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, 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
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: $729,120
On March 10, 2000 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 10, 2000 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, due April
30, 2005 ("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 JHC 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 and Secretary, Marc J. Anderson, Senior Vice
President and Chief Operating Officer and Frank Duckstein, Vice President.
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"), 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").
During 1999, the Company purchased its interest in S/N 668; the remaining
interest is owned by JetFleet III.
S/N 3606 and S/N 3676 are subject to similar 48-month leases, expiring in July
2001, with a British regional airline.
S/N AC-647 was subject to a 36-month lease, expiring in April 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 in November 2002. The Engine is
subleased by the seller to a Mexican-based regional carrier.
S/N 668 is subject to a 60-month lease, expiring in July 2004, with a regional
carrier in Colombia.
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.
Factors that May Affect Future Results
Ability to Repay Notes. The Company's ability to repay the Notes at their
maturity date is dependent in part upon reinvestment of excess cash flows in
additional Income Producing Assets. To the extent that the Company realizes less
than anticipated lease rentals due to lessee rental defaults, early termination
of leases, or lower than expected remarketing proceeds during the term of the
Notes, this may result in lower than expected excess cash flow available for
reinvestment in additional Assets. As a result, the Company's ability to repay
the Notes in full at maturity may be negatively affected by such events even if
the Company is able to meet its scheduled interest payments.
The Company's ability to repay the Notes at their maturity date is also
dependent in part upon its ability to refinance the Notes or sell its aircraft
portfolio at a price sufficient to retire the outstanding Note principal. If due
to the risks described below in the risk factors entitled "Ownership Risks" and
"Leasing Risks", the values of the Company's aircraft portfolio are in a
depressed state at the maturity date of the Notes, the Company may be unable to
repay the entire Note indebtedness on the maturity date.
Concentration of Leases. The Company owns 100% of one, and 50% of a second,
aircraft leased to a British regional carrier, which in the aggregate represents
52% of the Company's monthly revenue. The lessee has recently filed for
reorganization. The lessee is continuing to operate, and under the
reorganization plan, an agreement will be reached regarding the status of those
aircraft.
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 its 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 aircraft 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 does 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 would make 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 has determined the Company's status. JMC has reported to the Company
that it did not experience any problems with the Year 2000 event, and does not
anticipate any in the coming year. Lessees of the Company have not appeared to
be materially affected by the Year 2000, and to date, the Company's business
with all lessees appears unaffected by Year 2000. The Company has not incurred
and does not anticipate any costs related to the Year 2000 issue.
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
Approximate number of holders of Notes ("Noteholders") as of March 10,
2000: 350
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.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Capital Resources and Liquidity
At the end of 1999, the Company had cash balances of $369,330 and deposits of
$63,000. The Company's cash balances were held for the interest payment made to
the Noteholders in February 2000, 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
varies, 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.
1999 versus 1998
The decrease in cash flow from operations was due primarily to increases in
receivable from affiliates, accounts receivable and deposits during 1999
compared to 1998. The effect of these increases was only partially offset by an
increase in prepaid rent and maintenance reserves collected from lessees during
1999.
The decrease in cash flow used by investing activities was because the Company
invested approximately $382,000 less in Income Producing Assets during 1999 than
in 1998. There was no cash flow from financing activities in 1999 or 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 ($126,920) or ($0.52) per share and
($184,230) or ($0.76) per share for the year ended December 31, 1999 and 1998,
respectively.
1999 versus 1998
Rental income increased by approximately $76,000 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).
Depreciation also increased from 1998 to 1999 by approximately $44,000 as a
result of the acquisitions noted above. Maintenance expense increased by
approximately $88,000 in 1999 as a result of maintenance work performed on an
off-lease aircraft. Interest income decreased by approximately $61,000 from year
to year because the Company had lower cash balances in 1999 as a result of those
acquisitions. Professional fees increased by approximately $48,000 in 1999
primarily due to legal expenses incurred in connection with the repossession of
S/N AC-647.
The Company recognized a tax benefit during 1999 as a result of recording a
receivable from affiliates to reflect the tax benefits of net operating losses
of the Company used by other members of the group with which the Company files a
consolidated tax return. Under the terms of a tax sharing agreement between the
members of the consolidated group, in the event that the Company has taxable
income, the Company will be credited for the tax benefits provided by the use of
the Company's prior year net operating losses.
<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, 1999
Statements of Operations for the Years Ended December
31, 1999 and 1998 Statements of Changes in
Shareholder's Equity for the Years Ended
December 31, 1999 and 1998
Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998
Notes to Financial Statements
(2) Schedules:
All schedules 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, 1999 and the related statements of
operations, shareholder's equity and cash flows for the years ended December 31,
1999 and December 31, 1998. 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, 1999 and the related statements of operations, shareholder's equity
and cash flows for the years ended December 31, 1999 and 1998, in conformity
with generally accepted accounting principles.
VOCKER KRISTOFFERSON AND CO.
February 29, 2000
San Mateo, California
<PAGE>
<TABLE>
AEROCENTURY IV, INC.
Balance Sheet
December 31, 1999
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash $ 369,330
Deposits 63,000
Rent receivable 67,680
Accounts receivable 151,050
-------------
Total current assets 651,060
Receivable from affiliates 231,980
Aircraft and aircraft engines under operating leases,
net of accumulated depreciation of $491,630 3,781,830
Debt issue costs, net of accumulated
amortization of $181,090 408,430
Other assets 14,170
-------------
Total assets $ 5,087,470
=============
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C>
Current liabilities:
Accounts payable $ 102,820
Interest payable 81,150
Prepaid rent 33,160
Security deposits 40,200
Maintenance deposits 143,050
Deferred taxes 7,270
-------------
Total current liabilities 407,650
Medium-term secured notes 4,869,000
Total liabilities 5,276,650
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 (432,600)
-------------
Total shareholder's equity (189,180)
-------------
Total liabilities and shareholder's equity $ 5,087,470
=============
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
AEROCENTURY IV, INC.
Statements of Operations
<CAPTION>
For the year ended December 31,
<S> <C> <C>
1999 1998
Revenues:
Rent income $ 700,620 $ 625,280
Interest income 28,500 89,720
-------------- -------------
729,120 715,000
-------------- -------------
Expenses:
Depreciation 249,470 204,810
Amortization 76,580 76,580
Maintenance 88,470 -
Interest 486,900 486,900
Management fees 97,380 97,380
Professional fees and general and administrative 81,170 32,760
-------------- -------------
1,079,970 898,430
-------------- -------------
Loss before taxes (350,850) (183,430)
Tax (benefit)/provision (223,930) 800
-------------- -------------
Net loss $ (126,920) $ (184,230)
============== =============
Weighted average common shares outstanding 243,420 243,420
============== =============
Basic loss per common share $ (0.52) $ (0.76)
============== =============
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
AEROCENTURY IV, INC.
Statements of Shareholder's Equity
For the years ended December 31, 1999 and 1998
<S> <C> <C> <C>
Total
Common Accumulated Shareholder's
Stock Deficit Equity
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)
Net loss for the period - (126,920) (126,920)
------------- -------------- -------------
Balance, December 31, 1999 $ 243,420 $ (432,600) $ (189,180)
============= ============== =============
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
AEROCENTURY IV, INC.
Statements of Cash Flows
<CAPTION>
For the year ended December 31,
<S> <C> <C>
1999 1998
Operating activities:
Net loss $ (126,920) $ (184,230)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 249,470 204,810
Amortization 76,580 76,580
Change in operating assets and liabilities:
Deposits (48,390) (14,610)
Accounts receivable (144,640) (1,780)
Rent receivable (13,420) (22,040)
Receivable from affiliates (231,980) -
Other assets (14,170) -
Accounts payable 91,820 6,000
Prepaid rent 33,160 -
Security deposits 40,200 -
Maintenance deposits 122,030 21,020
Deferred taxes 7,270 -
-------------- -------------
Net cash provided by operating activities 41,010 85,750
-------------- -------------
Investing activities:
Investment in secured promissory note - (866,670)
Repayment of secured promissory note - 866,670
Purchase of interests in aircraft (659,940) (1,041,610)
-------------- -------------
Net cash used in invested activities (659,940) (1,041,610)
------------- -------------
Net decrease in cash (618,930) (955,860)
Cash, beginning of period 988,260 1,944,120
-------------- -------------
Cash, end of period $ 369,330 $ 988,260
============== =============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
1999 1998
---- ----
Interest (net of amount capitalized) $ 486,900 $ 486,900
Income taxes 800 800
</TABLE>
See accompanying notes.
<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 JHC 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.
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
reserves and security deposits and are subject to withdrawal restrictions. As of
December 31, 1999, the Company maintained $430,590 of its cash balances in a
money market fund held by a regional brokerage firm, which is not federally
insured.
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, 1999. 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 1999.
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 and amortizes such costs over the life of the
Notes (approximately eight years).
<PAGE>
AEROCENTURY IV, INC.
Notes to Financial Statements
1. Summary of Significant Accounting Policies (continued)
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.
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.
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").
During 1999, the Company purchased its interest in S/N 668; 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 in July 2001, with a British regional airline.
S/N AC-647 was subject to a 36-month lease, expiring in April 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 in November 2002. The Engine is
subleased by the seller to a Mexican-based regional carrier.
S/N 668 is subject to a 60-month lease, expiring in July 2004, with a
regional carrier in Colombia.
<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, 1999 and 1998:
<TABLE>
<S> <C> <C> <C>
Accumulated
Cost Depreciation Net
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
Additions 659,940 (249,470) 410,470
------------- ------------- -------------
Balance, December 31, 1999 $ 4,273,460 $ (491,630) $ 3,781,830
============= ============= =============
</TABLE>
3. Operating Segments
The Company operates in one business segment, aircraft leasing, and
therefore does not present separate segment information for lines of business.
Approximately 40% and 32% of the Company's operating lease revenue was
derived from lessees domiciled in the United States during 1999 and 1998,
respectively. All leases relating to aircraft leased and operated
internationally are denominated and payable in U.S. dollars.
The table below sets forth geographic information about the Company's
operating leased aircraft equipment grouped by domicile of the lessee:
<TABLE>
<CAPTION>
Operating Lease Revenue Net Book Value of Operating Leased Assets
For the Year Ended December 31, December 31,
<S> <C> <C> <C> <C> <C>
Country 1999 1998 1999 1998
------- ---- ---- ---- ----
United Kingdom $ 386,640 $ 362,480 $ 1,392,190 $ 1,516,520
Mexico 180,000 172,500 793,220 843,470
Colombia 86,680 - 651,020 -
Other 47,300 90,300 945,400 1,011,370
------------- ------------- ------------- -------------
$ 700,620 $ 625,280 $ 3,781,830 $ 3,371,360
============= ============= ============= =============
</TABLE>
For the year ended December 31, 1999, the Company had three significant
customers, which accounted for 55%, 26% and 12%, respectively of lease revenue.
For the year ended December 31, 1998, the Company had three significant
customers, which accounted for 58%, 28% and 14%, respectively, of lease revenue.
<PAGE>
AEROCENTURY IV, INC.
Notes to Financial Statements
3. Operating Segments (continued)
As of December 31, 1999, minimum future lease rent payments receivable
under noncancelable leases were as follows:
<TABLE>
<S> <C> <C>
Year Amount
2000 $ 822,690
2001 597,180
2002 330,900
2003 180,900
2004 90,450
-------------
$ 2,022,120
=============
</TABLE>
4. 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.
5. Income Taxes
The items comprising income tax expense are as follows:
<TABLE>
<S> <C> <C> <C>
1999 1998
---- ----
Current tax provision
Federal $ - $ -
State 800 800
------------- --------------
Current tax provision 800 800
------------- --------------
Deferred tax provision
Federal (119,830) (62,640)
State 16,880 (10,750)
------------- --------------
Deferred tax provision (102,950) (73,390)
Valuation allowance (121,770) 73,390
------------- --------------
Total provision for income taxes $ (223,920) $ 800
============= ==============
</TABLE>
<PAGE>
AEROCENTURY IV, INC.
Notes to Financial Statements
5. 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> <C>
1999 1998
---- ----
Income tax expense at statutory federal income tax rate $ (119,290) $ (62,640)
State taxes net of federal benefit (510) (10,750)
Tax rate differences 17,370 -
State franchise taxes 270 800
Change in valuation allowance (121,770) 73,390
------------- --------------
Total provision for income taxes $ (223,930) $ 800
============= ==============
</TABLE>
Temporary differences and carryforwards which gave rise to a
significant portion of deferred tax assets and liabilities as of December 31,
1999 are as follows:
<TABLE>
<S> <C> <C>
Deferred tax assets:
Prepaid rent $ 11,320
Maintenance deposits 25,700
State franchise taxes 270
-------------
Subtotal 37,290
Valuation allowance -
-------------
Net deferred tax assets 37,290
Deferred tax liabilities:
Amortization of organizational costs (200)
Depreciation of aircraft (44,360)
$ (7,270)
=============
</TABLE>
The Company anticipates generating adequate future taxable income to
realize the benefits of the remaining deferred tax assets on the balance sheet.
As discussed in Note 1, the Company is a subsidiary of JHC. JHC files a
consolidated tax return that includes the Company as a member of the
consolidated group. The current and deferred taxes of the consolidated group are
allocated to members of the group in their separately issued financial
statements. Current and deferred income taxes are allocated to members of the
group by applying FAS 109 as if it were a separate taxpayer. In addition, the
members of the group record inter-company receivables and payables to reflect
the tax benefits of net operating losses used in the consolidated tax return.
6. 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 1999 and 1998, the Company accrued a
total of $97,380 and $97,380, respectively, in management fees due JMC.
<PAGE>
AEROCENTURY IV, INC.
Notes to Financial Statements
6. Related Party Transactions (continued)
JMC may receive a acquisition 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 acquisition 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 1999 and 1998, the Company paid JMC a total
of $36,280 and $58,500, respectively, in acquisition fees and reimbursed JMC for
$6,620 and $8,110, respectively, for Chargeable Acquisition Expenses. No
remarketing fees were paid during 1999 or 1998.
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.
As discussed in Note 1, the Company reimbursed JHC for certain costs
incurred in connection with the organization of the Company and the Offering.
The Company made no such payments during 1999 or 1998.
The Company is a member of a group that files a consolidated tax
return. The Company has recorded a receivable from affiliates to reflect the tax
benefits of net operating losses of the Company used in the consolidated tax
return. Under the terms of a tax sharing agreement between the members of the
consolidated group, in the event that the Company has taxable income, the
Company will be credited for the tax benefits provided by the use of the
Company's prior year net operating losses.
7. Subsequent Event
On February 24, 2000, the lessee of two of the Company's 30-seat
aircraft filed for reorganization. The two aircraft are owned 100% and 50% by
the Company. The lessee is continuing to operate, and, under the reorganization
plan, an agreement will be reached regarding the status of those aircraft.
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
Sidney F. Gage Member of JMC Credit Committee
<PAGE>
Neal D. Crispin, age 54. 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, JMC and ACY.
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.
Marc J. Anderson, age 63. Mr. Anderson is the Company's Senior Vice President
and is also Senior Vice President 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 by several airlines in
various roles of increasing responsibility beginning in 1959.
Frank Duckstein, age 45. Mr. Duckstein is the Company's Vice President,
Remarketing. He holds the same position with JMC and ACY. 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.
Sidney F. Gage, age 56, Member of JMC Credit Committee. 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 listed 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, 1999 and 1998.
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 1999 and 1998, the Company paid a total of $97,380 and
$97,380, respectively, in management fees due JMC.
JMC may receive an acquisition 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 acquisition 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 1999 and 1998, the Company paid JMC a total of $36,280
and $58,500, respectively, in acquisition fees and reimbursed JMC for $6,620 and
$8,110, respectively, for Chargeable Acquisition Expenses. No remarketing fees
were paid during 1999 or 1998.
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 1999 or 1998.
<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 10, 2000.
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 10,
2000.
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
<CIK> 0001034237
<NAME> AEROCENTURY IV, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 432,330
<SECURITIES> 0
<RECEIVABLES> 218,730
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 651,060
<PP&E> 4,273,460
<DEPRECIATION> 491,630
<TOTAL-ASSETS> 5,087,470
<CURRENT-LIABILITIES> 407,650
<BONDS> 4,869,000
0
0
<COMMON> 243,420
<OTHER-SE> (432,600)
<TOTAL-LIABILITY-AND-EQUITY> 5,087,470
<SALES> 0
<TOTAL-REVENUES> 729,120
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 593,070
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 486,900
<INCOME-PRETAX> (350,850)
<INCOME-TAX> (223,930)
<INCOME-CONTINUING> (126,920)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (126,920)
<EPS-BASIC> (0.52)
<EPS-DILUTED> (0.52)
</TABLE>
