SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[ X ] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the quarterly period ended September 30, 1999
[ ] 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
--- ---
On November 15, 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 November 15, 1999 the Issuer has 243,420 Shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
---- ----
<PAGE>
Part I. Financial Information
Item 1. Financial Statements.
AEROCENTURY IV, INC.
Balance Sheet
September 30, 1999
<TABLE>
ASSETS
<S> <C>
Current assets:
Cash $ 368,430
Deposits 54,810
Accounts receivable 119,610
Rent receivable 15,400
-------------
Total current assets 558,250
Aircraft and aircraft engines under operating leases,
net of accumulated depreciation of $427,030 3,846,440
Debt issue costs, net of accumulated
amortization of $161,940 427,580
Other assets 24,700
-------------
Total assets $ 4,856,970
=============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 7,810
Interest payable 81,150
Prepaid rent 10,990
Security deposits 40,200
Maintenance deposits 111,410
-------------
Total current liabilities 251,560
Medium-term secured notes 4,869,000
Total liabilities 5,120,560
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 (507,010)
-------------
Total shareholder's equity (263,590)
-------------
Total liabilities and shareholder's equity $ 4,856,970
=============
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
AEROCENTURY IV, INC.
Statements of Operations
<S> <C> <C>
For the Nine Months For the Three Months
Ended September 30, Ended September 30,
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Rent income $ 513,740 $ 432,020 $ 183,110 $ 180,360
Interest income 23,360 79,860 5,290 17,860
------------- -------------- ------------- --------------
537,100 511,880 188,400 198,220
------------- -------------- ------------- --------------
Expenses:
Depreciation 184,870 144,700 64,600 57,420
Amortization 57,440 57,440 19,140 19,140
Interest 365,180 365,180 121,730 121,730
Management fees 73,030 73,030 24,340 24,340
Professional fees and
general and administrative 57,100 21,090 32,480 17,150
------------- -------------- ------------- --------------
737,620 661,440 262,290 239,780
------------- -------------- ------------- --------------
Loss before taxes $ (200,520) $ (149,560) $ (73,890) $ (41,560)
Provision for income taxes 800 - - -
------------- -------------- ------------- --------------
Net loss $ (201,320) $ (149,560) $ (73,890) $ (41,560)
============= ============== ============= ==============
Weighted average common shares outstanding 243,420 243,420 243,420 243,420
============= ============== ============= ==============
Basic loss per common share $ (0.83) $ (0.61) $ (0.30) $ (0.17)
============= ============== ============= ==============
</TABLE>
See accompanying notes.
<PAGE>
AEROCENTURY IV, INC.
Statements of Cash Flows
<TABLE>
For the Nine Months Ended September 30,
<S> <C> <C>
1999 1998
Net cash provided by operating activities $ 40,120 $ 86,120
Investing activities:
Investment in secured promissory note - (866,670)
Repayment of secured promissory note - 866,670
Purchase of interest in aircraft (659,950) (1,041,610)
-------------- -------------
Net cash used by investing activities (659,950) (1,041,610)
-------------- -------------
Net decrease in cash (619,830) (955,490)
Cash, beginning of period 988,260 1,944,120
-------------- -------------
Cash, end of period $ 368,430 $ 988,630
============== =============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 365,180 $ 365,180
Income taxes 800 800
</TABLE>
See accompanying notes.
<PAGE>
AEROCENTURY IV, INC.
Notes to Financial Statements
September 30, 1999
1. 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").
The accompanying balance sheet at September 30, 1999 and statements of
operations and cash flows for the nine months and three months ended September
30, 1999 and 1998 reflect all adjustments (consisting of only normal recurring
accruals) which are, in the opinion of the Company, necessary for a fair
presentation of the financial results. The results of operations of such periods
are not necessarily indicative of results of operations for a full year. The
statements should be read in conjunction with the Summary of Significant Account
Policies and other notes to financial statements included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998.
Organization and Capitalization
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 ("JetFleet III"), 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 (generally assumed to be
twelve years) to an estimated residual value.
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 issued 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
September 30, 1999
1. Basis of Presentation (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 September 30, 1999, the Company
maintained $422,440 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"),
a 50% undivided interest in a Shorts SD-360, serial number S/N 3676 ("S/N 3676")
and a 67% undivided interest in a deHavilland DHC-6, serial number S/N 668 ("S/N
668"). The Company purchased its interest in S/N 668 during July 1999; the
remaining interest is owned by JetFleet III.
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 was subject to a 36-month lease, expiring on April 13, 2001,
with a regional carrier in Uruguay. During June 1999, however, management
repossessed the aircraft due to non-payment of rent and is seeking re-lease
opportunities. In connection with the repossession, the Company recorded a
write-off of approximately $4,300 which represents rent receivable in excess of
the letter of credit held by the Company, which the Company collected during
August 1999.
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.
S/N 668 is subject to a 60-month lease with a regional carrier in
Colombia.
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.
<PAGE>
AEROCENTURY IV, INC.
Notes to Financial Statements
September 30, 1999
4. Income Taxes
The items comprising income tax expense for the nine months ended
September 30, 1999 are as follows:
Current tax provision:
Federal $ -
State 800
--------------
Current tax provision 800
Deferred tax provision:
Federal (68,722)
State 17,022
Deferred tax provision (51,700)
Valuation allowance 51,700
Total provision for income taxes $ 800
==============
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:
Income tax expense at
statutory federal income tax rate $ (68,178)
State taxes net of federal benefit (321)
Tax rate differences 17,343
California franchise tax 256
Valuation allowance 51,700
--------------
Total provision for income taxes $ 800
==============
Temporary differences and carryforwards which gave rise to a
significant portion of deferred tax assets and liabilities as of September 30,
1999 are as follows:
Deferred tax assets:
Net operating loss $ 193,121
Prepaid rent 3,753
Maintenance reserves 14,908
State franchise taxes 272
--------------
Subtotal 212,054
Valuation allowance (173,467)
--------------
Net deferred tax assets 38,587
Deferred tax liabilities:
Amortization of organizational costs 207
Depreciation on aircraft 38,380
$ -
==============
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 to twenty years depending upon when they were
created and begin to expire in 2012.
<PAGE>
AEROCENTURY IV, INC.
Notes to Financial Statements
September 30, 1999
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 the first nine months of 1999, the
Company paid a total of $73,030 in management fees to 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. Because the Company did not purchase aircraft during the first
nine months of 1998, it did not pay any brokerage fees or Chargeable Acquisition
Expenses to JMC. During the first nine months of 1999, the company purchased its
undivided interest in S/N 668 and paid a brokerage fee of $36,280.
As discussed in Note 2, the Company owns 50% and 67% undivided
interests in S/N 3676 and S/N 668, respectively. The remaining 50% and 33%
undivided interests are owned by JetFleet III. Each co-owner of S/N 3676 and S/N
668 receives its pro-rata share of rent income received from the lessee.
As provided in the prospectus for the Offering, the Company may invest
in Financial Assets, including indebtedness secured by Equipment. During March
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 $34,090 of interest during the term of the note.
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
Forward-Looking Statements
Certain statements contained in this report and, in particular, the discussion
regarding the Company's beliefs, plans, objectives, expectations and intentions
regarding: the Company's lack of significant operating expenses in connection
with assets that remain on lease; the Company's cash flow, even if S/N AC-647
remains off lease for the remainder of 1999; and the Company's exposure to loss
as a result of Year 2000 issues are forward looking statements. While the
Company believes that such statements are accurate, the Company's business is
dependent upon general economic conditions, particularly those that affect the
demand for turboprop aircraft and engines, including competition for turboprop
and other aircraft, and future trends and results cannot be predicted with
certainty. The Company's actual results could differ materially from those
discussed in such forward looking statements. Factors that could cause or
contribute to such differences include those discussed below in the section
entitled "Factors that May Affect Future Results." The cautionary statements
made in this Report should be read as being applicable to all related
forward-looking statements wherever they appear in this Report.
Capital Resources and Liquidity
At the end of September 1999, the Company had cash balances of $423,240. The
Company's cash balances were held primarily for the interest payment made to the
Noteholders in November 1999, for normally recurring expenses and for investment
in additional Income Producing Assets.
The primary source of the Company's funds is rental revenue from the Income
Producing Assets. 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 July 2001 and July 2004. As mentioned in Note 2 to the financial
statements, management has repossessed S/N AC-647 due to non-payment of rent and
is seeking re-lease opportunities. Management believes that the Company will
have adequate cash flow to meet any on-going operational needs, even if S/N
AC-647 remains off-lease for the remainder of 1999. If, however, S/N AC-647
remains off-lease for an extended period of time, the Company's ability to repay
the Notes at the maturity date may be adversely affected.
The decrease in cash flow from operations was due primarily to an increase in
accounts receivable and cash classified as deposits and a decrease in collection
of prepaid rent during 1999 compared to 1998. This effect was only partially
offset by an maintenance reserves collected from lessees during 1999 and a
decrease in rent receivable.
The decrease in cash flow used by investing activities was because the Company
invested $381,660 more in Income Producing Assets during the first nine months
of 1999 versus the same period of 1998. There was no cash flow from financing
activities in 1999 or 1998 because the Offering terminated in August 1997.
Results of Operations
The Company recorded a net loss of ($201,320) and ($149,560) or ($0.83) and
($0.61) per share for the nine months ended September 30, 1999 and 1998,
respectively, and ($73,890) and ($41,560) or ($0.30) and ($0.17) per share for
the three months ended September 30, 1999 and 1998, respectively.
Rental income increased by approximately $82,000 for the nine month period in
1999 due to the purchases of S/N AC-647 in July 1998 and S/N 668 during July
1999. This increase was partially offset by the lack of rent collected for S/N
AC-647 following its repossession in June 1999 (discussed in Note 2 to the
financial statements). Rental income increased by approximately $3,000 for the
three months ended September 30, 1999 versus 1998 because of the purchase of S/N
668. This increase was partially offset by the effect of the repossession of S/N
AC-647 mentioned above. Depreciation also increased from 1998 to 1999 by
approximately $40,000 as a result of the acquisitions of S/N AC-647 and S/N 668.
Interest income decreased from year to year because the Company had lower cash
balances in 1999 as a result of those purchases. Professional fees increased in
1999 due to legal expenses incurred in connection with the repossession of S/N
AC-647.
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. 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 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 sell the asset after the expiration of the initial lease term. Some of the
factors that have an impact on the Company's ability to re-lease or sell include
worldwide economic conditions, general aircraft market conditions, regulatory
changes that may make an asset's use more expensive or preclude use unless the
asset is modified, changes in the supply or cost of aircraft equipment and
technological developments which cause the asset to become obsolete. 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 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.
Lessee Credit Risk. If a lessee defaults upon his obligations under a lease, the
Company may be limited in its ability to enforce remedies. Most of the Company's
lessees are small domestic and foreign regional passenger airlines, which may be
even more sensitive to airline industry market conditions than the major
airlines. As a result, the Company's inability to collect rent under a
significant lease or to repossess equipment in the event of a default by a
lessee could have a material adverse effect on the Company's revenue. If a
lessee that is a certified U.S. airline is in default under the lease and seeks
protection under Chapter 11 of the United States Bankruptcy Code, under Section
1110 of the Bankruptcy Code, the Company would be automatically prevented from
exercising any remedies for a period of 60 days. By the end of the 60 day
period, the lessee must agree to perform the obligations and cure any defaults,
or the Company would have the right to repossess the equipment. This procedure
under the Bankruptcy Code has been subject to significant recent litigation,
however, and it is possible that the Company's enforcement rights may still be
further adversely affected by a declaration of bankruptcy by a defaulting
lessee.
International Risks. The Company's portfolio currently consists of leases with
foreign air carriers. Leases with foreign lessees 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 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 in which 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.
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 remarket equipment at acceptable rates may depend on the demand and
market values at the time of remarketing. 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 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 airframe or 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, and 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. Because all administrative and management functions of
the Company are carried out by its management company, JMC, JMC's readiness for
Year 2000 will determine the Company's status. JMC has reported to the Company
that it has directed its information technology ("IT") manager to require any
software or hardware purchased for use by management 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 JMC's IT system is based on a
"MacOS" system, JMC'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 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. To date, all lessees have reported
Year 2000 compliance with respect to the aircraft leased by the Company to the
lessee. The Company will request Year 2000 compliance information from any new
additional lessees, if any.
The Company has also been consulting with all the manufacturers of its leased
equipment to confirm Year 2000 compliance, who have all indicated that they have
already notified or will shortly notify all lessee operators of their respective
Year 2000 issues. Generally, the types of used turboprop aircraft owned by the
Company are not highly dependent upon date-sensitive electronics, unless the
lessee has added upgraded electronics to the aircraft. In any event, 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 or
additional upgraded electronics.
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. The Company has also inquired with its lessees regarding Year
2000 compliance of its administrative and operational activities. It appears
responding lessees are generally aware of the Year 2000 issue and have either
completed a plan or are in progress toward Year 2000 compliance. There is no
assurance that their compliance plans will be successful, however, and the
Company is not independently verifying any information provided by its lessees.
The Company continues to monitor its current lessees and each additional lessee.
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. This, of course, may affect the business of the Company's
existing and potential lessees, and in turn, the Company.
The essential functions of JMC and the Company 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 JMC or 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 and banking institutions. The Company,
through its management and JMC, is monitoring the Year 2000 readiness of such
providers. 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 made any contingency plans for the extended
loss of these basic services.
The Company has not incurred and does not anticipate any significant costs
related to the Year 2000 issue.
<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 November 15, 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 November
15, 1999.
Signature Title
/s/ Neal D. Crispin
- --------------------- President and Chairman of the
Neal D. Crispin Board of Directors of the Registrant
Chief Financial Officer
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