10-K 1 ac410k01.txt 2001 10-K, ACIV 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, 2001 OR [ ] 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: $473,970 On March 28, 2002 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 28, 2002 the Issuer had 243,420 Shares of Common Stock outstanding. Transitional Small Business Disclosure Format (check one): Yes No X ----- ------ Documents Incorporated by Reference: None PART I 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: collection of intercompany tax receivables under its tax sharing agreement, the incurring of significant operating expenses for assets on lease, an Event of Default during May 2002, the Trustee's actions after a May 2002 Event of Default to take control of the Company's assets and the Trustee's disposition of the assets are forward looking statements. While the company believes that such statements are accurate, actual results may differ due to further defaults by existing lessees, changing general economic conditions, particularly those that affect the re-sale value of 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. Item 1. Description of Business. Business of the Company AeroCentury IV, Inc. (the "Company") was incorporated in the state of California in February 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, and Marc J. Anderson, Senior Vice President and Chief Operating Officer. Aircraft and Aircraft Engines At December 31, 2001, the Company owned a Fairchild Metro III aircraft, serial number AC-647 ("S/N AC-647"), and a Pratt & Whitney JT8D-9A aircraft engine, serial number 674452B (the "Engine"). In January 2001, the Company sold its 50% interest in a Shorts SD3-60-100, serial number S/N 3676 ("S/N 3676"). The Company did not purchase any aircraft during 2001. S/N AC-647 is on lease 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. At the time of purchase, S/N 3676 (owned 50% by the Company) was subject to a 48-month lease, expiring in July 2001, with a British regional airline. In early 2000, the lessee filed for reorganization and subsequently returned the aircraft to the Company. During January 2001, it was sold. The Company had filed claims for approximately $1,069,000 of unfunded, pre-reorganization maintenance expense related to S/N 3676 and another aircraft which had been on lease to the same lessee. On February 13, 2001, a majority of the creditors of the lessee approved a reorganization plan, which provided that unsecured creditors, like the Company, would not receive any recovery of pre-reorganization claims. Item 2. Description of Property. 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 28, 2002: 350 Dividends The Company has not declared a dividend on Common Stock since its formation. Item 6. Management's Discussion and Analysis or Plan of Operation. Results of Operations The Company recorded a net loss of ($385,850) or ($1.59) per share and ($1,751,770) or ($7.20) per share for the year ended December 31, 2001 and 2000, respectively. Rental income decreased by approximately $194,000 in 2001 versus 2000 due to the sale of aircraft during the fourth quarter of 2000 and January 2001. Gain on sale of aircraft was approximately $105,000 higher in 2001 because S/N 3676 was sold at a gain, including the associated reserves retained, while one of the aircraft sold during 2000 was sold at a loss. Interest income was higher in 2001 by approximately $30,000 due to higher cash balances as a result of asset sales. Depreciation decreased approximately $121,000 in 2001 due to the asset sales noted above. Maintenance expense was approximately $63,000 lower in 2001 because there was substantial maintenance work performed on an aircraft upon its return in 2000. Professional fees and general and administrative expenses were approximately the same in both years. Under the terms of a tax sharing arrangement 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 this agreement, the Company does not expect its inter-company receivable to be collected because it does not expect to generate adequate future taxable income. Capital Resources and Liquidity The Company's current financial condition is a result of several factors, primarily the default on lease obligations by the original lessees of four of the Company's five aircraft. As a result of such defaults, the aircraft were repossessed by the Company or returned early by the lessees, which meant that the Company had to sell the aircraft earlier than anticipated or negotiate lease terms with new lessees. See "Factors that May Affect Future Results," below, for a complete discussion of factors affecting the Company's cash flow. Since its formation, the Company's capital has come in the form of equity contributions from JHC, proceeds from the Offering, rental revenue from the Income Producing Assets purchased using those proceeds, and, most recently, proceeds from the sale of assets. The Company's liquidity has varied, increasing to the extent cash flows from operations exceeded expenses, and decreasing as interest payments were made to the Noteholders and to the extent expenses exceeded cash flows from leases. At December 31, 2001, the Company had cash balances of $1,114,420 and deposits of $95,780. At December 31, 2001, the Company had Notes outstanding with an aggregate principal face value of $4,869,000. The fair value of the Notes, based upon the net book values of the aircraft and the net working capital of the Company as of that date, is estimated to be approximately $2,221,000, which is approximately 46% of the face value of the Notes 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 typically does not incur significant operating expenses in connection with ownership of its Income Producing Assets as long as they remain on lease. The Company has, however, incurred significant maintenance expense for aircraft which have been off lease prior to being sold. The Company could incur additional expenses for its two remaining aircraft if they are returned by the lessees when the leases expire in June and November 2002 and remain off lease. The Company sold several of its aircraft during 2000 and 2001; such sales were earlier than anticipated, as the aircraft were returned upon defaults by their respective lessees. As a result, the proceeds received from the sales were less than was expected and insufficient to purchase additional Income Producing Assets. Since the Trust Indenture precludes the Company from using sales proceeds to fund interest payments, after consultation with, and with the consent of, the Trustee, on December 15, 2001, the Company's Board of Directors approved a resolution authorizing a prepayment of $1,000,000 of principal to the Noteholders during the first quarter of 2002. The Company made such prepayment during February 2002. After the principal prepayment made during February 2002, the Company has Notes outstanding with an aggregate principal face value of $3,869,000. Including the February 2002 principal prepayment and all interest paid to date, the Company has paid to Noteholders an aggregate of approximately 63% of the face value of the Notes. The Company did not have sufficient cash balances to fund the required interest payment of approximately $122,000 on February 1, 2002 and is therefore in default under the Trust Indenture. While the Company has 90 days to cure such default, it does not anticipate having sufficient cash to do so. Therefore, in May 2002, there will be an "Event of Default" under the Trust Indenture. The Company's decrease in cash flow from operations was due primarily to the effect of the change in receivable from affiliates, prepaid expenses, payable to affiliate and maintenance deposits, which effects were only partially offset by a smaller net loss and the effect of the change in accounts receivable and accounts payable. The decrease in cash flow provided by investing activities was the result of the Company's sale of S/N 3676 during 2001 versus having sold S/N 3606 and its 67% interest in a deHavilland DHC-6 during 2000. There was no cash flow from financing activities in 2001 or 2000 because the Offering terminated in August 1997. During 2001, the Company paid $100,000 to the Trustee, which amount is estimated to be the expenses incurred by the Trustee and its counsel in connection with the February 2002 prepayment and the default on the February 1 interest payment. Based on reports from the Trustee, during December 2001, the Company expensed $40,000 of the $100,000; the balance is included in prepaid expenses and will be expensed as incurred during 2002. Outlook As discussed above, it is anticipated that during May 2002, there will be an Event of Default under the Trust Indenture. The Trustee would then have control over the Company's assets, all of which are collateral for the notes obligation. The Trustee could take title to, and possession of, the Company's assets; or the Company and the Trustee could enter into a "going-forward" agreement, whereunder the Company would retain legal title to the assets that are collateral for the Noteholder obligations, but would give the Trustee the sole power to manage the assets. In either case, the Trustee would have the ultimate discretion as to the timing of the disposition of each asset. The Trustee could choose to sell an asset to a third party and immediately distribute the proceeds of such sale to the Noteholders. In order to achieve an immediate liquidation of the asset, however, the Company may have to accept a price that is substantially less than the net book value of the asset or lower than it would receive in a normal market sale. Alternatively, the Trustee could decide to continue to hold an asset for the benefit of Noteholders and collect rent for such asset until the underlying user lease expires, or until the Trustee determines that the asset can be sold at an acceptable price. The Company's two assets are each currently on lease until June 2002 and November 2002, at a monthly lease rate of $10,000 and $15,000, respectively. If the Trustee were to direct the Company to retain both assets until lease end, from January 2002 until the assets' lease expirations, a total of approximately $200,000 could be collected under the leases; however, the amount of rental income received would nonetheless be insufficient to permit the Trustee to make net cash distributions to Noteholders at a rate of 10% per annum (the stated interest rate under the Notes) on unpaid Note principal. Any distributions to Noteholders of sales and/or rent proceeds would be net of legal and administrative expenses incurred by the Trustee. Such expenses are currently estimated at $100,000. Under the terms of the Trust Indenture, any final distribution to Noteholders upon sale of the last asset would consist first of accrued, but unpaid, interest on the Notes, and then principal. Factors that May Affect Future Results Anticipated Event of Default; Ability to Maximize Returns. As discussed above, due to cash flow problems created by lessee rental defaults, early termination of leases, and lower than expected remarketing proceeds described above, it is anticipated that there will be an Event of Default under the Trust Indenture on May 1, 2002. At that time, it is believed that the Trustee, Wells Fargo Bank Northwest (formerly known as First Security Bank, N.A.), will take control of the Company's assets securing the Indenture, namely the aircraft portfolio and leases and any remaining cash held by the Company. At that point, the Trustee will have the power to direct disposition of the collateral with the goal of maximizing value to the Noteholders. This could entail an immediate or staged disposition of all the assets or retention of the assets on lease for the benefit of the Noteholders, or a combination thereof. While the Trustee is unlikely to realize sufficient proceeds to enable repayment of the entire Note Indebtedness, its ability to maximize repayment to Noteholders will depend on the risk factors described below, particularly those that affect asset values of the Company's portfolio. Re-lease of Assets or Sale. The ability to maximize return to the Noteholders on the remaining assets of the Company will depend upon general economic conditions and the speed of recovery of the air transport industry. The industry is currently experiencing a cyclical downturn which has been exacerbated greatly by the terrorist attacks of September 11, 2001 and their aftermath. As a result, there has been a severe reduction in air travel and less revenue and less demand for aircraft capacity by the major air carriers, particularly those that serve U.S. markets. One of the Company's assets is a regional aircraft leased to a U.S. regional freight carrier. The second is a jet engine leased to a Mexican regional air carrier. It is not clear whether and to what extent the current downturn will have on these lessees. If the Company's lessees experience a corresponding downturn in their own businesses, they may be at risk of failure, and default under their respective leases. See "Risks Related to Regional Air Carriers", below. Even if the Company's lessees remain in compliance with their lease through expiration, the industry downturn may result in the lessees deciding not to renew the leases for an additional term. In that case the assets would likely be re-leased to another lessee; however, if the financial condition of the air travel industry does not improve within the next year, it may be very difficult to find a new lessee for the Company's assets. An unimproved or worse industry financial condition would also tend to result in lower amounts realizable on the assets if they are sold upon return from the lessee (See "Leasing Risks" and "Ownership Risks", below). Leasing Risks. The Company's successful negotiation of lease extensions, re-leases and sales for its two assets as directed by the Trustee under the going-forward agreement may be critical to its ability to achieve a maximum return of principal to its Noteholders, and will involve a number of risks. Demand for lease or purchase of the assets depends on the economic condition of the airline industry, which is in turn 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. As discussed above, The demand for and value of many types of older aircraft has been depressed by current 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 limited portfolio of two assets subjects the Company to economic risks if those particular airframe or engine types should decline in value. Risks Related to Regional Air Carriers. Because the Company's leases are 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. 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. 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 includes a lease with a foreign air carrier. 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. 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. 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, 2001 Statements of Operations for the Years Ended December 31, 2001 and 2000 Statements of Changes in Shareholder's Deficit for the Years Ended December 31, 2001 and 2000 Statements of Cash Flows for the Years Ended December 31, 2001 and 2000 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. 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, 2001 and the related statements of operations, shareholder's deficit and cash flows for the years ended December 31, 2001 and December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2001 and the related statements of operations, shareholder's equity and cash flows for the years ended December 31, 2001 and 2000, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the financial statements, the Company incurred a net loss of $385,850 for the year ended December 31, 2001, and, as of that date, the Company's total liabilities exceeded its total assets by $2,326,800. As described more fully in Note 7 to the financial statements, the Company defaulted on its required interest payment to the Noteholders on February 1, 2002 and has ninety days to cure the default. In the event the Company is not able to cure the default, the management of the Company will be transferred to the Trustee. These conditions raise substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. VOCKER KRISTOFFERSON AND CO. /s/ Vocker Kristofferson & Co. March 25, 2002 San Mateo, California AEROCENTURY IV, INC. Balance Sheet December 31, 2001 ASSETS Current assets: Cash $ 1,114,420 Deposits 95,780 Accounts receivable 128,510 Rent receivable 5,000 ------------- Total current assets 1,343,710 Aircraft and aircraft engines under operating leases, net of accumulated depreciation of $435,410 1,203,790 Debt issue costs, net of accumulated amortization of $334,250 255,270 Prepaid expenses 66,250 ------------- Total assets $ 2,869,020 ============= LIABILITIES AND SHAREHOLDER'S DEFICIT Current liabilities: Accounts payable $ 13,880 Interest payable 81,150 Prepaid rent 7,500 Security deposits 20,000 Maintenance deposits 204,290 ------------- Total current liabilities 326,820 ------------- Medium-term secured notes 4,869,000 ------------- Total liabilities 5,195,820 ------------- 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 (2,570,220) ------------- Total shareholder's deficit (2,326,800) ------------- Total liabilities and shareholder's deficit $ 2,869,020 =============

The accompanying notes are an integral part of these statements. AEROCENTURY IV, INC. Statements of Operations

The accompanying notes are an integral part of these statements. AEROCENTURY IV, INC. Statements of Shareholder's Deficit For the Years Ended December 31, 2001 and 2000

The accompanying notes are an integral part of these statements. AEROCENTURY IV, INC. Statements of Cash Flows

The accompanying notes are an integral part of these statements. 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, 2001, the Company maintained $1,207,440 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. Impairment of Long-lived Assets In accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to Be Disposed Of," assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. Periodically, the Company reviews its long-lived assets for impairment based on estimated future non-discounted cash flows attributable to the assets or appraisals. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated realizable 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"). AEROCENTURY IV, INC. Notes to Financial Statements 1. Summary of Significant Accounting Policies (continued) Debt Issue Costs (continued) 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. 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. Recent Accounting Pronouncements SFAS No. 138, which amended the effective date of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1999. The Company adopted SFAS No. 133 on January 1, 2001. This statement establishes accounting and reporting standards requiring that all derivative instruments are recorded on the balance sheet as either an asset or a liability, measured at fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met and such hedge accounting treatment is elected. Because the Company does not hold any derivatives as defined in SFAS No. 133, its adoption did not have a material impact on its results of operations or financial position. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," which supercedes SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to Be Disposed of." SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company will adopt SFAS No. 144 on January 1, 2002. Because SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale, the adoption of SFAS No. 144 is not expected to have a material effect on the Company's results of operations or financial position. AEROCENTURY IV, INC. Notes to Financial Statements 2. Aircraft and Aircraft Engines Under Operating Leases Aircraft and Aircraft Engines At December 31, 2001, the Company owned a Fairchild Metro III aircraft, serial number AC-647 ("S/N AC-647"), and a Pratt & Whitney JT8D-9A aircraft engine, serial number 674452B (the "Engine"). In January 2001, the Company sold its 50% interest in a Shorts SD3-60-100, serial number S/N 3676 ("S/N 3676"). The Company did not purchase any aircraft during 2001. Aircraft and Aircraft Engines Leases 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 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. At the time of purchase, S/N 3676 (owned 50% by the Company) was subject to a 48-month lease, expiring in July 2001, with a British regional airline. During 2000, the lessee filed for reorganization and subsequently returned the aircraft to the Company. The owners agreed that they would realize a greater benefit if they sold 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. Therefore, the Company reduced the carrying value of the aircraft to $170,000 and recognized a provision for impairment of $245,350 during 2000. The aircraft was sold during January 2001. At that time, the Company received net proceeds of $167,450 and recognized a gain of $35,980. During the second quarter of 2001, the lessee paid all amounts owed to the Company and, since the aircraft had been sold, the Company recognized an additional gain of $77,020, representing maintenance reserves retained. 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, 2001 and 2000:

AEROCENTURY IV, INC. Notes to Financial Statements 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 39% and 13% of the Company's operating lease revenue was derived from lessees domiciled in the United States during 2001 and 2000, 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:

As of December 31, 2001, minimum future lease rent payments receivable under noncancelable leases were as follows: Year Amount ---- ------ 2002 $ 200,000 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. As described in Note 7 to the financial statements, there is substantial doubt as to the Company's ability to continue as a going concern. Therefore, the fair value of the Notes is estimated to be approximately $2,221,000, which is $2,648,000 less than the carrying value. The fair value of the notes payable is estimated based upon the net book values of the aircraft and the current net working capital of the Company. The Company used the proceeds from previous asset sales to fund a principal prepayment totaling $1,000,000 to Noteholders during the first quarter of 2002. AEROCENTURY IV, INC. Notes to Financial Statements 4. Medium-Term Secured Notes (continued) The Company did not have sufficient cash balances to fund the required interest payment of approximately $122,000 on February 1, 2002 and is therefore in default under the Trust Indenture. The Company has 90 days to cure such default, but it will not have sufficient cash to do so. Under the Trust Indenture, 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, unless the Trustee assigns such management. During 2001, the Company paid $100,000 to the Trustee, which amount is estimated to be the expenses incurred by the Trustee and its counsel in connection with the prepayment and the default. Based on reports from the Trustee, during December 2001, the Company expensed $40,000 of the $100,000; the balance is included in prepaid expenses and will be expensed as incurred during 2002. 5. Income Taxes The items comprising income tax expense are as follows:

AEROCENTURY IV, INC. Notes to Financial Statements 5. Income Taxes (continued) Temporary differences and carryforwards, which gave rise to a significant portion of deferred tax assets and liabilities as of December 31, 2001 are as follows: Deferred tax assets: Depreciation of aircraft $ 41,590 Maintenance deposits 28,730 Net operating losses 339,350 Other 2,830 ------------- 412,500 Valuation allowance (412,380) ------------- Net deferred tax assets 120 Deferred tax liability- Amortization of organizational costs (120) ------------- $ - =============

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 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. However, under the terms of the tax sharing arrangement 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 of $995,640 may be carried forward for twenty years and begin to expire in 2020. 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 2001 and 2000, the Company accrued a total of $97,380 and $97,380, 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. During 2001 and 2000, no acquisition fees or reimbursements for Chargeable Acquisition Expenses were paid as the Company did not acquire additional assets. During 2001, remarketing fees of $2,550 were paid to JMC in connection with the sale of aircraft. During 2000, remarketing fees of $9,290 were accrued to JMC in connection with the sale of aircaft. AEROCENTURY IV, INC. Notes to Financial Statements 6. 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 2001 and 2000. 7. Going Concern As indicated in the accompanying financial statements, as of December 31, 2001, the Company's total liabilities exceeded its total assets by $2,326,800. The Company sold several of its aircraft during 2000 and 2001; such sales were earlier than anticipated, as the aircraft were returned upon defaults by their respective lessees. As a result, the proceeds received from the sales were less than was expected and insufficient to purchase additional Income Producing Assets. Since the Trust Indenture precludes the Company from using sales proceeds to fund interest payments, after consultation with, and with the consent of, the Trustee, on December 15, 2001, the Company's Board of Directors approved a resolution authorizing a prepayment of $1,000,000 of principal to the Noteholders during the first quarter of 2002. The Company made such prepayment during February 2002. The Company did not have sufficient cash balances to fund the required interest payment of approximately $122,000 on February 1, 2002 and is therefore in default under the Trust Indenture. The Company has 90 days to cure such default, but it does not anticipate having sufficient cash to do so. Therefore, in May 2002, the Trustee will declare an "Event of Default" under the Trust Indenture. Under the Trust Indenture, the Trustee will then have the right to manage the Company's assets, all of which are collateral for the notes obligation, and extinguishment of the Company's liabilities. The Trustee may assign such management to the Company or another party. During 2001, the Company prepaid $100,000 to the Trustee, which amount is estimated to be the expenses incurred by the Trustee and its counsel in connection with the prepayment and the default. Based on reports from the Trustee, during December 2001, the Company expensed $40,000 of the $100,000; the balance is included in prepaid expenses and will be expensed as incurred during 2002. These factors create a substantial uncertainty about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Since the Company has not yet elected liquidation, and there has not yet been a change in management, liquidation accounting has not been applied to these financial statements. 8. Subsequent Events After consultation, and with the consent of the Trustee, on February 19, 2002, the Company made a prepayment of $1,000,000 of principal to the Noteholders. After such prepayment, the Company has an aggregate of $3,869,000 of principal outstanding on the Notes. As discussed in Note 7, it is anticipated that during May 2002, there will be an Event of Default under the Trust Indenture. The Trustee would then have control over the Company's assets, all of which are collateral for the notes obligation. The Trustee could take title to, and possession of, the Company's assets on behalf of the Noteholders; or the Company and the Trustee could enter into a "going-forward" agreement, whereunder the Company would retain legal title to the assets that are collateral for the Noteholder obligations, but would give the Trustee the sole power to manage the assets. In either case, the Trustee would have the ultimate discretion as to the timing of the disposition of each asset. The Trustee could choose to sell an asset to a third party and immediately distribute the proceeds of such sale to the Noteholders. In order to achieve an immediate liquidation of the asset, however, the Company may have to accept a price that is substantially less than the net book value of the asset or lower than it would receive in a normal market sale. Alternatively, the Trustee could decide to continue to hold an asset for the benefit of Noteholders and collect rent for such asset until the underlying user lease expires, or until the Trustee determines that the asset can be sold at an acceptable price. 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 Neal D. Crispin, age 56. 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 65. 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. Item 10. Executive 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 0.5% of the Company's Aggregate Gross Proceeds received through the last day of such quarter. In 2001 and 2000, the Company accrued a total of $97,380 and $97,380, 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. During 2001 and 2000, no acquisition fees or reimbursements for Chargeable Acquisition Expenses were paid as the Company did not acquire additional assets. During 2001, remarketing fees of $2,550 were paid to JMC in connection with the sale of aircraft. During 2000, remarketing fees of $9,290 were accrued to JMC in connection with the sale of aircaft. 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 2001 and 2000. Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 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 Report on Form 8-K filed with the Securities and Exchange Commission on October 1, 2001. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this Report on Form 10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized on March 28, 2002. AEROCENTURY IV, INC. By: /s/ Neal D. Crispin ------------------------------- Neal D. Crispin Title: President

AEROCENTURY IV INC 10-K