





(ii)Investing activities





During the nine months ended September 30, 2010, the Company received cash of $2,380,700 from the collection of insurance proceeds for (i) an aircraft that was damaged and declared a total loss in January 2010 and (ii) an engine that was damaged in late 2009.   During the nine months ended September 30, 2010, the Company used cash of $575,800 for equipment that will be installed on several aircraft and for acquisition costs related to an aircraft engine purchased in December 2009, as well as deposits for two aircraft that the Company expects to purchase in late 2010 and early 2011.  During the first nine months of 2009, the Company used cash of $5,011,400 for asset purchases and capital equipment installed on aircraft.





(iii)Financing activities





The Company borrowed $2,000,000 and $4,000,000 during the first nine months of 2010 and 2009, respectively.  During the same periods, the Company repaid $8,105,500 and $12,677,000, respectively, of its outstanding debt.  Such payments were funded by excess cash flow.





Outlook





(a)General





The ongoing global economic downturn and slow rate of recovery from the recent recession have 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 carriers in nearly all geographic areas.  This capacity reduction has created a challenging environment for the Company in three respects:





•The reduction in the demand for aircraft has increased the possibility that the Company’s current lessees will choose to return leased aircraft at lease expiration rather than renew the existing leases, notwithstanding that any such lessee may incur significant expenses to satisfy return conditions.  Unless they are renewed, leases for three of the Company’s assets will expire in the fourth quarter of 2010.  As such, the Company’s primary focus is extending current leases and remarketing aircraft that have been or are returned.  Due to decreased demand for aircraft capacity, it is likely that the Company will experience lower on-lease utilization rates and that the Company will experience longer lead times for remarketing of returned aircraft.





•The global economic situation has also increased the possibility of an unanticipated lessee default, particularly among the less-established carriers in the Company’s customer base, due to such lessee’s business failure.  A lessee’s default and the unscheduled return of an aircraft to the Company for remarketing could result not only in reduced operating lease revenue but also in unanticipated, unrecoverable expenses arising from the lessee’s default on its maintenance and return condition obligations.





•Finally, the downturn also has created fewer opportunities for acquisitions for the Company.  The Company’s customers are generally carriers needing additional aircraft to expand their route systems or increase frequencies.  In the current environment of reduced demand for air travel and consequently reduced capacity by carriers, there is likely to be a significant decrease in the pool of such customers requiring aircraft.  Therefore, it is possiblethat the Company’s portfolio growth will be slower than it has been in recent years, as fewer carriers seek to expand their fleets.











The Company’s largest customer by monthly revenue leased three Fokker 100 aircraft with expiration dates in July and December 2010.  However, that customer suspended operations on August 28, 2010.  The customer has been cooperating with the Company in arranging for the return of the three aircraft to the Company, and is negotiating with the Company for the settlement of the mutual obligations under the leases. In addition, a customer that leased two of the Company’s Fokker 50 aircraft, with leases expiring in November and December 2010, returned both aircraft to the Company in October.  During the third quarter of 2010, the Company wrote off receivables, totaling approximately $938,000, owed by both customers, and it is likely that, in order to prepare the aircraft for lease to new customers, the Company will incur significant maintenance costs.  The majority of such costs are likely to be incurred in the fourth quarter of 2010 and first quarter of 2011, which will result in significant maintenance expense in those periods.  Further, it is possible that such expenses will exceed the amount of non-refundable reserves received during the term of the leases.  The Company is in the process of estimating the cost of such maintenance.





The Company continues to monitor the performance of all of its customers and, in the third quarter of 2010, noted indications of weakened financial conditions and operating results for several of its customers.





In 2009 and early 2010, the Company agreed to defer a portion of the rent and maintenance reserves due from four customers that lease a total of nine of the Company’s aircraft, including the two Fokker 50 and three Fokker 100 aircraft discussed above.  The Company previously recorded an allowance for the deferred balance related to the two Fokker 50 aircraft and, during the third quarter, the Company applied the security deposits for the three Fokker 100 aircraft to the entire outstanding deferred balance.  During the third quarter, another customer fully paid its deferred balance.  The current remaining balance of deferred rent and maintenance reserves, due from one customer, is approximately $421,000.





(b)Remarketing Efforts





In October 2010, the Company signed a term sheet with and received a deposit from a regional carrier in Asia for three-year leases of the Company’s two Fokker 50 aircraft that were returned in October.  The Company is seeking lessees for its other four off-lease Fokker 50 and three Fokker 100 aircraft which are in the process of being returned to the Company.





(c)New Credit Facility





The terms of the Company’s New Credit Facility are substantially the same as those of the Company’s Former Credit Facility. The Company’s New Credit Facility has a fixed interest rate margin that is higher than the highest variable margin that was applicable to the Company’s Former Credit Facility, but the Company does not anticipate that the higher margin will have a significant impact on the Company’s results.





Factors that May Affect Future Results





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 protracted downturn in the global economy.  Passenger volume has fallen significantly for carriers worldwide, and the loss of revenue has affected many carriers’ financial condition. The ongoing credit crisis has made it difficult or impossible for many regional carriers to find the additional debt financing on which they have traditionally relied.  The confluence of these economic factors increases the likelihood of failures among the Company’s customers.  The spread of another flu epidemic, the threat or execution of a terrorist attack against aviation, a natural event that interrupts air traffic, such as the recent Iceland volcano eruption, or other like events 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.





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 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, if, as older leases expire, they are replaced by lease renewals or re-leases at decreased lease rates, the lease revenue from the Company’s existing portfolio is likely to decline, with the magnitude of the decline dependent on the length of the downturn and the depth of the decline in market rents.





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





Several of the Company's customers have experienced financial difficulties arising from a combination of the weakened air carrier market and their own unique financial circumstances and have requested and been granted deferral of certain overdue and/or future rental or reserve payment obligations as disclosed in the section entitled "Outlook (a) General.”  If the current weakened air carrier environment continues, it is possible that the Company may enter into additional deferral agreements. When a customer requests a deferral of lease obligations, the Company evaluates the lessee’s financial plan, the likelihood that the lessee can remain a viable carrier, and whether the deferral will be repaid according to the agreed schedule.  If the Company feels that there is a risk that deferred obligations will not be repaid, the Company does not record the deferred rent and reserve payments and instead records an allowance for doubtful accounts. If the Company makes a judgment that the lessee is likely to meet its deferred obligations, the Company continues to record the deferred rental and reserve payments as revenue in the periods in which they accrue.  It is possible that a lessee that the Company judges to be likely to repay its deferred obligations could experience a worsening financial condition.  In that circumstance, the Company may determine that full repayment of the deferred obligations is no longer likely, in which case the Company would record a bad debt expense or reduction of income.  This could have a material effect on the Company's financial results in the period that such bad debt expense or income reduction is recorded.





The Company’s largest customer by monthly revenue leased three Fokker 100 aircraft.  However, that customer suspended operations on August 28, 2010.  At that time all three aircraft were in the process of being prepared for lease-end return, as the lease for one of the aircraft expired on July 19, 2010, and the other two were expiring in December 2010.   Though the parent of the carrier has declared bankruptcy, it is not clear whether the lessee intends to restart operations, or whether it will eventually also file for bankruptcy. To date, the lessee has been cooperating with the Company in arranging for the return of the aircraft, and is negotiating with the Company for the settlement of the mutual obligations under the lease.  The Company has written off the receivables owed by this lessee, and it is likely that the Company will have significant additional unanticipated expenses that would have been otherwise paid for by the lessee in order to prepare these aircraft for remarketing to a new lessee.








Ownership Risks.The Company’s portfolio is leased under operating leases.  The term of any such lease might be less than the entire anticipated remaining useful life of the leased 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 the asset 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 that 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.  Each lease typically obligates a customer to return an aircraft to the Company in a specified condition, which generally requires the aircraft be returned in equal or better condition than 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 may be required to expend funds in excess of the maintenance reserves collected from the insolvent lessee to return the aircraft to a remarketable condition.





Several of the Company’s leases do not require payment of monthly maintenance reserves.  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 and the Company may incur an unanticipated expense in order to re-lease the aircraft.





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 estimated to be 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.





Concentration of Lessees and Aircraft Type. For the month ended October 31, 2010, based on monthly revenue, the Company’s four largest customers were located in Antigua, Germany, Netherlands Antilles and Norway and accounted for approximately 18%, 13%, 13%, and 13%, 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, 2010, 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 20%, 25% and 32%, 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.





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.  The Company’s inability to collect payments under a lease or to repossess equipment in the event of a customer 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 were in default under a lease and sought protection under Chapter 11 of the United States Bankruptcy Code, Section 1110 of the Bankruptcy Code would automatically prevent the Company from exercising any remedies against such lessee for a period of 60 days.  After the 60-day period had passed, the lessee would have to agree to perform the lease obligations and cure any defaults, or the Company would have the right to repossess the equipment.  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.





Risks Related to Regional Air Carriers.The Company’s continued focus on its customer base of regional air carriers subjects the Company to additional risks.  Some of the lessees in the regional air carrier market are companies that are start-up, low-capital, and/or low-margin operators.  Often, the success of such carriers depends on contractual arrangements with major trunk carriers or franchises from governmental agencies that provide subsidies for operating essential air routes, both of which may be subject to termination or cancellation 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 carefully evaluates the credit risk of each customer and attempts to obtain a third party guaranty, letters of credit or other credit enhancements, if it deems them necessary in addition to customary security deposits.  There 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.





The Company has seen 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.  If any of the Company's current or future lessees becomes unable to meet their lease obligations, the Company's future results could be materially and adversely impacted.








Availability of Financing.The Company believes that the availability under the New Credit Facility will be sufficient to fund projected acquisitions through the end of 2011.   In the longer term, however, 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 remains difficult to obtain. The Company will continue to seek additional lenders for participation in the New Credit Facility to increase the maximum amount available for borrowing under such facility to $110 million and will continue to investigate 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.





New Credit Facility Obligations. The Company is obligated to make repayments of principal under the New 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 past due lease payments may reduce the borrowing base.  The Company believes it will have sufficient cash funds to make any payment that arises due to such borrowing base limitations.   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 or cure a default under the New Credit Facility agreement.





Risks of Debt Financing.  The Company’s use of debt as the primary form of acquisition financing subjects the Company to increased risks associated with leveraging.  Indebtedness owed under the New 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 New 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 ratios and required net worth.  Any default under the New Credit Facility, if not waived by the lenders, could result in foreclosure upon any or all of the existing assets of the Company.  Any such default could also result in a cross default under the Subordinated Notes.





Investment in New Aircraft Types.  The Company intends to continue to focus solely on regional aircraft and engines. Although the Company has traditionally invested in a limited number of types of turboprop aircraft and engines, the Company has also acquired several Fokker 100 regional jet aircraft and regional jet aircraft engines, 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,” above).





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 were 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.





Leasing Risks.  The Company’s successful negotiation of lease extensions, re-leases and sales is critical to achieving 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.





Interest Rate Risk.  The New Credit Facility carries a floating interest rate based upon short-term interest rate indices. Lease rates typically, but not always, move over time with interest rates, but market demand and numerous other asset-specific factors also affect lease rates. Because the Company’s typical lease rates are fixed at 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 decreased net income as additional interest expense outpaces revenue growth.  Further, even if significant lease origination occurs following such rate increases, other contemporaneous aircraft market forces may result in lower or flat rental rates, and the Company could also experience decreased net income.








International Risks.  The Company leases assets primarily 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 aircraft operated in the United States.  Depending on the jurisdiction, laws governing such tax liabilities may be complex, not well formed or not uniformly enforced. In such jurisdictions, the Company may decide to take an uncertain tax position based on the best advice of the local tax experts it engages, which position may be challenged by the taxing authority.  If the taxing authority later assesses a liability, the Company may be required to pay penalties and interest on the assessed amount, which penalties and interest would not give rise to a corresponding foreign tax credit on the Company’s U. S. tax return.





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 thirteenth 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.  In addition, certain persons serving as officers of both the Company and JMC hold significant ownership positions in both the Company and JHC, the holding company for JMC.  Consequently, the directors and officers of JMC may have a conflict of interest in the event of a dispute between the Company and JMC.  Although the Company has taken steps to prevent conflicts of interest arising from such dual roles, such conflicts may still occur.





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 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 New Credit Facility lender approval of the asset acquired and the lessee in order to be included in the New Credit Facility borrowing base, 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.








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.  Nevertheless, the Company believes that it is competitive because of JMC’s experience and operational efficiency in identifying and obtaining financing for the transaction types desired by regional air carriers.  This market segment, which 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, insure against and indemnify the Company for such claims.  Although some protection with respect to the Company’s aircraft assets may be provided by the United States Aviation Act, 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.  The possibility of such an event is remote, but any such uninsured loss with respect to the equipment or insured loss for which insurance proceeds are inadequate might result in a loss of invested capital in and any profits anticipated from, such equipment, as well as a potential claim directly against the Company.





Compliance With Future Environmental Regulations.Compliance with future environmental regulationsmay harm the Company’s business. Many aspects of aircraft operations are subject to increasingly stringent environmental regulations, and growing concerns about climate change may result in the imposition by the U.S and foreign governments of additional regulation of carbon emissions, aimed at either requiring adoption of technology to reduce the amount of carbon emissions or putting in place a fee or tax system on carbon emitters.  It is likely that any such regulation will be directed at the Company’s customers, as operators of aircraft, or at the Company, as owners of aircraft.  Under the Company’s triple-net arrangements, the Company would likely shift responsibility for compliance to its lessees, but there might be some costs of regulation that the Company could not shift and would itself have to bear. Although it is not expected that the costs of complying with current environmental regulations will have a material adverse effect on the Company’s financial position, results of operations, or cash flows, no assurance can be given that the costs of complying with environmental regulations adopted in the future will not have such an effect.





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





Item 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.





CEO and CFO Certifications. Attached as exhibits to this Quarterly Report on Form 10-Q (the “Report”) are certifications of the Company’s Chief Executive Officer (the “CEO”) and the Company’s Chief Financial Officer (the “CFO”), which are required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). This section of the Report includes information concerning the evaluation of disclosure controls and procedures referred to in the Section 302 Certifications and this should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.





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





The Company’s management, with the participation of the CEO and CFO, evaluated the effectiveness of the design and operation of the Company’s Disclosure Controls and concluded that the Company’s Disclosure Controls were effective as of September 30, 2010.





Changes in Internal Control Over Financial Reporting.  No change in the Company’s internal control over financial reporting occurred during the fiscal quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.








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.





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 12, 2010
By:
/s/ Toni M. PerazzoName: Toni M. PerazzoTitle: Senior Vice President-Finance andChief Financial Officer