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, 2000
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from to
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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, 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 November 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.
AEROCENTURY IV, INC.
Balance Sheet
September 30, 2000
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash $ 150,630
Deposits 121,350
Rent receivable 56,450
Accounts receivable 209,510
-------------
Total current assets 537,940
Aircraft and aircraft engines under operating leases,
net of accumulated depreciation of $685,670 2,994,220
Debt issue costs, net of accumulated
amortization of $238,520 351,000
Other assets 10,070
-------------
Total assets $ 3,893,230
=============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 138,800
Interest payable 81,150
Prepaid rent 12,500
Security deposits 30,000
Maintenance deposits 310,850
-------------
Total current liabilities 573,300
-------------
Medium-term secured notes 4,869,000
-------------
Total liabilities 5,442,300
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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 (1,792,490)
-------------
Total shareholder's equity (1,549,070)
-------------
Total liabilities and shareholder's equity $ 3,893,230
=============
See accompanying notes.
</TABLE>
<PAGE>
AEROCENTURY IV, INC.
Statements of Operations
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
Rent income $ 414,890 $ 513,740 $ 84,450 $ 183,110
Interest income 13,190 23,360 4,240 5,290
------------- ------------- ------------- -------------
428,080 537,100 88,690 188,400
------------- ------------- ------------- -------------
Expenses:
Depreciation 194,030 184,870 64,840 64,600
Provision for impairment in
value of aircraft 623,940 - 623,940 -
Amortization 57,440 57,440 19,150 19,140
Maintenance 204,620 - 154,280 -
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 44,200 57,100 21,530 32,480
------------- ------------- ------------- -------------
1,562,440 737,620 1,029,810 262,290
------------- ------------- ------------- -------------
Loss before taxes (1,134,360) (200,520) (941,120) (73,890)
Tax provision 225,520 800 196,710 -
------------- ------------- ------------- -------------
Net loss $ (1,359,880) $ (201,320) $ (1,137,830) $ (73,890)
============= ============= ============= =============
Weighted average common
shares outstanding 243,420 243,420 243,420 243,420
============= ============= ============= =============
Basic loss per common share $ (5.59) $ (0.83) $ (4.67) $ (0.30)
============= ============= ============= =============
See accompanying notes.
</TABLE>
<PAGE>
AEROCENTURY IV, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
<S> <C> <C>
2000 1999
---- ----
Net cash used by operating activities $ (188,320) $ 40,120
Investing activity -
Purchase of interest in aircraft (30,380) (659,950)
-------------- -------------
Net decrease in cash (218,700) (619,830)
Cash, beginning of period 369,330 988,260
-------------- -------------
Cash, end of period $ 150,630 $ 368,430
============== =============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
2000 1999
---- ----
Interest $ 365,180 $ 365,180
Income taxes 800 800
See accompanying notes.
</TABLE>
<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
September 30, 2000, the Company maintained $252,780 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 the lower of cost
or market value, 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 nine months of
2000, but did capitalize $30,370 of equipment added to S/N 668.
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. The
original lease, entered into in 1997, did not require that the lessee pay
maintenance reserves based on usage because, at the time, the lessee was
considered creditworthy and had its own facility which was certified to perform
any required maintenance. On February 24, 2000, the lessee filed for
reorganization. The lessee has continued to operate, and, under the
reorganization plan, the lessee is continuing to lease S/N 3676, in which the
Company owns a 50% interest, on a month-to-month basis at the same rent as under
the original lease. The lessee also began paying monthly maintenance reserves
based on the hours flown. Under British law, the owners were precluded from
repossessing the aircraft so long as the lessee was operating it and paying rent
and maintenance reserves under its reorganization plan. The owners of the
aircraft now believe that S/N 3676 will be returned by the lessee by year-end
2000 and that collection on any claim for the maintenance related to usage by
the lessee prior to the reorganization date but not required to be performed
until after the reorganization date is doubtful. The owners believe that they
will realize a greater benefit if they sell the aircraft "as is" rather than
fund the maintenance work necessary to return the aircraft to a condition which
would allow it to possibly be re-leased to a new lessee. Because such
maintenance will likely not be performed, the Company believes that there has
been an impairment of the asset. The Company has, therefore, reduced the
carrying value of the aircraft from $425,700 to $275,000 and recognized a
provision for impairment estimated to be $150,700 at September 30, 2000. (See
also Note 6, Subsequent Events.) The same British regional airline was lessee of
S/N 3606 and operated it through April 24, 2000 at the same rent. The aircraft
was subsequently returned to the Company. In order to bring the aircraft to a
condition required to lease it to a new lessee, the Company would have had to
spend more on maintenance than it could afford. The Company decided to attempt
to sell the aircraft "as is", which sale was completed in October 2000.
Therefore, the Company reduced the carrying value of the aircraft from $873,200
to $400,000, the sales price, and recognized a provision for impairment of
$473,200 at September 30, 2000.
<PAGE>
AEROCENTURY IV, INC.
Notes to Financial Statements
2. Aircraft and Aircraft Engines Under Operating Leases (continued)
Aircraft and Aircraft Engines (continued)
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 represented 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, in which the Company owns a 67% interest, was subject to a
60-month lease, expiring in July 2004, with a regional carrier in Colombia.
During the third quarter of 2000, due to non-payment of rent and reserves by the
lessee, the Company notified the lessee of its intent to repossess the aircraft.
The Company recorded a write-off of $93,120 of rent receivable which amount was
net of the security deposit held by the Company, and reduced its reserves
receivable and related liability by $122,600. During November, the owners
repossessed S/N 668. At September 30, 2000, the Company has also accrued
$134,000 of estimated maintenance to be performed on S/N 668 related to usage by
the lessee. The owners believe that there are limited re-lease opportunities for
this type of aircraft. Therefore, in November 2000, the owners signed a
non-binding term sheet for the sale of the aircraft to be consummated on
November 30, 2000 which, if successful, would allow the Company to realize a
gain on the sale of approximately $71,000. (See also Note 6, Subsequent Events.)
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.
<PAGE>
AEROCENTURY IV, INC.
Notes to Financial Statements
4. Income Taxes
The items comprising income tax expense are as follows:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
<S> <C> <C>
2000 1999
---- ----
Current tax provision
Federal $ - $ -
State 800 800
------------- --------------
Current tax provision 800 800
------------- --------------
Deferred tax provision
Federal 14,080 (68,720)
State 810 17,020
------------- --------------
Deferred tax provision 14,890 (51,700)
Valuation allowance 209,830 51,700
------------- --------------
Total provision for income taxes $ 225,520 $ 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 $ (352,490) $ (68,180)
State taxes net of federal benefit (240) (320)
Tax rate differences - 17,340
Basis differences 21,370 -
California franchise tax - 260
Inter-company tax expense 347,050 -
Valuation allowance 209,830 51,700
------------- --------------
Total provision for income taxes $ 225,520 $ 800
============= ==============
</TABLE>
Temporary differences and carryforwards which gave rise to a
significant portion of deferred tax assets and liabilities as of September 30,
2000 are as follows:
<TABLE>
<S> <C>
Depreciation on aircraft $ 130,010
Maintenance deposits 64,930
Prepaid rent 4,260
Net operating losses 10,530
State franchise taxes 270
-------------
Subtotal 210,000
Valuation allowance (209,830)
-------------
Net deferred tax assets 170
Deferred tax liabilities:
Amortization of organizational costs (170)
-------------
Net deferred tax asset $ -
=============
</TABLE>
<PAGE>
AEROCENTURY IV, INC.
Notes to Financial Statements
4. Income Taxes (continued)
The Company does not anticipate generating adequate future taxable
income to realize the benefits of the remaining deferred tax assets on the
balance sheet. Therefore, the Company has recognized a valuation allowance equal
to the net deferred tax asset.
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 each 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.
However, under the terms of the tax sharing agreement with other members of the
consolidated group, the Company does not expect its inter-company receivable to
be collected because it does not expect to generate adequate future taxable
income. The Company's current net operating losses may be carried forward for
twenty years and begin to expire in 2020.
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 2000 and 1999,
the Company paid a total of $73,030 and $73,030, respectively, in management
fees to 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. Because the Company did not purchase aircraft
during the first nine months of 2000, it did not pay any acquisition fees or
Chargeable Acquisitions Expenses to JMC. During the first nine months of 1999,
the Company paid JMC a total of $36,280 in acquisition fees.
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 nine months of 2000 or 1999.
6. Subsequent Events
At the time of purchase in July 1997, S/N 3676, in which the Company
owns a 50% interest, was under a lease, expiring July 2001, with a British
regional airline. The original lease, entered into in 1997, did not require that
the lessee pay maintenance reserves based on usage because, at the time, the
lessee was considered creditworthy and had its own facility which was certified
to perform any required maintenance. In February 2000, the lessee filed for
reorganization. The lessee has continued to operate, and, under the
reorganization plan, the lessee has continued to lease S/N 3676 on a
month-to-month basis at the same rent as under the original lease. The lessee
also began paying monthly maintenance reserves based on the hours flown. Under
British law, the owners were precluded from repossessing the aircraft so long as
the lessee was operating it and paying rent and maintenance reserves under its
reorganization plan. The owners of the aircraft now believe that S/N 3676 will
be returned by the lessee by year-end
<PAGE>
AEROCENTURY IV, INC.
Notes to Financial Statements
6. Subsequent Events (continued)
2000 and that collection on any claim for the maintenance related to usage by
the lessee prior to the reorganization date but not required to be performed
until after the reorganization date is doubtful. The owners believe that they
will realize a greater benefit if they sell the aircraft "as is" rather than
fund the maintenance work necessary to return the aircraft to a condition which
would allow it to possibly be re-leased to a new lessee. Because such
maintenance will likely not be performed, the Company believes that there has
been an impairment of the asset. The Company has, therefore, reduced the
carrying value of the aircraft from $425,700 to $275,000 and recognized a
provision for impairment estimated to be $150,700 at September 30, 2000. If, as
the Company anticipates, it is unable to collect a substantial portion of its
claim in bankruptcy for unfunded maintenance requirements, this possibility,
along with the asset impairment for S/N 3676 recognized during the third quarter
of 2000, will have a material adverse affect upon the Company's ability to meet
its scheduled interest payments, as well as repayment in full of the Notes at
maturity.
The same British regional airline was lessee of S/N 3606 and operated
it through April 24, 2000 at the same rent. The aircraft was subsequently
returned to the Company. In order to bring the aircraft to a condition required
to lease it to a new lessee, the Company would have had to spend more on
maintenance than it could afford. The Company decided to attempt to sell the
aircraft "as is", which sale was completed in October 2000. Therefore, the
Company reduced the carrying value of the aircraft from $873,200 to $400,000,
the sales price, and recognized a provision for impairment of $473,200 at
September 30, 2000.
The Company owns a 67% interest in S/N 668. Over the last several
months, the owners of the aircraft have tried to work out a payment plan under
which the lessee of S/N 668, a Colombian regional carrier, could continue to use
the aircraft while paying reduced rent and deferring the shortfall until the
lessee became more profitable. The owners attempted to perfect a first priority
secured interest in real estate owned by the lessee, the estimated fair market
value of which approximated the monies owed the owners. However, after
protracted negotiations, the lessee failed to sign the necessary documents, and
the owners began repossession efforts which were completed in November 2000. The
owners believe that there are limited re-lease opportunities for this type of
aircraft. Therefore, in November 2000, the owners signed a non-binding term
sheet for the sale of the aircraft to be consummated on November 30, 2000 which,
if successful, would allow the Company to realize a gain on the sale of
approximately $71,000.
The total proceeds from the sale of S/N 3606 and the sale of S/N 668,
if it occurs, will probably not be adequate to invest in another income
producing asset. Under the Trust Indenture Agreement, the proceeds would then be
turned over to the Trustee to distribute to the Noteholders.
<PAGE>
AEROCENTURY IV, INC
Notes to Financial Statements
7. Going Concern
As shown in the accompanying financial statements, the Company incurred
a net loss of ($1,359,880) for the nine months ended September 30, 2000, and as
of that date, the Company's total liabilities exceeded its total assets by
$1,549,070. In addition, the Company does not anticipate having sufficient total
potential proceeds to invest in another income producing asset and, therefore,
under the Trust Indenture, it anticipates turning over those proceeds to the
Trustee. Further, the Company estimates that it may not have sufficient cash
balances to fund the required interest payment of approximately $122,000 on
February 1, 2001.
These factors create a substantial uncertainty about the Company's
ability to continue as a going concern. Therefore, the Company intends to notify
the Trustee that a default under the Trust Indenture Agreement is likely and,
upon such default, the Trustee would then have the right to manage the Company's
assets, all of which are collateral for the notes obligation. Management of the
Company's assets and extinguishment of its liabilities would then become the
responsibility of the Trustee. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
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 return of S/N 3676 and the collection of unfunded maintenance
requirements, realization of a greater benefit from sale rather than re-lease of
S/N 3676, the limited re-lease opportunities for S/N 668, the possible sale of
S/N 668, the generation of future taxable income, the Company's lack of
significant operating expenses in connection with assets that remain on lease,
the collection of its inter-company receivable related to its tax sharing
agreement, and the inadequacy of cash reserves to meet short-term immediate
requirements are forward looking statements. While the Company believes that
such statements are accurate, actual results may differ due to further defaults
by existing lessees, recovery of maintenance claims from certain defaulting
lessees, time required to re-lease any returned aircraft, 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 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 September 30, 2000, the Company had cash balances of $150,630 and deposits of
$121,350. The Company's cash balances were held for the interest payment made to
the Noteholders in November 2000 and for normally recurring expenses.
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 estimates that it may not have available adequate reserves
to meet its short term immediate cash requirements for normal operating costs
and interest on the secured notes due February 1, 2001. See "Factors that May
Affect Future Results", below, for a discussion of factors affecting the
Company's cash flow.
The decrease in cash flow used by investing activities from 1999 to 2000 was due
to the Company's purchase of an aircraft during August 1999 versus no such
purchases, other than capitalizing the cost of equipment added to a plane
already owned, in 2000. There was no cash flow from financing activities in the
first nine months of 2000 or 1999 because the Offering terminated in August
1997.
The Company had negative cash flow from operations for the first nine months of
2000 because the total paid for interest, maintenance and operating expenses
exceeded revenues collected. However, even when the Company had positive cash
flow from operations, it typically operated at a net loss due to depreciation
and interest expense.
Results of Operations
The Company recorded a net loss of ($1,359,880) and ($201,320) or ($5.59) and
($0.83) per share for the nine months ended September 30, 2000 and 1999,
respectively, and ($1,137,830) and ($73,890) or ($4.67) and ($0.30) per share
for the three months ended September 30, 2000 and 1999, respectively.
Rental income decreased by approximately $99,000 in the nine month and three
month periods of 2000 versus 1999, due to the repossession of S/N 668 and the
associated write-off of rent receivable during the third quarter of 2000.
Depreciation increased by approximately $9,000 during the nine months ended
September 30, 2000 versus 1999 as a result of the depreciation expense
associated with the purchase of S/N 668 during July 1999. Maintenance expense
increased by approximately $205,000 and $154,000 in the nine month and three
periods of 2000 as a result of maintenance work performed on S/N 647 prior to
its re-lease and the accrual of estimated maintenance to be performed on S/N
668, as a result of reserves which the Company was unable to collect from the
lessee. The company wrote off the receivable for uncollected maintenance during
September 2000. During the third quarter of 2000, the Company recorded a
provision for impairment in value of S/N 3676 based on its estimated fair value
and a provision for impairment in value of S/N 3606 based on its sale during
October 2000. If, as the Company anticipates, it is unable to collect a
substantial portion of its claim in bankruptcy for unfunded maintenance
requirements, this possibility, along with the asset impairment for S/N 3676 and
S/N 3606 recognized during the third quarter of 2000, will have a material
adverse affect upon the Company's ability to meet its scheduled interest
payments, as well as repayment in full of the Notes at maturity.
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. However, under the terms of the tax sharing agreement with other members
of the consolidated group, the Company does not expect its inter-company
receivable to be collected because it does not expect to generate adequate
future taxable income.
Factors that May Affect Future Results
Lessee Defaults; Need for Debt Restructuring. As described below in "Risks
Related to Regional Air Carriers", the Company's primary customers are regional
air carriers who generally pay a higher lease rate, but entail a higher risk of
default or lessee bankruptcy compared to major carriers. To date, though the
Company carefully analyzed the financial risk of its lessees prior to entering
into lease transactions, the Company has unfortunately experienced defaults with
respect to lessees of four of five aircraft that it owns or co-owns. The most
recent bankruptcy of a lessee that leases two aircraft from the Company, one
entirely owned by the Company and the other half-owned, described below in
"Bankruptcy of Certain Lessee" was a substantial setback to the Company, given
the Company's modest portfolio size. This, combined with the prior defaults by
other lessees, has eroded the Company's financial status. Though the Company
has, to date, been able to make its required interest payments to the
Noteholders, other lessee defaults and the failure to recover on claims made
against defaulting lessees and/or promptly re-lease repossessed aircraft, have
adversely affected the Company's ability to continue to meet its interest
obligations, and may also result in the Company's inability to fully repay the
principal due under the Notes at maturity, absent substantial restructuring of
the debt obligations.
Bankruptcy of Certain Lessee. The lessee for two of the Company's aircraft, a
British regional carrier, filed for reorganization in February 2000. 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 a reorganization plan adopted by
the trustee managing the reorganization, the lessee agreed to continue leasing
S/N 3676, on a month-to-month basis at the same rent as under the original
lease. The lessee also agreed to begin paying monthly maintenance reserves based
on the hours flown. In April 2000, the lessee suspended payments on the second
aircraft, S/N 3606, and returned the aircraft to the Company. The Company has
claims for unfunded maintenance related to periods prior to the reorganization,
and any unpaid lease rentals for both aircraft, which 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 there is a
substantial deficiency in the recovery of its claims against such lessee, or if
the Company is unable to maintain S/N 3676 on lease with the British regional
air carrier, the Company's ability to meet its scheduled interest payments may
be impaired.
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.
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. The Company has realized less than
anticipated lease rentals due to an unanticipated number of lessee rental
defaults, early termination of leases and significant unexpected expenses due to
lessee defaults in rent or other obligations. This has resulted in lower than
expected excess cash flow available for reinvestment in additional Assets and a
smaller than anticipated portfolio value. As a result, the Company's ability to
repay the Notes in full at maturity has been negatively affected by such events
and, absent a restructuring of such debt, repayment in full at maturity is not
likely, even if the Company is able to meet its scheduled interest payments.
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.
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.
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.
<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, 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 November
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
