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Section 1: 8-K/A (AMENDMENT TO REPORT ON FORM 8-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549 

FORM 8-K/A

Amendment No. 1

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Original Report (Date of Earliest Event Reported):   October 1, 2018

Date of Amendment: December 11, 2018

AEROCENTURY CORP.

_____________________________________

(Exact name of registrant as specified in its charter)

Delaware

 001-13387

94-3263974

(State or Other Jurisdiction of incorporation)

 Commission File Number

(I.R.S. Employer Identification No.)


 


1440 Chapin Avenue, Suite 310 Burlingame, CA 

 

94010

(Address of principal executive offices)

 

(Zip Code)

 

(650)-340-1888

Registrant’s telephone number, including area code:

 

Not Applicable

Former Name or Former Address, if changed since last report

 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: 

☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐


Explanatory Note
This Current Report on Form 8-K/A amends the Current Report on Form 8-K filed by AeroCentury Corp. (“AeroCentury”) on October 1, 2018 (the "Original Form 8-K"), to include the historical financial statements and pro forma financial information required under Item 9.01 in connection with the Company’s acquisition of JetFleet Holding Corp. (“JetFleet”).  No other modification to the Original Form 8-K is being made by this Current Report on Form 8-K/A.  The financial statements and information filed herewith should be read in conjunction with the Original Form 8-K , and the information previously reported in or filed with the Original Form 8-K is hereby incorporated by reference in this Current Report on Form 8-K/A
ITEM 9.01 — FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired
The Audited Consolidated Financial Statements of JetFleet as of and for the years ended December 31, 2016 and December 31, 2017, and the nine months ended September 30, 2017, with independent auditors’ reports thereon, are filed as Exhibits 99.1,  99.2, and 99.3,  respectively, to this Current Report on Form 8-K/A. The Unaudited Condensed Consolidated Financial Statements of JetFleet as of September 30, 2018, and for the nine months ended September 30, 2018 are filed as Exhibit 99.4 to this Current Report on Form 8-K/A.
(b) Pro forma financial information
The Unaudited Pro Forma Condensed Combined Financial Information of AeroCentury as of and for the nine months ended September 30, 2018 and for the year ended December 31, 2017 is filed as Exhibit 99.5 to this Current Report on Form 8-K/A.
 
(c) Exhibits

Exhibit Index
 
 
 
Exhibit No.
Description
99.1
Audited Consolidated Financial Statements of JetFleet as of and for the year ended December 31, 2016
99.2
Audited Consolidated Financial Statements of JetFleet as of and for the year ended December 31, 2017
99.3
Audited Consolidated Financial Statements of JetFleet as of and for the nine months ended September 30, 2017
99.4
Unaudited Condensed Consolidated Financial Statements of JetFleet as of and for the nine months ended September 30, 2018
99.5
Unaudited Pro Forma Condensed Combined Financial Information of AeroCentury as of and for the nine months ended September 30, 2018 and for the year ended December  31, 2017





SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
 
Date:  December 11, 2018
 
AEROCENTURY CORP.
By: /s/ Toni M. Perazzo
Toni M. Perazzo
Sr. Vice President & Chief Financial Officer

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Section 2: EX-99.1 (AUDITED CONSOLIDATED 2016 JETFLEET HOLDING FINANCIAL STATEMENTS)

EXHIBIT 99.1










JetFleet Holding Corp. and Subsidiaries


Consolidated Financial Statements


For the year ended December 31, 2016

TABLE OF CONTENTS



TITLE

TABLE OF CONTENTS

INDEPENDENT AUDITOR’S REPORT

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheet

Consolidated Statement of Operations

Consolidated Statement of Comprehensive Income

Consolidated Statement of Shareholders’ Equity

Consolidated Statement of Cash Flows

Notes to Consolidated Financial Statements

JETFLEET AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2016

Independent Auditor’s Report

Board of Directors
JetFleet Holding Corp. and Subsidiaries
Burlingame, California

We have audited the accompanying consolidated financial statements of JetFleet Holding Corp. and Subsidiaries, which comprise the consolidated balance sheet as of December 31, 2016, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of JetFleet Holding Corp. and Subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

/s/ BDO USA, LLP

October 23, 2017


JetFleet Holding Corp. and Subsidiaries
Consolidated Balance Sheet
December 31, 2016

ASSETS
 
Assets:
     
Cash and cash equivalents
 
$
3,082,800
 
Marketable securities
   
2,167,100
 
Receivable from affiliates
   
1,013,700
 
Accounts receivable and other receivables
   
10,300
 
Note receivable
   
41,500
 
Prepaid expense and other assets
   
104,200
 
Equipment (net of accumulated depreciation of $56,200)
   
17,100
 
Total assets
 
$
6,436,700
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
Liabilities:
       
Accounts payable
 
$
80,400
 
Accrued payroll
   
598,000
 
Taxes payable
   
106,900
 
Deferred tax liabilities
   
394,400
 
Total liabilities
   
1,179,700
 
         
Shareholders' equity:
       
Series A Redeemable Preferred stock, 200,000 shares authorized,
  no shares issued and outstanding
   
-
 
Common stock, no par value, 1,000,000 shares authorized,
  362,194 issued and outstanding
   
1,261,600
 
Retained earnings
   
3,319,200
 
Accumulated other comprehensive income:
       
Foreign currency translation adjustments
   
100
 
Unrealized gain on securities
   
676,100
 
Total shareholders’ equity
   
5,257,000
 
Total liabilities and shareholders’ equity
 
$
6,436,700
 








See accompanying notes to consolidated financial statements.

JetFleet Holding Corp. and Subsidiaries
Consolidated Statement of Operations
For the year ended December 31, 2016


Revenues:
     
Management fees
 
$
5,204,400
 
Acquisition and remarketing fees
   
1,408,700
 
Gain on sale of assets
   
154,200
 
Income from partnership investment
   
107,200
 
Dividends, interest and other income
   
13,000
 
Total revenues
   
6,887,500
 
Costs and expenses:
       
Salaries and employee benefits
   
2,947,900
 
Rent
   
433,000
 
Consulting fees
   
870,500
 
Travel, meals and entertainment
   
327,700
 
General and administrative
   
716,600
 
Total costs and expenses
   
5,295,700
 
Income before income taxes
   
1,591,800
 
Income tax expense
   
584,800
 
Net income
 
$
1,007,000
 



















See accompanying notes to consolidated financial statements.

JetFleet Holding Corp. and Subsidiaries
Consolidated Statement of Comprehensive Income
For the year ended December 31, 2016


Net income
 
$
1,007,000
 
Other comprehensive income (loss), net of tax:
       
Foreign currency translation adjustments
   
(200
)
Unrealized loss on securities
   
(421,700
)
Other comprehensive loss
   
(421,900
)
Comprehensive income
 
$
585,100
 


































See accompanying notes to consolidated financial statements.

JetFleet Holding Corp. and Subsidiaries
Consolidated Statement of Shareholders’ Equity
For the year ended December 31, 2016


   
Number of
Shares
   
Common
Stock
   
Retained
Earnings
   
Accumulated
Other Comprehensive Income
   
Total
 
Balance at December 31, 2015
   
362,194
   
$
1,261,600
   
$
2,312,200
   
$
1,098,100
   
$
4,671,900
 
Net income
   
-
     
-
     
1,007,000
     
-
     
1,007,000
 
Foreign currency translation
  adjustments, net of tax benefit
  of $100
   
-
     
-
     
-
     
(200
)
   
(200
)
Unrealized loss on securities,
  net of tax benefit of $279,100
   
-
     
-
     
-
     
(421,700
)
   
(421,700
)
Balance at December 31, 2016
   
362,194
   
$
1,261,600
   
$
3,319,200
   
$
676,200
   
$
5,257,000
 



























See accompanying notes to consolidated financial statements

JetFleet Holding Corp. and Subsidiaries
Consolidated Statement of Cash Flows
For the year ended December 31, 2016

Operating activities:
     
Net income
 
$
1,007,000
 
Adjustments to reconcile net income to net cash provided by operating activities:
       
Gain on sale of assets
   
(154,200
)
Depreciation
   
5,900
 
Share of income upon termination of partnership investment
       
Deferred income taxes
   
(107,200
)
Changes in operating assets and liabilities:
   
2,000
 
Receivable from affiliates
   
(609,100
)
Accounts receivable and other receivables
   
(1,700
)
Taxes receivable
   
82,900
 
Prepaid expenses and other assets
   
2,700
 
Accounts payable
   
(27,300
)
Accrued payroll
   
156,400
 
Income taxes payable
   
106,900
 
Net cash provided by operating activities
   
464,300
 
Investing activities:
       
Proceeds from asset sales
   
211,500
 
Investment in capital assets
   
(15,600
)
Repayments on note receivable
   
16,100
 
Distribution upon termination of partnership investment
   
208,600
 
Net cash provided by investing activities
   
420,600
 
Net increase in cash and cash equivalents
   
884,900
 
Cash and cash equivalents, beginning of year
   
2,198,300
 
Exchange losses on cash and cash equivalents
   
(400
)
Cash and cash equivalents, end of year
 
$
3,082,800
 
Supplemental disclosures of cash flow information:
       
Cash paid during the period for:
       
Income taxes
 
$
391,900
 
Foreign taxes
   
1,300
 









See accompanying notes to consolidated financial statements.

1. Organization and Business of the Company

Organization

JetFleet Holding Corp. and Subsidiaries (“JHC”) was incorporated in the state of California on January 27, 1994.  As of December 31, 2016, all of the outstanding common stock of JHC was owned indirectly through trusts by Toni M. Perazzo and Abigail Crispin (Ms. Perazzo’s dependent child), and by shareholders not affiliated with JHC or its subsidiaries.

JHC owns all of the outstanding common stock of JetFleet Management Corp (“JMC”). JMC owns all of the outstanding common stock of JetFleet Canada and all the membership interests of JetFleet Management USVI LLC (“JMC USVI”).  JMC owned all of the outstanding common stock of EZLease Corp (“EZLease”) until December 13, 2016 when EZLease was liquidated and dissolved.

Business of the Company's Subsidiaries

The Company was formed to build an integrated aircraft management, marketing and financing business.  In August 2015, the Company extended its management agreement with AeroCentury Corp. (“ACY”) for ten years.  The new management agreement expires in August 2025, and the Company remains responsible for the selection of assets to be acquired by ACY and the leasing, re-leasing and/or subsequent sale of assets owned by ACY. The Company is entitled to acquisition fees, re-sale fees and management fees in connection with these activities.

 As mentioned above, JetFleet Canada is a subsidiary of JMC.  Based in Calgary, Alberta, Canada, JetFleet Canada provides aircraft management and technical services for the Company and its affiliates. 

JMC USVI is a subsidiary of JMC based in St. Thomas, USVI.  JMC has an agreement with JMC USVI for consulting services and to operate office space in the U.S. Virgin Islands for use by JMC.

EZLease was a subsidiary of JMC, based in Burlingame, California. Prior to JMC’s acquisition of EZLease in July 2012, JMC had an agreement to lease office and computer equipment on a monthly basis from EZLease.  Subsequent to the acquisition, JMC terminated monthly rent payments to EZLease.  In December 2016, EZLease distributed all its assets to JMC to reduce costs and improve administrative efficiencies.  The Company recognized no gain or loss from EZLease’s transfer of all its assets and operations to JMC.  After the asset transfer, EZLease filed articles of dissolution and terminated operations.



1. Organization and Business of the Company (continued)

Partnership Investment

Prior to his death in January 2016, Neal D. Crispin and the Company were partners in a partnership, Montevideo L.P. The Partnership’s sole business activity was the ownership of a variable universal life insurance policy on the Company’s President and Chief Executive Officer, Neal D. Crispin.  Upon Mr. Crispin’s death, Montevideo L.P. collected the life insurance policy’s death benefits and pursuant to the terms of the partnership agreement, distributed all its assets to its partners and terminated operations. In 2016, the Company received total distributions of approximately $208,600, representing five percent of Montevideo L.P.’s assets.

2. Summary of Significant Accounting Policies

Basis of Presentation

Financial information for JHC, JMC, EZLease, JMC USVI and JetFleet Canada  (collectively, the "Company") is presented on a consolidated basis in accordance with accounting principles generally accepted in the United States of America ("GAAP") based upon the continuation of the business as a going concern. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Principles of Consolidation

These financial statements reflect the consolidation of JHC’s results with those of its wholly owned subsidiaries, JMC, JMC USVI, and JetFleet Canada for the entire year and EZLease for the portion of the year it existed. All intercompany balances and transactions have been eliminated in consolidation.

Use of estimates

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

The most significant estimates with regard to these consolidated financial statements are the estimated value of certain financial assets and the accounting for income taxes.





2. Summary of Significant Accounting Policies (continued)

Cash and Cash Equivalents

The Company considers highly liquid investments readily convertible into known amounts of cash, with original maturities of thirty days or less, as cash equivalents.

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible.  The standard describes a fair value hierarchy based on three levels of inputs.  The first two are considered observable and the last unobservable.

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

The following table shows by level, within the fair value hierarchy, the Company’s assets at fair value:
 
December 31, 2016
   
Level
Level
Level
 
Total
1
2
3
Marketable securities
$2,167,100
$2,030,600
$          -
$136,500
Money market funds
272,700
272,700
-
-
Total
$2,439,800
$2,303,300
$          -
$136,500

As of December 31, 2016 there were no liabilities that were required to be measured and recorded at fair value on a recurring basis. During the year ended December 31, 2016, the Company transferred $101,400 out of Level 3 securities, upon receiving liquidation distributions and termination of Montevideo L.P., as described in Footnote 1.



2. Summary of Significant Accounting Policies (continued)

Fair Value of Other Financial Instruments

The Company’s financial instruments, other than cash, consist principally of cash equivalents, accounts receivable, marketable securities, and accounts payable.  The fair value of cash equivalents, accounts receivable and accounts payable approximates the carrying value of these financial instruments because of their short-term nature.

Marketable securities are stated at fair value as of the balance sheet date.  The Company measures the fair values of investments in securities using the last quoted sales price from the primary exchange where the security is traded.  The Company classifies its marketable equity securities as available for sale. Realized gains and losses, determined using the first in, first out (“FIFO”) method, are included in earnings; unrealized holding gains and losses are reported in other comprehensive income.

For the year ended December 31, 2016, the Company had a gross unrecognized loss on its marketable equity securities available for sale of $700,800.  From inception to December 31, 2016, the Company had the following cumulative gross unrealized gains on marketable equity securities available for sale:

Description
 
Total
Cost
   
Fair Market
Value
   
Gross Unrealized Gain
 
Cumulative gross unrealized gains on
   marketable securities
 
$
1,043,300
   
$
2,167,100
   
$
1,123,800
 

At December 31, 2016, the Company holds 214,876 shares of ACY common stock.  The Company’s investment in ACY is recorded at fair value and classified within Level 1 because it is listed on the NYSE American Exchange where its value is based on quoted market prices in active markets.

On May 1, 2012, the Company made an initial capital contribution of $101,700 in Montevideo L.P. for a 5% general partnership interest.  Montevideo L.P. was a Nevada limited partnership organized to acquire life insurance on Neal Crispin, the President and CEO of the Company.  Because Montevideo L.P. did not meet the definition of a business and the limited partner retained substantive participating rights in certain partnership decisions, the Company did not have control over the partnership and could not consolidate the results of the limited partnership with those of the Company.  The Company accounted for its investment in the limited partnership using the equity method of accounting.  Under the terms of the partnership agreement, the Company was allocated 5% of the net profits and losses earned by Montevideo L.P.   As discussed above, after the death of Mr. Crispin, the partnership distributed all its assets prior to December 31, 2016, and dissolved on February 15, 2017.



2. Summary of Significant Accounting Policies (continued)

On December 31, 2016, the Company owned 121 shares of Uniform Components non-voting preferred stock.  The Uniform Components non-voting preferred stock has a cumulative preferred annual dividend of 10% and a liquidation value of $1,000 per share, but may not be liquidated before January 1, 2019.   Because the Company owns a minority share of non-voting preferred stock, Uniform Components results are not consolidated with those of the Company.

The Company’s investment in Uniform Components non-voting preferred stock has been classified within Level 3 due to unobservable inputs and infrequent trading.  When observable prices are not available for these securities, the Company measures their fair value using the income valuation approach, for which sufficient and reliable data is available.  The use of the income approach generally consists of the net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors.  Pursuant to the income valuation approach, the Company estimates the Uniform Components non-voting preferred stock’s fair market value based on the estimated net present value of future dividends, the January 1, 2019 liquidation value and a 4% interest rate.

Note Receivable

The note receivable is carried at its estimated collectible amount. Interest income on the note receivable is recognized using the interest method.

Equipment and Depreciation

The Company’s interests in equipment are recorded at cost and depreciated using the straight-line method over five years.

Income taxes

As part of the process of preparing the Company’s consolidated financial statements, management is required to estimate income taxes in each of the jurisdictions in which the Company operates.  This process involves estimating the Company’s current tax exposure under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and GAAP purposes.  These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet.  Management must also assess the likelihood that the Company’s deferred tax assets will be recovered from future taxable income, and, to the extent management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized, the Company must establish a valuation allowance.  To the extent the Company establishes a valuation allowance or changes the allowance in a period, the Company reflects the corresponding increase or decrease within the tax provision in the consolidated statement of operations. Significant management judgment is required in determining the Company’s future taxable income for purposes of assessing the Company’s ability to realize any benefit from its deferred taxes.  The Company records non-income based sales, use, property, value added and franchise taxes as general and administrative expense in the consolidated statement of operations.


2. Summary of Significant Accounting Policies (continued)

Common Stock

On December 31, 2016, the Company had 362,194 shares of common stock outstanding.

Comprehensive Income

The Company reports unrealized gains and losses from marketable securities in comprehensive income.  In addition, for the Company’s foreign subsidiary where the functional currency is the Canadian dollar, monetary assets and liabilities are translated at year-end exchange rates while non-monetary items are translated at historical rates.  Income and expense accounts are translated at the average rates in effect during the year.

Foreign Currency

The reporting currency of the Company is the U.S. dollar. The functional currency of JetFleet Canada is the Canadian dollar. The balance sheet of the Company’s foreign subsidiary is translated at year-end rates of exchange, and the statement of operations is translated at the average exchange rate for the year. Gains or losses resulting from translating foreign currency financial statements are included in accumulated other comprehensive income.

Revenue Recognition

The Company recognizes income earned from services provided to ACY pursuant to a management agreement.  The Company receives a monthly management fee based on the net asset value of ACY’s assets under management by the Company.  The Company records the monthly management fee at the end of each month.  The Company also receives an acquisition fee for locating assets for ACY, and may receive a remarketing fee in connection with the sale or re-lease of ACY’s assets.  The Company’s policy is to record acquisition fees on the date ACY completes the acquisition of aircraft assets and to record remarketing fees on the date a sale or re-lease of ACY’s assets occurs.

Concentration of Revenues

All of the management, acquisition and remarketing fees earned by the Company are derived from aviation assets owned by ACY, which are leased to customers in countries around the world.  Related party issues between the Company and ACY are discussed in Footnote 9.


3. Commitments

The Company leases its office space under a lease expiring June 30, 2020 and a storage facility on a monthly basis.  The monthly lease commitment for the office space includes an amount for base rent and operating expenses.  The Company estimates that the future minimum lease commitments for its office space and storage facility are as follows:

Year Ended December 31:
Amount
 
2017
$   437,700
 
2018
 
441,800
 
2019
 
449,100
 
2020
 
230,700
   
Total
$1,559,300

The Company has a contractual obligation to pay a certain amount of operating expenses (utilities and insurance costs) that are included in office rent expense.  The projected annual rent expenses shown above for the periods 2017 through 2020 are based on periodic increases to the base rental rate per the lease and operating expense amounts in effect at December 31, 2016.  The lease allows for a 2% increase to monthly operating expenses beginning on January 1, 2017, but since no increase occurred it was not reflected in the estimated operating expenses for 2017 and 2018.  The lease also allows for a 2% increase in monthly operating expenses beginning on January 1, 2019, which is reflected in estimated operating expenses for 2019 and 2020. Total rent expense for the year ended December 31, 2016, which included rent for a storage facility rented on a monthly basis, was $433,000.

4. Income tax provision

The components for the provision for income taxes for the year ended December 31, 2016 were as follows:

Current tax provision:
     
Federal
 
$
476,700
 
State
   
104,800
 
Foreign
   
1,300
 
Current tax provision
   
582,800
 
Deferred tax provision:
       
Federal
   
3,000
 
State
   
500
 
Change in valuation allowance
   
(1,500
)
Deferred tax provision
   
2,000
 
Total provision for income taxes
 
$
584,800
 



4. Income tax provision (continued)

Total income tax expense differs from the amount that would be provided by applying the statutory federal income tax rate to pretax earnings as illustrated below:

Income tax benefit statutory federal income tax rate
 
$
541,200
 
State tax benefit net of federal benefit
   
66,100
 
Meals and entertainment
   
11,400
 
Non-taxable income
   
(40,900
)
Tax rate differences
   
8,500
 
Change in valuation allowance
   
(1,500
)
Total income tax provision
 
$
584,800
 

Temporary differences and carry-forwards that gave rise to a significant portion of deferred tax assets and (liabilities) as of December 31, 2016 are as follows:

Gross deferred tax assets:
     
Net operating loss carry-forwards
 
$
3,000
 
Deferred compensation
   
28,900
 
Franchise taxes and other
   
32,600
 
Deferred tax assets
   
64,500
 
Valuation allowance
   
(1,700
)
Net deferred tax asset
   
62,800
 
Gross deferred tax liabilities:
       
Unrealized gains on securities
   
(447,600
)
Depreciation and impairment
   
(9,600
)
Net deferred tax liabilities
 
$
(394,400
)

JetFleet Canada is a Canadian corporation subject to tax in Canada and JMC USVI is a Virgin Islands limited liability company taxed as a corporation in the Virgin Islands.  Accordingly, the provision for income taxes for these subsidiaries is reflected in the Company’s consolidated financial statements and includes foreign taxes currently payable and changes in deferred tax assets and liabilities.

A portion of the deferred tax assets recognized relates to JetFleet Canada’s and JMC USVI’s foreign net operating loss carryovers.  The foreign net operating carryovers of approximately $7,700 will be available to offset taxable income in future years and begin to expire in 2029.  A valuation allowance was deemed necessary on certain JetFleet Canada net operating loss carryovers, as the Company has concluded, based on an assessment of all available evidence, that it is more likely than not that future taxable income will not be sufficient to realize these tax benefits. Where a valuation allowance was not recorded for other non foreign net operating loss carryover deferred tax assets, the Company believes that it is more likely than not that future taxable income (including the reversal of temporary differences) will be sufficient to realize the tax benefits for the balance of deferred tax assets on the balance sheet at December 31, 2016.


4. Income tax provision (continued)

The Company accounts for interest related to uncertain tax positions as interest expense and for income tax penalties as tax expense. There are no material unrecognized income tax positions related to uncertain tax positions.

All of the Company's tax years remain open to examination other than as barred in the various jurisdictions by statutes of limitation.

5. Concentration of Credit Risk

The Company maintains its cash and cash equivalents at various financial institutions, where they are insured by the Federal Deposit Insurance Corporation (“FDIC”) and the Securities Investor Protection Corporation (“SIPC”) up to $250,000. The balances of these accounts from time to time exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents. At December 31, 2016, the amount over FDIC and SIPC limits was approximately $2,141,000.

6. Assets Sold

 During 2016, Company recorded net gains totaling $154,200 from the sale of automobiles, computers and furniture.

7. Accumulated Comprehensive Income

 

 
Before-tax Amount
   
Tax
(Expense)
   
Net-of-tax Amount
 
Foreign currency translation adjustments
 
$
100
   
$
0
   
$
100
 
Unrealized gains on securities
   
1,123,800
     
(447,700
)
   
676,100
 
Total accumulated comprehensive income
 
$
1,123,900
   
$
(447,700
)
 
$
676,200
 

8. Retirement plan

The Company maintains a qualified defined contribution salary deferral profit sharing plan for U.S. employees.  An employee must be at least 21 years of age to participate in this plan.  This plan permits employees to defer up to 15% of their salary based on strict IRS guidelines.  During 2016, the Company elected to make matching contributions equal to 100% of the portion of the participant’s salary reduction, up to $5,000, which does not exceed 4% of the participant’s qualified compensation.  Participants are always 100% vested in their salary deferral contributions. Participants vest in the matching Company contributions ratably over two years.  The Company made matching contributions to this plan for the year ended December 31, 2016 of $48,000.


9. Related Party Transactions

The Company’s subsidiary, JMC, an integrated aircraft management, marketing and financing business, manages and administers a portfolio of leased aircraft assets owned by ACY pursuant to a ten-year management agreement. Certain officers of the Company are also officers of ACY and hold significant ownership positions in both ACY and the Company. JMC also receives an acquisition fee for locating assets for ACY, and may receive a remarketing fee in connection with the sale or re-lease of the ACY’s assets.  During the year ended December 31, 2016, JMC received management fees of $5,204,400 and acquisition fees of $1,124,200.  Also during 2016, JMC received remarketing fees of $284,500 from ACY.

10. Subsequent Events

The Company has evaluated events occurring through October 23, 2017, the date the consolidated financial statements were available to be issued, for events requiring recording or disclosure in the consolidated financial statements for the year ended December 31, 2016.

JMC USVI completed its liquidation and filed amendment to dissolve effective June 30, 2017.




(Back To Top)

Section 3: EX-99.2 (AUDITED JETFLEET HOLDING 2017 FINANCIAL STATEMENTS)

EXHIBIT 99.2












JetFleet Holding Corp. and Subsidiaries


Consolidated Financial Statements


For the year ended December 31, 2017

TABLE OF CONTENTS


INDEPENDENT AUDITOR’S REPORT

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheet

Consolidated Statement of Operations

Consolidated Statement of Comprehensive Income

Consolidated Statement of Shareholders’ Equity

Consolidated Statement of Cash Flows

Notes to Consolidated Financial Statements

JETFLEET AUDITED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2017

Independent Auditor’s Report

Board of Directors
JetFleet Holding Corp. and Subsidiaries
Burlingame, California

We have audited the accompanying consolidated financial statements of JetFleet Holding Corp. and Subsidiaries, which comprise the consolidated balance sheet as of December 31, 2017, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of JetFleet Holding Corp. and Subsidiaries as of December 31, 2017, and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

/s/ BDO USA, LLP

June 11, 2018



JetFleet Holding Corp. and Subsidiaries
Consolidated Balance Sheet
December 31, 2017

ASSETS
Assets:
 
Cash and cash equivalents
$4,866,000
Marketable securities
3,407,600
Receivable from affiliates
496,600
Accounts receivable
3,400
Taxes receivable
24,600
Note receivable
32,800
Prepaid expenses and other assets
121,300
Equipment (net of accumulated depreciation of $62,200)
22,700
Total assets
$8,975,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
 
Accounts payable and accrued liabilities
$  202,300
Accrued payroll
908,400
Income taxes payable
600
Deferred tax liabilities
631,900
Total liabilities
1,743,200
   
Shareholders' equity:
 
Series A Redeemable Preferred stock, 200,000 shares authorized,
  no shares issued and outstanding
-
Common stock, no par value, 1,000,000 shares authorized,
  362,194 issued and outstanding
1,261,600
Retained earnings
4,267,100
Accumulated other comprehensive income:
 
Foreign currency translation adjustments
300
Unrealized gain on securities
1,702,800
Total shareholders’ equity
7,231,800
Total liabilities and shareholders’ equity
$8,975,000









See accompanying notes to consolidated financial statements.

JetFleet Holding Corp. and Subsidiaries
Consolidated Statement of Operations
For the year ended December 31, 2017



Revenues:
 
Management fees
$6,109,100
Acquisition and remarketing fees
901,600
Dividends, interest and other income
12,700
Total revenues
7,023,400
Costs and expenses:
 
Salaries and employee benefits
3,459,700
Rent
423,600
Consulting fees
524,700
Travel, meals and entertainment
334,500
Interest
19,600
General and administrative
564,600
Total costs and expenses
5,326,700
Income before income taxes
1,696,700
Income tax expense
481,400
Net income
$1,215,300

















See accompanying notes to consolidated financial statements.

JetFleet Holding Corp. and Subsidiaries
Consolidated Statement of Comprehensive Income
For the year ended December 31, 2017



Net income
 
$
1,215,300
 
Other comprehensive income, net of tax:
       
Foreign currency translation adjustments
   
300
 
Unrealized gain on securities
   
759,200
 
Other comprehensive income
   
759,500
 
Comprehensive income
 
$
1,974,800
 































See accompanying notes to consolidated financial statements.

JetFleet Holding Corp. and Subsidiaries
Consolidated Statement of Shareholders’ Equity
For the year ended December 31, 2017


   
Number of
Shares
   
Common
Stock
   
Retained
Earnings
   
Accumulated Comprehensive Income
   
Total
 
Balance at December 31, 2016
   
362,194
   
$
1,261,600
   
$
3,319,200
   
$
676,200
   
$
5,257,000
 
Net income
   
-
     
-
     
1,215,300
     
-
     
1,215,300
 
Foreign currency translation
  adjustments, net of tax expense
  of $100
   
-
     
-
     
-
     
300
     
300
 
Unrealized gain on securities,
  net of tax expense of $481,300
   
-
     
-
     
-
     
759,200
     
759,200
 
Reclassification of stranded tax
  effects pursuant to
  ASU 2018-02
   
-
     
-
     
(267,400
)
   
267,400
     
-
 
Balance at December 31, 2017
   
362,194
   
$
1,261,600
   
$
4,267,100
   
$
1,703,100
   
$
7,231,800
 




















See accompanying notes to consolidated financial statements

JetFleet Holding Corp. and Subsidiaries
Consolidated Statement of Cash Flows
For the year ended December 31, 2017


Operating activities:
     
Net income
 
$
1,215,300
 
Adjustments to reconcile net income to net cash provided by operating activities:
       
Depreciation
   
5,300
 
Deferred income taxes
   
(243,900
)
Changes in operating assets and liabilities:
       
Receivable from affiliates
   
517,100
 
Accounts receivable
   
6,900
 
Taxes receivable
   
(24,600
)
Prepaid expenses and other assets
   
(17,100
)
Accounts payable and accrued liabilities
   
121,900
 
Accrued payroll
   
310,400
 
Income taxes payable
   
(106,300
)
Net cash provided by operating activities
   
1,785,000
 
Investing activities:
       
Investment in capital assets
   
(11,000
)
Repayments on note receivable
   
8,700
 
Net cash used in investing activities
   
(2,300
)
Net increase in cash and cash equivalents
   
1,782,700
 
Exchange gains on cash and cash equivalents
   
500
 
Cash and cash equivalents, beginning of period
   
3,082,800
 
Cash and cash equivalents, end of period
 
$
4,866,000
 
Supplemental disclosures of cash flow information:
       
Cash paid during the period for:
       
Income taxes
 
$
790,200
 
Foreign taxes
   
600
 











See accompanying notes to consolidated financial statements


1.
Organization and Business of the Company

Organization

JetFleet Holding Corp. and Subsidiaries (“JHC” or the “Company”) was incorporated in the state of California on January 27, 1994.  As of December 31, 2017, all of the outstanding common stock of JHC was owned indirectly through trusts by Toni M. Perazzo and Abigail Crispin (Ms. Perazzo’s dependent child), and by shareholders not affiliated with JHC or its subsidiaries.

JHC owns all of the outstanding common stock of JetFleet Management Corp (“JMC”). JMC owns all of the outstanding common stock of 1314401 Alberta Inc. (“JetFleet Canada”) and owned all the membership interests of JetFleet Management USVI LLC (“JMC USVI”) until June 30, 2017, when it was liquidated and dissolved.

Business of the Company's Subsidiaries

The Company was formed to build an integrated aircraft management, marketing and financing business.  In August 2015, the Company extended its management agreement with AeroCentury Corp. (“ACY”) for ten years.  The new management agreement expires in August 2025, and the Company remains responsible for the selection of assets to be acquired by ACY and the leasing, re-leasing and/or subsequent sale of assets owned by ACY. The Company is entitled to acquisition fees, re-sale and re-lease fees and management fees in connection with these activities.

 As mentioned above, JetFleet Canada is a subsidiary of JMC.  Based in Calgary, Alberta, Canada, JetFleet Canada provides aircraft management and technical services for the Company and its affiliates. 

JMC USVI was a subsidiary of JMC, based in St. Thomas, U.S. Virgin Islands (“USVI”).  JMC had an agreement with JMC USVI for consulting services and to operate office space in the U.S. Virgin Islands for use by JMC.  In 2016, JMC ceased payment of consulting fees and initiated closing JMC USVI’s office in the Virgin Islands. JMC USVI distributed all its assets to JMC and was dissolved on June 30, 2017.

2. Summary of Significant Accounting Policies

Basis of Presentation

Financial information for the Company is presented on a consolidated basis in accordance with accounting principles generally accepted in the United States of America ("GAAP") based upon the continuation of the business as a going concern.


2. Summary of Significant Accounting Policies (continued)

Principles of Consolidation

These financial statements reflect the consolidation of JHC’s results with those of its wholly owned subsidiaries, JMC, JetFleet Canada and JMC USVI. All intercompany balances and transactions have been eliminated in consolidation.

Use of estimates

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

The most significant estimates with regard to these consolidated financial statements are the estimated value of marketable securities and the accounting for income taxes.

Cash and Cash Equivalents

The Company considers highly liquid investments readily convertible into known amounts of cash, with original maturities of three months or less, as cash equivalents.

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible.  The standard describes a fair value hierarchy based on three levels of inputs.  The first two are considered observable and the last unobservable.

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.


2. Summary of Significant Accounting Policies (continued)

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

The following table shows by level, within the fair value hierarchy, the Company’s assets at fair value:
   
December 31, 2017
 
         
Level
   
Level
   
Level
 
   
Total
     
1
     
2
     
3
 
Marketable securities
 
$
3,407,600
   
$
3,274,700
   
$
0
   
$
132,900
 
Money market funds
   
273,000
     
273,000
     
0
     
0
 
Total
 
$
3,680,600
   
$
3,547,700
   
$
0
   
$
132,900
 

As of December 31, 2017, there were no liabilities that were required to be measured and recorded at fair value on a recurring basis. During the year ended December 31, 2017, there were no transfers in or out of Level 3 securities.

Fair Value of Other Financial Instruments

The Company’s financial instruments, other than cash, consist principally of cash equivalents, accounts receivable, marketable securities, and accounts payable.  The fair value of cash equivalents, accounts receivable and accounts payable approximates the carrying value of these financial instruments because of their short-term nature.

Marketable securities are stated at fair value as of the balance sheet date.  The Company measures the fair values of investments in Level 1securities using the last quoted sales price from the primary exchange where the security is traded.  The Company classifies its marketable equity securities as available for sale. Realized gains and losses, determined using the first in, first out (FIFO) method are included in earnings; unrealized holding gains and losses are reported in other comprehensive income.

For the year ended December 31, 2017, the Company had a gross unrecognized gain on its marketable equity securities available for sale of $2,364,400.  From inception to December 31, 2017, the Company had the following cumulative gross unrealized gains on marketable equity securities available for sale:
Description
 
Total
Cost
   
Fair Market
Value
   
Gross Unrealized Gain
 
Cumulative gross unrealized gains on
   marketable securities
 
$
1,043,300
   
$
3,407,600
   
$
2,364,400
 

At December 31, 2017, the Company held 214,876 shares of ACY common stock. The Company’s investment in ACY is recorded at fair value and classified within Level 1 because it is listed on the NYSE American Exchange where its value is based on quoted market prices in active markets.

2. Summary of Significant Accounting Policies (continued)

At December 31, 2017, the Company owned 121 shares of Uniform Components non-voting preferred stock.  The Uniform Components non-voting preferred stock has a cumulative preferred annual dividend of 10% and a liquidation value of $1,000 per share, but may not be liquidated before January 1, 2019.   Because the Company owns a minority share of non-voting preferred stock, Uniform Components results are not consolidated with those of the Company.

The Company’s investment in Uniform Components non-voting preferred stock has been classified within Level 3 due to unobservable inputs and infrequent trading.  When observable prices are not available for these securities, the Company measures their fair value using the income valuation approach, for which sufficient and reliable data is available.  The use of the income approach generally consists of the net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors.  Pursuant to the income valuation approach, the Company estimates the Uniform Components non-voting preferred stock’s fair market value based on the estimated net present value of future dividends, the January 1, 2019 liquidation value and a 2.0% interest rate.

Note Receivable

The note receivable is carried at its estimated collectible amount. The Company received the note receivable in July 2014 from an outside consultant in exchange for a cash loan.  Interest income on the note receivable is recognized using the interest method.

Equipment and Depreciation

The Company’s interests in equipment are recorded at cost and depreciated using the straight-line method over five years.

Income taxes

As part of the process of preparing the Company’s consolidated financial statements, management is required to estimate income taxes in each of the jurisdictions in which the Company operates.  This process involves estimating the Company’s current tax exposure under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and GAAP purposes.  These differences result in deferred tax assets and liabilities that are included in the consolidated balance sheet.  Management must also assess the likelihood that the Company’s deferred tax assets will be recovered from future taxable income, and, to the extent management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized, the Company must establish a valuation allowance.  To the extent the Company establishes a valuation allowance or changes the allowance in a period, the Company reflects the corresponding increase or decrease within the tax provision in the consolidated statement of operations. Significant management judgment is required in determining the Company’s future taxable income for purposes of assessing the Company’s ability to realize any benefit from its deferred taxes.  The Company records non-income based sales, use, property, value added and franchise taxes as general and administrative expense in the consolidated statement of operations.





2. Summary of Significant Accounting Policies (continued)

In early 2018, ASU 2018-02 was adopted by the FASB, providing that reporting entities could elect to reclassify “stranded tax effects,” resulting from a reduction in the tax rate provided for in the Tax Cuts and Jobs Act in 2017, from accumulated comprehensive income to retained earnings.  The Company has elected to early adopt such provisions and, as such, while the reduction in deferred tax liabilities associated with such reduction are included in the current year tax provision, the amount of such reduction has been reclassified from accumulated comprehensive income to retained earnings, as shown in the Company’s Consolidated Statement of Shareholders’ Equity.

Common Stock

On December 31, 2017, the Company had 362,194 shares of common stock outstanding.

Comprehensive Income

The Company reports unrealized gains and losses from marketable securities in comprehensive income.  In addition, for the Company’s foreign subsidiary where the functional currency is the Canadian dollar, monetary assets and liabilities are translated at year-end exchange rates while non-monetary items are translated at historical rates.  Income and expense accounts are translated at the average rates in effect during the year.

Foreign Currency

The reporting currency of the Company is the U.S. dollar. The functional currency of JetFleet Canada is the Canadian dollar. The balance sheet of the Company’s foreign subsidiary is translated at the December 31, 2017 rate of exchange, and the statement of operations is translated at the average exchange rate for the period January 1, 2017 through December 31, 2017. Gains or losses resulting from translating foreign currency financial statements are included in accumulated other comprehensive income.

Revenue Recognition

The Company recognizes income earned from services provided to ACY pursuant to a management agreement.  The Company receives a monthly management fee based on the net asset value of ACY’s assets under management by the Company.  The Company records the monthly management fee at the end of each month. The Company also receives an acquisition fee for locating assets for ACY and may receive a remarketing fee in connection with the sale or re-lease of ACY’s assets. The Company’s policy is to record acquisition fees on the date ACY completes the acquisition of aircraft assets and to record remarketing fees on the date a sale or re-lease of ACY’s assets occurs.

Concentration of Revenues

All of the fees earned by the Company are derived from aviation assets owned by ACY, which are leased to customers in countries around the world. Related party issues between the Company and ACY are discussed in footnote 9.


3. Commitments

The Company leases its office space under a lease expiring June 30, 2020 and a storage facility on a monthly basis.  The monthly lease commitment for the office space includes an amount for base rent and operating expenses.  The Company estimates that the future minimum lease commitments for its office space and storage facility are as follows:

Year Ended December 31:
 
Amount
 
2018
 
$
440,300
 
2019
   
442,000
 
2020
   
222,600
 
Total
 
$
1,104,900
 

The Company has a contractual obligation to pay a certain amount of operating expenses (utilities and insurance costs) that are included in office rent expense.  The projected annual rent expenses shown above for the periods 2018 through 2020 are based on periodic increases to the base rental rate per the lease and operating expense amounts in effect at December 31, 2017.  The lease allows for a 2% increase to monthly operating expenses beginning on January 1, 2017, but since no increase occurred it was not reflected in the estimated operating expenses for 2018.  The lease also allows for a 2% increase in monthly operating expenses beginning on January 1, 2019, which is reflected in future minimum lease commitments for 2019 and 2020. Total rent expense for the year ended December 31, 2017, which included rent for a storage facility rented on a monthly basis, was $423,600.

4. Income tax provision

The components for the provision for income taxes for the year ended December 31, 2017 were as follows:

Current tax provision:
     
Federal
 
$
552,400
 
State
   
106,300
 
Foreign
   
66,600
 
Current tax provision
   
725,300
 
Deferred tax provision:
       
Federal
 
$
2,300
 
State
   
500
 
Foreign
   
1,300
 
Net legislative change in corporate tax rate
   
(246,400
)
Change in valuation allowance
   
(1,600
)
Deferred tax provision
   
(243,900
)
Total provision for income taxes
 
$
481,400
 



4. Income tax provision (continued)

Total income tax expense differs from the amount that would be provided by applying the statutory federal income tax rate to pretax earnings as illustrated below:

Income tax expense at the statutory federal income tax rate
 
$
576,900
 
State tax expense net of federal benefit
   
66,500
 
Non-deductible expenses
   
19,500
 
Non-taxable income
   
(3,200
)
Net legislative change in corporate tax rate
   
(246,400
)
Foreign tax on Canadian operations
   
66,000
 
Other tax rate differences
   
3,700
 
Change in valuation allowance
   
(1,600
)
Total income tax provision
 
$
481,400
 

Temporary differences and carry-forwards that gave rise to a significant portion of deferred tax assets and (liabilities) as of December 31, 2017 are as follows:

Gross deferred tax assets:
     
Franchise taxes
 
$
20,600
 
Deferred compensation
   
15,400
 
Deferred tax assets
   
36,000
 
Valuation allowance
   
-
 
Net deferred tax asset
   
36,000
 
Gross deferred tax liabilities:
       
Unrealized gains on securities
   
(661,700
)
Depreciation and impairment
   
(6,200
)
Net deferred tax liabilities
 
$
(631,900
)

JetFleet Canada is a Canadian corporation subject to tax in Canada and JMC USVI was a Virgin Islands limited liability company taxed as a corporation in the Virgin Islands.  Accordingly, the provision for income taxes for these subsidiaries is reflected in the Company’s consolidated financial statements and includes foreign taxes currently payable and changes in deferred tax assets and liabilities.

Deferred federal income taxes arise from temporary differences between the valuation of assets and liabilities as determined for financial reporting purposes and federal income tax purposes and are measured at enacted tax rates.  As of December 31, 2016, the Company measured its deferred tax items at an effective federal tax rate of 34%.  On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law.  Among other things, the Act reduced the Company’s corporate federal tax rate to a flat 21% for years after 2017 and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. The Act also establishes new taxes on certain foreign-sourced earnings.




4. Income tax provision (continued)

As of December 31, 2017, the Company’s deferred tax items have been re-measured and adjusted based on the new federal tax rate of 21%, which is the rate at which they are expected to reverse in subsequent years, and an additional income tax benefit of $246,400 has been recognized from the legislative change in corporate tax rate.

Utilization of the deferred tax assets may be subject to a substantial annual limitation due to ownership change limitations that could occur in the future, as required by the Internal Revenue Code Section 382, as well as similar state provisions. In general, an "ownership change," as defined by the code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups.

The Company has not established a valuation allowance at December 31, 2017 for its deferred tax assets because the Company believes that it is more likely than not that it will have sufficient future taxable income (including the reversal of temporary differences) to realize the tax benefits from such assets.

Pursuant to ASU 2018-02, the Company has elected to apply the option to reclassify the tax effects from the Act related to the appreciation of its investment in marketable securities on such date, from accumulated other comprehensive income to retained earnings. The amount of the reclassification, $267,400, is the difference between the amount initially charged or credited directly to other comprehensive income at the previously enacted federal corporate income tax rate and the amount that would have been charged or credited directly to other comprehensive income by applying the newly enacted 21% rate.

The Company accounts for interest related to uncertain tax positions as interest expense and for income tax penalties as tax expense. As of December 31, 2017, the Company has accrued $65,400 of tax and penalties and $19,600 of interest in accounts payable and accrued liabilities related to unrecognized tax benefits on its Canadian operation, all of which were recorded in the current year and are recorded through the Company’s Consolidated Statements of Operations and Comprehensive Income.  The Company does not anticipate any significant changes to the unrecognized tax benefits within twelve months of this reporting date.

All of the Company's tax years remain open to examination other than as barred in the various jurisdictions by statutes of limitation.



5. Acquisition by AeroCentury Corp.

In October 2017, the Company and ACY entered into an Agreement and Plan of Merger (the "Merger Agreement") for the acquisition of the Company by ACY in a reverse triangular merger (the "Merger") for consideration of $3.5 million in cash and 129,286 shares of common stock of ACY, subject to adjustment as provided in the Merger Agreement. ACY submitted an application to the State of California Department of Business Oversight (the "DBO") for a permit (the "Permit") to issue securities to the Company's shareholders in the Merger, which Permit was issued on February 22, 2018 after a hearing with the DBO. The Company’s shareholders approved the acquisition of the Company by ACY on March 14, 2018.  It is anticipated that the closing will occur in the second quarter of 2018, upon the fulfillment of several conditions, including votes in favor of the Merger by certain specified constituencies of ACY’s shareholders. The Company is evaluating the accounting for the Merger.

6. Concentration of Credit Risk

The Company maintains its cash and cash equivalents at various financial institutions, where they are insured by the Federal Deposit Insurance Corporation (“FDIC”) and the Securities Investor Protection Corporation (“SIPC”) up to $250,000. The balances of these accounts from time to time exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents. At December 31, 2017, the amount over FDIC and SIPC limits was approximately $4,042,600.

7. Accumulated Comprehensive Income
   
Before-tax Amount
   
Tax
(Expense)
   
Net-of-tax Amount
 
Foreign currency translation adjustments
 
$
400
   
$
(100
)
 
$
300
 
Unrealized gains on securities
   
2,364,400
     
(661,600
)
   
1,702,800
 
Total accumulated comprehensive income
 
$
2,364,800
   
$
(661,700
)
 
$
1,703,100
 

8. Retirement plan

The Company maintains a qualified defined contribution salary deferral profit sharing plan for U.S. employees.  An employee must be at least 21 years of age to participate in this plan.  This plan permits employees to defer up to 15% of their salary based on strict IRS guidelines. Participants are always 100% vested in their salary deferral contributions. Participants vest in the matching Company contributions ratably over two years.  The Company made matching contributions to this plan for the year ended December 31, 2017 of $56,500.


9. Related Party Transactions

The Company’s subsidiary, JMC, an integrated aircraft management, marketing and financing business, manages and administers a portfolio of leased aircraft assets owned by ACY pursuant to a management agreement which expires in August 2025. Certain officers of the Company are also officers of ACY and hold significant ownership positions in both ACY and the Company. JMC also receives an acquisition fee for locating assets for ACY and may receive a remarketing fee in connection with the sale or re-lease of ACY’s assets.  During the year ended December 31, 2017, JMC received management fees of $6,109,100 and acquisition fees of $850,500.  Also, during 2017, JMC received remarketing fees of $51,100 from ACY.

10. Subsequent Events

The Company has evaluated events occurring through May 15, 2018 the date the financial statements were available to be issued. In March 2018, the Company received approval by the Company’s shareholders and by California regulatory authorities to merge with a subsidiary of ACY.  Under the merger agreement, the Company’s shareholders expect to receive $3.5 million in cash and 129,286 shares of ACY common stock, subject to various adjustments at closing, in return for all the outstanding capital stock of the Company.

In April 2018, the Company agreed to forebear its right to receive certain fees otherwise owed by ACY to the Company pursuant to the Management Agreement for all periods after March 31, 2018 and until August 15, 2018, provided that the ACY will still be required to reimburse the Company for certain expenses as required under the Management Agreement.  If the Merger Agreement is terminated on or before August 15, 2018 or the Merger otherwise does not close by August 15, 2018, this forbearance will end and ACY will be obligated to pay all such fees that the Company agreed to forebear.  If the Merger closes on or before August 15, 2018, this forbearance will be deemed to be a permanent waiver of such fees and the ACY will not be required to pay such fees to the Company. 

There are no other events that require recording or disclosure in the financial statements for the year ended December 31, 2017.


(Back To Top)

Section 4: EX-99.3 (AUDITED JETFLEET HOLDING SEP 30, 2017 FINANCIAL STATEMENTS)



EXHIBIT 99.3








JetFleet Holding Corp. and Subsidiaries


Consolidated Financial Statements


For the nine months ended September 30, 2017

TABLE OF CONTENTS


 
TITLE
TABLE OF CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS


Independent Auditor’s Report


Board of Directors
JetFleet Holding Corp. and Subsidiaries
Burlingame, California

We have audited the accompanying consolidated financial statements of JetFleet Holding Corp. and Subsidiaries, which comprise the consolidated balance sheet as of September 30, 2017, and the related consolidated statement of operations, comprehensive income, stockholders’ equity, and cash flows for the period then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of JetFleet Holding Corp. and Subsidiaries as of September 30, 2017, and the results of its operations and its cash flows for the period then ended in accordance with accounting principles generally accepted in the United States of America.

/s/ BDO USA, LLP


December 20, 2017

JetFleet Holding Corp. and Subsidiaries
Consolidated Balance Sheet
September 30, 2017

ASSETS
 
Assets:
     
Cash and cash equivalents
 
$
4,196,500
 
Marketable securities
   
3,181,200
 
Receivable from affiliates
   
1,056,500
 
Accounts receivable
   
2,800
 
Note receivable
   
38,100
 
Prepaid expenses and other assets
   
133,200
 
Equipment (net of accumulated depreciation of $60,800)
   
21,000
 
Total assets
 
$
8,629,300
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
Liabilities:
       
Accounts payable
 
$
102,800
 
Accrued payroll
   
80,300
 
Income taxes payable
   
311,200
 
Deferred tax liabilities
   
783,200
 
Total liabilities
   
1,277,500
 
         
Shareholders' equity:
       
Series A Redeemable Preferred stock, 200,000 shares authorized,
  no shares issued and outstanding
   
-
 
Common stock, no par value, 1,000,000 shares authorized,
  362,194 issued and outstanding
   
1,261,600
 
Retained earnings
   
4,804,000
 
Accumulated other comprehensive income:
       
Foreign currency translation adjustments
   
(100
)
Unrealized gain on securities
   
1,286,300
 
Total shareholders’ equity
   
7,351,800
 
Total liabilities and shareholders’ equity
 
$
8,629,300
 





See accompanying notes to consolidated financial statements.

JetFleet Holding Corp. and Subsidiaries
Consolidated Statement of Operations
For the nine months ended September 30, 2017



Revenues:
     
Management fees
 
$
4,588,800
 
Acquisition and remarketing fees
   
901,600
 
Dividends, interest and other income
   
9,600
 
Total revenues
   
5,500,000
 
Costs and expenses:
       
Salaries and employee benefits
   
1,876,700
 
Rent
   
311,200
 
Consulting fees
   
345,900
 
Travel, meals and entertainment
   
218,500
 
General and administrative
   
336,900
 
Total costs and expenses
   
3,089,200
 
Income before income taxes
   
2,410,800
 
Income tax expense
   
926,000
 
Net income
 
$
1,484,800
 

















See accompanying notes to consolidated financial statements.

JetFleet Holding Corp. and Subsidiaries
Consolidated Statement of Comprehensive Income
For the nine months ended September 30, 2017



Net income
 
$
1,484,800
 
Other comprehensive income, net of tax:
       
Foreign currency translation adjustments
   
(200
)
Unrealized gain on securities
   
610,200
 
Other comprehensive income
   
610,000
 
Comprehensive income
 
$
2,094,800
 










See accompanying notes to consolidated financial statements.

JetFleet Holding Corp. and Subsidiaries
Consolidated Statement of Shareholders’ Equity
For the nine months ended September 30, 2017

   
Number of
Shares
   
Common
Stock
   
Retained
Earnings
   
Accumulated Comprehensive Income
   
Total
 
Balance at December 31, 2016
   
362,194
   
$
1,261,600
   
$
3,319,200
   
$
676,200
   
$
5,257,000
 
Net income
   
-
     
-
     
1,484,800
     
-
     
1,484,800
 
Foreign currency translation
  adjustments, net of tax benefit
  of $100
   
-
     
-
     
-
     
(200
)
   
(200
)
Unrealized gain on securities,
  net of tax expense of $403,900
   
-
     
-
     
-
     
610,200
     
610,200
 
Balance at September 30, 2017
   
362,194
   
$
1,261,600
   
$
4,804,000
   
$
1,286,200
   
$
7,351,800
 




















See accompanying notes to consolidated financial statements

JetFleet Holding Corp. and Subsidiaries
Consolidated Statement of Cash Flows
For the nine months ended September 30, 2017


Operating activities:
     
Net income
 
$
1,484,800
 
Adjustments to reconcile net income to net cash provided by operating activities:
       
Depreciation
   
3,800
 
Deferred income taxes
   
(15,100
)
Changes in operating assets and liabilities:
       
Receivable from affiliates
   
(42,800
)
Accounts receivable
   
7,500
 
Prepaid expenses and other assets
   
(29,000
)
Accounts payable
   
22,400
 
Accrued payroll
   
(517,700
)
Income taxes payable
   
204,300
 
Net cash provided by operating activities
   
1,118,200
 
Investing activities:
       
Investment in capital assets
   
(7,700
)
Repayments on note receivable
   
3,400
 
Net cash used in investing activities
   
(4,300
)
Net increase in cash and cash equivalents
   
1,113,900
 
Cash and cash equivalents, beginning of period
   
3,082,800
 
Exchange losses on cash and cash equivalents
   
(200
)
Cash and cash equivalents, end of period
 
$
4,196,500
 
Supplemental disclosures of cash flow information:
       
Cash paid during the period for:
       
Income taxes
 
$
736,200
 
Foreign taxes
   
600
 







See accompanying notes to consolidated financial statements


1.
Organization and Business of the Company

Organization

JetFleet Holding Corp. and subsidiaries (“JHC”) was incorporated in the state of California on January 27, 1994.  As of September 30, 2017, all of the outstanding common stock of JHC was owned indirectly through trusts by Toni M. Perazzo and Abigail Crispin (Ms. Perazzo’s dependent child), and by shareholders not affiliated with JHC or its subsidiaries.

JHC owns all of the outstanding common stock of JetFleet Management Corp (“JMC”). JMC owns all of the outstanding common stock of 1314401 Alberta Inc. (“JetFleet Canada”) and owned all the membership interests of JetFleet Management USVI LLC (“JMC USVI”) until June 30, 2017, when it was liquidated and dissolved.

Business of the Company's Subsidiaries

The Company was formed to build an integrated aircraft management, marketing and financing business.  In August 2015, the Company extended its management agreement with AeroCentury Corp. (“ACY”) for ten years.  The new management agreement expires in August 2025, and the Company remains responsible for the selection of assets to be acquired by ACY and the leasing, re-leasing and/or subsequent sale of assets owned by ACY. The Company is entitled to acquisition fees, re-sale and re-lease fees and management fees in connection with these activities.

 As mentioned above, JetFleet Canada is a subsidiary of JMC.  Based in Calgary, Alberta, Canada, JetFleet Canada provides aircraft management and technical services for the Company and its affiliates. 

JMC USVI was a subsidiary of JMC, based in St. Thomas, U.S. Virgin Islands (“USVI”).  JMC had an agreement with JMC USVI for consulting services and to operate office space in the U.S. Virgin Islands for use by JMC.  In 2016, JMC ceased payment of consulting fees and initiated closing JMC USVI’s office in the Virgin Islands. JMC USVI distributed all its assets to JMC and was dissolved on June 30, 2017.

2. Summary of Significant Accounting Policies

Basis of Presentation

Financial information for JHC, JMC, JMC USVI and JetFleet Canada  (collectively, the "Company") is presented on a consolidated basis in accordance with accounting principles generally accepted in the United States of America ("GAAP") based upon the continuation of the business as a going concern.



2. Summary of Significant Accounting Policies (continued)

Principles of Consolidation

These financial statements reflect the consolidation of JHC’s results with those of its wholly owned subsidiaries, JMC, JetFleet Canada and JMC USVI. All intercompany balances and transactions have been eliminated in consolidation.

Use of estimates

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

The most significant estimates with regard to these consolidated financial statements are the estimated value of certain financial assets and the accounting for income taxes.

Cash and Cash Equivalents

The Company considers highly liquid investments readily convertible into known amounts of cash, with original maturities of three months or less, as cash equivalents.

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible.  The standard describes a fair value hierarchy based on three levels of inputs.  The first two are considered observable and the last unobservable.

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.



2. Summary of Significant Accounting Policies (continued)

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

The following table shows by level, within the fair value hierarchy, the Company’s assets at fair value:

   
September 30, 2017
 
         
Level
   
Level
   
Level
 
   
Total
     
1
     
2
     
3
 
Marketable securities
 
$
3,181,200
   
$
3,046,900
   
$
-
   
$
134,300
 
Money market funds
   
272,900
     
272,900
     
-
     
-
 
Total
 
$
3,454,100
   
$
3,319,800
   
$
-
   
$
134,300
 

As of September 30, 2017 there were no liabilities that were required to be measured and recorded at fair value on a recurring basis. During the period ended September 30, 2017, there were no transfers in or out of Level 3 securities.

Fair Value of Other Financial Instruments

The Company’s financial instruments, other than cash, consist principally of cash equivalents, accounts receivable, marketable securities, and accounts payable.  The fair value of cash equivalents, accounts receivable and accounts payable approximates the carrying value of these financial instruments because of their short-term nature.

Marketable securities are stated at fair value as of the balance sheet date.  The Company measures the fair values of investments in securities using the last quoted sales price from the primary exchange where the security is traded.  The Company classifies its marketable equity securities as available for sale. Realized gains and losses, determined using the first in, first out (FIFO) method are included in earnings; unrealized holding gains and losses are reported in other comprehensive income.

For the nine-month period ended September 30, 2017, the Company had a gross unrecognized gain on its marketable equity securities available for sale of $1,014,100.  From inception to September 30, 2017, the Company had the following cumulative gross unrealized gains on marketable equity securities available for sale:
Description
 
Total
Cost
   
Fair Market
Value
   
Gross Unrealized Gain
 
Cumulative gross unrealized gains on
   marketable securities
 
$
1,043,300
   
$
3,181,200
   
$
2,137,900
 

At September 30, 2017, the Company held 214,876 shares of ACY common stock. The Company’s investment in ACY is recorded at fair value and classified within Level 1 because it is listed on the NYSE American Exchange where its value is based on quoted market prices in active markets.



2. Summary of Significant Accounting Policies (continued)

At September 30, 2017, the Company owned 121 shares of Uniform Components non-voting preferred stock.  The Uniform Components non-voting preferred stock has a cumulative preferred annual dividend of 10% and a liquidation value of $1,000 per share, but may not be liquidated before January 1, 2019.   Because the Company owns a minority share of non-voting preferred stock, Uniform Components results are not consolidated with those of the Company.

The Company’s investment in Uniform Components non-voting preferred stock has been classified within Level 3 due to unobservable inputs and infrequent trading.  When observable prices are not available for these securities, the Company measures their fair value using the income valuation approach, for which sufficient and reliable data is available.  The use of the income approach generally consists of the net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors.  Pursuant to the income valuation approach, the Company estimates the Uniform Components non-voting preferred stock’s fair market value based on the estimated net present value of future dividends, the January 1, 2019 liquidation value and a 2.5% interest rate.

Note Receivable

The note receivable is carried at its estimated collectible amount. Interest income on the note receivable is recognized using the interest method.

Equipment and Depreciation

The Company’s interests in equipment are recorded at cost and depreciated using the straight-line method over five years.

Income taxes

As part of the process of preparing the Company’s consolidated financial statements, management is required to estimate income taxes in each of the jurisdictions in which the Company operates.  This process involves estimating the Company’s current tax exposure under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and GAAP purposes.  These differences result in deferred tax assets and liabilities that are included in the consolidated balance sheet.  Management must also assess the likelihood that the Company’s deferred tax assets will be recovered from future taxable income, and, to the extent management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized, the Company must establish a valuation allowance.  To the extent the Company establishes a valuation allowance or changes the allowance in a period, the Company reflects the corresponding increase or decrease within the tax provision in the consolidated statement of operations. Significant management judgment is required in determining the Company’s future taxable income for purposes of assessing the Company’s ability to realize any benefit from its deferred taxes.  The Company records non-income based sales, use, property, value added and franchise taxes as general and administrative expense in the consolidated statement of operations.



2. Summary of Significant Accounting Policies (continued)

Common Stock

On September 30, 2017, the Company had 362,194 shares of common stock outstanding.

Comprehensive Income

The Company reports unrealized gains and losses from marketable securities in comprehensive income.  In addition, for the Company’s foreign subsidiary where the functional currency is the Canadian dollar, monetary assets and liabilities are translated at period-end exchange rates while non-monetary items are translated at historical rates.  Income and expense accounts are translated at the average rates in effect during the period.

Foreign Currency

The reporting currency of the Company is the U.S. dollar. The functional currency of JetFleet Canada is the Canadian dollar. The balance sheet of the Company’s foreign subsidiary is translated at the September 30, 2017 rate of exchange, and the statement of operations is translated at the average exchange rate for the period January 1, 2017 through September 30, 2017. Gains or losses resulting from translating foreign currency financial statements are included in accumulated other comprehensive income.

Revenue Recognition

The Company recognizes income earned from services provided to ACY pursuant to a management agreement.  The Company receives a monthly management fee based on the net asset value of ACY’s assets under management by the Company.  The Company records the monthly management fee at the end of each month. The Company also receives an acquisition fee for locating assets for ACY, and may receive a remarketing fee in connection with the sale or re-lease of ACY’s assets. The Company’s policy is to record acquisition fees on the date ACY completes the acquisition of aircraft assets and to record remarketing fees on the date a sale or re-lease of ACY’s assets occurs.

Concentration of Revenues

All of the fees earned by the Company are derived from aviation assets owned by ACY, which are leased to customers in countries around the world. Related party issues between the Company and ACY are discussed in footnote 8.



3. Commitments

The Company leases its office space under a lease expiring June 30, 2020 and a storage facility on a monthly basis.  The monthly lease commitment for the office space includes an amount for base rent and operating expenses.  The Company estimates that the future minimum lease commitments for its office space and storage facility are as follows:

Year Ended December 31:
 
Amount
 
2017 (3 months remaining)
 
$
110,400
 
2018
   
441,800
 
2019
   
449,100
 
2020
   
230,700
 
Total
 
$
1,232,000
 

The Company has a contractual obligation to pay a certain amount of operating expenses (utilities and insurance costs) that are included in office rent expense.  The projected annual rent expenses shown above for the periods 2017 through 2020 are based on periodic increases to the base rental rate per the lease and operating expense amounts in effect at September 30, 2017.  The lease allows for a 2% increase to monthly operating expenses beginning on January 1, 2017, but since no increase occurred it was not reflected in the estimated operating expenses for 2017 and 2018.  The lease also allows for a 2% increase in monthly operating expenses beginning on January 1, 2019, which is reflected in estimated operating expenses for 2019 and 2020. Total rent expense for the nine months ended September 30, 2017, which included rent for a storage facility rented on a monthly basis, was $311,200.

4. Income tax provision

The components for the provision for income taxes for the nine months ended September 30, 2017 were as follows:

Current tax provision:
     
Federal
 
$
788,600
 
State
   
151,900
 
Foreign
   
600
 
Current tax provision
   
941,100
 
Deferred tax provision:
       
Federal
   
(17,400
)
State
   
(300
)
Change in valuation allowance
   
2,600
 
Deferred tax provision
   
(15,100
)
Total provision for income taxes
 
$
926,000
 



4. Income tax provision (continued)

Total income tax expense differs from the amount that would be provided by applying the statutory federal income tax rate to pretax earnings as illustrated below:

Income tax expense at the statutory federal income tax rate
 
$
819,700
 
State tax expense net of federal benefit
   
97,900
 
Meals and entertainment
   
3,100
 
Non-taxable income
   
(2,500
)
Tax rate differences
   
5,200
 
Change in valuation allowance
   
2,600
 
Total income tax provision
 
$
926,000
 

Temporary differences and carry-forwards that gave rise to a significant portion of deferred tax assets and (liabilities) as of September 30, 2017 are as follows:

Gross deferred tax assets:
     
Franchise taxes
 
$
48,200
 
Deferred compensation
   
30,700
 
Net operating loss carry forwards
   
4,300
 
Deferred tax assets
   
83,200
 
Valuation allowance
   
(4,300
)
Net deferred tax asset
   
78,900
 
Gross deferred tax liabilities:
       
Unrealized gains on securities
   
(851,600
)
Depreciation and impairment
   
(10,500
)
Net deferred tax liabilities
 
$
(783,200
)

JetFleet Canada is a Canadian corporation subject to tax in Canada and JMC USVI was a Virgin Islands limited liability company taxed as a corporation in the Virgin Islands.  Accordingly, the provision for income taxes for these subsidiaries is reflected in the Company’s consolidated financial statements and includes foreign taxes currently payable and changes in deferred tax assets and liabilities.

A portion of the deferred tax assets recognized relates to JetFleet Canada’s foreign net operating loss carryovers.  The foreign net operating carryovers of approximately $11,200 will be available to offset taxable income in future years and begin to expire in 2029.  A valuation allowance was deemed necessary on JetFleet Canada net operating loss carryovers, as the Company has concluded, based on an assessment of all available evidence, that it is more likely than not that future taxable income will not be sufficient to realize these tax benefits. Where a valuation allowance was not recorded for other deferred tax assets, the Company believes that it is more likely than not that future taxable income (including the reversal of temporary differences) will be sufficient to realize the tax benefits for the balance of deferred tax assets on the balance sheet at September 30, 2017.





4. Income tax provision (continued)

The Company accounts for interest related to uncertain tax positions as interest expense and for income tax penalties as tax expense. There are no material unrecognized income tax positions related to uncertain tax positions.

All of the Company's tax years remain open to examination other than as barred in the various jurisdictions by statutes of limitation.

5. Concentration of Credit Risk

The Company maintains its cash and cash equivalents at various financial institutions, where they are insured by the Federal Deposit Insurance Corporation (“FDIC”) and the Securities Investor Protection Corporation (“SIPC”) up to $250,000. The balances of these accounts from time to time exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents. At September 30, 2017, the amount over FDIC and SIPC limits was approximately $3,428,400.

6. Accumulated Comprehensive Income

   
Before-tax Amount
   
Tax
(Expense)
   
Net-of-tax Amount
 
Foreign currency translation adjustments
 
$
(200
)
 
$
100
   
$
(100
)
Unrealized gains on securities
   
2,137,900
     
(851,600
)
   
1,286,300
 
Total accumulated comprehensive income
 
$
2,137,700
   
$
(851,500
)
 
$
1,286,200
 

7. Retirement plan

The Company maintains a qualified defined contribution salary deferral profit sharing plan for U.S. employees.  An employee must be at least 21 years of age to participate in this plan.  This plan permits employees to defer up to 15% of their salary based on strict IRS guidelines. Participants are always 100% vested in their salary deferral contributions. Participants vest in the matching Company contributions ratably over two years.  The Company made no matching contributions to this plan for the nine months ended September 30, 2017.

8. Related Party Transactions

The Company’s subsidiary, JMC, an integrated aircraft management, marketing and financing business, manages and administers a portfolio of leased aircraft assets owned by ACY pursuant to a management agreement which expires in August 2025. Certain officers of the Company are also officers of ACY and hold significant ownership positions in both ACY and the Company. JMC also receives an acquisition fee for locating assets for ACY, and may receive a remarketing fee in connection with the sale or re-lease of ACY’s assets.  During the nine months ended September 30, 2017, JMC received management fees of $4,588,800 and acquisition fees of $850,500.  Also during 2017, JMC received remarketing fees of $51,100 from ACY.




9. Subsequent Events

The Company has evaluated events occurring through December 20, 2017, the date the financial statements were available to be issued. In October 2017, the Company agreed to be acquired by ACY, subject to approval by the Company’s shareholders and by California regulatory authorities.  Under the merger agreement, the Company’s shareholders expect to receive $3.5 million in cash and 129,286 shares of ACY common stock, subject to various adjustments at closing, in return for all the outstanding capital stock of the Company.  The closing of the merger agreement is expected to occur in the first quarter of 2018, and is subject to satisfaction of certain conditions customary for merger transactions. There are no other events that require recording or disclosure in the financial statements for the nine months ended September 30, 2017.


(Back To Top)

Section 5: EX-99.3 (UNAUDTED JETFLEET HOLDING CONSOLIDATED 9/30/18 FINANCIAL STATEMENTS)




EXHIBIT 99.4







JetFleet Holding Corp. and Subsidiaries


Unaudited Consolidated Financial Statements


For the nine months ended September 30, 2018




TABLE OF CONTENTS



 
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JetFleet Holding Corp. and Subsidiaries
Consolidated Balance Sheet
September 30, 2018
(Unaudited)

ASSETS
 
Assets:
     
Cash and cash equivalents
 
$
40,000
 
Marketable securities
   
3,451,600
 
Receivable from affiliate
   
561,900
 
Accounts receivable
   
3,200
 
Taxes receivable
   
101,100
 
Note receivable
   
23,100
 
Prepaid expenses and other assets
   
201,200
 
Equipment (net of accumulated depreciation of $39,200)
   
25,000
 
Leasehold interest (net of accumulated amortization of $900)
   
10,600
 
Total assets
 
$
4,417,700
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
Liabilities:
       
Accounts payable and accrued liabilities
 
$
174,800
 
Accrued payroll
   
93,400
 
Income taxes payable
   
6,000
 
Deferred tax liability
   
665,800
 
Dividend payable
   
3,330,600
 
Total liabilities
   
4,270,600
 
         
Shareholders' equity:
       
Series A Redeemable Preferred stock, 200,000 shares authorized,
  no shares issued and outstanding
   
-
 
Common stock, no par value, 1,000,000 shares authorized,
  362,194 issued and outstanding
   
1,261,600
 
Retained earnings
   
(1,088,600
)
Accumulated other comprehensive income:
       
Foreign currency translation adjustments
   
(500
)
Unrealized gain on marketable securities
   
(25,400
)
Total shareholders’ equity
   
147,100
 
Total liabilities and shareholders’ equity
 
$
4,417,700
 







See accompanying notes to unaudited consolidated financial statements.

JetFleet Holding Corp. and Subsidiaries
Consolidated Statement of Operations
For the nine months ended September 30, 2018
(Unaudited)



Revenues:
     
Management fees
 
$
3,459,700
 
Dividends, interest and other income
   
9,600
 
Total revenues
   
3,469,300
 
Costs and expenses:
       
Salaries and employee benefits
   
1,987,500
 
Rent
   
288,000
 
Consulting fees
   
210,000
 
Travel, meals and entertainment
   
257,600
 
Interest
   
3,200
 
General and administrative
   
454,200
 
Total costs and expenses
   
3,200,500
 
Income from operations

   
268,800
 
Gain on distribution of AeroCentury common stock (reclassified from other
  comprehensive income on marketable securities)
   
2,433,700
 
Income before income taxes
   
2,702,500
 
Income tax expense (including $681,000 reclassified from other
  comprehensive income on marketable securities)
   
757,400
 
Net income
 
$
1,945,100
 
















See accompanying notes to unaudited consolidated financial statements.

JetFleet Holding Corp. and Subsidiaries
Consolidated Statement of Comprehensive Income
For the nine months ended September 30, 2018
(Unaudited)



Net income
 
$
1,945,100
 
Other comprehensive income, net of tax:
       
Foreign currency translation adjustment
   
(800
)
Unrealized holding losses on securities
   
(15,700
)
Unrealized holding gains on securities
   
40,200
 
Less:  reclassification adjustment for gains included in net income
   
(1,752,700
)
Comprehensive income
 
$
216,100
 
































See accompanying notes to unaudited consolidated financial statements.

JetFleet Holding Corp. and Subsidiaries
Consolidated Statement of Shareholders’ Equity
For the nine months ended September 30, 2018
(Unaudited)

   
Number of
Shares
   
Common
Stock
   
Retained
Earnings
   
Accumulated Comprehensive Income
   
Total
 
Balance at December 31, 2017
   
362,194
   
$
1,261,600
   
$
4,267,100
   
$
1,703,100
   
$
7,231,800
 
Net income for the
  nine-month period ended
  September 30, 2018
   
-
     
-
     
1,945,100
     
-
     
1,945,100
 
Foreign currency translation
  adjustments, net of tax benefit
  of $300
   
-
     
-
     
-
     
(800
)
   
(800
)
Unrealized holding loss on
  securities, net of tax
  expense of $3,800
   
-
     
-
     
-
     
(15,700
)
   
(15,700
)
Unrealized holding gains on
  securities, net of tax
  expense of $15,600
   
-
     
-
     
-
     
40,200
     
40,200
 
Reclassification of gains
  on securities included in
  current income, net of tax
  expense of $665,400
   
-
     
-
     
-
     
(1,752,700
)
   
(1,752,700
)
Dividend of 0.593 shares of
  AeroCentury common stock
  per share of common stock
   
-
     
-
     
(3,330,600
)
           
(3,330,600
)
Dividend of $10.96 per share
  of common stock
   
-
     
-
     
(3,970,200
)
   
-
     
(3,970,200
)
Balance at September 30, 2017
   
362,194
   
$
1,261,600
   
$
(1,088,600
)
 
$
(25,900
)
 
$
147,100
 









See accompanying notes to unaudited consolidated financial statements

JetFleet Holding Corp. and Subsidiaries
Consolidated Statement of Cash Flows
For the nine months ended September 30, 2018
(Unaudited)


Operating activities:
     
Net income
 
$
1,945,100
 
Adjustments to reconcile net income to net cash used in operating activities:
       
Gain on declaration of AeroCentury common stock dividend
   
(2,433,700
)
Depreciation and amortization
   
11,600
 
Deferred income taxes
   
695,900
 
Changes in operating assets and liabilities:
       
Receivable from affiliate
   
(65,300
)
Accounts receivable
   
200
 
Taxes receivable
   
(76,500
)
Prepaid expenses and other assets
   
(79,900
)
Accounts payable and accrued liabilities
   
(27,500
)
Accrued payroll
   
(815,000
)
Income taxes payable
   
5,400
 
Net cash used in operating activities
   
(839,700
)
Investing activities:
       
Net investment in equipment
   
(24,500
)
Repayments on note receivable
   
9,700
 
Net cash used in investing activities
   
(14,800
)
Financing activities:
       
Cash dividends
   
(3,970,200
)
Net cash used in financing activities
   
(3,970,200
)
Net decrease in cash and cash equivalents
   
(4,824,700
)
Exchange loss on cash and cash equivalents
   
(1,300
)
Cash and cash equivalents, beginning of period
   
4,866,000
 
Cash and cash equivalents, end of period
 
$
40,000
 
Supplemental disclosures of cash flow information:
       
Cash paid during the period for:
       
Income taxes
 
$
130,500
 
Foreign taxes
 
$
1,100
 





See accompanying notes to unaudited consolidated financial statements


1.
Organization and Business of the Company

Organization

JetFleet Holding Corp. and Subsidiaries (“JHC” or the “Company”) was incorporated in the state of California on January 27, 1994.  As of September 30, 2018, all of the outstanding common stock of JHC was owned indirectly through trusts by Toni M. Perazzo and Abigail Crispin (Ms. Perazzo’s daughter), and by shareholders not affiliated with JHC or its subsidiaries.

JHC owns all of the outstanding common stock of JetFleet Management Corp (“JMC”). JMC owns all of the outstanding common stock of 1314401 Alberta Inc. (“JetFleet Canada”).

Business of the Company and the Company's Subsidiaries

The Company was formed to build an integrated aircraft management, marketing and financing business.  In August 2015, the Company extended its management agreement with AeroCentury Corp. (“ACY”) for ten years.  The new management agreement expires in August 2025, and the Company remains responsible for the selection of assets to be acquired by ACY and the leasing, re-leasing and/or subsequent sale of assets owned by ACY. The Company is entitled to acquisition fees, re-sale and re-lease fees and management fees in connection with these activities. As a result of the October 1, 2018 merger between ACY and the Company discussed in Note 6, the Company will cease to receive these fees.

 As mentioned above, JetFleet Canada is a subsidiary of JMC.  Based in Calgary, Alberta, Canada, JetFleet Canada provides aircraft management and technical services for the Company and its affiliates. 

2. Summary of Significant Accounting Policies

Basis of Presentation

Financial information for the Company is presented on a consolidated basis in accordance with accounting principles generally accepted in the United States of America ("GAAP") based upon the continuation of the business as a going concern.

Principles of Consolidation

These financial statements reflect the consolidation of JHC’s results with those of its wholly owned subsidiaries, JMC, and JetFleet Canada. All intercompany balances and transactions have been eliminated in consolidation.



2. Summary of Significant Accounting Policies (continued)

Use of estimates

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

The most significant estimates with regard to these consolidated financial statements are the estimated value of marketable securities and the accounting for income taxes.

Cash and Cash Equivalents

The Company considers highly liquid investments readily convertible into known amounts of cash, with original maturities of three months or less, as cash equivalents.

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible.  The standard describes a fair value hierarchy based on three levels of inputs.  The first two are considered observable and the last unobservable.

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.











2. Summary of Significant Accounting Policies (continued)

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

The following table shows by level, within the fair value hierarchy, the Company’s assets at fair value:
   
September 30, 2018
 
         
Level
   
Level
   
Level
 
   
Total
     
1
     
2
     
3
 
Marketable securities
 
$
3,451,600
   
$
3,330,600
   
$
-
   
$
121,000
 
Money market funds
   
200
     
200
     
-
     
-
 
Total
 
$
3,451,800
   
$
3,330,800
   
$
-
   
$
121,000
 

As of September 30, 2018, there were no liabilities that were required to be measured and recorded at fair value on a recurring basis. During the nine months ended September 30, 2018, there were no transfers in or out of Level 3 securities.

Fair Value of Other Financial Instruments

The Company’s financial instruments, other than cash, consist principally of cash equivalents, accounts receivable, marketable securities, and accounts payable.  The fair value of cash equivalents, accounts receivable and accounts payable approximates the carrying value of these financial instruments because of their short-term nature.

Marketable securities are stated at fair value as of the balance sheet date.  The Company measures the fair values of investments in Level 1 securities using the last quoted sales price from the primary exchange where the security is traded.  The Company classifies its marketable equity securities as available for sale. Realized gains and losses, determined using the first in, first out (FIFO) method are included in earnings; unrealized holding gains and losses are reported in other comprehensive income.

For the nine months ended September 30, 2018, the Company had a gross unrecognized loss on its marketable equity securities available for sale of $11,900.  From inception to September 30, 2018, the Company had the following cumulative gross unrealized losses on marketable equity securities available for sale:
Description
Total
Cost
Fair Market
Value
Gross Unrealized Gain
Cumulative gross unrealized gains on
   marketable securities
$146,400
$121,000
$25,400





2. Summary of Significant Accounting Policies (continued)

At September 30, 2018, the Company held 214,876 shares of ACY common stock. The Company’s investment in ACY is recorded at fair value and classified within Level 1 because it is listed on the NYSE American Exchange where its value is based on quoted market prices in active markets. As discussed below in Note 3, the Company made a dividend distribution of the ACY common stock on October 1, 2018 and recognized the gain in current income at September 30, 2018.

At September 30, 2018, the Company owned 121 shares of Uniform Components non-voting preferred stock.  The Uniform Components non-voting preferred stock has a cumulative preferred annual dividend of 10% and a liquidation value of $1,000 per share, but may not be redeemed before January 1, 2019.   Because the Company owns a minority share of non-voting preferred stock, Uniform Components results are not consolidated with those of the Company.


 The Company’s investment in Uniform Components non-voting preferred stock has been classified within Level 3 due to unobservable inputs and infrequent trading.  When observable prices are not available for these securities, the Company measures their fair value using the income valuation approach, for which sufficient and reliable data is available.  At September 30, 2018,  the Company has estimated the stock’s fair market value to be equal to its stated liquidation value on January 1, 2019, which does not differ materially from estimating the value based upon expected dividends and liquidation proceeds, discounted at 10%, the stock’s dividend rate.

Note Receivable

The note receivable is carried at its estimated collectible amount. The Company received the note receivable in July 2014 from an outside consultant in exchange for a cash loan. The note receivable accrues interest at 1% per annum and matures on October 31, 2020.   Interest income on the note receivable is recognized using the interest method.

Equipment, Leasehold Improvements and Depreciation

The Company’s interests in equipment are recorded at cost and depreciated using the straight-line method over five years. The Company’s leasehold improvements are recorded at cost and amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the respective assets.

Income taxes

As part of the process of preparing the Company’s consolidated financial statements, management is required to estimate income taxes in each of the jurisdictions in which the Company operates.  This process involves estimating the Company’s current tax exposure under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and GAAP purposes.  These differences result in deferred tax assets and liabilities that are included in the consolidated balance sheet.  Management must also assess the likelihood that the Company’s deferred tax assets will be recovered from future taxable income, and, to the extent management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized, the Company must establish a valuation allowance.  To the extent the Company

2.
Summary of Significant Accounting Policies (continued)

establishes a valuation allowance or changes the allowance in a period, the Company reflects the corresponding increase or decrease within the tax provision in the consolidated statement of operations. Significant management judgment is required in determining the Company’s future taxable income for purposes of assessing the Company’s ability to realize any benefit from its deferred taxes.  The Company records non-income based sales, use, property, value added and franchise taxes as general and administrative expense in the consolidated statement of operations.

In early 2018, Accounting Standards Update 2018-02 Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income  (“ASU 2018-02”) was adopted by the FASB, providing that reporting entities could elect to reclassify “stranded tax effects,” resulting from the tax rate reduction provided for in the Tax Cuts and Jobs Act of 2017, from accumulated comprehensive income to retained earnings.  The Company early adopted ASU 2018-02 for its year ended December 31, 2017, and consequently reclassified its stranded tax effects in that year.

Common Stock

On September 30, 2018, the Company had 362,194 shares of common stock outstanding.

Comprehensive Income

The Company reports unrealized gains and losses from marketable securities in comprehensive income.  In addition, for the Company’s foreign subsidiary where the functional currency is the Canadian dollar, monetary assets and liabilities are translated at period-end exchange rates while non-monetary items are translated at historical rates.  Income and expense accounts are translated at the average rates in effect during the period.

Foreign Currency

The reporting currency of the Company is the U.S. dollar. The functional currency of JetFleet Canada is the Canadian dollar. The balance sheet of the Company’s foreign subsidiary is translated at the September 30, 2018 rate of exchange, and the statement of operations is translated at the average exchange rate for the period from January 1, 2018 through September 30, 2018. Gains or losses resulting from translating foreign currency financial statements are included in accumulated other comprehensive income.

Revenue Recognition

The Company recognizes income earned from services provided to ACY pursuant to a management agreement.  The Company receives a monthly management fee based on the net asset value of ACY’s assets under management by the Company.  The Company records the monthly management fee at the end of each month. The Company also receives an acquisition fee for locating assets for ACY and may receive a remarketing fee in connection with the sale or re-lease of ACY’s assets. The Company’s policy is to record acquisition fees on the date ACY completes the acquisition of aircraft assets and to record remarketing fees on the date a sale or re-lease of ACY’s assets occurs.




2. Summary of Significant Accounting Policies (continued)

Concentration of Revenues

All of the fees earned by the Company are derived from aviation assets owned by ACY, which are leased to customers in countries around the world. Related party transactions between the Company and ACY are discussed in footnote 10.

3.
Dividends

On September 18, 2018, the Board of Directors declared a dividend to common stockholders in the form of 0.593 shares of common stock of ACY, which stock was held as available for sale. On October 1, 2018, stockholders of record on September 19, 2018 received 0.593 shares of ACY’s common stock for each share of the Company's stock held. Retained earnings was charged in the amount of $3,330,600, which represented the aggregate market value of such ACY stock. A gain of $2,433,700, representing the excess of the distributed stock’s aggregate market value over its aggregate cost, was included in net income in the nine months ended September 30, 2018.

On September 25, 2018, the Board of Directors declared a cash dividend of $10.96 per share of common stock payable on October 1, 2018 to stockholders of record on September 26, 2018.  Retained earnings has been charged in the amount of $3,970,200, which represents the aggregate amount of the cash dividend.

4. Commitments

The Company leases its office space under a lease expiring June 30, 2020 and a storage facility on a monthly basis.  Effective June 1, 2018, the Company agreed to amend its office lease to reduce the size of the rented office space and to provide two consecutive, 1-year renewal options.  The amended monthly lease commitment for the office space includes an amount for base rent and operating expenses (including utilities and insurance costs).  The Company estimates that the future minimum lease commitments for its office space, including both the base rent and operating expenses, and storage facility are as follows:

Year Ended December 31:
 
Amount
 
2018 (3 months remaining)
 
$
79,700
 
2019
   
321,500
 
2020
   
324,400
 
2021
   
327,300
 
2022
   
165,100
 
Total
 
$
1,218,000
 


The projected annual rent expenses shown above are based on periodic increases to the base rental rate provided in the amended lease, and fixed operating expenses of $10,670 per month as required under the amended lease.  Total rent expense for the nine months ended September 30, 2018, which included rent for a storage facility rented on a monthly basis, was $288,000.


5. Income tax provision

The components for the provision for income taxes for the nine months ended September 30, 2018 were as follows:

Current tax provision:
     
Federal
 
$
34,100
 
State
   
21,000
 
Foreign
   
6,400
 
Current tax provision
   
61,500
 
Deferred tax provision:
       
Federal
   
527,700
 
State
   
170,000
 
Foreign
   
(1,800
)
Deferred tax provision
   
695,900
 
Total provision for income taxes
 
$
757,400
 

Total income tax expense differs from the amount that would be provided by applying the statutory federal income tax rate to pretax earnings as illustrated below:

Income tax expense at the statutory federal income tax rate
 
$
567,500
 
State tax expense net of federal benefit
   
137,500
 
Non-deductible expenses
   
2,900
 
Non-taxable income
   
(1,200
)
Tax rate differences, principally on gain from stock distribution
   
50,700
 
Total income tax provision
 
$
757,400
 

Temporary differences and carry-forwards that gave rise to a significant portion of deferred tax assets and (liabilities) as of September 30, 2018 are as follows:

Deferred tax assets:
     
Franchise taxes
 
$
4,100
 
Deferred compensation
   
20,700
 
Deferred tax assets
   
24,800
 
Deferred tax liabilities:
       
Depreciation and impairment
   
(9,800
)
Unrealized gains on securities
   
(680,800
)
Net deferred tax liabilities
 
$
(665,800
)

JetFleet Canada is a Canadian corporation subject to tax in Canada.  Accordingly, the provision for income taxes for JetFleet Canada is reflected in the Company’s consolidated financial statements and includes foreign taxes currently payable and changes in deferred tax assets and liabilities.






5. Income tax provision (continued)

Deferred federal income taxes arise from temporary differences between the valuation of assets and liabilities as determined for financial reporting purposes and federal income tax purposes and are measured at enacted tax rates.  On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law.  Among other things, the Act reduced the Company’s corporate federal tax rate to a flat 21% for years after 2017 and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. The Act also establishes new taxes on certain foreign-sourced earnings.  As of September 30, 2018, the Company’s deferred tax items have been measured and adjusted based on the new federal tax rate of 21%, which is the rate at which they are expected to reverse in subsequent years.

Utilization of the deferred tax assets may be subject to a substantial annual limitation due to ownership change limitations that could occur in the future, as required by the Internal Revenue Code Section 382, as well as similar state provisions. In general, an "ownership change," as defined by the code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups.

The Company has not established a valuation allowance at September 30, 2018 for its remaining deferred tax assets because the Company believes that it is more likely than not that it will have sufficient future taxable income (including the reversal of temporary differences) to realize the tax benefits from such assets.

The Company accounts for interest related to uncertain tax positions as interest expense and for income tax penalties as tax expense. As of September 30, 2018, the Company had a balance of accrued tax, penalties and interest of $89,100 in accounts payable and accrued liabilities related to unrecognized tax benefits on its Canadian operation.  The Company does not anticipate any significant changes to the unrecognized tax benefits within twelve months of this reporting date.

All of the Company's tax years remain open to examination other than as barred in the various jurisdictions by statutes of limitation.

6. Acquisition by AeroCentury Corp.

In October 2017, the Company and ACY entered into an Agreement and Plan of Merger (the "Merger Agreement") for the acquisition of the Company by ACY in a reverse triangular merger (the "Merger") for consideration of $3.5 million in cash and 129,286 shares of common stock of ACY, subject to adjustment as provided in the Merger Agreement. ACY submitted an application to the State of California Department of Business Oversight (the "DBO") for a permit (the "Permit") to issue securities to the Company's shareholders in the Merger, which Permit was issued on February 22, 2018 after a hearing with the DBO. The Company’s shareholders approved the acquisition of the Company by ACY on March 14, 2018.  ACY held a special meeting of its shareholders to approve the Merger and the issuance of ACY Common Stock in connection with the Merger as required under the applicable listing rules of the NYSE American exchange on which ACY’s common stock is traded.  Approval of the Merger was not required under Delaware or California corporate law, or under the Merger Agreement.



6. Acquisition by AeroCentury Corp. (continued)

In August 2018 ACY’s shareholders approved the issuance of ACY Common Stock, and the Merger was consummated on October 1, 2018.

In April 2018, subsequent to the execution of the Merger Agreement, the Company agreed to waive its right to receive management and acquisition fees ("Contract Fees") otherwise owed by
ACY to the Company pursuant to the Management Agreement for all periods after March 31, 2018 and until the earlier of the consummation of the Merger or August 15, 2018.  In return, ACY agreed to reimburse the Company for expenses ("Management Expense") incurred in providing management services set forth under the Management Agreement. In July 2018, the Company agreed to extend the expiration of this agreement (the "Waiver and Reimbursement Agreement") through October 15, 2018. Thus, if the Merger Agreement was terminated on or before October 15, 2018 or the Merger otherwise did not close by October 15, 2018, ACY would have become obligated to pay the Company any excess (the "JMC Margin") of (i) the Contract Fees that would have been paid to the Company since April 1, 2018 in the absence of the Waiver and Reimbursement Agreement over (ii) the Management Expenses actually paid by ACY to the Company since April 1, 2018. For the period April 1, 2018 through September 30, 2018, contractual fees exceeded reimbursed fees by $1,023,100 of management fees and $494,400 of acquisition fees. Pursuant to the Waiver and Reimbursement Agreement, the Company did not accrue as income the JMC Margin that would have been due under the Management Agreement.

Upon the consummation of the Merger Agreement on October 1, 2018, ACY will not be obligated to pay the Company the JMC Margin for the period from April 1, 2018, through October 1, 2018.  Thereafter, the Company will not recognize its right to receive management fees and acquisition fees pursuant to the terms of the Management Agreement.

7. Concentration of Credit Risk

The Company maintains its cash and cash equivalents at various financial institutions, where they are insured by the Federal Deposit Insurance Corporation (“FDIC”) and the Securities Investor Protection Corporation (“SIPC”) up to $250,000. The balances of these accounts from time to time exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents. At September 30, 2018, the amount over FDIC and SIPC limits was approximately $0.

8. Accumulated Comprehensive Income
 
Before-tax Amount
Tax
(Expense)
Net-of-tax Amount
Foreign currency translation adjustments
$     (700)
$200
$     (500)
Unrealized losses on securities
(25,400)
-
(25,400)
Total accumulated comprehensive income
$(26,100)
$200
$(25,900)








8. Accumulated Comprehensive Income (continued)

The Company has not established a deferred tax asset from the unrealized capital loss in the Uniform Components preferred stock of $25,400, at September 30, 2018. When it is realized, the loss will be characterized as a capital loss for income tax purposes and only available to off-set capital gains. In addition, the unused capital loss could only be carried forward for five-years before it expires. Based on an assessment of all available information, the Company believes it is more likely than not that it will not have sufficient future taxable capital gains to realize the tax benefit from such an asset.

9. Retirement plan

The Company maintains a qualified defined contribution salary deferral profit sharing plan for U.S. employees.  An employee must be at least 21 years of age to participate in this plan.  This plan permits employees to defer up to 15% of their salary based on strict IRS guidelines. Participants are always 100% vested in their salary deferral contributions. Participants vest in the matching Company contributions ratably over two years.  The Company made no matching contributions to this plan for the nine months ended September 30, 2018.

10. Related Party Transactions

The Company’s subsidiary, JMC, an integrated aircraft management, marketing and financing business, manages and administers a portfolio of leased aircraft assets owned by ACY pursuant to a management agreement which expires in August 2025. Certain officers of the Company are also officers of ACY and hold significant ownership positions in both ACY and the Company. JMC also receives an acquisition fee for locating assets for ACY and may receive a remarketing fee in connection with the sale or re-lease of ACY’s assets.  During the nine months ended September 30, 2018, JMC earned management fees of $3,459,700.

As discussed above in Note 6, if the Merger had been terminated on or before October 15, 2018 or the Merger otherwise had not closed by October 15, 2018, ACY would have been obligated to pay the Company the JMC Margin.  For the period April 1, 2018 through September 30, 2018, the JMC Margin consisted of $1,023,100 of management fees and $494,400 of acquisition fees. Upon consummation of the Merger on October 1, 2018, the fees subject to the Waiver and Reimbursement Agreement for the period beginning on April 1, 2018 and ending on October 1, 2018, will not be collected.

11. Subsequent Events

The Company has evaluated events occurring through December 10, 2018 the date the financial statements were available to be issued.

On October 1, 2018, the Company distributed to stockholders of record on September 19, 2018, the ACY common stock dividend as described in Note 3.

The Company and ACY consummated the merger agreement on October 1, 2018.  As a subsidiary of ACY, the Company’s results will be included in ACY’s consolidated financial statements beginning in fourth quarter of 2018.  There are no other events that require recording or disclosure in the financial statements for the nine months ended September 30, 2018.
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Section 6: EX-99.5 (UNAUDITED CONDENSED CONSOLIDATED AEROCENTURY FINANCIAL STATEMENTS 9/30/18 AND 12/31/17)

EXHIBIT 99.5
Unaudited Pro Forma Condensed
Combined Financial Information
On October 26, 2017, AeroCentury Corp. (“AeroCentury” or the “Company”) and JetFleet Holding Corp. (“JHC”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) for the acquisition of JHC by the Company in a reverse triangular merger (“Merger”) for consideration of approximately $2.8 million in cash and 129,286 shares of common stock of the Company, as determined pursuant to the Merger Agreement.  JHC is the sole shareholder of JetFleet Management Corp, (“JMC”), which is the manager of the Company’s assets.  The Merger was consummated on October 1, 2018.  The Company’s common stock issued as consideration in the Merger was offered and sold pursuant to an exemption from registration under Section 3(a)(10) of the Securities Act of 1933, as the California Department of Business Oversight (the “DBO”) had issued a permit for the issuance of such securities to JHC’s shareholders on February 22, 2018 after a fairness hearing before the DBO.
The accompanying unaudited preliminary pro forma condensed combined financial statements present the pro
forma combined financial position and results of operations of the combined company based upon the historical financial statements of AeroCentury and JHC after giving effect to the Merger.
The adjustments set forth herein and described in the accompanying footnotes are intended to reflect the impact of the Merger on AeroCentury. The accompanying unaudited pro forma condensed combined financial statements are based upon the historical financial statements and have been derived from the (1) audited consolidated financial statements of AeroCentury contained in its Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and the unaudited condensed consolidated financial statements of AeroCentury contained in its Quarterly Report on Form 10-Q for the nine months ended September 30, 2018, and (2) the audited consolidated statement of operations of JHC for the year ended December 31, 2017 and the unaudited consolidated statement of operations of JHC for the nine months ended September 30, 2018.
The accompanying unaudited pro forma condensed combined financial statements are prepared using the purchase method of accounting, with AeroCentury treated as the acquirer and as if the Merger had been consummated on (1) September 30, 2018 for purposes of preparing the unaudited pro forma condensed combined balance sheet and (2) on January 1, 2017 for purposes of preparing the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2017 and the nine months ended September 30, 2018.  The Company recorded a settlement loss of approximately $2.5 million as of the closing date of the Merger related to its prior obligations under the management agreement with JMC.  As a result of the Merger, the Company assumed JHC liabilities of approximately $0.9 million.

 
The accompanying unaudited preliminary pro forma condensed combined financial statements are provided for illustrative purposes only and do not purport to represent what the actual consolidated results of operations or the consolidated financial position of AeroCentury would have been had the Merger occurred on the dates assumed, nor are they necessarily indicative of future consolidated results of operations or consolidated financial position. The unaudited pro forma condensed combined financial statements should be read in conjunction with the separate historical consolidated financial statements and accompanying notes of AeroCentury, previously filed on AeroCentury’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and Quarterly Report on Form 10-Q for the nine months ended September 30, 2018, and the separate historical consolidated financial statements and accompanying notes of JetFleet for the year ended December 31, 2017 and nine months ended September 30, 2018 included elsewhere in this filing.


Unaudited Pro Forma Condensed Combined Balance Sheet
               
As of September 30, 2018
                         
   
AeroCetury
   
JetFleet
   
Pro forma
     
Pro forma
 
   
historical
   
historical
   
adjustments
 
Notes
 
combined
 
                           
ASSETS
 
                           
Cash and cash equivalents
 
$
6,769,500
   
$
40,000
   
$
(2,863,900
)
(a)
 
$
3,945,600
 
Marketable securities
   
-
     
3,451,600
     
(3,330,600
)
(b)
   
121,000
 
Accounts receivable
   
3,168,000
     
3,200
     
-
       
3,171,200
 
Taxes receivable
   
-
     
101,100
     
(99,900
)
(c)
   
1,200
 
Receivable-AeroCentury
   
-
     
561,900
     
(561,900
)
(d)
   
-
 
Finance leases receivable
   
16,055,500
     
-
     
-
       
16,055,500
 
Note receivable
   
-
     
23,100
     
-
       
23,100
 
Aircraft, net of accumulated depreciation
   
187,092,900
     
-
     
-
       
187,092,900
 
Assets held for sale
   
14,511,600
     
-
     
-
       
14,511,600
 
Equipment, net of depreciation
   
-
     
25,000
     
-
       
25,000
 
Prepaid expenses and other
   
353,500
     
211,800
     
925,000
 
(e)
   
1,490,300
 
                                   
Total assets
 
$
227,951,000
   
$
4,417,700
   
$
(5,931,300
)
   
$
226,437,400
 
                                   
LIABILITIES AND STOCKHOLDERS' EQUITY
 
                                   
Accounts payable and accrued expenses
 
$
238,300
   
$
174,800
   
$
75,000
 
(f)
 
$
488,100
 
Payable-JetFleet
   
2,079,300
     
-
     
(2,079,300
)
(g)
   
-
 
Accrued payroll
   
-
     
93,400
     
-
       
93,400
 
Dividends Payable
   
-
     
3,330,600
     
(3,330,600
)
(b)
   
-
 
Notes payable and accrued interest
   
140,247,200
     
-
     
-
       
140,247,200
 
Security deposits
   
3,367,800
     
-
     
-
       
3,367,800
 
Unearned revenues
   
4,160,400
     
-
     
-
       
4,160,400
 
Maintenance reserves
   
27,030,800
     
-
     
-
       
27,030,800
 
Accrued maintenance costs
   
260,100
     
-
     
-
       
260,100
 
Deferred income taxes
   
7,159,000
     
665,800
     
(530,500
)
(h)
   
7,294,300
 
Income taxes payable
   
289,000
     
6,000
     
626,100
 
(c)
   
921,300
 
                                   
Total liabilities
   
184,831,900
     
4,270,600
     
(5,239,300
)
     
183,863,200
 
                                   
Stockholders' equity:
                                 
Common stock
   
1,600
     
1,261,600
     
(1,261,500
)
(i)
   
1,700
 
Paid-in capital
   
14,780,100
     
-
     
2,002,800
 
(j)
   
16,782,900
 
Retained earnings
   
31,374,200
     
(1,088,600
)
   
(1,459,200
)
(k)
   
28,826,400
 
Foreign currency translation adjustments
   
-
     
(500
)
   
500
 
(l)
   
-
 
Unrealized loss on securities
   
-
     
(25,400
)
   
25,400
 
(m)
   
-
 
                                   
     
46,155,900
     
147,100
     
(692,000
)
     
45,611,000
 
Treasury stock
   
(3,036,800
)
   
-
     
-
       
(3,036,800
)
                                   
Total stockholders' equity
   
43,119,100
     
147,100
     
(692,000
)
     
42,574,200
 
                                   
Total liabilities and stockholders' equity
 
$
227,951,000
   
$
4,417,700
   
$
(5,931,300
)
   
$
226,437,400