SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[ X ] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the fiscal year ended December 31, 1998
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the transition period from to
Commission File Number: 333-22239
AeroCentury IV, Inc.
(Name of small business issuer in its charter)
California 94-3260392
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1440 Chapin Avenue, Suite 310
Burlingame, California 94010
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (650) 340-1880
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the Issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ----
Check if there no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Revenues for the issuer's most recent fiscal year: $715,000
On March 26, 1999 the aggregate market value of the voting and non voting
Common equity held by non-affiliates (computed by reference to the price at
which the common equity was sold) was $0.
As of March 26, 1999 the Issuer has 243,420 Shares of Common Stock
outstanding.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format (check one): Yes No X ---- ----
<PAGE>
PART I
Item 1. Business.
Business of the Company
AeroCentury IV, Inc. (the "Company") was incorporated in the state of California
on February 27, 1997 ("Inception"). The Company was formed solely for the
purpose of offering up to $10,000,000 in 10% Secured Promissory Notes ("Notes")
(the "Offering"). The Offering commenced in May 1997 and was terminated in
August 1997, after $4,869,000 in Notes were sold. The proceeds of the Offering
were used to purchase income producing assets ("Income Producing Assets")
consisting of turboprop aircraft and aircraft engines, subject to operating or
full payout leases with third parties.
All of the Company's outstanding common stock is owned by JetFleet Holding Corp.
("JHC"), a California corporation formed in January 1994. In May 1998, JetFleet
Management Corp., the sole shareholder of the Company was renamed JetFleet
Holding Corp. The rights and obligations under the management agreement between
the Company and JHC were assigned by JHC to its newly-created wholly-owned
subsidiary named "JetFleet Management Corp." ("JMC"). JMC also manages
AeroCentury Corp. ("ACY"), a Delaware corporation, and JetFleet III, a
California corporation, which are affiliates of the Company and which have
objectives similar to the Company's. Neal D. Crispin, the President of the
Company, holds the same position with JHC and JMC and owns a significant amount
of the common stock of JHC.
The sole director of the Company is Neal D. Crispin. The officers of the Company
are Neal D. Crispin, President, Marc J. Anderson, Senior Vice President and
Chief Operating Officer, Frank Duckstein, Vice President and Glenn Roberts,
Secretary.
The revenue generated from the Income Producing Assets is used to fund interest
payments on the Notes, reinvestment in additional Income Producing Assets and,
after May 1, 2003, deposits to a sinking fund account established to facilitate
repayment of principal of the Notes on their maturity (or such earlier time if
the Company decides to make prepayments on the principal of the Notes). At the
maturity date of the Notes, the Company will pay off the outstanding principal
using proceeds of the resale of the Company's Income Producing Assets, the funds
in the Sinking Fund Account and/or proceeds of third-party lender refinancing.
Aircraft and Aircraft Engines
The Company owns a Shorts SD3-60-100, serial number S/N 3606 ("S/N 3606"), a
Pratt & Whitney JT8D-9A aircraft engine, serial number 674452B (the "Engine"), a
Fairchild Metro III aircraft, serial number AC-647 ("S/N AC-647") and a 50%
undivided interest in a Shorts SD-360, serial number S/N 3676 ("S/N 3676")
S/N 3606 and S/N 3676 are subject to similar 48-month leases, expiring on July
27, 2001, with a British regional airline.
S/N AC-647 is subject to a 36-month lease, expiring on April 13, 2001, with a
regional carrier in Uruguay.
The Engine is used on a McDonnell Douglas DC-9 aircraft and is subject to a
60-month lease with the seller ending on November 4, 2002. The Engine is
subleased by the seller to a Mexican-based regional carrier.
Financial Assets
As provided in the prospectus for the Offering, the Company may invest in
Financial Assets, including indebtedness secured by Equipment. On March 4, 1998
the Company loaned $866,670 to ACY, in connection with ACY's purchase of a
Shorts SD-360 aircraft. ACY issued a secured promissory note to the Company in
the amount of the loan, which was secured by a perfected first lien security
interest in the aircraft. Pursuant to the note's provision for prepayment at any
time without penalty, ACY repaid the note in full during August 1998. ACY paid
the Company $43,910 of interest during the term of the loan.
<PAGE>
Factors that May Affect Future Results
General Economic Conditions. The market for used aircraft has been cyclical, and
usually reflects economic conditions and the strength of the travel and
transportation industry. The Company believes that the air transport industry is
currently stable, with demand for aircraft, asset prices and lease rates level,
and in some cases, increasing. Nonetheless at any time, the market for used
aircraft may be adversely affected by such factors as airline financial
difficulties, higher fuel costs, and improved availability and economics of new
replacement aircraft.
An adverse change in the global air travel industry, however, could result in
reduced carrier revenue and excess capacity and increase the risk of failure of
some weaker regional air carriers. While the Company believes that with proper
asset and lessee selection in the current climate, as well as during such
downturns, the impact of such changes on the Company can be reduced, there is no
assurance that the Company's business will escape the effects of such a global
downturn, or a regional downturn in an area where the Company has placed a
significant amount of its assets.
Reliance on JMC. All management of the Company is performed by JMC pursuant to a
management agreement between JMC and the Company. The Board of Directors does,
however, have ultimate control and supervisory responsibility over all aspects
of the Company and does owe fiduciary duties to the Company and its
stockholders. In addition, while JMC may not owe any fiduciary duties to the
Company by virtue of the management agreement, the officers of the Company are
also officers or employees of JMC, and in that capacity owe fiduciary duties to
the Company and the stockholders by virtue of holding such offices. Although the
Company has taken steps to prevent such conflicts, such conflicts of interest
arising from such dual roles may still occur.
Ownership Risks. The Company's portfolio is leased under operating leases, where
the terms of the leases do not take up the entire useful life of an asset. The
Company's ability to recover its purchase investment in an asset subject to an
operating lease is dependent upon the Company's ability to profitably re-lease
or re-sell the asset after the expiration of the initial lease term. Some of the
factors that have an impact on the Company's ability to re-lease or re-sell
include worldwide economic conditions, general aircraft market conditions,
regulatory changes that may make an asset's use more expensive or preclude use
unless the asset is modified, changes in the supply or cost of aircraft
equipment and technological developments which cause the asset to become
obsolete. In addition, a successful investment in an asset subject to an
operating lease depends in part upon having the asset returned by the lessee in
serviceable condition as required under the lease. If the Company is unable to
remarket or sell its aircraft equipment on favorable terms when the operating
lease for such equipment expires, the Company's business, financial condition,
cash flow, ability to service debt and results of operation could be adversely
affected.
International Risks. The Company's portfolio currently consists of leases with
foreign air carriers. Leases with foreign lessees, however, may present somewhat
different credit risks than those with domestic lessees.
Foreign laws, regulations and judicial procedures may be more or less protective
of lessor rights as those which apply in the United States. The Company could
experience collection problems related to the enforcement of its lease
agreements under foreign local laws and the attendant remedies in foreign
jurisdictions. The protections potentially offered by Section 1110 of the
Bankruptcy Code would not apply to non-U.S. carriers, and applicable local law
may not offer similar protections. Certain countries do not have a central
registration or recording system with which to locally establish the Company's
interest in equipment, and related leases. This could add difficulty in
recovering an engine in the event that a foreign lessee defaults.
Leases with foreign lessees are subject to risks related to the economy of the
country or region that such lessee is located even if the U.S. economy remains
strong. On the other hand, a foreign economy may remain strong even though the
domestic U.S. economy is not. A foreign economic downturn may occur and impact a
foreign lessee's ability to make lease payments, even though the U.S. and other
economies remain stable. Furthermore, foreign lessees are subject to risks
related currency conversion fluctuations. Although the Company's current leases
are all payable in U.S. dollars, in the future, the Company may agree to leases
that permit payment in foreign currency, which would subject such lease revenue
to monetary risk due to currency fluctuations. Even with dollar-denominated
lease payment provisions, the Company could still be affected by a devaluation
of the lessee's local currency which makes it more difficult for a lessee to
meet its dollar-denominated lease payments, increasing the risk of default of
that lessee, particularly if that carrier's revenue is primarily derived in the
local currency.
<PAGE>
Competition. The Company has many competitors in the aircraft leasing industry,
including leasing companies, banks and other financial institutions and aircraft
leasing partnerships. The market is highly competitive. Most of the Company's
competitors have substantially greater financial and other resources than the
Company.
Casualties, Insurance Coverage. The Company, as owner of transportation
equipment, could be held liable for injuries or damage to property caused by its
assets. Though some protection may be provided by the United States Aviation Act
with respect to its aircraft assets, it is not clear to what extent such
statutory protection would be available to the Company and such act may not
apply to aircraft operated in foreign countries. Though the Company may carry
insurance or require a lessee to insure against a risk, some risks of loss may
not be insurable. An uninsured loss with respect to the Equipment or an insured
loss for which insurance proceeds are inadequate, would result in a possible
loss of invested capital in and any profits anticipated from such equipment.
Leasing Risks. The Company's successful negotiation of lease extensions,
re-leases and sales may be critical to its ability to achieve its financial
objectives, and will involve a number of substantial risks. Demand for lease or
purchase of the assets depends on the economic condition of the airline industry
which is in turn highly sensitive to general economic conditions. Ability to
re-lease or re-sell equipment at acceptable rates may depend on the demand and
market values at the time of re-lease or re-sale. The market for used aircraft
is cyclical, and generally, but not always, reflects economic conditions and the
strength of the travel and transportation industry. The demand for and re-sale
value of many types of older aircraft in the recent past has been depressed by
such factors as airline financial difficulties, increased fuel costs, the number
of new aircraft on order and the number of older aircraft coming off lease. The
Company's concentration in a limited number of airframe and aircraft engine
types (generally, turboprop equipment) subjects the Company to economic risks if
those aircraft engine types should decline in value. The recent introduction of
"regional jets" to serve on short routes previously thought to be economical
only for turboprop aircraft operation could decrease the demand for turboprop
aircraft, while at the same increasing the supply of used turboprop aircraft.
This could result in lower lease rates and values for the Company's turboprop
aircraft.
Risks Related to Regional Air Carriers. Because the Company has concentrated its
existing leases on leases to regional air carriers, it will be subject to
certain risks. First, lessees in the regional air carrier market include a
number of companies that are start-up, low capital, low margin operations.
Often, the success of such carriers is dependent upon arrangements with major
trunk carriers, which may be subject to termination or cancellation by such
major carrier. This market segment is also characterized by low entry costs, and
thus, there is strong competition in this industry segment from start-ups as
well as major airlines. Thus, leasing transactions with these types of lessees
results in a generally higher lease rate on aircraft, but may entail higher risk
of default or lessee bankruptcy.
Year 2000 Considerations. Management of the Company has directed its information
technology ("IT") manager to require any software or hardware purchased for use
by the Company to have a warranty of Year 2000 compliance. It has also directed
its IT manager to study any systems that may require Year 2000 remediation. The
IT manager has determined that, because the Company's IT system is based on the
"MacOS" system, the Company's internal technology systems are ready for Year
2000, and there should not be any material costs associated with such
remediation. Furthermore, the phone and internet access systems have been
warranted by their vendors for Year 2000 compliance. The Company's internal and
administrative operations are not highly dependent on any other advanced
technology system, and, consequently, management believes that the Company's
exposure to loss as a result of Year 2000 issues in its internal and
administrative operations is not significant.
Management believes that the electronic systems used in the equipment leased by
the Company to lessees will not be materially affected by the Year 2000 and that
any remediation of the technology systems embedded in the aircraft that it
leases will not be a material expense to the Company. The Company has notified
all lessees of the Year 2000 problem and has requested information on the status
of each lessee's study and remediation plans. The Company believes that there
should not be any material costs in connection with such a study. The Company is
consulting with all the manufacturers of its leased equipment to confirm Year
2000 compliance. Since the Company's leases generally place all maintenance and
repair obligations on the lessees, to the extent that the aircraft are on lease
when the Year 2000 problem is identified, it would generally be the lessee's and
not the Company's responsibility to remediate any Year 2000 problem with the
leased aircraft.
<PAGE>
To the extent that a lessee has Year 2000 problems that significantly adversely
affect its overall financial status, such material problems may affect the
lessee's operations and increase the risk of default by a lessee under its lease
with the Company. Furthermore, Year 2000 issues may have a material impact on
FAA operations and the operations of certain air carriers, which in turn would
negatively affect the aircraft industry in general.
The Company's essential functions are not dependent upon any key third party
vendors or service providers related to the leasing or finance business, and
consequently, the interruption of goods and services from any such industry
specific third party vendor or service provider to the Company is not likely to
cause a material loss to the Company. Of course, the Company's ordinary business
operation is dependent upon vendors that provide basic services to businesses
generally, such as utility companies, phone and long distance companies, courier
services, banking institutions. The Company is in the process of inquiring with
such providers regarding their respective Year 2000 readiness. The state of Year
2000 readiness of these third parties cannot be assessed by the Company;
however, management believes that a temporary interruption in services to the
Company by these types of service providers caused by Year 2000 problems would
not cause material losses to the Company. An extended loss of these services,
however, could adversely affect the Company's business and financial
performance. The Company has not yet made any contingency plans for the extended
loss of these basic services.
Item 2. Properties.
The Company does not own or lease any real property, plant or materially
important physical properties other than equipment under operating lease as set
forth in Item 1.
The Company maintains its principal office at 1440 Chapin Avenue, Suite 310,
Burlingame, California, 94010. All office facilities are provided by JMC without
reimbursement by the Company.
Item 3. Legal Proceedings.
The Company is not involved in any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for the Common Equity and Related Stockholder Matters.
General
There is no established trading market for the Notes and the Notes are not
listed on any securities exchange.
Number of Security Holders
Number of holders of Notes ("Noteholders") as of March 26, 1999: 353
Dividends
The Company has not declared a dividend on Common Stock since its formation. The
Company intends to retain earnings, if any, to pay interest on the Notes, to
acquire additional aircraft assets, and to fund repayment of the Note principal
upon the maturity date of the Notes. Under the Indenture under which the Notes
were issued, dividends may not be paid until the Notes are repaid in full.
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation.
Although the Company was formed during February 1997, it had no significant
operations until the third quarter of 1997.
Capital Resources and Liquidity
At the end of 1998, the Company had cash balances of $988,260 and deposits of
$14,610. The Company's cash balances were held for the interest payment made to
the Noteholders in February 1999, for normally recurring expenses and for
investment in additional Income Producing Assets.
Since its formation, the Company's capital has come in the form of equity
contributions from JHC, proceeds from the Offering and rental revenue from the
Income Producing Assets purchased using those proceeds. The Company's liquidity
will vary in the future, increasing to the extent cash flows from operations
exceed expenses, and decreasing as interest payments are made to the Noteholders
and to the extent expenses exceed cash flows from leases.
The Company's primary use of its operating cash flow is interest payments to its
Noteholders. Excess cash flow, after payment of interest and operating expenses
is held for investment in additional Income Producing Assets. Since the Company
has acquired Income Producing Assets which are subject to triple net leases (the
lessee pays operating and maintenance expenses, insurance and taxes), the
Company does not anticipate that it will incur significant operating expenses in
connection with ownership of its Income Producing Assets as long as they remain
on lease.
The Company currently has available adequate reserves to meet its immediate cash
requirements. The leases for the Company's aircraft expire at varying times
between April 2001 and November 2002.
1998 versus 1997
The increase in cash flow from operations was due primarily to an increase in
rent income from the Income Producing Assets purchased during 1997 and 1998,
which was only partially offset by an increase in interest expense and
management fees (see Results of Operations, below). As mentioned above, the
Company had no significant operations until the third quarter of 1997.
During 1998, the Company invested approximately $1,041,610, including
reimbursement for chargeable acquisition costs and brokerage fees of
approximately $66,610, in Income Producing Assets, compared to $2,571,910
invested in 1997. There was no cash flow from financing activities in 1998
because the Offering terminated in August 1997.
Although the Company has positive cash flow from operations, the Company
operates at a net loss due to depreciation and interest expense.
Results of Operations
The Company recorded a net loss of ($184,230) or ($0.76) per share and
($121,450) or ($1.23) per share for the year ended December 31, 1998 and the
period from Inception (February 7, 1997) to December 31, 1997, respectively.
1998 versus 1997
Rental income increased by approximately $470,000 as a result of the additional
rent received from aircraft purchased during the second half of 1997 and during
1998. Depreciation increased from year to year by approximately $168,000 as a
result of depreciable aircraft purchased during the latter part of 1997 and
during 1998. Amortization was approximately $49,000 higher in 1998 than in 1997
bcause of the additional proceeds raised in the Offering during 1997. Interest
expense and management fees also increased by approximately $291,000 and
$46,000, respectively, in 1998 as a result of the additional proceeds received
over the term of the Offering during 1997 which were subject to interest and
management fees for all of 1998.
<PAGE>
Item 7. Financial Statements.
(a) Financial Statements and Schedules
(1) Financial statements for AeroCentury IV, Inc.:
Report of Independent Auditors, Vocker Kristofferson
and Co.
Balance Sheet as of December 31, 1998
Statements of Operations for the Year Ended December
31, 1998 and the Period from
Inception (February 7, 1997) to December 31, 1997
Statements of Changes in Shareholder's Equity for the
Year Ended December 31, 1998 and the Period from
Inception (February 7, 1997) to December 31, 1997
Statements of Cash Flows for the Year Ended December
31, 1998 and the Period from Inception (February
7, 1997) to December 31, 1997
Notes to Financial Statements
(2) Schedules:
Allschedules have been omitted since the required
information is presented in the financial
statements or is not applicable.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of AeroCentury IV, Inc.
We have audited the accompanying balance sheet of AeroCentury IV, Inc.,
California corporation, as of December 31, 1998 and the related statements of
operations, shareholder's equity and cash flows for the year ended December 31,
1998 and the period from Inception (February 7, 1997) to December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AeroCentury IV, Inc., at
December 31, 1998 and the related statements of operations, shareholder's equity
and cash flows for the year ended December 31, 1998 and the period from
Inception (February 7, 1997) to December 31, 1997, in conformity with generally
accepted accounting principles.
VOCKER KRISTOFFERSON AND CO.
/s/Vocker Kristofferson and Co.
February 4, 1999
San Mateo, California
<PAGE>
AEROCENTURY IV, INC.
Balance Sheet
December 31, 1998
<TABLE>
ASSETS
<S> <C>
Current assets:
Cash $ 988,260
Deposits 14,610
Rent receivable 54,260
Accounts receivable 6,410
-------------
Total current assets 1,063,540
Aircraft and aircraft engines under operating leases,
net of accumulated depreciation of $242,160 3,371,360
Debt issue costs, net of accumulated
amortization of $104,500 485,010
-------------
Total assets $ 4,919,910
=============
</TABLE>
<TABLE>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C>
Current liabilities:
Accounts payable $ 11,000
Interest payable 81,150
Maintenance deposits 21,020
-------------
Total current liabilities 113,170
Medium-term secured notes 4,869,000
Total liabilities 4,982,170
Preferred stock, no par value, 100,000 shares authorized,
no shares issued and outstanding -
Common stock, no par value, 500,000 shares authorized,
243,420 shares issued and outstanding 243,420
Accumulated deficit (305,680)
-------------
Total shareholder's equity (62,260)
-------------
Total liabilities and shareholder's equity $ 4,919,910
=============
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
AEROCENTURY IV, INC.
Statements of Operations
<S> <C> <C>
For the
For the period from Inception
year ended (February 7, 1997) to
December 31, December 31,
1998 1997
Revenues:
Rent income $ 625,280 $ 155,300
Interest income 89,720 71,590
-------------- -------------
715,000 226,890
-------------- -------------
Expenses:
Depreciation 204,810 37,350
Amortization 76,580 27,920
Interest 486,900 195,990
Management fees 97,380 51,240
Professional fees and general and administrative 32,760 35,040
-------------- -------------
898,430 347,540
-------------- -------------
Loss before taxes (183,430) (120,650)
Provision for income taxes 800 800
-------------- -------------
Net loss $ (184,230) $ (121,450)
============== =============
Weighted average common shares outstanding 243,420 98,929
============== =============
Basic loss per common share $ (0.76) $ (1.23)
============== =============
</TABLE>
See accompanying notes.
<PAGE>
AEROCENTURY IV, INC.
Statements of Shareholder's Equity
For the year ended December 31, 1998 and the
period from Inception (February 7, 1997) to December
31, 1997
<TABLE>
<S> <C> <C> <C> <C>
Total
Preferred Common Accumulated Shareholder's
Stock Stock Deficit Equity
Issuance of 243,420 shares of common stock $ - $ 243,420 $ - $ 243,420
Net loss for the period - - (121,450) (121,450)
------------- -------------- ------------- --------------
Balance, December 31, 1997 - 243,420 (121,450) 121,970
Net loss for the period - - (184,230) (184,230)
------------- -------------- ------------- --------------
Balance, December 31, 1998 $ - $ 243,420 $ 305,680 $ (62,260)
============= ============== ============= ==============
</TABLE>
See accompanying notes.
<PAGE>
AEROCENTURY IV, INC.
Statements of Cash Flows
<TABLE>
<S> <C> <C>
For the
For the period from Inception
year ended (February 7, 1997) to
December 31, December 31,
1998 1997
Operating activities:
Net loss $ (184,230) $ (121,450)
Adjustments to reconcile net loss to
net cash provided/(used) by operating activities:
Depreciation 204,810 37,350
Amortization 76,580 27,920
Change in operating assets and liabilities:
Deposits (14,610) -
Accounts receivable (1,780) (4,620)
Rent receivable (22,040) (32,220)
Accounts payable 6,000 5,000
Interest payable - 81,150
Maintenance deposits 21,020 -
-------------- -------------
Net cash provided/(used) by operating activities 85,750 (6,870)
Investing activities:
Investment in secured promissory note (866,670) -
Repayment of secured promissory note 866,670 -
Purchase of interests in aircraft (1,041,610) (2,571,910)
-------------- -------------
Net cash used in invested activities (1,041,610) (2,571,910)
Financing activities:
Proceeds from issuance of medium-term secured notes - 4,869,000
Debt issue costs - (486,900)
Proceeds from issuance of common stock - 140,800
-------------- -------------
Net cash provided by financing activities - 4,522,900
-------------- -------------
Net (decrease)/increase in cash (955,860) 1,944,120
Cash, beginning of period 1,944,120 -
-------------- -------------
Cash, end of period $ 988,260 $ 1,944,120
============== =============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
1998 1997
---- ----
Interest (net of amount capitalized) $ 486,900 $ 121,960
Income taxes 800 800
</TABLE>
Supplemental schedule of noncash investing and financing activities:
During 1997, JHC contributed $102,620 of the total it paid for debt issue costs
as a common stock investment in the Company.
<PAGE>
AEROCENTURY IV, INC.
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
AeroCentury IV, Inc. (the "Company") was incorporated in the state of
California on February 7, 1997 ("Inception"). The Company was formed solely for
the purpose of acquiring Income Producing Assets. The Company offered up to
$10,000,000 in $1,000 Secured Promissory Notes maturing on April 30, 2005 (the
"Notes") pursuant to a prospectus dated May 21, 1997 (the "Prospectus").
All of the Company's outstanding common stock is owned by JetFleet
Holding Corp. ("JHC"), a California corporation formed in January 1994. In May
1998, JetFleet Management Corp., the sole shareholder of the Company was renamed
JetFleet Holding Corp. The rights and obligations under the management agreement
between the Company and JHC were assigned by JHC to a newly-created wholly-owned
subsidiary named "JetFleet Management Corp." ("JMC"). JMC also manages
AeroCentury Corp. ("ACY"), a Delaware corporation, and JetFleet III, a
California corporation, which are affiliates of the Company and which have
objectives similar to the Company's. Neal D. Crispin, the President of the
Company, holds the same position with JHC and JMC and owns a significant amount
of the common stock of JHC.
Aircraft and Aircraft Engines Under Operating Leases
The Company's interests in aircraft are recorded at cost, which include
acquisition costs (see Note 2). Depreciation is computed using the straight-line
method over each aircraft's estimated economic life to its estimated residual
value.
As the Company has substantial amounts of long-lived assets that are
potentially subject to impairment, FAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" has been applied
for the year ending December 31, 1998. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of the asset, a loss is
recognized for the difference between the fair value and the carrying value of
the asset. There were no write-downs required during 1998.
Debt Issue Costs
Pursuant to the terms of the Prospectus, the Company paid an
Organization and Offering Expense Reimbursement to JHC in cash in an amount up
to 2.0% of Aggregate Gross Offering Proceeds for reimbursement of certain costs
incurred in connection with the organization of the Company and the Offering
(the "Reimbursement").
To the extent that JHC incurred expenses in excess of the 2.0% cash
limit, such excess expenses were repaid to JHC in the form of Common Stock
issued by the Company at a price of $1.00 per share (the "Excess Stock"). The
amount of Excess Stock that the Company can issue was limited according to the
amount of Aggregate Gross Offering Proceeds raised by the Company.
The Company capitalized the Reimbursement paid by the Company and
amortizes such costs over the life of the Notes (approximately eight years).
Assets Subject to Lien
The Company's obligations under the Notes are secured by a security
interest in all of the Company's right, title and interest in the Income
Producing Assets acquired by the Company.
<PAGE>
AEROCENTURY IV, INC.
Notes to Financial Statements
1. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company follows the liability method of accounting for income taxes
as required by the provisions of Statement of Financial Accounting Standards No.
109 - Accounting for Income Taxes.
Cash and Cash Equivalents/Deposits
The Company considers highly liquid investments readily convertible
into known amounts of cash, with original maturities of 90 days or less, as cash
equivalents. Deposits represent cash balances held related to maintenance and
are subject to withdrawal restrictions. As of December 31, 1998, the Company
maintained $965,080 of its cash balances in a money market fund held by a
regional brokerage firm, which is not federally insured.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
2. Aircraft and Aircraft Engines Under Operating Leases
Aircraft and Aircraft Engines
The Company owns a Shorts SD3-60-100, serial number S/N 3606 ("S/N
3606"), a Pratt & Whitney JT8D-9A aircraft engine, serial number 674452B (the
"Engine"), a Fairchild Metro III aircraft, serial number AC-647 ("S/N AC-647")
and a 50% undivided interest in a Shorts SD-360, serial number S/N 3676 ("S/N
3676")
The Company invested approximately $1,041,610, including reimbursement
for chargeable acquisition costs and brokerage fees of approximately $66,610, in
aircraft assets during 1998.
Aircraft and Aircraft Engines Leases
S/N 3606 and S/N 3676 are subject to similar 48-month leases,
expiring on July 27, 2001, with a British regional airline.
S/N AC-647 is subject to a 36-month lease, expiring on April 13, 2001,
with a regional carrier in Uruguay.
The Engine is used on a McDonnell Douglas DC-9 aircraft and is subject
to a 60-month lease with the seller, expiring on November 4, 2002. The Engine is
subleased by the seller to a Mexican-based regional carrier.
All of the Company's aircraft are leased and operated
internationally. All leases relating to these aircraft are denominated and
payable in U.S. dollars.
<PAGE>
AEROCENTURY IV, INC.
Notes to Financial Statements
2. Aircraft and Aircraft Engines Under Operating Leases (continued)
Aircraft and Aircraft Engines Leases (continued)
The Company leases its aircraft to lessees domiciled in three
geographic areas. The tables below set forth geographic information about the
Company's operating leased aircraft equipment grouped by domicile of the lessee:
<TABLE>
<S> <C> <C>
For the
For the Period from Inception
Year Ended (February 7, 1997) to
December 31, December 31,
Region 1998 1997
- ------ ---- ----
Operating lease revenue:
Europe $ 362,480 $ 125,300
South America 90,300 -
Mexico 172,500 30,000
---------------- ------------------
Total $ 625,280 $ 155,300
================ ==================
Operating lease revenue less depreciation:
Europe $ 238,150 $ 92,140
South America 60,070 -
Mexico 122,250 25,810
---------------- ------------------
Total $ 420,470 $ 117,950
================ ==================
Net book value of operating leased assets:
Europe $ 1,516,520
South America 1,011,370
Mexico 843,470
----------------
Total $ 3,371,360
================
</TABLE>
As of December 31, 1998, minimum future lease rent payments receivable
under noncancelable leases were as follows:
Year Amount
1999 $ 773,040
2000 773,040
2001 465,740
2002 150,000
2003 -
-------------
$ 2,161,820
<PAGE>
AEROCENTURY IV, INC.
Notes to Financial Statements
2. Aircraft and Aircraft Engines Under Operating Leases (continued)
Detail of Investment
The following schedule provides an analysis of the Company's investment
in aircraft under operating leases and the related accumulated depreciation for
the years ended December 31, 1998 and 1997:
<TABLE>
<S> <C> <C>
Accumulated
Cost Depreciation Net
Additions $ 2,571,910 $ (37,350) $ 2,534,560
------------- ------------ -------------
Balance, December 31, 1997 2,571,910 (37,350) 2,534,560
Additions 1,041,610 (204,810) 836,800
------------- ------------- -------------
Balance, December 31, 1998 $ 3,613,520 $ (242,160) $ 3,371,360
============= ============= =============
</TABLE>
3. Medium-term secured Notes
As mentioned above, the Company raised funds through the Offering from
May 1997 to August 1997. During 1997, the Company accepted subscriptions for
4,869 Notes aggregating $4,869,000 in Gross Offering Proceeds. Pursuant to the
Prospectus, the Company subsequently issued $4,869,000 in Notes due April 30,
2005. The Notes bear interest at an annual rate of 10.00% which is due and
payable on a quarterly basis, in arrears, on the first business day of February,
May, August and November. The carrying amount of the Notes payable approximates
fair value.
4. Income taxes
The items comprising income tax expense are as follows:
<TABLE>
<S> <C> <C>
1998 1997
---- ----
Current tax provision
Federal $ - $ -
State 800 800
------------- --------------
Current tax provision 800 800
------------- --------------
Deferred tax provision
Federal (62,640) 41,290
State (10,750) 7,090
------------ --------------
Deferred tax provision (73,390) 49,180
Valuation allowance 73,390 (48,380)
------------- --------------
Total provision for income taxes $ 800 $ 800
============= ==============
</TABLE>
<PAGE>
AEROCENTURY IV, INC.
Notes to Financial Statements
4. Income taxes (continued)
Total income tax expense differs from the amount which would be
provided by applying the statutory federal income tax rate to pretax earnings as
illustrated below:
<TABLE>
<S> <C> <C>
1998 1997
---- ----
Income tax expense at statutory federal income tax rate $ (62,640) $ (41,290)
State taxes net of federal benefit (10,750) (7,090)
State franchise taxes 800
Valuation allowance 73,390 48,380
------------- --------------
Total provision for income taxes $ 800 $ -
============= ==============
</TABLE>
Temporary differences and carryforwards which gave rise to a
significant portion of deferred tax assets and liabilities as of December 31,
1998 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss $ (133,890)
Maintenance reserves and other (8,370)
-------------
Subtotal (142,260)
Valuation allowance 121,770
-------------
Net deferred tax asset 20,490
Deferred tax liabilities:
Amortization of organizational costs 270
Depreciation on aircraft 20,220
------------
$ -
=============
</TABLE>
The Company anticipates that deferred tax liabilities will be offset by
deferred tax assets and has recorded a valuation allowance for the remaining
portion of deferred tax assets as the Company does not anticipate generating
adequate future taxable income to realize the benefits of the remaining deferred
tax assets on the balance sheet. The Company's net operating losses may be
carried forward for fifteen or twenty years depending on when they were created,
and begin to expire in 2012.
5. Related Party Transactions
The Company's Income Producing Asset portfolio is managed and
administered under the terms of a management agreement with JMC. Under this
agreement, on the last day of each calendar quarter, JMC receives a quarterly
management fee equal to 0.5% of the Company's Aggregate Gross Proceeds received
through the last day of such quarter. In 1998 and 1997, the Company accrued a
total of $97,380 and $51,240, respectively, in management fees due JMC.
JMC may receive a brokerage fee for locating assets for the Company,
and a remarketing fee in connection with the sale of the Company's assets,
provided that such fees are not more than the customary and usual fees
that would be paid to an unaffiliated party for such a transaction. The total of
the Aggregate Purchase Price plus the brokerage fee cannot exceed the fair
market value of the asset based on appraisal. JMC may also receive reimbursement
of Chargeable Acquisition Expenses incurred in connection with a transaction
which are payable to third parties. During 1998 and 1997, the Company paid JMC a
total of $58,500 and $299,000, respectively, in brokerage fees and reimbursed
JMC for $8,110 and $22,900, respectively, for Chargeable Acquisition Expenses.
No remarketing fees were paid during 1998 or 1997
<PAGE>
AEROCENTURY IV, INC.
Notes to Financial Statements
5. Related Party Transactions (continued)
As discussed in Note 1, the Company reimbursed JHC for certain costs
incurred in connection with the organization of the Company and the Offering. In
1997, the Company paid $97,380 to JHC. In addition, during 1997, JHC contributed
$102,620 of the total it paid for organization and offering expenses as a common
stock investment in the Company. JHC purchased 130,800 additional shares of
common stock in the Company at a price of $1.00 per share on August 6, 1997.
As provided in the prospectus for the Offering, the Company may invest
in Financial Assets, including indebtedness secured by Equipment. On March 4,
1998 the Company loaned $866,670 to ACY in connection with ACY's purchase of a
Shorts SD-360 aircraft. ACY issued a secured promissory note to the Company in
the amount of the loan, which was secured by a perfected first lien security
interest in the aircraft. Pursuant to the note's provision for prepayment at any
time without penalty, ACY repaid the note in full during August 1998. ACY paid
the Company $43,910 of interest during the term of the loan.
8
21
Item 8. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
General
Pursuant to a Management Agreement between the Company and JMC, JMC is
responsible for most management decisions, has responsibility for supervising
the Company's day-to-day operations, including compliance with legal and
regulatory requirements, and is responsible for cash management and
communications between the Company and the holders of Notes. The Management
Agreement authorizes JMC, in its sole discretion, to acquire, hold title to,
sell, lease, re-lease or otherwise dispose of Income Producing Assets or any
interest therein, on behalf of the Company when and upon such terms as JMC
determines to be in the best interests of the Company, subject to certain
limitations set forth in the Prospectus.
Directors and Officers
The directors, executive officers and key employees of the Company and JMC, each
of whom serves until his successor is elected and qualified, are as follows:
Name Position Held
Neal D. Crispin President, Chairman of the Board of
Directors and Chief
Financial Officer of the Company
Marc J. Anderson Senior Vice President of the Company
Frank Duckstein Vice President of the Company
Glenn Roberts Secretary of the Company
Sidney F. Gage Member of JMC's Advisory Board
Neal D. Crispin, age 53. Mr. Crispin is Chairman of the Board of Directors and
President of the Company. He is also President and a Director of ACY, JHC, JMC
and CMA Consolidated, Inc. ("CMA"). Prior to forming CMA in 1983, Mr. Crispin
was vice president-finance of an oil and gas company. Previously, Mr. Crispin
was a manager with Arthur Young & Co., Certified Public Accountants. Mr. Crispin
is the husband of Toni M. Perazzo, a Director and Officer of JHC and JMC. He
received a Bachelors degree in Economics from the University of California at
Santa Barbara and a Masters degree in Business Administration (specializing in
Finance) from the University of California at Berkeley. Mr. Crispin, a certified
public accountant, is a member of the American Institute of Certified Public
Accountants and the California Society of Certified Public Accountants.
<PAGE>
Marc J. Anderson, age 62. Mr. Anderson is the Company's Senior Vice President
and is also Senior Vice President and Chief Operating Officer of JHC, JMC and
ACY and a Director of ACY. Prior to joining JMC in 1994, Mr. Anderson was an
aviation consultant (1992 to 1994) and prior to that spent seven years (1985 to
1992) as Senior Vice President-Marketing for PLM International, a transportation
equipment leasing company. He was responsible for the acquisition, modification,
leasing and remarketing of all aircraft. Prior to PLM, Mr. Anderson served as
Director-Contracts for Fairchild Aircraft Corp., Director of Aircraft Sales for
Fairchild SAAB Joint Venture, and Vice President, Contracts for SHORTS Aircraft
USA, Inc. Prior to that, Mr. Anderson was employed with several airlines in
various roles of increasing responsibility beginning in 1959.
Frank Duckstein, age 44. Mr. Duckstein is the Company's Vice President,
Remarketing. He holds the same position with JMC. Mr. Duckstein has been in
charge of market development for JMC since joining JMC 1995. From 1989 to 1995,
Mr. Duckstein served as Director of Marketing for PLM International, a
transportation equipment leasing company. While at PLM, he was responsible for
sales and remarketing, market research and development, both domestically and
internationally, of PLM's corporate and commuter aircraft, as well as their
helicopter fleet. Previously, he was with the following international and
regional airlines operating within Europe and the U.S. with responsibility for
operation, market development and sales: Direct Air (Berlin, Germany); Air
Berlin (Berlin, Germany), and Aeroamerica (Berlin, Germany). Mr. Duckstein
attended the Technical University of Berlin, majoring in Economics.
Glenn Roberts, age 34, Secretary, is also the Controller of JMC and ACY. Mr.
Roberts has been employed by JMC and CMA since 1989. He has also served as
Manager of Investor Relations for several equipment leasing programs sponsored
by JMC and CMA and as a financial analyst for JMC. Mr. Roberts was previously
employed as a production manager for a database publishing firm specializing in
company and industry research reports.
Sidney F. Gage, age 55, Member of JMC Advisory Board. Mr. Gage has been a
partner of Gage & Baumgarten, a management consulting firm specializing in
strategic business planning, since 1990. Previously, he was Executive Vice
President and Director of Mission Resources, Inc., the managing general partner
of Mission Resource Partners, an oil and gas company on the American Stock
Exchange, and President of Mission Securities, Inc., its NASD broker-dealer
affiliate. He is a certified public accountant with degrees from the University
of Notre Dame and the Stanford University Graduate School of Business. Mr. Gage
has served as a consultant to the CMA Group of companies since 1990.
Item 10. Executive Compensation.
The Company has no employees. The following is a summary of the compensation and
reimbursements paid to the parent of the Company and related parties by the
Company for the years ended December 31, 1998 and 1997.
Compensation
The Company's Income Producing Asset portfolio is managed and administered under
the terms of a management agreement with JMC. Under this agreement, on the last
day of each calendar quarter, JMC receives a quarterly management fee equal to
0.50% of the Company's Aggregate Gross Proceeds received through the last day of
such quarter. During 1998 and 1997, the Company accrued a total of $97,380 and
$51,240, respectively, in management fees due JMC.
JMC may receive a brokerage fee for locating assets for the Company and a
remarketing fee in connection with the sale of the Company's assets, provided
that such fees are not more than the customary and usual brokerage fee that
would be paid to an unaffiliated party for such a transaction. The total of the
Aggregate Purchase Price plus the brokerage fee shall not exceed the fair market
value of the asset based on appraisal. During 1998 and 1997, the Company paid
JMC a total of $58,500 and $299,000, respectively, in brokerage fees and
reimbursed JMC for $8,110 and $22,900, respectively, in Chargeable Acquisition
Expenses. No remarketing fees were paid during 1998 or 1997.
The Company reimburses JHC for certain costs incurred in connection with the
organization of the Company and the Offering. The Company made no such payments
during 1998. In 1997, the Company paid $97,380 to JHC. In addition, during 1997,
JHC contributed $102,620 of the total it paid for organization and offering
expenses as a common stock investment in the Company.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
No person is known to the Company to be the beneficial owner of more than 5% of
the Units. No officer or director of JHC or JMC or any of its related parties
beneficially owns any Units.
JHC owns 100% of the issued and outstanding common stock of the Company. Mr.
Crispin, President of JHC, and Toni M. Perazzo, Vice President-Finance of JHC,
collectively own the majority of the issued and outstanding common stock of JHC,
including shares owned by CMA Consolidated, an affiliated company controlled by
Mr. Crispin. Marc J. Anderson, Senior Vice President of JMC owns approximately
1% of JHC's common stock.
Item 12. Certain Relationships and Related Transactions.
See Item 10, above.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on form 8-K Filed in Last Quarter
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 26, 1999.
AEROCENTURY IV, INC.
By: /s/ Neal D. Crispin
-----------------------
Neal D. Crispin
Title: President
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons in the capacities indicated on March 26,
1999.
Signature Title
/s/ Neal D. Crispin President and Chairman of the
- ---------------------- Board of Directors of the Registrant
Neal D. Crispin Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001034237
<NAME> AeroCentury IV, Inc.
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,002,870
<SECURITIES> 0
<RECEIVABLES> 60,670
<ALLOWANCES> 0
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<CURRENT-ASSETS> 1,063,540
<PP&E> 3,613,520
<DEPRECIATION> 242,160
<TOTAL-ASSETS> 4,919,910
<CURRENT-LIABILITIES> 113,170
<BONDS> 4,869,000
0
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<COMMON> 243,420
<OTHER-SE> (305,680)
<TOTAL-LIABILITY-AND-EQUITY> 4,919,910
<SALES> 0
<TOTAL-REVENUES> 715,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 411,530
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 486,900
<INCOME-PRETAX> (183,430)
<INCOME-TAX> 800
<INCOME-CONTINUING> (184,230)
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