FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 33-84336-LA
JetFleet III
(Exact name of Registrant as specified in its charter)
California 94-3208983
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1440 Chapin Avenue, Suite 310
Burlingame, California 94010
(Address of principal executive offices) (Zip code)
(650) 340-1880
(Registrant's telephone number including area code)
Not applicable (Former name, former address, and former fiscal year, if
changed since last report)
Check whether the issuer (1) has 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 ____
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the registrant has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title Outstanding
Common Stock 815,200
Transitional Small Business Disclosure Format (check one);
Yes___ No X
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
JETFLEET III
Balance Sheets
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 889,105 $ 539,626
Deposits 134,931 107,913
Rent receivable 39,432 48,903
Accounts receivable 18,120 19,875
----------------- -----------------
Total current assets 1,081,588 716,317
Aircraft under operating lease, net of
accumulated depreciation of $1,062,139
in 1998 and $761,600 in 1997 10,885,213 11,185,752
Debt issue costs, net of accumulated
amortization of $442,143 in 1998
and $327,833 in 1997 1,219,309 1,333,619
Other, including deferred tax asset
net of valuation allowance 65,000 65,000
----------------- -----------------
Total assets $ 13,251,110 $ 13,300,688
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 1,349 $ 17,435
Interest payable 238,880 238,880
Prepaid rents 81,840 57,675
Maintenance reserves 154,428 127,788
----------------- -----------------
Total current liabilities 476,497 441,778
Medium-term secured bonds 11,076,350 11,076,350
----------------- -----------------
Total liabilities 11,552,847 11,518,128
----------------- -----------------
Preferred stock, no par value,
300,000 shares authorized, 195,465
issued and outstanding 1,661,452 1,661,452
Common stock, no par value,
1,000,000 shares authorized, 815,200
issued and outstanding 815,200 815,200
Accumulated deficit (778,389) (694,092)
----------------- -----------------
Total shareholders' equity 1,698,263 1,782,560
----------------- -----------------
Total liabilities and shareholders' equity $ 13,251,110 $ 13,300,688
================= =================
See accompanying notes.
</TABLE>
<PAGE>
JETFLEET III
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months For the Three Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Rent income, net of
finance charges $ 1,138,620 $ 858,194 $ 569,310 $ 472,650
Interest income 20,679 44,663 10,213 4,013
--------------- --------------- --------------- ----------------
1,159,299 902,857 579,523 476,663
--------------- --------------- --------------- ----------------
Expenses:
Depreciation expense 300,539 216,879 150,269 123,438
Amortization expense 114,310 95,957 57,155 49,856
Interest expense 716,640 675,141 358,320 357,885
Management fees 97,733 96,307 48,866 48,866
General and administrative 14,374 11,572 7,190 4,750
--------------- --------------- --------------- --------------
1,243,596 1,095,856 621,800 584,795
--------------- --------------- --------------- --------------
Net loss $ (84,297) $ (192,999) $ (42,277) $ (108,132)
=============== =============== =============== ==============
Weighted average common shares 815,200 580,903 815,200 613,650
=============== =============== =============== ==============
Net loss per common share $ ( 0.10) $ ( 0.33) $ (0.05) $ (0.18)
=============== =============== =============== ==============
See accompanying notes.
</TABLE>
<PAGE>
JETFLEET III
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
1998 1997
<S> <C> <C>
Net cash provided by operating activities $ 349,479 $ 278,514
Investing activity -
Purchase of interests in aircraft - (991,550)
Financing activities:
Proceeds from issuance of
medium-term secured bonds - 2,269,500
Debt issue costs - (226,950)
Proceeds from issuance of preferred stock - 400,500
Offering costs - (40,050)
Proceeds from issuance of common stock - 95,600
------------------ ------------------
Net cash provided by financing activities - 2,498,600
------------------ ------------------
Net increase in cash 349,479 1,785,564
Cash, beginning of period 539,626 255,851
------------------ ------------------
Cash, end of period $ 889,105 $ 2,041,415
================== ==================
Supplemental schedule of noncash investing and financing activities: During
January 1997, the Company exercised its option to purchase three aircraft which
previously served as collateral for loans made by the Company during 1996. The
purchase price for the three aircraft was equal to the unpaid balance, including
principal and interest totaling $2,294,228, on the secured note for each
aircraft, which balances were paid in full by the seller immediately prior to
the Company's purchase of each aircraft.
See accompanying notes.
</TABLE>
<PAGE>
JETFLEET III
Notes to Financial Statements
June 30, 1998
(Unaudited)
1. Basis of presentation
JetFleet III (the "Company") was incorporated in the state of California on
August 23, 1994 ("Inception"). All of the Company's outstanding common stock is
owned by JetFleet Management Corp. ("JMC"), a California corporation formed in
January 1994. JMC is the management company for the Company, and also manages
AeroCentury Corp., a Delaware corporation, and AeroCentury IV, Inc., a
California corporation, which are affiliates of the Company and which have
objectives similar to the Company's. Neal D. Crispin, the President of the
Company, holds the same position with JMC and owns a significant amount of the
common stock of JMC.
The accompanying balance sheets at June 30, 1998 and December 31, 1997 and
statements of operations and cash flows for the six months and three months
ended June 30, 1998 and 1997 reflect all adjustments (consisting of only normal
recurring accruals) which are, in the opinion of the Company, necessary for a
fair presentation of the financial results. The results of operations of such
periods are not necessarily indicative of results of operations for a full year.
The statements should be read in conjunction with the Summary of Significant
Account Policies and other notes to financial statements included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1997.
2. Organization and Capitalization
The Company was formed solely for the purpose of acquiring Income Producing
Assets, consisting mainly of aircraft, aircraft engines, aircraft parts or other
transportation industry equipment subject to operating or full payout leases
with third parties. The Company raised $13,031,000 in $1,000 Series A Units (the
"Offering") consisting of $850 of bonds maturing on November 1, 2003 (the
"Bonds") and $150 of preferred stock (the "Preferred Stock") pursuant to a
prospectus dated September 27, 1995 (the "Prospectus").
Organization and offering costs
Pursuant to the terms of the Prospectus, the Company paid an Organization
and Offering Expense Reimbursement to JMC 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 Company
also issued 651,550 shares of common stock to JMC as reimbursement of
organization and offering costs JMC incurred in excess of the 2.0% cash
reimbursement (collectively, the "Reimbursement").
The Company capitalized the portion of the Reimbursement related to the
Bonds (85%) and amortizes such costs over the life of the Bonds (approximately
eight years). The remainder of the amount paid by the Company for organization
and offering costs was deducted from shareholders' equity.
<PAGE>
JETFLEET III
Notes to Financial Statements
June 30, 1998
(Unaudited)
3. Aircraft and Aircraft Engines Under Operating Leases
Aircraft and aircraft engines
The Company owns a deHavilland DHC-8-100, serial number 13 ("S/N 13"), a
Shorts SD3-60, serial number S/N 3611 ("S/N 3611"), a Pratt & Whitney JT8D-9A
aircraft engine, serial number 674267 ("S/N 674267"), three deHavilland
DHC-6-300 aircraft ("S/Ns 646, 751 and 696"), a Fairchild Metro III SA-227-AC,
Serial No. AC-621 ("S/N AC-621") a Shorts SD3-60, serial number S/N 3656 ("S/N
3656") and 50% undivided interests in a Fairchild Metro II SA-226-TC, serial
number TC-370 ("S/N TC-370") and a Shorts SD3-60, serial number S/N 3676 ("S/N
3676").
The Company made no investments in aircraft during the first six months of
1998.
Aircraft and aircraft engines leases
S/N 13 is subject to a 120-month lease with the seller. The lease may be
terminated by either party, with at least 120 days prior written notice, at the
end of the first 36 months of the lease. The seller also has a fixed purchase
option at the end of the first 36 months of the lease, which may be exercised
with at least 90 days prior written notice. Although the lessee has not provided
formal notice to terminate the lease on November 30, 1998, management
anticipates that the lease will not be renewed and is, therefore, negotiating
with the sub-lessee, an Australian carrier, regarding its continued use of S/N
13.
S/N 3611 is subject to a 27-month lease with the seller, a British regional
airline.
S/N 674267 is used on a McDonnell Douglas DC-9 and is subject to a 60-month
sublease between the seller and a Mexican based regional carrier which operates
between the United States and Mexico.
S/Ns 646, 751 and 696 are subject to similar 36-month leases with a U.S.
regional carrier.
S/N AC-621 is subject to a 36-month lease with a U.S. regional carrier.
S/N TC-370 is subject to a lease with a United States charter operator
operating under FAA regulations. The lease contains a guaranty by the seller for
basic rent in an amount not to exceed a total aggregate amount of $29,250 (which
guaranty is shared equally by the Company and AeroCentury Corp., the co-owner of
S/N TC-370).
S/N 3656 and S/N 3676 are subject to similar 48-month leases with a British
regional airline.
4. Medium-term secured bonds
Each $1,000 Unit subscribed in the Offering included an $850 medium-term
secured bond maturing on November 1, 2003. During 1997, the Company accepted
subscriptions for 2,310 Units aggregating $2,310,000 in Gross Offering Proceeds.
Pursuant to the Prospectus, the Company subsequently issued $1,963,500 in Bonds
and 40,050 shares of Preferred Stock. The Bonds bear interest at an annual
<PAGE>
JETFLEET III
Notes to Financial Statements
June 30, 1998
(Unaudited)
4. Medium-term secured bonds (continued)
rate of 12.94% from issuance through October 31, 1998 and, thereafter, a
variable rate, adjusted annually on November 1, equal to the one-year United
States Treasury bill rate plus 2%, but not less than 8.24%. Interest is due and
payable on a quarterly basis, in arrears, on the first business day of February,
May, August and November. The carrying amount of the notes payable approximates
fair value.
5. 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 0.375% of the Company's Aggregate Gross Proceeds received through the last
day of such quarter. During the first six months of 1998 and 1997, the Company
paid a total of $97,733 and $96,307, respectively, in management fees to JMC.
JMC may receive a brokerage fee for locating assets for the Company,
provided that such fee is not more than the customary and usual brokerage fee
that would be paid to an unaffiliated party for such a transaction. The total of
the Aggregate Purchase Price plus the brokerage fee cannot exceed the fair
market value of the asset based on appraisal. JMC may also receive reimbursement
of Chargeable Acquisition Expenses incurred in connection with a transaction
which are payable to third parties. Because the Company did not purchase
aircraft during the first six months of 1998, it did not pay any brokerage fees
or Chargeable Acquisition Expenses to JMC. The Company paid JMC $73,200 and
$3,350 for brokerage fees and Chargeable Acquisition Expenses, respectively,
during the first six months of 1997.
As discussed in Note 1, the Company reimburses JMC for certain costs
incurred in connection with the organization of the Company and the Offering.
Because the Offering was closed to new subscriptions during June 1997, the
Company did not reimburse JMC for any organization and offering expenses during
the first six months of 1998. The Company reimbursed JMC $53,400 during the
first six months of 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Capital Resources and Liquidity
On June 30, 1998, the Company had cash balances of $1,024,036. Of this
amount, $134,931 was deposits which represent maintenance reserves collected
from lessees and interest earned on those funds, as applicable. The remainder of
the Company's cash balance was held primarily for the interest payment made to
the Unitholders in August 1998 and for normally recurring expenses.
Since Inception, the Company's funds have come in the form of an initial
contribution from JMC, proceeds from the Offering and rental revenue from the
Income Producing Assets purchased using those proceeds. The Company's liquidity
will vary in the future, increasing to the extent cash flows from operations
exceed expenses, and decreasing as interest payments are made to the Unitholders
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 Unitholders. Excess cash flow, after payment of interest and operating
expenses is held for investment in additional Income Producing Assets. Since the
Company has acquired Income Producing Assets which are subject to triple net
leases (the lessee pays operating and maintenance expenses, insurance and
taxes), the Company does not anticipate that it will incur significant operating
expenses in connection with ownership of its Income Producing Assets as long as
they remain on lease.
The Company currently has available adequate reserves to meet its immediate
cash requirements. The leases for the Company's aircraft expire at varying times
between November 1998 and November 2001. Although S/N 13 is subject to a
120-month lease, the lease may be terminated by either the lessor or lessee at
the end of the first 36 months with at least 120 days prior written notice.
Although the lessee has not provided formal notice to terminate the lease on
November 30, 1998, management anticipates that the lease will not be renewed and
is, therefore, negotiating with the sub-lessee, an Australian carrier, regarding
its continued use of S/N 13.
As discussed in Item 1, the interest rate on the Bonds is 12.94% through
October 31, 1998 and a variable rate thereafter. The variable rate will be
dependent on the one-year United States Treasury bill rate and, therefore,
management believes that the rate will be lower than the current rate.
1998 versus 1997
The increase in cash flow from operations was due partially to a decreased
net loss (see Results of Operations). The other significant factor was an
increase in prepaid rent received from lessees.
The Company did not purchase aircraft during the first six months of 1998
and, therefore, had no cash flows from investing activities. The Company also
had no cash flows from financing activities because the Offering terminated
during June 1997.
Results of Operations
The Company recorded a net loss of ($84,297) or ($0.10) per share and
($192,999) or ($0.33) per share for the six months ended June 30, 1998 and 1997,
respectively and ($42,277) or ($0.05) and ($108,132) or ($0.18) per share for
the three months ended June 30, 1998 and 1997, respectively.
1998 versus 1997
Rental income increased as a result of the additional rent received from
aircraft purchased during 1997. Interest income decreased in 1998 because, at
the end of January 1997, the Company exercised its purchase options for three
aircraft which previously served as collateral for three secured loans. As a
result, the Company recognized no interest income for the loans during 1998,
compared to one month of interest income during 1997.
Amortization and depreciation increased from year to year as a result of
the additional funds raised during 1997 and the depreciable aircraft purchased
with those funds. Interest expense and management fees also increased in 1998 as
a result of the additional proceeds raised.
Factors that May Affect Future Results
Year 2000 Considerations. The Company's internal and administrative
operations are not highly dependent on advanced technological computer or other
electronic systems, and, consequently, management believes that the Company's
exposure to loss as a result of Year 2000 issues is not significant. Further,
management believes that the electronic systems used in the equipment leased by
the Company to lessees will not be affected by the Year 2000 issue, and,
therefore, this issue should not directly affect the Company's financial
performance or the lessees' ability to comply with their respective lease
obligations. Of course, to the extent that a lessee has Year 2000 problems that
significantly adversely affect its overall financial status, such material
problems may affect the lessee's operations and increase the risk of default by
a lessee under its lease with the Company. Furthermore, Year 2000 issues may
have a material impact on FAA operations and the operations of certain air
carriers, which in turn would negatively affect the aircraft industry in
general.
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
The effective date of the Form SB-2 Registration Statement for JetFleet III
was September 27, 1995, and assigned Commission File No. 33-84336-LA. The
offering terminated on June 2, 1997. Of the 20,000 Units registered, 13,134
Units were sold. The Dealer Manager for the offering was Crispin Koehler
Securities. The offering price of the Units was $1000, each Unit consisting of a
secured bond with a principal amount of $850, and 15 shares of non-convertible,
redeemable Preferred Stock. The gross proceeds of the offering of the Units was
$13,031,000, representing 13,031 Units sold. The amount of expenses incurred in
connectiion with the issuance and distribution consisted of sale commissions of
$1,042,480 and offering expenses of $260,620. The remaining $11,727,900 was
applied toward purchase of aircraft equipment, of which $927,542 consisted of
brokerage fees paid to JetFleet Management Corp., the sole common shareholder of
and management company for the Company.
Item 3. Defaults Upon Senior Securities
No disclosure required.
Item 4. Submission of Matters to a Vote of Security Holders
No disclosure required.
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
1. Exhibit 27. Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JetFleet III
August 10, 1998 By: /s/ Neal D. Crispin
Date ---------------------------------------
Neal D. Crispin, President and Chairman
of the Board of Directors of the
Registrant
<TABLE> <S> <C>
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<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,024,036
<SECURITIES> 0
<RECEIVABLES> 57,552
<ALLOWANCES> 0
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<CURRENT-ASSETS> 1,081,588
<PP&E> 11,947,352
<DEPRECIATION> 1,062,139
<TOTAL-ASSETS> 13,251,110
<CURRENT-LIABILITIES> 476,497
<BONDS> 11,076,350
0
1,661,452
<COMMON> 815,200
<OTHER-SE> (778,389)
<TOTAL-LIABILITY-AND-EQUITY> 13,251,110
<SALES> 0
<TOTAL-REVENUES> 1,159,299
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 526,956
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 716,640
<INCOME-PRETAX> (84,297)
<INCOME-TAX> 0
<INCOME-CONTINUING> (84,297)
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