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 March 31, 2009
 
 o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
transition period from ____________ to ____________
 
 Commission
File Number:001-13387
 
 AeroCentury
Corp.
 (Exact
Name of Registrant as Specified in Its Charter)
 
 Delaware
              
              94-3263974(State
      or Other Jurisdiction of Incorporation or Organization)
              
              (I.R.S.
      Employer Identification No.)
 1440
Chapin Avenue, Suite 310
 Burlingame,
California 94010
 (Address
of Principal Executive Offices)
 
 (650)
340-1888
 (Issuer’s
Telephone Number Including Area Code)
 
 None
 (Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes xNo  o
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
is 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 May 14, 2009 the
Issuer had 1,606,557Shares of Common Stock,
par value $0.001 per share, issued, of which 63,300 are held as Treasury Stock.
 
  - 1
-
  
 PART
I
 FINANCIAL
INFORMATION
 Forward-Looking
Statements
 
 This
Quarterly Report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as
amended (“the Exchange Act”). All statements in this Report other than
statements of historical fact are "forward-looking statements" for purposes of
these provisions, including any statements of plans and objectives for future
operations and any statements of assumptions underlying any of the foregoing.
Statements that include the use of terminology such as "may," "will," "expects,"
"plans," "anticipates," "estimates," "potential," or "continue," or the negative
thereof, or other comparable terminology are forward-looking statements.
Forward-looking statements include: (i) in Item 1 “Financial Statements” the
Company’s statements that the adoption of SFAS 162, FSP 107-1 and FSP 157-4 will
not have a material effect on the Company’s financial statements; (ii) in Item 2
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and
Capital Resources,” the Company’s statements regarding its belief that it
will remain in compliance with the covenants of its Credit Facility; that it
will continue to be in compliance with all covenants of its Subordinated Notes
Agreement; and that the Company will have adequate cash flow to meet its ongoing
operational needs, including required repayments under its Credit Facility and
Subordinated Notes financings; (iii) in Item 2 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Outlook,” the Company’s
statements regarding its belief that  many carriers will be forced to
reduce capacity, which may result in fewer leasing or sales opportunities for
the Company; that there will be fewer acquisition opportunities in 2009, and
that the borrowing capacity under the Credit Facility will be sufficient to fund
targeted acquisitions through 2009; that the Company will incur approximately
$367,000 to ready a Saab 340A for remarketing; that the Company will incur
approximately $400,000 of additional maintenance expenses through the third
quarter of 2009 on a returned Fokker 50; that the Company does not expect any
significant monetary recovery against the insolvent lessee of a Saab 340B
aircraft; that such Saab 340B aircraft will require approximately $1.3 million
of maintenance in order to prepare it for re-lease; that the Company will be
able to complete maintenance and find a new lessee for such 340B aircraft in
2009; that the Company will be successful in extending the leases for a majority
of the seven aircraft the leases for which expire in 2009; and (iv) in Item 2
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Factors that May
Affect Future Results,” the Company’s statements regarding its belief
that the current banking crisis will not have an immediate effect on the
Company; that the lenders in its Credit Facility will continue to be able to
honor their commitment to provide loans as committed in the Credit Facility
agreements and that the unused capacity under the Credit Facility provides
sufficient capital to fund acquisitions through the end of 2009; that the
current lenders in the Credit Facility will renew and remain as participants in
the amount for which they are currently committed when the Credit Facility
expires in March 2010; that the Company will have sufficient cash funds to make
any payment that arises due to borrowing base limitations caused by assets
scheduled to come off lease in the near term; that JMC personnel's overall
industry experience and its technical resources should permit the Company to
effectively manage new aircraft types and engines; that the Company intends to
focus on regional air carriers and typically is able to obtain generally higher
lease rates from regional carriers than mainline carriers; and that the Company
is competitive because of JMC’s experience and operational efficiency in
identifying and obtaining financing for the transaction types desired by
regional air carriers and that it benefits from JMC’s
reputation.  These forward-looking statements involve risks and
uncertainties, and it is important to note that the Company's actual results
could differ materially from those projected or assumed in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are the factors detailed under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Factors That May Affect Future
Results," including the continued availability of Credit Facility
financing; the compliance of the Company's lessees with obligations under their
respective leases, risks related to use of debt financing for acquisitions; a
sudden worsening in demand for regional aircraft or severe reduction in regional
airline capacity; general economic conditions, particularly those that affect
the air travel industry; the Company’s success in finding additional financing
and appropriate assets to acquire with such financing; deviations from the
assumption that future major maintenance expenses will be relatively evenly
spaced over the entire portfolio; and future trends and results which cannot be
predicted with certainty. The cautionary statements made in this Report should
be read as being applicable to all related forward-looking statements wherever
they appear herein. All forward-looking statements and risk factors included in
this document are made as of the date hereof, based on information available to
the Company as of the date hereof, and the Company assumes no obligation to
update any forward-looking statement or risk factor. You should consult the risk
factors listed from time to time in the Company's filings with the Securities
and Exchange Commission.
  - 2
-
  Item
1. Financial
Statements.
 AeroCentury
Corp.
 Condensed
Consolidated Balance Sheets
 Unaudited
 
 ASSETSMarch
      31,
                    2009
                  
                  
                  December
      31,
                    2008Assets:Cash
      and cash equivalents
                  
                  $
                  1,966,500
                  
                  
                  $
                  2,169,700Accounts
      receivable, including deferred rent of $201,100 and $244,100
      at
                    March
      31, 2009 and December 31, 2008, respectively
                  
                  
                  2,209,200
                  
                  
                  
                  2,022,800Aircraft
      and aircraft engine held for lease, net of accumulated
                    depreciation
      of $35,293,000 and $33,385,300 at
                    March
      31, 2009 and December 31, 2008, respectively
                  
                  
                  123,005,800
                  
                  
                  
                  124,913,600Taxes
      receivable
                  
                  
                  1,626,800
                  
                  
                  
                  1,626,800Prepaid
      expenses and other
                  
                  
                  978,800
                  
                  
                  
                  1,000,600Total
      assets
                  
                  $
                  129,787,100
                  
                  
                  $
                  131,733,500LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Accounts
      payable and accrued expenses
                  
                  $
                  600,000
                  
                  
                  $
                  503,000Notes
      payable and accrued interest
                  
                  
                  68,133,000
                  
                  
                  
                  72,411,300Maintenance
      reserves and accrued costs
                  
                  
                  8,811,700
                  
                  
                  
                  8,190,700Security
      deposits
                  
                  
                  5,389,400
                  
                  
                  
                  5,498,800Prepaid
      rent
                  
                  
                  968,600
                  
                  
                  
                  1,072,900Deferred
      income taxes
                  
                  
                  9,803,700
                  
                  
                  
                  9,169,400Taxes
      payable
                  
                  
                  7,400
                  
                  
                  
                  52,300Total
      liabilities
                  
                  
                  93,713,800
                  
                  
                  
                  96,898,400Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $0.001 par value, 2,000,000 shares
                    authorized,
      no shares issued and outstanding
                  
                  
                  -
                  
                  
                  
                  -Common
      stock, $0.001 par value, 10,000,000 shares
                    authorized,
      1,606,557 shares issued and outstanding
                  
                  
                  1,600
                  
                  
                  
                  1,600Paid-in
      capital
                  
                  
                  14,780,100
                  
                  
                  
                  14,780,100Retained
      earnings
                  
                  
                  21,795,700
                  
                  
                  
                  20,557,50036,577,400
                  
                  
                  
                  35,339,200Treasury
      stock at cost, 63,300 shares
                  
                  
                  (504,100
                  )
                  
                  
                  (504,100
                  )Total
      stockholders’ equity
                  
                  
                  36,073,300
                  
                  
                  
                  34,835,100Total
      liabilities and stockholders’ equity
                  
                  $
                  129,787,100
                  
                  
                  $
                  131,733,500
 
 The
accompanying notes are an integral part of these statements.
  - 3
-
  
 AeroCentury
Corp.
 Condensed
Consolidated Statements of Operations
 Unaudited
 
 For
      the Three Months
                    Ended
      March 31,2009
                  
                  
                  2008Revenues
      and other income:Operating
      lease revenue
                  
                  $
                  6,469,200
                  
                  
                  $
                  5,893,900Maintenance
      reserves income
                  
                  
                  1,568,400
                  
                  
                  
                  1,749,500Other
      income
                  
                  
                  6,200
                  
                  
                  
                  179,5008,043,800
                  
                  
                  
                  7,822,900Expenses:Depreciation
                  
                  
                  1,907,800
                  
                  
                  
                  1,706,900Maintenance
      costs
                  
                  
                  1,505,300
                  
                  
                  
                  2,381,400Interest
                  
                  
                  1,409,700
                  
                  
                  
                  2,129,200Management
      fees
                  
                  
                  927,300
                  
                  
                  
                  883,400Professional
      fees and general and administrative
                  
                  
                  253,000
                  
                  
                  
                  278,400Insurance
                  
                  
                  96,200
                  
                  
                  
                  78,100Other
      taxes
                  
                  
                  56,700
                  
                  
                  
                  (79,800
                  )Bad
      debt expense
                  
                  
                  1,300
                  
                  
                  
                  -6,157,300
                  
                  
                  
                  7,377,600Income
      before income tax provision
                  
                  
                  1,886,500
                  
                  
                  
                  445,300Income
      tax provision
                  
                  
                  648,300
                  
                  
                  
                  149,700Net
      income
                  
                  $
                  1,238,200
                  
                  
                  $
                  295,600Earnings
      per share:Basic
                  
                  $
                  0.80
                  
                  
                  $
                  0.19Diluted
                  
                  $
                  0.80
                  
                  
                  $
                  0.18Weighted
      average shares used in earnings per share computations:Basic
                  
                  
                  1,543,257
                  
                  
                  
                  1,543,257Diluted
                  
                  
                  1,543,257
                  
                  
                  
                  1,624,017
 
 The
accompanying notes are an integral part of these statements.
 
 
 
  - 4
-
  AeroCentury
Corp.
 Condensed
Consolidated Statements of Cash Flows
 Unaudited
 
 For
      the Three Months
                    Ended
      March 31,2009
                  
                  
                  2008Net
      cash provided by operating activities
                  
                  $
                  4,140,800
                  
                  
                  $
                  4,563,200Investing
      activity -Equipment
      additions to aircraft
                  
                  
                  -
                  
                  
                  
                  (25,300
                  )Financing
      activity -Repayments
      of the Credit Facility and notes payable
                  
                  
                  (4,344,000
                  )
                  
                  
                  (1,841,900
                  )Net
      (decrease)/increase in cash and cash equivalents
                  
                  
                  (203,200
                  )
                  
                  
                  2,696,000Cash
      and cash equivalents, beginning of period
                  
                  
                  2,169,700
                  
                  
                  
                  2,843,200Cash
      and cash equivalents, end of period
                  
                  $
                  1,966,500
                  
                  
                  $
                  5,539,200
 
 During
the three months ended March 31, 2009 and 2008, the Company paid interest
totaling $1,200,800 and $1,570,400, respectively.
 
 During
the three months ended March 31, 2009, the Company paid income taxes totaling
$400.  During the three months ended March 31, 2008, the Company paid
income taxes totaling $1,300 and received federal tax refunds totaling
$210,500.
 
 The
accompanying notes are an integral part of these statements.
 
  - 5
-
  AeroCentury
Corp.
 Notes to
Condensed Consolidated Financial Statements (Unaudited)
 March 31,
2009
 
 1. Organization
and Summary of Significant Accounting Policies
 
 (a)  The
Company and Basis of Presentation
 
 AeroCentury
Corp., a Delaware corporation incorporated in 1997 (the Company, as defined
below) acquires used regional aircraft for lease to foreign and domestic
regional carriers.  Financial information for AeroCentury Corp. and
its wholly-owned subsidiaries, AeroCentury Investments V LLC (“AeroCentury V
LLC”) which was dissolved on August 25, 2008, and AeroCentury Investments VI LLC
(“AeroCentury VI LLC”) (collectively, the “Company”), is presented on a
consolidated basis.  All intercompany balances and transactions have
been eliminated in consolidation.
 
 The
condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”) for interim financial information, the instructions to Form 10-Q and
Article 10 of Regulation S-X.  Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.  In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included.  Operating
results for the three-month period ended March 31, 2009, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2009.
 
 For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company’s annual report on Form 10-K for the
year ended December 31, 2008.
 
 (b)  Use
of Estimates
 
 The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.  The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable for making
judgments that are not readily apparent from other sources.
 
 The most
significant estimates with regard to these financial statements are the residual
values of the aircraft, the useful lives of the aircraft, the estimated fair
value of financial instruments, the amount and timing of cash flow associated
with each aircraft that are used to evaluate impairment, if any, accrued
maintenance costs, accounting for income taxes, and the amounts recorded as
allowances for doubtful accounts.
 
 (c) 
Fair Value of Financial Instruments and Accounting for Derivative
Instrument
 
 The
Company’s financial instruments, other than cash, consist principally of cash
equivalents, accounts receivable, accounts payable, amounts borrowed under a
credit facility, borrowings under notes payable and a derivative
instrument.  The fair value of cash, cash equivalents, accounts
receivable and accounts payable approximates the carrying value of these
financial instruments because of their short-term nature.
 
 Borrowings
under the Company’s revolving credit facility (the “Credit Facility”) and
certain notes payable bear floating rates of interest that reset periodically to
a market benchmark rate plus a credit margin.  The Company believes
the effective rates of its various debt agreements approximate current market
rates for such indebtedness at the balance sheet date.  The Company
believes the carrying amount of its fixed rate debt approximates fair value at
the balance sheet date.  As discussed in Note 4, the fair value of the
Company’s interest rate swap derivative instrument is determined by reference to
banker quotations.
 
  - 6
-
  AeroCentury
Corp.
 Notes to
Condensed Consolidated Financial Statements (Unaudited)
 March 31,
2009
 
 1. Organization
and Summary of Significant Accounting Policies (continued)
 
 (d) 
Reclassifications
 
 Certain
of the prior period financial statement amounts have been reclassified to
conform to the current year presentation.  These reclassifications had
no impact on previously reported net income or cash flows.
 
 (e) 
Recent Accounting Pronouncements
 
 On May
14, 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) 162, “The Hierarchy of Generally
Accepted Accounting Principles,” which codified the sources of accounting
principles and the framework for selecting the principles to be used in
preparation of financial statements of non-governmental entities that are
presented in conformity with generally accepted accounting principles. 
This statement is effective sixty days following the adoption by the Securities
and Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board
amendments to AU 411, “The Meaning of Fairly Presented in Conformity With
Generally Accepted Accounting Principles,” and is not expected to have any
effect on the Company’s condensed consolidated financial
statements.
 
 On March
19, 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS 161”), which is effective for fiscal years and
interim periods beginning after November 15, 2008 and which requires enhanced
disclosure about derivatives and hedging transactions.  SFAS 161 amended
SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” and
requires that objectives for using derivative instruments be disclosed in terms
of the underlying risk and accounting designation, better conveying the purpose
underlying the derivatives’ use in terms of the risk the reporting entity is
intending to manage.  It further requires disclosure of the fair value of
derivative instruments and their gains or losses in tabular format, information
about credit risk-related contingent features providing information on the
potential effect on the reporting entity’s liquidity from using derivatives, and
cross-referencing within footnotes.  The Company adopted the provisions of
SFAS 161 effective January 1, 2009.  Adoption of SFAS 161 did not
impact the amount of gain or loss recognized or the financial position of the
Company.
 
 The
Company adopted SFAS 157, “Fair Value Measurements” (“SFAS 157”), which provides
guidance on the use of fair value measurements in generally accepted accounting
standards, on January 1, 2008, except with respect to non-financial assets and
liabilities covered by FSP 157-2, discussed below.  Information
regarding the Company’s fair value measurements is presented in Note
4.
 
 During
February 2008, two FASB Staff Positions (“FSP”) related to implementation of
SFAS 157 were issued.   FSP 157-1, “Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
under Statement 13” (“FSP 157-1”), amended SFAS 157 to exclude SFAS 13,
“Accounting for Leases” and other pronouncements that address fair value
measurements for purposes of lease classification or amendment from the
provisions of SFAS 157, except in the case of a business combination where such
measures are governed by SFAS 141, “Business Combinations.”  FSP 157-1 is
effective upon adoption of SFAS 157.  Implementation of FSP 157-1 had
no material effect on the Company’s condensed consolidated financial
statements.
 
 FSP
157-2, “Effective Date of FASB Statement No. 157,” delayed the effective date of
SFAS 157 for non-financial assets and liabilities that are not recognized or
disclosed at fair value, to fiscal years beginning after November 15, 2008 and
interim periods within such years.  The Company’s adoption of SFAS 157
with respect to such assets and liabilities on January 1, 2009, did not have a
material effect on the Company’s condensed consolidated financial
statements.
 
 
  - 7
-
  AeroCentury
Corp.
 Notes to
Condensed Consolidated Financial Statements (Unaudited)
 March 31,
2009
 
 1. Organization
and Summary of Significant Accounting Policies (continued)
 
 (e) 
Recent Accounting Pronouncements (continued)
 
 In June
2008, the FASB Emerging Issues Task Force ("EITF") reached a consensus on EITF
Issue No. 07-5, "Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entity's Own Stock" ("EITF 07-5").  EITF 07-5 provides
that an entity should use a two step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instrument's contingent exercise and settlement
provisions.  EITF 07-5 is effective for fiscal years beginning after
December 15, 2008. Adoption of EITF 07-5 did not have any effect on its
condensed consolidated financial statements.
 
 In April
2009, two new FASB staff positions became effective.  FSP FAS 107-1 and APB
28-1, “Interim Disclosures
about Fair Value of Financial Instruments” (“FSP 107-1”) and FSP FAS
157-4, “Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly” (“FSP 157-4”) are effective for reporting periods after June 15,
2009.  Early adoption is permitted as long as both are adopted
together.  FSP 107-1 requires disclosure of the fair value of financial
instruments for interim reporting periods, and FSP 157-4 provides guidance on
determination of the fair value of assets and liabilities in circumstances in
which the activity of trading has significantly declined and in identifying
transactions in such assets and liabilities that are not orderly.  FSP
107-1 requires additional disclosures, but does not affect accounting. 
Although the Company has not adopted these FSPs, it does not expect that
adoption will have a material affect on the Company’s condensed consolidated
financial statements.
 
 2. Aircraft and
Aircraft Engine Held for Lease
 
 During
the three months ended March 31, 2009, the Company did not purchase or sell any
aircraft.  At March 31, 2009, two Saab 340A aircraft, one Fokker 50
aircraft, one Saab 340-B aircraft and one turboprop engine were off
lease.  At December 31, 2008, the two Saab 340A aircraft, the Fokker
50 aircraft and the turboprop engine were off lease.  The lease for
the Saab 340-B aircraft was terminated early in the first quarter of
2009.   Both the Fokker 50 and Saab 340A aircraft are undergoing
maintenance to prepare them for re-lease.
 
 3. Maintenance
Reserves and Accrued Costs
 
 The
accompanying condensed consolidated balance sheets reflect liabilities for
maintenance reserves and accrued costs, which include refundable maintenance
payments received from lessees based on usage.  At March 31, 2009, and
December 31, 2008, the Company’s maintenance reserves and accruals consisted of
the following:
 
 March
      31,
                    2009
                  
                  
                  December
      31,
                    2008Refundable
      maintenance reserves
                  
                  $
                  6,271,100
                  
                  
                  $
                  5,746,600Accrued
      costs
                  
                  
                  2,540,600
                  
                  
                  
                  2,444,100$
                  8,811,700
                  
                  
                  $
                  8,190,700
 
 
  - 8
-
  AeroCentury
Corp.
 Notes to
Condensed Consolidated Financial Statements (Unaudited)
 March 31,
2009
 
 3.  Maintenance
Reserves and Accrued Costs (continued)
 
 Additions
to and deductions from the Company’s accrued costs during the three months ended
March 31, 2009, and 2008, for aircraft maintenance were as follows:
 
 For
      the Three Months Ended
                    March
      31,2009
                  
                  
                  2008Balance,
      beginning of period
                  
                  $
                  2,444,100
                  
                  
                  $
                  1,591,300Additions:Charged
      to expense
                  
                  
                  1,623,000
                  
                  
                  
                  2,384,900Reversals
      of previously accrued maintenance costs
                  
                  
                  (117,700
                  )
                  
                  
                  (3,500
                  )Total
      maintenance expense
                  
                  
                  1,505,300
                  
                  
                  
                  2,381,400Other
                  
                  
                  68,600
                  
                  
                  
                  70,600Total
      additions
                  
                  
                  1,573,900
                  
                  
                  
                  2,452,000Deductions:Payments
      for previously accrued maintenance costs
                  
                  
                  1,453,100
                  
                  
                  
                  766,300Other
                  
                  
                  24,300
                  
                  
                  
                  300Total
      deductions
                  
                  
                  1,477,400
                  
                  
                  
                  766,600Net
      increase in accrued maintenance costs
                  
                  
                  96,500
                  
                  
                  
                  1,685,400Balance,
      end of period
                  
                  $
                  2,540,600
                  
                  
                  $
                  3,276,700
  4. Notes Payable
and Accrued Interest
 
 At March
31, 2009, and December 31, 2008, the Company’s notes payable and accrued
interest consisted of the following:
 
 March
      31,
                    2009
                  
                  
                  December
      31,
                    2008Credit
      Facility principal
                  
                  $
                  54,500,000
                  
                  
                  $
                  58,096,000Credit
      Facility accrued interest
                  
                  
                  53,800
                  
                  
                  
                  39,500Subordinated
      Notes principal
                  
                  
                  14,000,000
                  
                  
                  
                  14,000,000Subordinated
      Notes discount
                  
                  
                  (991,600
                  )
                  
                  
                  (1,166,500
                  )Special
      purpose financing principal
                  
                  
                  -
                  
                  
                  
                  748,000Special
      purpose financing accrued interest
                  
                  
                  -
                  
                  
                  
                  700Interest
      Swap valuation
                  
                  
                  507,500
                  
                  
                  
                  645,800Interest
      Swap accrued interest
                  
                  
                  63,300
                  
                  
                  
                  47,800$
                  68,133,000
                  
                  
                  $
                  72,411,300
 
  - 9
-
  AeroCentury
Corp.
 Notes to
Condensed Consolidated Financial Statements (Unaudited)
 March 31,
2009
 
 4. Notes Payable
and Accrued Interest (continued)
 
 (a) 
Credit Facility
 
 The
current amount available under the Company’s revolving credit facility (the
“Credit Facility”) is $80 million and may be increased to a maximum of $110
million.  During the three months ended March 31, 2009, the Company
borrowed $0 and repaid $3,596,000 of the outstanding principal under the Credit
Facility.  As of March 31, 2009 and December 31, 2008, the Company was
in compliance with all covenants under the Credit Facility
agreement.  At March 31, 2009 and December 31, 2008, there was
$25,500,000 and $21,904,000, respectively, in borrowing capacity
remaining.  The weighted average interest rate on the Credit Facility
at March 31, 2009 and December 31, 2008 was 3.31% and 3.42%,
respectively.
 
 (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, reducing the volatility of
cash flow associated with its debt obligations.
 
 At March
31, 2009 and December 31, 2008, the Company recorded the fair value of the Swap
of $507,500 and $645,800, respectively, as a liability on its condensed
consolidated balance sheet as a component of notes payable and accrued interest.
The Company recorded a gain on the Swap of $138,300 for the three months ended
March 31, 2009 and a loss of $470,600 for the three months ended March 31, 2008,
respectively, as a component of interest expense.  The Company also
recognized additional interest expense on the net settlement of the Swap of
$179,400 and $14,300 in the three months ended March 31, 2009 and 2008,
respectively, as a component of interest expense.
 
 SFAS No.
157 discusses 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). The statement 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
Company’s interest rate swap agreement effectively converts $20 million of the
Company’s short-term variable rate debt to a fixed rate.  Under this
agreement, the Company pays a fixed rate and receives a variable rate of
LIBOR.  The fair value of this interest rate derivative is based on
quoted prices for similar instruments from a commercial bank and, therefore, the
interest rate derivative is considered a Level 2 input.
 
 (c) 
Senior unsecured subordinated debt
 
 As of
March 31, 2009 and December 31, 2008, the Company was in compliance with all
covenants under the securities purchase agreement that governs its subordinated
debt (the “Subordinated Notes”).
 
 
 - 10
-
 AeroCentury
Corp.
 Notes to
Condensed Consolidated Financial Statements (Unaudited)
 March 31,
2009
 
 4. Notes Payable and
Accrued Interest (continued)
 
 (d) 
Special purpose financings
 
 In March
2009, the Company repaid the outstanding principal of $646,800 owed by
AeroCentury VI LLC under its special purpose financing and paid a prepayment
penalty of $1,300.  At the same time, the Company transferred
ownership of the aircraft that served as collateral for the financing from
AeroCentury VI LLC to AeroCentury Corp., whereupon the aircraft became eligible
as collateral under the Credit Facility.
 
 5. Computation
of Earnings Per Share
 
 Basic and
diluted earnings per share are calculated as follows:
 
 For
      the Three Months Ended
                      March
      31,2009
                    
                    
                    2008Net
      income
                    
                    $
                    1,238,200
                    
                    
                    $
                    295,600Weighted
      average shares outstanding for the period
                    
                    
                    1,543,257
                    
                    
                    
                    1,543,257Dilutive
      effect of warrants
                    
                    
                    -
                    
                    
                    
                    80,760Weighted
      average diluted shares outstanding
                    
                    
                    1,543,257
                    
                    
                    
                    1,624,017Basic
      earnings per share
                    
                    $
                    0.80
                    
                    
                    $
                    0.19Diluted
      earnings per share
                    
                    $
                    0.80
                    
                    
                    $
                    0.18
 
 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.  Since the average market price of the Company’s common stock
was less than the exercise price of the Warrants, the warrants would be
anti-dilutive for the 2009 period, so conversion is assumed not to occur in the
2009 earnings per share calculations.
 
 6. Related Party
Transactions
 
 The
Company’s portfolio of leased aircraft assets is managed and administered under
the terms of a management agreement with JetFleet Management Corp. (“JMC”),
which is an integrated aircraft management, marketing and financing business and
a subsidiary of JetFleet Holding Corp. ("JHC").   Certain
officers of the Company are also officers of JHC and JMC and hold significant
ownership positions in both JHC and the Company. The Company recorded management
fees of $927,300 and $883,400 during the three months ended March 31, 2009, and
2008, respectively. The Company paid acquisition fees totaling $0 to JMC during
the same periods.  No remarketing fees were paid to JMC during the
three months ended March 31, 2009, or 2008.
 
  - 11
-
  AeroCentury
Corp.
 Notes to
Condensed Consolidated Financial Statements (Unaudited)
 March 31,
2009
 
 7. Subsequent
Events
 
 Three of
the Company’s Fokker 100 aircraft are leased by a regional airline based in
Mexico.  On April 30, 2009, the Company received a request from the
lessee to defer three months of future payments as a result of a decrease in
passenger volume due to the H1N1 virus.  The Company has agreed to
discuss a possible deferral with the lessee at a meeting in late
May.
 
 In April
2009, the lease for one of the Company’s DHC-8-100 aircraft, which was to expire
in May, was extended for 36 months.
 
 In May
2009, the Company and the lessee of one of the Company’s Fokker 50 aircraft with
a lease expiring in mid May agreed in principle to a two-year re-lease at the
same rent, with an option for a one-year extension.
 
 In May
2009, the Company received notice from the Internal Revenue Service that the
Company’s claim for a tax refund of approximately $1,600,000 has been
accepted.
 
  - 12
-
  Item
2.  Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
 
 The
following discussion should be read in conjunction with the Company’s Form 10-K
for the year ended December 31, 2008, and the unaudited financial statements and
the related notes that appear elsewhere in this report.
 
 Results
of Operations for the Three Months Ended March 31, 2009 and 2008
  (a) 
Revenues
 
 Operating
lease revenue was $575,300 greater in the three months ended March 31, 2009,
compared to the same period in 2008, primarily because of a $793,000 increase in
operating lease revenue from aircraft purchased during 2008, re-leases of two of
the Company’s aircraft that were off lease for part of the first quarter of
2008, and re-leases of several of the Company’s aircraft during 2008 at
increased rental rates. The aggregate effect of these increases was partially
offset by a decrease in revenue related to aircraft that were off lease for all
or part of 2009 in the amount of $221,000.
 
 Maintenance
reserves revenue, comprised of non-refundable reserves that are earned based on
lessee aircraft usage, was $1,568,400 and $1,749,500 in the three months ended
March 31, 2009, and 2008, respectively.  Such income was $181,100
lower in the 2009 period compared to 2008 primarily as a result of lower average
usage of aircraft by some the Company’s lessees and because there were more
aircraft off lease in the 2009 period compared to the 2008 period.
 
 Other
income was $173,300 lower in the three months ended March 31, 2009, compared to
the same period in 2008, principally because the 2008 period included $150,000
of compensation paid by a lessee for canceling a potential re-lease
transaction.
 
 (b) 
Expense items
 
 Interest
expense was $719,500 lower in the three months ended March 31, 2009, compared to
the three moths ended March 31, 2008, primarily because of the net effect of the
following:
 
 • a
      gain in fair value of $138,300 related to the interest rate swap in the
      three months ended March 31, 2009, compared to a $470,600 loss in the same
      period of 2008 (which were reflected as a reduction and an increase,
      respectively, in interest expense for the two
  periods);
 
 • a
      decrease of $563,600 in Credit Facility interest as a result of lower
      average interest rates;
 
 • a
      decrease of $28,100 in Credit Facility and Subordinated Notes unused
      commitment fees as a result of lower average unused
    balances;
 
 •
      an increase of $118,500 related to higher Credit Facility and Subordinated
      Notes balances;
 
 •
      an increase of $197,500 in Subordinated Notes fee amortization as a result
      of the issuance of additional Subordinated Notes in July 2008;
      and
 
 •
      an increase of $165,100 in net settlement interest related to the interest
      rate swap.
 
 Depreciation
was $200,900 greater in the three months ended March 31, 2009, compared to the
same period in 2008, primarily because of purchases of aircraft during
2008.
 
 Management
fees, which are calculated on the net book value of the aircraft, were $43,900
greater in the three months ended March 31, 2009, compared to the same period in
2008 because of higher net book values as a result of aircraft acquisitions in
2008.  The effects of this increase were partially offset by the
effect of depreciation.
 
 The
Company’s maintenance expense is dependent on the aggregate amount of
maintenance incurred by lessees related to non-refundable reserves and expenses
incurred in connection with off-lease aircraft, and, therefore, can vary greatly
between periods.  In the three months ended March 31, 2009, the
Company recognized $876,100 less in maintenance expense than in the same period
of 2008, due to the net effect of the following:
 
 • a decrease of $1,060,800 in total
lessee work incurred; and
 
 • an increase of $184,700 in expense
related to off-lease aircraft.
 
 During
the first three months of 2009 and 2008, the Company incurred $783,100 and
$938,600, respectively, of maintenance expense was funded by non-refundable
maintenance reserves, which were recorded as income when accrued.
 
 The
Company records non-income based sales, use, value-added and franchise taxes as
other tax expense.  Such expenses were $136,500 higher in the three
months ended March 31, 2009, compared to the same period in
2008.   The increase was partially due to an increase in Delaware
state franchise taxes of $55,400, the effect of which was partially offset by a
$32,600 decrease in value-added taxes related to an aircraft leased in
Australia.  In 2008, upon completion of further analysis and
confirmation from the Australian tax authority, the Company reduced the accruals
for such amounts in the three months ended March 31, 2008 by
$113,700.
 
 The
Company's insurance expense consists primarily of product liability insurance
and insurance for off-lease aircraft and aircraft engines which varies depending
on the type and length of time each off-lease asset is insured, as well as
directors and officers insurance.  Aircraft insurance expense was
$16,500 greater in the first three months of 2009 compared to the same period in
2008 as a result of differences in the type of and length of time the insured
assets were off lease.   Directors and officers insurance was
$1,500 higher in the 2009 period as a result of higher premiums.
 
 The
Company’s effective tax rates for the three months ended March 31, 2009 and 2008
were approximately 34% for both periods.
 
 - 13
-
 Liquidity
and Capital Resources
 
 The
Company is currently financing its assets primarily through debt borrowings and
excess cash flows.
 
 (a) 
Credit Facility
 
 The
current amount available under the Company’s revolving credit facility (the
“Credit Facility”) is $80 million and may be increased to a maximum of $110
million.  During the three months ended March 31, 2009, the Company
borrowed $0 and repaid $3,596,000 of the outstanding principal under the Credit
Facility.  The balance of the principal amount owed under the Credit
Facility at March 31, 2009, was $54,500,000 and interest of $53,800 was
accrued.
 
 The
Company was in compliance at March 31, 2009, and currently is in compliance with
all covenants of the Credit Facility.  Based on its current
projections, the Company believes it will continue to be in compliance with all
covenants of its Credit Facility, but there can be no assurance of such
compliance in the future.  See "Factors That May Affect Future
Results –  'Risks of Debt Financing’ and 'Credit Facility
Obligations,’”below.
 
 The
Company's interest expense in connection with the Credit Facility generally
increases and decreases with prevailing interest rates, although the Company did
enter into an interest rate swap in December 2007 that expires at the end of
2009, as discussed in (b) below. Because aircraft
owners seeking financing generally can obtain financing through either leasing
transactions or traditional secured debt financings, prevailing interest rates
are a significant factor in determining market lease rates, and market lease
rates generally move up or down with prevailing interest rates, assuming supply
and demand of the desired equipment remain constant.  However, because
lease rates for the Company’s assets typically are fixed under existing leases,
the Company normally does not experience any positive or negative impact in
revenue from changes in market lease rates due to interest rate changes until
existing leases have terminated and new lease rates are set as aircraft are
re-leased.
 
  - 14
-
  (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 Swap is designed to limit exposure to
interest rate increases on $20 million of the Company’s Credit Facility debt by
fixing the net interest payable over the term of the Swap.
 
 The
Company recognized net settlement expense related to the Swap of $179,400 for
the three months ended March 31, 2009, as a component of interest
expense.  Short-term interest rates are currently below the fixed rate
of the Swap. If short-term interest rates remain below the fixed rate of the
Swap, the Company will incur additional interest expense as a
result.
 
 At March
31, 2009, the Company also recognized a $507,500 liability for the Swap on its
condensed consolidated balance sheet as a component of notes payable and accrued
interest, which reflects market expectations concerning the “spread” between
fixed and variable interest rates over the remaining term of the
Swap.  The Company also recognized a gain of $138,300 for the three
months ended March 31, 2009 as a component of interest expense for the change in
fair value of the swap contract.  Market expectations of increasing
interest rates will tend to decrease the fair value of the swap, and
expectations of decreasing interest rates will tend to increase the fair value
of the swap.  Over the remaining term of the Swap, so long as there is
no default by either counterparty and the Company does not elect to terminate it
early, the change in fair value of the Swap will be recognized as a reduction in
interest expense.
 
 (c) 
Senior unsecured subordinated debt
 
 As of
March 31, 2009, the carrying amount of the Subordinated Notes was $13,008,400
(outstanding principal amount of $14,000,000 less unamortized debt discount of
$991,600) and accrued interest payable was $0.  The Company is
currently, and at March 31, 2009, was, in compliance with all covenants under
the Subordinated Notes Agreement.  Based on its current projections,
the Company believes it will continue to be in compliance with all covenants of
its Subordinated Notes Agreement, but there can be no assurance of such
compliance in the future.  See "Factors That May Affect Future
Results –  'Risks of Debt Financing’ and 'Credit Facility
Obligations,’”below.
 
 (d) 
Special purpose financings
 
 In March
2009, the Company repaid the outstanding principal of $646,800 owed by
AeroCentury VI LLC under its special purpose financing and paid a prepayment
penalty of $1,300. At the same time, the Company transferred ownership of the
aircraft that served as collateral for the financing from AeroCentury VI LLC to
AeroCentury Corp., whereupon the aircraft became eligible as collateral under
the Credit Facility.
 
 (e) 
Cash flow
 
 The
Company's primary sources of cash are aircraft lease rentals and maintenance
reserves billed to lessees based on aircraft usage.  Maintenance
reserves collected by the Company are not required by the leases to be
segregated and are included in cash and cash equivalents on the Company’s
condensed consolidated balance sheet.
 
 The
Company is currently not receiving lease revenue for its off-lease assets,
comprised of one of the Company’s Fokker 50 aircraft, its two Saab 340A
aircraft, a Saab 340B aircraft and one turboprop engine.  The Company
has and will continue to incur significant maintenance expense in order to
prepare these aircraft for re-lease.  Eight of the Company’s leases
expire in 2009.  The Company believes that it will be successful in
extending the leases for a majority of the aircraft, given preliminary
indications from current lessees.
 
 The
Company’s primary uses of cash are for financing interest payments, maintenance
expense, management fees, professional fees, insurance and, beginning in April
2009, principal payments on the Subordinated Notes pursuant to an amortization
schedule.The
amount and timing of the Company’s maintenance expenditures are dependent on the
aggregate amount of the maintenance claims submitted by lessees for
reimbursement from reserves and expenses incurred in connection with off-lease
aircraft and preparation of such aircraft for re-lease.  The amount of
interest paid by the Company is dependent on the outstanding balance of its
Credit Facility and Subordinated Notes debt.  In addition, the amount
of interest expenditures related to the Company’s Credit Facility is dependent
on changes in prevailing interest rates.
 
 Management
believes that the Company will have adequate cash flow to meet its ongoing
operational needs, including required repayments under its Credit Facility and
Subordinated Notes financing, based upon its estimates of future revenues and
expenditures. The Company’s expectations concerning such cash flows are based on
existing lease terms and rents, as well as numerous estimates, including (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 rate increases and decreases, and (v) the
cost and anticipated timing of maintenance to be performed.
 
 While 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 external factors outside the
Company’s control that could have an impact on the accuracy of cash flow
assumptions are (i) an increase in interest rates that negatively affects the
Company’s profitability and causes the Company to violate covenants of its
Credit Facility or its Subordinated Notes, which may in turn require repayment
of some or all of the amounts outstanding under the Credit Facility or the
Subordinated Notes, (ii) lessee non-performance or non-compliance with lease
obligations which may affect Credit Facility collateral limitations and
Subordinated Notes covenants, as well as revenue and expenses, (iii) inability
to locate and acquire a sufficient volume of additional aircraft assets at
prices that will produce acceptable net returns, (iv) lessee performance of
maintenance earlier than anticipated and (v) failure of the Credit Facility
participants to fully fund their respective commitments.
 
 (i)  Operating
activities
 
 Although
the Company’s net income was $942,600 higher in the three months ended March 31,
2009 compared to the same period in 2008, the Company’s cash flow from
operations decreased by $422,400 in the 2009 period compared to
2008.  This was primarily due to maintenance expense accrued in the
first quarter of 2008, but not paid until the second
quarter.   The change in cash flow from period to period is a
result of changes in several cash flow items during the period, including
principally the following:
 
 - 15
-
 Lease rents, maintenance
reserves and security deposits
 
 Payments
received from lessees for rent were $223,200 greater in the three months ended
March 31, 2009, compared to the same period in 2008, due primarily to rent
payments for aircraft acquired during 2008, and re-leases during 2008 at
increased rental rates for several of the Company’s aircraft. The aggregate
effect of these increases was partially offset by a decrease in revenue related
to aircraft that were off lease for all or part of the 2009 period.
 
 Payments
received for refundable and non-refundable maintenance reserves are based on
usage of the Company’s aircraft.  Such payments were $363,800 less in
the three months ended March 31, 2009, than in the three months ended March 31,
2008 as a result of lower average usage of aircraft by some the Company’s
lessees.
 
 The
Company did not receive or return any security deposits during the first three
months of 2009.  During the first three months of 2008, the Company
returned a $308,000 security deposit to a lessee upon return of an aircraft at
lease end.
 
 Payments for
interest
 
 Payments
for interest decreased by $369,600 in the first three months of 2009 compared to
the same period of 2008.  The Company paid $669,600 less interest
related to the Company’s Credit Facility and special purpose financing debt in
the 2009 period compared to the same period in 2008 as a result of lower average
index rates upon which the Credit Facility and special purpose financing
interest rates were based. The Company also paid $2,000 more in commitment fees
related to the unused portion of its Credit Facility in the 2009
period.  The Company paid $23,000 less in commitment fees related to
its Subordinated Notes debt in the 2009 period because no such fees are payable
after the Company’s second Subordinated Notes draw in July 2008. The aggregate
effect of these decreases was partially offset by an increase of $155,600 in
interest expense related to the Company’s Subordinated Notes in the three months
ended March 31, 2009, compared to the same period in 2008 as a result of a
higher principal balance.  During the first three months of 2009, the
Company also recorded $165,400 more of net settlement interest related to the
Swap than during the first three months of 2008.
 
 Payments for
maintenance
 
 Payments
for maintenance were $897,400 greater in the first three months of 2009 compared
to the first three months of 2008, as a result of higher maintenance
expenditures for off-lease aircraft of $1,087,400 offset partially by $191,000
of lower payments for lessee maintenance claims.  The amount of
payments for maintenance in future periods will be dependent on the amount and
timing of maintenance paid as reimbursement to lessees from maintenance reserves
and maintenance paid for off-lease aircraft, both of which will largely be
influenced by utilization of and maintenance cycles on aircraft.
 
 Income
taxes
 
 The
Company paid taxes of $400 and $1,300 in the three months ended March 31, 2009,
and 2008, respectively. During the three months ended March 31, 2008, the
Company received $210,500 of federal tax refunds.
 
 (ii)  Investing
activities
 
 During
the first three months of 2009 and 2008, the Company used cash of $0 and $25,300
respectively, for capital equipment installed on aircraft.
 
 (iii)  Financing
activities
 
 The
Company made no borrowings during the first three months of 2009 or
2008.  The Company repaid $4,344,000 and $1,841,900 of its outstanding
debt in the three months ended 2009 and 2008,
respectively.   Such payments were funded by excess cash
flow.
 
 - 16
-
 Outlook
 
 Because
the global economy is in a significant downturn, the Company anticipates that
many air carriers will be forced to reduce capacity, which may negatively impact
their needs for additional aircraft, which in turn may mean fewer leasing or
sales opportunities for the Company. To date, except for the lease termination
and payment deferrals discussed below, the Company has not experienced
significant changes in any of its customers’ payment timeliness but has seen
indications of a weakening in the financial condition and operating results of
some customers.
 
 The
current tightening of the credit markets may create increased demand for
sale-leasebacks from carriers as a way to monetize owned assets, or from
carriers that are proceeding with fleet expansions but are unable to obtain
asset-based acquisition loans.  The Company therefore anticipates that
there will be opportunities for acquisitions during 2009 albeit fewer than in
previous years, and that the available borrowing capacity under the Credit
Facility will be sufficient to fund targeted acquisitions projected through
2009.
 
 The
Company is currently seeking to re-lease its two Saab 340A aircraft, one Saab
340B aircraft, and one Fokker 50 aircraft that are off lease.
 
 One of
the Saab 340A aircraft has already had significant maintenance performed on it
to ready it for remarketing.  Maintenance on the second Saab 340A
aircraft, estimated to cost approximately $367,000, will not commence until a
new lessee is identified.
 
 The
Fokker 50 aircraft was returned early by its lessee, which ceased operations due
to insolvency in late 2008.  Maintenance reserves of approximately
$1.1 million previously collected from the lessee and previously recorded as
income are being used to partially fund the work necessary to prepare the
aircraft for re-lease. The repair work commenced in late 2008, and the Company
recorded approximately $1.2 million of expense through December 31, 2008 and
approximately $200,000 during the first quarter of 2009.  Expense for
remaining work will be recognized when performed, which the Company expects to
occur before September 30, 2009.  Total maintenance expense to prepare
this aircraft for re-lease is estimated to be $1.8 million.The Company is currently
negotiating a term sheet for the off-lease Fokker 50 aircraft with a current
lessee of two other of the Company’s Fokker 50 aircraft.
 
 Additionally,
one of the Company’s Saab 340B aircraft is undergoing maintenance in preparation
for re-leasing to another lessee.  In January 2009, the Company
terminated its lease for the aircraft with an Australian lessee due to payment
and other defaults under the lease.  The expiration date of the lease
for this aircraft had been in March 2009.  The lessee has ceased
operations and its business is being wound up under local insolvency
laws.  The Company does not anticipate a significant monetary recovery
on any claims against the lessee given the number of secured claims on the
lessee’s few remaining assets.  The Company estimates that the
aircraft will require approximately $1.3 million of maintenance to prepare it
for re-lease.  Through March 31, 2009, the Company recorded
approximately $200,000 of expense to prepare the aircraft for
re-lease.  The Company believes that it will be able to complete the
remaining required maintenance and find a new customer for the aircraft during
2009.
 
 To date
in 2009, the Company has extended the leases for three of its aircraft and is
negotiating the extension of a fourth lease.  Seven of the Company’s
other aircraft leases expire in 2009, and the Company believes
that it will be successful in extending the leases for a majority of these
aircraft, given preliminary indications from current lessees. If the aircraft
that are currently off lease remain off lease for an extended period of time and
the Company is not successful in extending the leases for a majority of the
eight aircraft with leases expiring in 2009, the Company may not be able to meet
its operational needs or remain in compliance with the terms of its Credit
Facility and Subordinated Notes.
 
 The
Company continually monitors the financial condition of its lessees to avoid
unanticipated creditworthiness issues, and works where necessary with lessees to
ensure continued compliance with obligations under their respective
leases.  Currently, the Company is closely monitoring the performance
of three lessees with a total of seven aircraft under lease.  The
Company continues to work closely with these lessees to ensure compliance with
their current obligations. In February 2009, the Company and the lessee of two
of the Company’s aircraft agreed to defer a portion of the rent and maintenance
reserves due from the lessee.  The deferral required payment in four,
equal monthly installments beginning in March 2009; the Company has received the
first two payments.  Another lessee
has indicated to the Company that due to a significant drop in revenue as a
result of the H1N1 virus crisis, the lessee may seek a three-month rent deferral
from the Company.
 
 If any of
the Company's current lessees are unable to meet their lease payment
obligations, the Company's future operating results could be materially
impacted.  Any weakening in the aircraft industry may also affect the
performance of lessees that currently appear to the Company to be
creditworthy.  See "Factors that May Affect Future
Results – General Economic Conditions," below.
 
 The
Company accrues non-refundable maintenance reserves billed to lessees as income
based on aircraft usage and records maintenance expenses as
incurred.  The Company accrues estimated maintenance costs based on
information provided by its lessees and, accordingly, estimates of such expenses
depend on timely and accurate reporting by such parties.  Because
revenue accrues based upon utilization of aircraft, but expense depends upon
costs accrued for actual maintenance events, which may be somewhat sporadic, the
Company expects that its reported net income will be subject to significant
fluctuations between different reporting periods.  Due to the
acquisition of Fokker 100 jet engine powered aircraft during 2007 and 2008, the
magnitude of these fluctuations may be greater due to the higher maintenance
reserve rates and related maintenance expense for jet engines as compared to
turboprop engines.
 
 - 17
-
 Factors
that May Affect Future Results
 
 Availability of
Financing.The Company’s continued growth will depend on its
ability to obtain capital, either through debt or equity
financings.  The financial markets have experienced certain setbacks
related in many cases to certain financial institutions’ investments in
mortgage-backed securities.  As a result, commercial lending
origination has dramatically decreased, and asset-based debt financing is now
more difficult to obtain.  The Company believes that the current
banking crisis will not have an immediate effect on the Company.  The
Company believes the lenders in its Credit Facility will continue to honor their
commitment to provide loans as committed in the Credit Facility agreements and
that the unused capacity under the Credit Facility will remain available and
provide sufficient capital to fund acquisitions through the end of
2009.  The Company, however, will eventually need to seek additional
capital once its Credit Facility is fully drawn. The Company is currently
seeking additional lenders for participation in its Credit Facility, and
investigating other sources of debt financing. There is no assurance that the
Company will succeed in finding such additional capital, and if such financing
is found, it may not be on terms as favorable as its current debt
financings.  The current term of the Credit Facility expires in March
2010.  While the Company anticipates that, at that time, the current
lenders participating in the facility will remain as participants in the amount
for which they are currently committed, there is no assurance that such will
occur.  If one or more participants does not continue, then the Company
will either need to pay off such participant by obtaining additional commitment
amounts from the remaining lenders, finding new replacement lenders, or selling
assets, or doing a combination of any of the foregoing.
 
 Risks of Debt
Financing.  The Company’s use of debt as the primary form of
acquisition financing subjects the Company to increased risks of
leveraging.  Indebtedness owed under the Credit Facility is secured by
the Company’s existing assets as well as the specific assets acquired with each
financing.  In addition to payment obligations, the Credit Facility
also requires the Company to comply with certain financial covenants, including
a requirement of positive earnings, interest coverage and net worth
ratios.  Any default under the Credit Facility, if not waived by the
lenders, could result in foreclosure upon any or all of the existing assets of
the Company securing the loan.  Any such default could also result in
a cross default under the Subordinated Notes.
 
 The
addition of the Subordinated Notes, the second tranche of which closed in July
2008, while providing additional resources for acquisitions of revenue
generating assets, also had the effect of increasing the Company’s overall cost
of capital, as they bear an effective overall interest rate that is currently
higher than the rate payable under the Credit Facility.  The two
tranches of Subordinated Notes financing started bearing interest immediately
upon their issuance and, therefore, timely acquisition of income producing
assets has become more critical to the Company’s financial results. The
agreement under which the Subordinated Notes were issued also contains financial
and other covenants which, if violated, could cause a default.
 
 General Economic Conditions and
Lowered Demand for Travel.The Company’s business is dependent upon
general economic conditions and the strength of the travel and transportation
industry.  The industry is in a period of financial difficulty and
contraction due to the global economic downturn.  Continuing
unavailability of additional debt financing relied on by many regional carriers
caused by the current credit crisis and a protracted economic downturn, which
will certainly affect carriers’ revenue, may increase the likelihood of
failures.  Events such as the spread of the H1N1 flu epidemic to other
parts of the globe or a terrorist attack against aviation which could cause
lower passenger revenue due to lowered demand or disruptions in scheduled
flights may also increase the possibility of an economic failure of one or more
of the Company’s lessees.  If lessees experience financial
difficulties and are unable to meet lease obligations, this could, in turn,
affect the Company’s financial performance.
 
 Credit Facility Obligations.
The Company is obligated to make repayments of principal under the Credit
Facility in order to maintain certain debt ratios with respect to its assets in
the borrowing base.  Assets that come off lease and remain off-lease
for a period of time, as well as assets with lease payments more than 30 days
past due, are excluded from the borrowing base.  The Company believes
it will have sufficient cash funds to make any payment that arises due to
borrowing base limitations caused by assets scheduled to come off lease in the
near term.   The Company’s belief is based on certain assumptions
regarding renewal of existing leases, interest rates, profitability, lessee
defaults or bankruptcies, and certain other matters that the Company deems
reasonable in light of its experience in the industry. There can be no assurance
that the Company’s assumptions will prove to be correct.  If the
assumptions are incorrect (for example, if an asset in the collateral base
unexpectedly goes off lease for an extended period of time) and the Company has
not obtained an applicable waiver or amendment of applicable covenants from its
lenders to mitigate the situation, the Company may have to sell a significant
portion of its portfolio in order to avoid a default under the Credit Facility
agreement.
 
 During
periods of economic contraction, carriers generally reduce capacity in response
to lower passenger loads, and as a result, there is a reduced demand for
aircraft and a corresponding decrease in market lease rental rates and aircraft
values.  This reduced market value for aircraft could affect the
Company’s results if the market value of an asset or assets in the Company’s
aircraft portfolio falls below carrying value, and the Company determines that a
write-down of the value on the Company’s balance sheet is appropriate.
Furthermore, as older leases expire and are replaced by lease renewals or
re-leases at decreasing lease rates, the lease revenue from the Company’s
existing portfolio is likely to decline, with the magnitude of the decline
dependent on the length of the downturn and the depth of the decline in market
rents.
 
 Economic
downturns can affect specific regions of the world exclusively.  As
the Company’s portfolio is not entirely globally diversified, a localized
downturn in one of the key regions in which the Company leases aircraft could
have a significant adverse impact on the Company.
 
 - 18
-
 Investment in New Aircraft
Types.  The Company has traditionally invested in a limited
number of types of turboprop aircraft and engines. While the Company intends to
continue to focus solely on regional aircraft and engines, beginning in 2007,
the Company has acquired several Fokker 100 regional jet aircraft, and may
continue to seek acquisition opportunities for new types and models of regional
jet and turboprop aircraft and engines used in the Company's targeted customer
base of regional air carriers.  Acquisition of other aircraft types
and engines not previously acquired by the Company entails greater ownership
risk due to the Company's lack of experience managing those aircraft and engine
types. The Company believes, however, that the overall industry experience of
JMC’s personnel and its technical resources should permit the Company to
effectively manage such new aircraft types and engines.  Further, the
broadening of the asset types in the aircraft portfolio may have a benefit of
diversifying the Company's portfolio (see "Factors That May Affect Future
Results – Concentration of Lessees and Aircraft Type,”
below).
 
 Warrant
Issuance.  As part of the Subordinated Notes financing, as
revised upon the second and final closing in July 2008, the holders of
Subordinated Notes hold warrants to purchase up to 81,224 shares of the
Company’s common stock, which represents 5% of the post-exercise fully diluted
capitalization of the Company as of the initial closing of the Subordinated
Notes financing.  The exercise price under the warrants is $8.75 per
share.  If the warrants to purchase shares are exercised at a time
when the exercise price is less than the fair market value of the Company’s
common stock, there would be dilution to the existing holders of common
stock.  This dilution of the Company’s common stock could depress its
trading price.
 
 Concentration of Lessees and
Aircraft Type.  Currently, the Company’s five largest customers
are located in Mexico, Antigua, Norway, Netherlands Antilles and Germany; they
currently account for approximately 16%, 14%, 10%, 10% and 10%, 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.
 
 Currently,
the Company owns 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 22%, 26% and 34%, respectively, of net book value. 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.  As a result, the Company’s inability to
collect rent under a lease or to repossess equipment in the event of a lessee
default could have a material adverse effect on the Company’s
revenue.  Most of the Company’s lessees are foreign and not subject to
U.S. bankruptcy laws, although there may be debtor protection similar to U.S.
bankruptcy laws available in some jurisdictions.  If a lessee that is
a certified U.S. airline is in default under the lease and seeks protection
under Chapter 11 of the United States Bankruptcy Code, Section 1110 of the
Bankruptcy Code would automatically prevent the Company from exercising any
remedies for a period of 60 days.  After the 60-day period has passed,
the lessee must agree to perform the obligations and cure any defaults, or the
Company will have the right to repossess the equipment.  This
procedure under the Bankruptcy Code has been subject to significant litigation,
however, and it is possible that the Company’s enforcement rights may be further
adversely affected by a declaration of bankruptcy by a defaulting
lessee.
 
 Leasing Risks.  The
Company’s successful negotiation of lease extensions, re-leases and sales may be
critical to its ability to achieve its financial objectives, and involves a
number of risks.  Demand for lease or purchase of the assets depends
on the economic condition of the airline industry, which is, in turn, sensitive
to general economic conditions.  The ability to re-lease equipment at
acceptable rates may depend on the demand and market values at the time of
remarketing.  The Company acquires used aircraft
equipment.  The market for used aircraft equipment is 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.
 
 - 19
-
 Risks Related to Regional Air
Carriers.Because the Company’s customer base is regional air
carriers and the Company continues to focus on this market, it is subject to
additional risks.  Some of the lessees in the regional air carrier
market are companies that are start-up, low-capital, and/or low-margin
operations.  Often, the success of such carriers is dependent upon
contractual arrangements with major trunk carriers or franchises from
governmental agencies that provide subsidies for operating essential air routes,
both of which may be subject to termination or cancellation with short notice
periods.  Because of this exposure, the Company typically is able to
obtain generally higher lease rates from these types of lessees.  In
the event of a business failure or bankruptcy of the lessee, the Company can
generally regain possession of its aircraft, but the aircraft could be in
substantially worse condition than would be the case if the aircraft were
returned in accordance with the lease provisions at lease
expiration.
 
 The
Company evaluates the credit risk of each lessee carefully, and attempts to
obtain a third party guaranty, letters of credit or other credit enhancements,
if it deems them necessary in addition to customary security
deposits.  There is no assurance, however, that such enhancements will
be available or that, if obtained, they will fully protect the Company from
losses resulting from a lessee default or bankruptcy.  Also, most of
the current and expected market growth is outside of the United States, where
collection and enforcement are often more difficult and complicated than in the
United States. If any of the Company's current or future lessees are unable to
meet their lease obligations, the Company's future results could be materially
impacted.
 
 Interest Rate
Risk.  The Company’s current Credit Facility carries a floating
interest rate based upon short-term interest rate indices. Lease rates
typically, but not always, move over time with interest rates, but market demand
and numerous other factors for the asset also affect lease rates. Because the
Company’s typical lease rates are fixed at the origination of leases, interest
rate changes during the term of a lease have no effect on existing lease
payments.  Therefore, if interest rates rise significantly, and there
is relatively little lease origination by the Company following such rate
increases, the Company could experience lower net income.  Further,
even if significant lease origination occurs following such rate increases,
other contemporaneous aircraft market forces may result in lower or flat rental
rates, and the Company could also experience lower net income.
 
 In
December 2007, the Company entered into a two-year interest rate swap with a
notional amount of $20 million, under which it committed to make or receive a
net settlement for the difference in interest receivable computed monthly on the
basis of 30-day LIBOR and interest payable monthly on the basis of a fixed rate
of 4.04% per annum. The Swap is designed to limit exposure to interest rate
increases on $20 million of the Company’s Credit Facility debt by fixing the net
interest payable over the term of the Swap.  Nonetheless, if an
interest rate increase were great enough, the Company might not be able to
generate sufficient lease revenue to meet its interest payments and obligations
on the Credit Facility balance that is not subject to the Swap and to comply
with the other covenants of its Credit Facility.  If the one-month
LIBOR rate applicable for an interest period is below the fixed swap rate set in
the Swap contract, as has been the case in recent months, the Company will be
obligated to pay the swap counterparty the difference between the fixed swap
rate of 4.04% and that one-month LIBOR rate, resulting in a negative impact on
the Company’s results.  As of May 13, 2009, the one-month LIBOR rate
was 0.375%.
 
 - 20
-
 International
Risks.  The Company has focused on leases in overseas
markets.  Leases with foreign lessees, however, may present different
risks than those with domestic lessees.
 
 Foreign
laws, regulations and judicial procedures may be more or less protective of
lessor rights than those which apply in the United States.  The
Company could experience collection or repossession problems related to the
enforcement of its lease agreements under foreign local laws and remedies in
foreign jurisdictions. The protections potentially offered by Section 1110 of
the Bankruptcy Code do not apply to non-U.S. carriers, and applicable local law
may not offer similar protections.  Certain countries do not have a
central registration or recording system with which to locally establish the
Company’s interest in equipment and related leases.  This could make
it more difficult for the Company to recover an aircraft in the event of a
default by a foreign lessee.
 
 A lease
with a foreign lessee is subject to risks related to the economy of the country
or region in which such lessee is located, which may be weaker than the U.S.
economy.  A foreign economic downturn may impact a foreign lessee’s
ability to make lease payments, even though the U.S. and other economies remain
stable.
 
 In
addition, foreign lessees are subject to risks related to currency conversion
fluctuations.  Although the Company’s current leases are all payable
in U.S. dollars, the Company may agree in the future to leases that permit
payment in foreign currency, which would subject such lease revenue to monetary
risk due to currency fluctuations.  In addition, if the Company
undertakes certain obligations under a lease to contribute to a repair or
improvement and if the work is performed in a foreign jurisdiction and paid for
in foreign currency, currency fluctuations causing a weaker dollar between the
time such agreement is made and the time payment for the work is made may result
in an unanticipated increase in dollar 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 lease payments,
increasing the risk of default of that lessee, particularly if its revenue is
primarily derived in the local currency.
 
 Finally,
ownership of a leased asset operating in a foreign country and/or by a foreign
carrier may subject the Company to additional tax liabilities that are not
present with domestically operated aircraft.  Depending on the
jurisdiction, laws governing such tax liabilities may be complex or not well
formed or not uniformly enforced. In such jurisdictions, the Company may decide
to take an uncertain tax position based on the best advice of the local tax
experts it engages, which position may be challenged by the taxing
authority.  If the taxing authority later assesses a liability, the
Company may be required to pay penalties and interest on the assessed amount,
which penalties and interest would not give rise to a corresponding foreign tax
credit on the Company’s U. S. tax return.
 
 Reliance on
JMC.All management of the Company is performed by JMC under a
Management Agreement between the Company and JMC, which is in the twelfth year
of a 20-year term and provides for an asset-based management fee. JMC is not a
fiduciary to the Company or its stockholders. The Company’s Board of Directors
(the “Board”) has ultimate control and supervisory responsibility over all
aspects of the Company and owes fiduciary duties to the Company and its
stockholders. The Board has no control over the internal operations of JMC, but
the Board does have the ability and responsibility to manage the Company's
relationship with JMC and the performance of JMC's obligations to the Company
under the Management Agreement, as it would have for any third party service
provider to the Company.  While JMC may not owe any fiduciary duties
to the Company by virtue of the Management Agreement, all of the officers of JMC
are also officers of the Company, and in that capacity owe fiduciary duties to
the Company and its stockholders.  In addition, certain officers of
the Company hold significant ownership positions in the Company and JHC, the
parent company of JMC.
 
 The
Management Agreement may be terminated if JMC defaults on its obligations to the
Company.  However, the agreement provides for liquidated damages in
the event of its wrongful termination by the Company.  All of the
officers of JMC are also officers of the Company, and certain directors of the
Company are also directors of JMC.  Consequently, the directors and
officers of JMC may have a conflict of interest in the event of a dispute
between the Company and JMC.  Although the Company has taken steps to
prevent conflicts of interest arising from such dual roles, such conflicts may
still occur.
 
 JMC has
acted as the management company for two other aircraft portfolio owners,
JetFleet III, which raised approximately $13,000,000 in bond issuance proceeds,
and AeroCentury IV, Inc. (“AeroCentury IV”), which raised approximately
$5,000,000 in bond issuance proceeds.  In the first quarter of 2002,
AeroCentury IV defaulted on certain bond obligations.  In June 2002,
the indenture trustee for AeroCentury IV’s bondholders repossessed AeroCentury
IV’s assets and took over management of AeroCentury IV’s remaining
assets.  JetFleet III defaulted on its bond obligation of $11,076,400
in May 2004.  The indenture trustee for JetFleet III bondholders
repossessed JetFleet III’s unsold assets in late May 2004.
 
 - 21
-
 Ownership
Risks.The Company’s portfolio is leased under operating
leases, where the terms of the leases are less than the entire anticipated
useful life of an asset.  The Company’s ability to recover its
purchase investment in an asset subject to an operating lease is dependent upon
the Company’s ability to profitably re-lease or sell the asset after the
expiration of the initial lease term.   Some of the factors that
have an impact on the Company’s ability to re-lease or sell include worldwide
economic conditions, general aircraft market conditions, regulatory changes that
may make an asset’s use more expensive or preclude use unless the asset is
modified, changes in the supply or cost of aircraft equipment and technological
developments which cause the asset to become obsolete. If the Company is unable
to remarket its aircraft equipment on favorable terms when the operating leases
for such equipment expire, the Company’s business, financial condition, cash
flow, ability to service debt and results of operations could be adversely
affected.
 
 In
addition, a successful investment in an asset subject to an operating lease
depends in part upon having the asset returned by the lessee in the condition as
required under the lease.  Typically, a lessee has the obligation to
return an aircraft to the Company in the condition required under a lease, which
generally requires the aircraft be returned in equal or better condition than
that at delivery to the lessee.  If the lessee becomes insolvent
during the term of its lease and the Company has to repossess the aircraft from
the lessee, it is unlikely that the lessee will have the financial ability to
meet these return obligations.  Thus, upon repossession, the Company
will be required to expend its own resources to return the aircraft to a
remarketable condition, and maintenance reserves collected from the lessee
during the term of the lease may be insufficient to fund the total expense of
such repair and maintenance.
 
 Furthermore,
an asset impairment charge against the Company’s earnings may result from the
occurrence of unexpected adverse changes that impact the Company’s estimates of
expected cash flows generated from such asset. The Company periodically reviews
long-term assets for impairment, in particular, when events or changes in
circumstances indicate the carrying value of an asset may not be recoverable. An
impairment loss is recognized when the carrying amount of an asset is not
recoverable and exceeds its fair value. The Company may be required to recognize
asset impairment charges in the future as a result of a prolonged weak economic
environment, challenging market conditions in the airline industry or events
related to particular lessees, assets or asset types.
 
 In some
cases, anticipated maintenance expenses may result in an asset impairment
charge, and the Company may subsequently be required to recognize those same
costs of maintenance as expense after the impairment charge, which may result in
a required redundancy in recognition of maintenance costs and an asset having a
recorded book value lower than its fair value.
 
 Several
of the Company’s leases do not require payment of monthly maintenance reserves,
and if a repossession due to lessee default occurs with that lessee, the Company
will not have received payment for the costs of unperformed repair and
maintenance under the applicable lease.
 
 Government
Regulation.  There are a number of areas in which government
regulation may result in costs to the Company.  These include aircraft
registration, safety requirements, required equipment modifications, and
aircraft noise requirements.  Although it is contemplated that the
burden and cost of complying with such requirements will fall primarily upon
lessees of equipment, there can be no assurance that the cost will not fall on
the Company.  Furthermore, future government regulations could cause
the value of any non-complying equipment owned by the Company to decline
substantially.
 
 Competition.  The
aircraft leasing industry is highly competitive.  The Company competes
with aircraft manufacturers, distributors, airlines and other operators,
equipment managers, leasing companies, equipment leasing programs, financial
institutions and other parties engaged in leasing, managing or remarketing
aircraft, many of which have significantly greater financial
resources.  However, the Company believes that it is competitive
because of JMC’s experience and operational efficiency in identifying and
obtaining financing for the transaction types desired by regional air
carriers.  This market segment, which is characterized by transaction
sizes of less than $10 million and in many cases privately held, unrated
lessees, is not well served by the Company’s larger competitors.  JMC
has developed a reputation as a global participant in this segment of the
market, and the Company believes that JMC’s reputation benefits the
Company.  There is, however, no assurance that competition from larger
aircraft leasing companies will not increase significantly or that JMC’s
reputation will continue to be strong in this market segment.
 
 Casualties, Insurance
Coverage.  The Company, as owner of transportation equipment,
may be named in a suit claiming damages for injuries or damage to property
caused by its assets.  As a triple net lessor, the Company is
generally protected against such claims, since the lessee would be responsible
for, and insure against and indemnify the Company for such
claims.  Although some protection may be provided by the United States
Aviation Act with respect to the Company’s aircraft assets, it is, unclear to
what extent such statutory protection would be available to the Company with
respect to most of the Company’s aircraft, which are operated in foreign
countries, where such provisions of the United States Aviation Act may not
apply.   Also, although the Company’s leases generally require a
lessee to insure against likely risks, there may be certain cases where the loss
is not entirely covered by the lessee or its insurance.  Though this
is a remote possibility, an uninsured loss with respect to the equipment, or an
insured loss for which insurance proceeds are inadequate, would result in a
possible loss of invested capital in and any profits anticipated from, such
equipment, as well as a potential claim directly against the Company.
 
 Possible Volatility of Stock
Price.  The market price of the Company’s common stock may be
subject to fluctuations following developments relating to the Company’s
operating results, changes in general conditions in the economy, the financial
markets, the airline industry, changes in accounting principles or tax laws
applicable to the Company or its lessees, or other developments affecting the
Company, its customers or its competitors, or arising from other investor
sentiment unknown to the Company.  Because the Company has a
relatively small capitalization of approximately 1.5 million shares outstanding,
there is a correspondingly limited amount of trading and float of the Company’s
shares.  Consequently, the Company’s stock price is more sensitive to
a single large trade or a small number of simultaneous trades along the same
trend than a company with larger capitalization and higher trading volume and
float.
 
 - 22
-
 Item
3.  Quantitative and Qualitative Disclosures About Market
Risk.
 
 This
report does not include information described under Item 3 of Form 10-Q pursuant
to the rules of the Securities and Exchange Commission that permit “smaller
reporting companies” to omit such information.
 
 Item
4T.  Controls and Procedures.
 
 Quarterly evaluation of the Company’s
Disclosure Controls and Procedures. As of the end of the period covered
by this report, the Company evaluated the effectiveness of the design and
operation of its “disclosure controls and procedures” (“Disclosure
Controls”).  This evaluation (the “Controls Evaluation”) was done
under the supervision and with the participation of management, including the
Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”).  Rules adopted by the Securities and Exchange Commission
(“SEC”) require that in this section of the report, the Company present the
conclusions of the CEO and the CFO about the effectiveness of the Company’s
Disclosure Controls as of March 31, 2009.
 
 Disclosure Controls.
Disclosure Controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in the Company’s reports
filed under the Securities Exchange Act of 1934 (the “Exchange Act”), such as
this report, is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. Disclosure Controls are also
designed with the objective of ensuring that such information is accumulated and
communicated to the Company’s management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.
 
 Limitations on the Effectiveness of
Disclosure Controls. The Company’s management, including the CEO and CFO,
does not expect that its Disclosure Controls will prevent all errors and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
 
 Scope of the Controls
Evaluation. The CEO/CFO evaluation of the Company’s Disclosure Controls
included a review of the controls objectives and design, the controls
implementation by the Company and the effect of the controls on the information
generated for use in this report. In the course of the Controls Evaluation, the
CEO and CFO sought to identify data errors, controls problems or acts of fraud
and to confirm that appropriate corrective action, including process
improvements, were being undertaken. This type of evaluation is being done on a
quarterly basis so that the conclusions concerning controls effectiveness can be
reported in the Company’s quarterly reports on Form 10-Q and annual report on
Form 10-K. The overall goals of these various evaluation activities are to
monitor the Company’s Disclosure Controls and to make modifications as
necessary; the Company’s intent in this regard is that the Disclosure Controls
and the Internal Controls will be maintained as dynamic systems that change
(reflecting improvements and corrections) as conditions warrant.
 
 Conclusions. Based upon the
Controls Evaluation, the Company’s CEO and CFO have concluded that, as of March
31, 2009, the Company’s Disclosure Controls are effective to ensure that the
information required to be disclosed by the Company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission’s rules and forms and then
accumulated and communicated to Company management, including the CEO and CFO,
as appropriate to make timely decisions regarding required
disclosures.
 
 Changes in Internal Controls Over
Financial Reporting.  In accordance with SEC requirements, the
CEO and CFO note that there has been no significant change in the Company’s
internal controls over financial reporting that occurred during the quarter
ended March 31, 2009 that has materially affected or is reasonably likely to
materially affect the Company’s internal control over financial reporting.
 
 - 23
-
 PART
II
 OTHER
INFORMATION
 
 Item
6.Exhibits
 
 Exhibit
                Number
              Description3.7
              Form
      of Amendment of Bylaws, incorporated herein by reference to Exhibit 3.1 of
      the Company’s Report on Form 8-K filed with the Securities and Exchange
      Commission on February 4, 200931.1
              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 CorpDate: 
      May 14, 2009
                By:
                /s/ Toni
      M. PerazzoName: 
      Toni M. PerazzoTitle:
      Sr. Vice President - Finance & Chief Financial Officer
 
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