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 June 30, 2000
[ ] 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 August 15, 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 August 15, 2000 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.
<TABLE>
AEROCENTURY IV, INC.
Balance Sheet
June 30, 2000
<CAPTION>
ASSETS
<S> <C>
Cash $ 237,400
Deposits 88,300
Rent receivable 132,120
Accounts receivable 278,620
-------------
Total current assets 736,440
Receivable from affiliates 190,210
Aircraft and aircraft engines under operating leases,
net of accumulated depreciation of $620,840 3,652,630
Debt issue costs, net of accumulated
amortization of $219,380 370,140
Deferred taxes 6,500
Other assets 7,580
-------------
Total assets $ 4,963,500
=============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 23,900
Interest payable 81,150
Prepaid rent 12,500
Security deposits 60,200
Maintenance deposits 327,990
-------------
Total current liabilities 505,740
-------------
Medium-term secured notes 4,869,000
-------------
Total liabilities 5,374,740
-------------
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 (654,660)
-------------
Total shareholder's equity (411,240)
-------------
Total liabilities and shareholder's equity $ 4,963,500
=============
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
AEROCENTURY IV, INC.
Statements of Operations
<CAPTION>
For the Six Months Ended June 30, For the Three Months Ended June 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
Rent income $ 330,440 $ 330,620 $ 143,560 $ 137,360
Interest income 8,950 18,080 4,070 9,780
------------- ------------- ------------- -------------
339,390 348,700 147,630 147,140
------------- ------------- ------------- -------------
Expenses:
Depreciation 129,200 120,260 64,600 60,130
Amortization 38,290 38,290 19,150 19,150
Maintenance 50,330 - 6,850 -
Interest 243,450 243,450 121,730 121,730
Management fees 48,690 48,690 24,340 24,340
Professional fees and
general and administrative 22,670 24,650 11,060 23,040
------------- ------------- ------------- -------------
532,630 475,340 247,730 248,390
------------- ------------- ------------- -------------
Loss before taxes (193,240) (126,640) (100,100) (101,250)
Tax provision 28,820 800 60,870 800
------------- ------------- ------------- -------------
Net loss $ (222,060) $ (127,440) $ (160,970) $ (102,050)
============= ============= ============= =============
Weighted average common
shares outstanding 243,420 243,420 243,420 243,420
============= ============= ============= =============
Basic loss per common share $ (0.91) $ (0.52) $ (0.66) $ (0.42)
============= ============= ============= =============
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
AEROCENTURY IV, INC.
Statements of Cash Flows
<CAPTION>
For the Six Months Ended June 30,
<S> <C> <C>
2000 1999
---- ----
Net cash used by operating activities $ (131,930) $ (27,300)
-------------- -------------
Net decrease in cash (131,930) (27,300)
Cash, beginning of period 369,330 988,260
-------------- -------------
Cash, end of period $ 237,400 $ 960,960
============== =============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
2000 1999
---- ----
Interest (net of amount capitalized) $ 121,730 $ 243,450
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
June 30, 2000, the Company maintained $324,530 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.
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).
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.
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 did not purchase any aircraft during the first six months of
2000.
Aircraft and Aircraft Engines Leases
At the time of purchase, S/N 3606 and S/N 3676 were subject to similar
48-month leases, expiring in July 2001, with a British regional airline. On
February 24, 2000, the lessee of these two 30-seat aircraft filed for
reorganization. The lessee is continuing to operate, and, under the
reorganization plan, the lessee has agreed to continue leasing one of the
aircraft, S/N 3676, in which the Company owns a 50% interest, on a month to
month basis at the same rent. The lessee has also begun paying monthly
maintenance reserves based on the hours flown. The Company is in the process of
identifying any unfunded maintenance requirements related to the
pre-reorganization period for which it will submit an unsecured claim to the
reorganization administrator. The lessee operated S/N 3606 through April 24,
2000 at the same rent. The Company is evaluating the condition of the aircraft
and will seek re-lease opportunities once such condition is determined and any
necessary maintenance work is performed.
When S/N AC-647 was acquired, it 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. 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. In
June 2000, S/N AC-647 was re-leased to a U.S. carrier for a two-year term,
expiring in June 2002.
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
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 approximates fair
value.
4. Income Taxes
The items comprising income tax expense are as follows:
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
<S> <C> <C>
2000 1999
---- ----
Current tax provision
Federal $ - $ -
State 800 800
------------- --------------
Current tax provision 800 800
------------- --------------
Deferred tax provision
Federal 27,190 (43,600)
State 830 17,140
------------- --------------
Deferred tax provision 28,020 (26,460)
Valuation allowance - 26,460
------------- --------------
Total provision for income taxes $ 28,820 $ 800
============= ==============
</TABLE>
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>
2000 1999
---- ----
Income tax expense at statutory federal income tax rate $ (43,570) $ (43,330)
State taxes net of federal benefit (20) (200)
Tax rate differences - 17,340
Basis differences 72,410 -
California franchise tax - 530
Valuation allowance - 26,460
------------- --------------
Total provision for income taxes $ 28,820 $ 800
============= ==============
</TABLE>
<PAGE>
AEROCENTURY IV, INC.
Notes to Financial Statements
4. Income Taxes (continued)
Temporary differences and carryforwards which gave rise to a
significant portion of deferred tax assets and liabilities as of June 30, 2000
are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Maintenance deposits $ 76,390
Prepaid rent 4,250
State franchise taxes 270
-------------
Subtotal 80,910
Valuation allowance -
-------------
Net deferred tax assets 80,910
Deferred tax liabilities:
Amortization of organizational costs (180)
Depreciation of aircraft (74,230)
-------------
$ 6,500
=============
</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.
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 six months of 2000 and 1999,
the Company paid a total of $48,690 and $48,690, respectively, in management
fees to JMC.
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. Because the Company did not purchase aircraft
during the first six months of 2000 or 1999, it did not pay any acquisition fees
or Chargeable Acquisitions Expenses to JMC. No remarketing fees were paid during
the first six months of 2000 or 1999.
<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.
The Company made no such payments during the first six months of 2000 or 1999.
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.
<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 and the Company's cash flow 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, a favorable outcome with respect
to the aircraft leased to the defaulting British regional air carrier, and
future trends and results that 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 June 30, 2000, the Company had cash balances of $237,400 and deposits of
$88,300. The Company's cash balances were held for the interest payment made to
the Noteholders in August 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. See "Factors that May Affect Future Results", below, for a
discussion of factors affecting the Company's cash flow.
There was no cash flow from investing activities during the first six months or
2000 or 1999 because the Company did purchase any aircraft during those periods.
There was no cash flow from financing activities in the first six months of 2000
or 1999 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 ($222,060) and ($127,440) or ($0.91) and
($0.52) per share for the six months ended June 30, 2000 and 1999, respectively
and ($160,970) and ($102,050) or ($0.66) and ($0.42) per share for the three
months ended June 30, 2000 and 1999, respectively.
Rental income was approximately the same in 2000 as in 1999. Depreciation
increased by approximately $9,000 and $5,000 during the six months and three
months ended June 30, 2000 versus 1999 as a result of the depreciation expense
associated with the aircraft purchased during July 1999, discussed above.
Maintenance expense increased by approximately $43,000 in 2000 as a result of
maintenance work performed on the Company's off-lease aircraft.
Under the terms of a tax sharing agreement between the members of the
consolidated group with which the Company files a consolidated tax return, 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.
Factors that May Affect Future Results
Default by Certain Lessee. The lessee for two of the Company's aircraft, a
British regional carrier, recently filed for reorganization. The Company owns a
50% interest of one aircraft (S/N 3676) and 100% of the other (S/N 3606). The
lessee is continuing to operate, and, under the reorganization plan, the lessee
has agreed to continue leasing S/N 3676, on a month-to-month basis at the same
rent. The lessee has also agreed to begin paying monthly maintenance reserves
based on the hours flown. The lessee has suspended payments on the second
aircraft, S/N 3656, and will return the aircraft to the Company. The Company is
in the process of identifying any pre-reorganization claims, such as unfunded
maintenance reserves or unpaid lease rentals for both aircraft, which will be
submitted to the administrators of the lessee, and will be considered an
unsecured claim against the lessee. It is unlikely, however, that the Company
will recover the full amount of such claims from the lessee. If the Company is
unable to maintain S/N 3676 on lease with the British regional air carrier and
find a replacement lessee for S/N 3606 promptly, the Company's ability to meet
its scheduled interest payments may be impaired.
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 or realizes significant unexpected expenses due to lessee defaults in rent
or other obligations, 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.
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. Even if an aircraft can be repossessed, the Company may be unable to
recover damages from the lessee if the condition of the aircraft when
repossessed was worse than that required by the lease.
International Risks. The Company's portfolio currently consists of leases with
primarily 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's leases are all
with 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.
<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 August 15, 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 August 15,
2000.
Signature Title
/s/ Neal D. Crispin President and Chairman of the
------------------- Board of Directors of the Registrant
Neal D. Crispin Chief Financial Officer
