<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 1997, 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 33-84336-LA
JETFLEET III
(Name of small business issuer in its charter)
CALIFORNIA 94-3208983
(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 Exchange Act 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 is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, 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. $2,059,922
-----------
On March 27, 1998 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 27, 1998 the Issuer has 815,200 Shares of Common Stock and 195,465
Shares of Series A Preferred Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format (check one): Yes No X
------ ------
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PART I
ITEM 1: BUSINESS
JetFleet III (the "Company") was incorporated in the state of
California on August 23, 1994 ("Inception"). The Company was formed solely for
the purpose of offering up to $20,000,000 in $1,000 Series A Units, each Unit
consisting of one $850 Bond and 15 shares of Preferred Stock (the "Offering").
Capitalized terms not defined in this report are defined in the Prospectus for
the Offering and are incorporated herein by reference to the Prospectus.
All of the Company's outstanding common stock is owned by
JetFleet Management Corp. ("JMC"), a California corporation formed in January
1994 (the "Sponsor"). JMC is also the management company for the Company
pursuant to the Management Agreement between JMC and the Company. JMC has
ultimate responsibility and authority for the selection of Income Producing
Assets to be acquired by the Company and the management, leasing, re-leasing
and/or subsequent sale of the Income Producing Assets. JMC also manages the
aircraft portfolios of AeroCentury Corp. and AeroCentury IV, Inc., affiliated
corporations involved in business similar to that of the Company's.
The directors of the Company are Neal D. Crispin, Chairman and
Edwin S. Nakamura, Director. The officers of the Company are Neal D. Crispin,
President, Marc J. Anderson, Senior Vice President, Frank Duckstein, Vice
President and Glenn Roberts, Secretary.
The Company received Securities and Exchange Commission
("SEC") clearance for the Offering on February 3, 1995. Because the structure of
the Offering was somewhat different than traditional bond offerings, the Company
experienced a delay in obtaining clearance from the securities divisions of some
key states. As a result, the Offering was restructured. The Company received SEC
clearance on September 27, 1995 for the Offering as amended.
Between September 1995 and June 1997, the Company raised
$13,031,000 in the Offering. The Bonds bear interest at 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 200
basis points, but not less than 8.24%. The Company may prepay all or a portion
of the outstanding principal of the Bonds at any time beginning November 1,
1998. The Preferred Stock was issued for $10 per share and is entitled to
receive 50% in the aggregate, of any remaining proceeds after (1) the Preferred
Stock has been redeemed at $10 per share and (2) the Common Stock has been
redeemed at $1 per share. A dividend can only be paid on the Common Stock if a
dividend has also been paid on each share of Preferred Stock in any amount equal
to ten times the per-share dividend paid on the Common Stock.
The proceeds of the Offering have been used to purchase Income
Producing Assets ("Income Producing Assets"). These assets consist of aircraft
and aircraft engines subject to operating leases.
The revenue generated from the Income Producing Assets is used
to fund interest payments on the Bonds, reinvestment in additional Income
Producing Assets and, after November 1, 2001, deposits to a sinking fund account
established to
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facilitate repayment of principal of the Bonds on their maturity (or such
earlier time if the Company decides to make prepayments on the principal of the
Bonds). At the maturity date of the Bonds, the Company will pay off the
outstanding principal using proceeds of the resale of the Company's Income
Producing Assets, the funds in the Sinking Fund Account and/or proceeds of
third-party lender refinancing. When the Company repays the entire Bond
indebtedness, it may also, with such approval of its shareholders as required
under California law, dissolve and liquidate all of its assets. Any remaining
liquidation proceeds would be distributed to the Preferred Shareholders up to
the amount of their liquidation preference, then to the Common Shareholders in
an amount equal to $1.00 per share. Residual proceeds, if any, would be
distributed equally between the Preferred Shareholders, as a class, and the
Common Shareholders, as a class.
Aircraft and aircraft engines
The Company owns a deHavilland DHC-8-100, serial number 13
("S/N 13") and 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"), a
Fairchild Metro III SA-227-AC, serial number AC-621 ("S/N AC-621"), a Shorts
SD-360, 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
SD-360, serial number S/N 3676 ("S/N 3676").
The Company invested approximately $1,405,000, $5,400,000 and
$5,142,000, including reimbursement for chargeable acquisition costs and
brokerage fees of approximately $106,600, $427,800 and $298,450, in aircraft
assets during 1995, 1996 and 1997, respectively.
S/N 13 is subject to a 120-month lease with the seller. The
S/N 13 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 exercised with at least 90 days prior written notice.
S/N TC-370 is subject to a lease with a United States charter
operator. 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 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 aircraft and is
subject to a 60-month sublease between the seller and a Mexican-based regional
carrier operating between the United States and Mexico.
S/N 3656 and S/N 3676 are subject to similar 48-month leases
with a British regional airline.
Secured notes receivable
During July, August and September 1996, the Company loaned
$2,400,000 to a United States regional carrier in three separate $800,000 loans.
Each loan was secured by a 100% undivided interest in one of three deHavilland
DHC-6-300 aircraft
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(collectively, the "Dash-6's"). In connection with these transactions, the
Company paid chargeable acquisition expenses and brokerage fees totaling
$184,736. The Security Agreement for each aircraft contained an option for the
Company to purchase the aircraft and simultaneously lease it back to the seller.
As discussed in Note 3 to the accompanying financial
statements, during January 1997, the Company exercised its options under the
Security Agreements for each of the secured notes to purchase the Dash-6's.
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.
ITEM 2: PROPERTIES
The Company does not own or lease any real property, plant or
materially important physical properties other than equipment under operating
lease as set forth in Item 1.
The Company maintains its principal office at 1440 Chapin
Avenue, Suite 310, Burlingame, California, 94010. All office facilities are
provided by JMC without reimbursement by the Company.
ITEM 3: LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings.
ITEM 4: SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5: MARKET FOR THE COMPANY'S UNITS AND RELATED SECURITYHOLDER MATTERS
General
There is no established trading market for the Units and their
constituent securities (collectively, the "Securities"), and none of the
Securities are listed on any securities exchange.
Number of Security Holders
Number of holders of Series A
Units ("Unitholders") as of March 27, 1998: 799
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Dividends
The Company has not declared a dividend on either the
Preferred Stock or Common Stock since Inception. The Company is not permitted to
pay any dividends on the Common Stock unless the shares of Preferred Stock also
receive a per share dividend equal to ten times the per share dividend paid to
the Common Stock. The Company intends to retain earnings, if any, to finance the
development and expansion of its business. Future dividend policy is subject to
the discretion of the Board of Directors and will depend upon a number of
factors, including future earnings, capital requirements, and the financial
condition of the Company.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Although the Company was formed during August 1994, it had no
significant operations until the fourth quarter of 1995. Management's discussion
and analysis addresses changes in capital resources and results of operations
for the years ended December 31, 1995, 1996 and 1997.
Capital Resources and Liquidity
At the end of 1997, the Company had cash balances of $647,539.
Of this amount, $107,913 was restricted cash which represents 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 February 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. The seller also has a fixed purchase option at the end of the first 36
months of the lease, which may exercised with at least 90 days prior written
notice.
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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.
1997 versus 1996
The increase in cash flow from operations was due partially to
a decreased net loss (see Results of Operations). Other significant factors were
an increase in maintenance reserves collected from lessees and prepaid rent
received from lessees and a smaller change in payables in 1997 than in 1996.
The increase in cash flow from investing activities was a
result of the Company's exercise of its purchase options for aircraft which
previously served as collateral for notes receivable issued during 1996. The
decrease in cash flow from financing activities was because the Offering
terminated during June 1997.
1996 versus 1995
The decrease in cash flow from operations was primarily a
result of amounts paid during 1996 for previously accrued expenses.
The increase in cash flow from investing activities and
financing activities was because the Company had a full year of operations
during 1996 versus only the fourth quarter of 1995.
If inflation in the general economy becomes significant, it
may affect the Company inasmuch as the residual values and rates on re-leases of
its aircraft may increase as the costs of similar assets increase. However, the
Company's revenues from existing leases would not increase, as such rates are
generally fixed for the terms of the leases without adjustment for inflation.
If interest rates increase significantly, the lease rates that
the Company can obtain on future leases would be expected to increase as the
cost of capital is a significant factor in the pricing of lease financing.
However, leases already in place, for the most part, would not be affected by
changes in interest rates.
Results of Operations
The Company recorded a net loss of ($284,148) or ($0.42) per
share, ($336,033) or ($0.67) per share and ($73,745) or ($0.31) per share for
the years ended December 31, 1997, 1996 and 1995, respectively. As mentioned
above, the Company did not have significant operations until the fourth quarter
of 1995.
1997 versus 1996
Rental income increased as a result of the additional rent
received from aircraft purchased during 1996 and 1997. Interest income decreased
in 1997 because, during January 1997, the Company exercised its purchase options
for three aircraft which previously served as collateral for secured loans. As a
result, for the balance of 1997, the Company recognized rent income for the
three aircraft rather than interest income on the loans.
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Depreciation and amortization increased from year to year as a
result of the additional funds raised during the two years and the depreciable
aircraft purchased with those funds. Interest expense and management fees also
increased in 1997 as a result of the additional proceeds raised.
1996 versus 1995
Results for 1996 included depreciation for S/N 13, which had
been fully capitalized during 1995, but which was paid for in monthly
installments through June 1996 and, therefore, generated gradually increased
monthly rent during the year. However, the Company's secured notes receivable
which were issued during 1996 generated interest income comparable to the lease
rates on the Company's other assets, with no related depreciation expense.
Because management fees are based on funds raised, the
increase from year to year was due to the additional funds raised by the Company
during 1996. General and administrative expenses and professional fees increased
as a result of the Company having a full year of operations during 1996 versus
one quarter in 1995.
ITEM 7: FINANCIAL STATEMENTS
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REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of JetFleet III
We have audited the accompanying balance sheets of JetFleet III, a California
corporation, as of December 31, 1997 and December 31, 1996 and the related
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 1997, December 31, 1996 and December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of JetFleet III, at December 31,
1997 and December 31, 1996 and the related statements of operations,
shareholders' equity and cash flows for the years ended December 31, 1997,
December 31, 1996 and December 31, 1995, in conformity with generally accepted
accounting principles.
VOCKER KRISTOFFERSON AND CO.
March 24, 1998
San Mateo, California
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JETFLEET III
Balance Sheets
ASSETS
<TABLE>
<CAPTION>
December 31,
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 539,626 $ 242,580
Restricted cash 107,913 13,271
Rent receivable 48,903 13,000
Accounts receivable 19,875 658
------------ ------------
Total current assets 716,317 269,509
Aircraft under operating lease, net of
accumulated depreciation of $761,600
in 1997 and $258,793 in 1996 11,185,752 6,546,145
Secured notes receivable -- 2,311,146
Debt issue costs, net of accumulated
amortization of $327,833 in 1997
and $119,850 in 1996 1,333,619 1,143,335
Other, including deferred tax asset
net of valuation allowance 65,000 184,736
------------ ------------
Total assets $ 13,300,688 $ 10,454,871
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 17,435 $ 12,285
Payable to affiliates -- 71
Interest payable 238,880 183,053
Prepaid rents 57,675 --
Maintenance reserves 127,788 13,271
------------ ------------
Total current liabilities 441,778 208,680
Medium-term secured bonds 11,076,350 8,806,850
------------ ------------
Total liabilities 11,518,128 9,015,530
Preferred stock, no par value,
300,000 shares authorized, 195,465 and
155,415 issued and outstanding in 1997
and 1996, respectively 1,661,452 1,331,235
Common stock, no par value,
1,000,000 shares authorized, 815,200
and 518,050 issued and outstanding in
1997 and 1996, respectively 815,200 518,050
Accumulated deficit (694,092) (409,944)
------------ ------------
Total shareholders' equity 1,782,560 1,439,341
------------ ------------
Total liabilities and shareholders' equity $ 13,300,688 $ 10,454,871
============ ============
</TABLE>
See accompanying notes.
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JETFLEET III
Statements of Operations
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rent income, net of
finance charges $ 1,978,274 $ 655,677 $ 11,286
Interest income 81,648 133,938 1,200
----------- ----------- ---------
2,059,922 789,615 12,486
----------- ----------- ---------
Expenses:
Depreciation expense 502,807 211,703 47,090
Amortization expense 207,983 114,969 4,881
Interest expense 1,391,781 645,415 9,757
Professional fees 16,296 27,999 17,080
Management fees 194,040 112,009 5,854
General and administrative 31,163 13,553 1,569
----------- ----------- ---------
2,344,070 1,125,648 86,231
----------- ----------- ---------
Net loss $ (284,148) $ (336,033) $ (73,745)
=========== =========== =========
Weighted average common shares 674,527 500,049 238,630
=========== =========== =========
Net loss per common share $ (0.42) $ (0.67) $ (0.31)
=========== =========== =========
</TABLE>
See accompanying notes.
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JETFLEET III
Statements of Shareholders' Equity
For the Years Ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Total
Common Preferred Accumulated Shareholders'
Stock Stock Deficit Equity
-------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Balance,
December 31, 1994 $ 50,000 $ -- $ (166) $ 49,834
Issuance of 23,415
shares of preferred
stock, net of offering costs -- 143,235 -- 143,235
Issuance of 450,000
shares of common stock 450,000 -- -- 450,000
Net loss for the period -- -- (73,745) (73,745)
-------- ---------- --------- -----------
Balance,
December 31, 1995 500,000 143,235 (73,911) 569,324
Issuance of 132,000
shares of preferred
stock, net of offering costs -- 1,188,000 -- 1,188,000
Issuance of 18,050
shares of common stock 18,050 -- -- 18,050
Net loss for the period -- -- (336,033) (336,033)
-------- ---------- --------- -----------
Balance,
December 31, 1996 518,050 1,331,235 (409,944) 1,439,341
Issuance of 40,050
shares of preferred
stock, net of offering costs -- 330,217 -- 330,217
Issuance of 297,150
shares of common stock 297,150 -- -- 297,150
Net loss for the period -- -- (284,148) (284,148)
-------- ---------- --------- -----------
Balance,
December 31, 1997 $815,200 $1,661,452 $(694,092) $ 1,782,560
======== ========== ========= ===========
</TABLE>
See accompanying notes.
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JETFLEET III
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net loss $ (284,148) $ (336,033) $ (73,745)
Adjustments to reconcile net loss to
net cash (used)/provided by
operating activities:
Depreciation of aircraft 502,807 211,703 47,090
Amortization of organization costs 207,983 114,969 4,881
Change in operating assets
and liabilities:
Restricted cash (94,642) (13,271) --
Rent receivable (35,903) (13,000) --
Accounts receivable (19,217) 474 (1,132)
Accounts payable - trade 5,150 5,059 6,726
Payable to affiliates (71) (223,377) 5,854
Prepaid rents 57,675 -- --
Interest payable 55,827 173,296 9,757
Other assets 119,736 (184,736) --
Other liabilities -- (5,275) 18,546
Maintenance reserves 114,517 -- --
----------- ----------- -----------
Net cash provided by/ (used)
operating activities 616,443 (256,920) 17,977
Investing activities:
Purchase of interests in aircraft (5,142,414) (2,280,728) (1,404,883)
Accounts payable - aircraft -- (2,901,733) --
Issuance of secured notes receivable -- (2,400,000) --
Payments received on
secured notes receivable 2,311,146 88,854 --
----------- ----------- -----------
Net cash used in investing activities (2,831,268) (7,493,607) (1,404,883)
Financing activities:
Proceeds from issuance of
medium-term secured bonds 2,269,500 7,480,000 1,326,850
Debt issue costs (226,950) (748,000) (132,685)
Proceeds from issuance
of preferred stock 400,500 1,320,000 234,150
Offering costs (40,050) (132,000) (23,415)
Proceeds from issuance
of common stock 95,600 18,050 --
----------- ----------- -----------
Net cash provided by
financing activities 2,498,600 7,938,050 1,404,900
----------- ----------- -----------
Net increase in cash 283,775 187,523 17,994
Cash, beginning of period 242,850 68,328 50,334
----------- ----------- -----------
Cash, end of period $ 539,626 $ 242,580 $ 68,328
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for: 1997 1996 1995
----------- ----------- -----------
Interest (net of amount capitalized) $ 1,335,954 $ 475,687 $ 1,132
Income taxes 1,038 1,783 800
</TABLE>
Supplemental schedule of noncash investing and financing activities:
JMC contributed $651,550 of the total it has paid for organization and offering
expenses as a common stock investment in the Company (the "Initial
Contribution"). During 1995, the Company issued 450,000 shares of common stock
to JMC in return for the Initial Contribution.
The Company purchased a 100% interest in a deHavilland DHC-8 aircraft during
1995 on an installment basis for a total purchase price of $4,200,000. During
1995, the Company paid $1,298,267 towards the purchase price to the seller in
connection with the financing. During 1996, the Company paid the balance of the
purchase price ($2,901,733) to the seller. In addition to the payment of the
purchase price, the Company paid JMC a brokerage fee of $315,000. During 1995
and 1996, the Company paid $97,406 and $217,594 of the brokerage fee to JMC.
See accompanying notes.
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JETFLEET III
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Basis of presentation
JetFleet III (the "Company") was incorporated in the state of
California on August 23, 1994 ("Inception"). The Company was formed solely for
the purpose of acquiring Income Producing Assets. The Company offered up to
$20,000,000 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"). 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. CMA Consolidated, Inc. ("CMA"), an affiliated California
corporation owned by Mr. Crispin, provides certain accounting and
investor-related services for the Company. CMA Capital Management, Inc., a
subsidiary of CMA ("CMACM") purchased a Fairchild Metro aircraft in February
1996 and subsequently resold the aircraft to the Company in June 1996. The
Company also has significant transactions with deHavilland Inc. ("deHavilland")
and its affiliate, Bombardier Regional Aircraft Division ("Bombardier").
Aircraft and aircraft engines under operating leases
The Company's interests in aircraft are recorded at cost, which include
acquisition costs (see Note 2). Depreciation is computed using the straight-line
method over each aircraft's estimated economic life to its estimated residual
value.
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 "Reimbursement").
JMC contributed $450,000 of the total it estimated it would pay for
organization and offering expenses as a common stock investment in the Company
(the "Initial Contribution"). The Company issued 450,000 shares of common stock
to JMC in return for the Initial Contribution. To the extent that JMC incurred
expenses in excess of the 2.0% cash limit, such excess expenses were repaid to
JMC 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 is limited according to the amount of Aggregate Gross Offering Proceeds
raised by the Company.
The Company capitalized the portions of both the Reimbursement paid by
the Company and the Initial Contribution related to the Bonds (85%) and
amortizes such costs over the life of the Bonds (approximately eight years). The
remainder of any of the Initial Contribution and Reimbursement is deducted from
shareholders' equity.
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JETFLEET III
Notes to Financial Statements
1. Summary of Significant Accounting Policies (continued)
Assets subject to lien
The Company's obligations under the Bonds 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.
Cash balances
As of December 31, 1997, the Company maintained $603,325 of its cash
balances in a large open-end money fund which is not federally insured. Of this
amount, $107,913 was restricted cash, discussed below. The carrying amount
approximates fair value because of the short-term maturity of these instruments.
Restricted cash
As of December 31, 1997 and December 31, 1996, the Company held
restricted cash in the amount of $107,913 and $13,271 which represents
maintenance reserves collected from lessees and interest earned on those funds,
as applicable. This amount is not included in the cash balance for statement of
cash flow purposes.
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 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 invested approximately $1,405,000, $5,400,000 and
$5,142,000, including reimbursement for chargeable acquisition costs and
brokerage fees of approximately $106,600, $427,800 and $298,450, in aircraft
assets during 1995, 1996 and 1997, respectively.
13
<PAGE> 15
JETFLEET III
Notes to Financial Statements
2. Aircraft and Aircraft Engines Under Operating Leases (continued)
Aircraft and aircraft engines leases
S/N 13 is subject to a 120-month lease with the seller. The S/N 13
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.
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
Scottish regional airline.
Future minimum rents
The following is a schedule of future gross minimum rental payments by
year under the existing leases:
<TABLE>
<CAPTION>
Year Amount
---- -------
<S> <C>
1998 $ 2,019,240
1999 1,156,740
2000 1,074,990
2001 735,740
-------------------
$ 4,986,710
===================
</TABLE>
14
<PAGE> 16
JETFLEET III
Notes to Financial Statements
2. Aircraft and Aircraft Engines Under Operating Leases (continued)
Aircraft and aircraft engines leases (continued)
Detail of investment
The following schedule provides an analysis of the Company's investment
in aircraft under operating leases and the related accumulated depreciation for
the years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation Net
---- ------------ ---
<S> <C> <C> <C>
Balance, December 31, 1995 $ 4,524,210 $ (47,090) $ 4,477,120
Additions 2,280,728 (211,703) 2,069,025
----------- --------- -----------
Balance, December 31, 1996 6,804,938 (258,793) 6,546,145
Additions 5,142,414 (502,807) 4,639,607
----------- --------- -----------
Balance, December 31, 1997 $11,947,352 $(761,600) $11,185,752
=========== ========= ===========
</TABLE>
3. Secured notes receivable
During July, August and September 1996, the Company loaned $2,400,000
to a United States Regional carrier in three separate loans of $800,000 each.
Each loan was secured by a 100% undivided interest in one of three deHavilland
DHC-6-300 aircraft. In connection with these transactions, the Company paid
chargeable acquisition expenses and brokerage fees totaling $184,736. The
Security Agreement for each aircraft contained an option for the Company to
purchase the aircraft and subsequently lease it back to the seller. On January
30, 1997 and January 31, 1997, the Company exercised its options under the
Security Agreements to purchase the three aircraft and lease them back to the
seller. The purchase price for each aircraft was equal to the unpaid balance,
including principal and interest, 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.
4. Medium-term secured bonds
As mentioned above, the Company raised funds through the Offering from
November 1995 to June 1997. 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 rate of 12.94% which is due and payable on a quarterly
basis, in arrears, on the first business day of November, February, May and
August. The carrying amount of the notes payable approximates fair value.
15
<PAGE> 17
JETFLEET III
Notes to Financial Statements
5. Income taxes
The components of the provision for income taxes for the year ended
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Current tax provision
Federal $ --
State 1,133
---------
Current tax provision 1,133
Deferred tax provision
Federal (235,991)
State (37,173)
Deferred tax provision --
Valuation allowance 273,164
---------
Total provision for
income taxes $ 1,133
=========
</TABLE>
The difference between income tax expense (benefit) and the amount
computed by applying the statutory U.S. federal income tax rate then in effect
consists of the following:
<TABLE>
<S> <C>
Statutory U.S. federal income tax expense/(benefit) $ (235,991)
State franchise tax, net of federal benefit ( 37,173)
Valuation allowance 273,164
-----------
Actual tax expense/(benefit) $ --
===========
</TABLE>
The tax effects of temporary differences and carryforwards that give
rise to deferred tax assets consist of the following:
<TABLE>
<S> <C>
Prepaid rent $ (22,698)
Amortization (201)
Depreciation 190,187
Net operating loss carryforward (440,452)
Valuation allowance 273,164
-------------
Net current and noncurrent deferred tax assets $ --
=============
</TABLE>
As of December 31, 1997 the Company has approximately $1.1 million of
federal operating loss carryforwards which begin to expire in 2012.
For income tax purposes, the treatment of organization and offering
costs is consistent with treatment for financial accounting purposes.
As a result of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", the Company is required to recognize deferred tax
assets and liabilities resulting from temporary differences and operating loss
and tax credit carryforwards. For the current year the Company has not
recognized a deferred tax asset for its current year operating loss because
based on the available evidence, it is not more likely than not that all of the
deferred tax asset will be realized. In accordance with the requirements of FAS
109, the Company has recognized a valuation allowance for the deferred tax asset
sufficient to reduce it to the amount more likely than not to be realized.
16
<PAGE> 18
JETFLEET III
Notes to Financial Statements
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 0.375% of the Company's Aggregate Gross Proceeds
received through the last day of such quarter. In 1997, 1996 and 1995, the
Company accrued a total of $194,040, $112,009 and $5,854, respectively, in
management fees due JMC.
As mentioned above, CMA provides certain administrative services to the
Company. The Company does not reimburse CMA for those services. JMC may pay a
portion of its management fee to CMA in connection with services rendered for
the Company.
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. During 1997, 1996 and 1995, the Company paid
JMC a total of $276,200, $385,338 and $97,406, in brokerage fees, respectively,
and reimbursed JMC $22,250, $37,884 and $9,210, respectively, for Chargeable
Acquisition Expenses.
As discussed in Note 2, the Company purchased a 50% undivided interest
in S/N TC-370 during 1996. The Company purchased its interest from CMACM, which
had purchased the interest in February 1996 for the express purpose of reselling
the entire interest to the Company when the necessary funds had been raised. The
purchase price paid by the Company was the same price paid by CMACM reduced by
the net rent received by CMACM during the period the aircraft was held for
resale. In connection with its purchase, the Company reimbursed CMACM $4,533 for
Chargeable Acquisition Expenses.
As discussed in Note 1, the Company reimburses JMC for certain costs
incurred in connection with the organization of the Company and the Offering. In
1997, 1996 and 1995, the Company paid $46,200, $176,000 and $31,220,
respectively, to JMC. In addition, during 1995 and 1997, JMC contributed
$450,000 and $201,550 of the total it paid for organization and offering
expenses as a common stock investment in the Company. An additional 18,050 and
95,600 shares of common stock in the Company at a price of $1.00 per share were
purchased by JMC on December 31, 1996 and March 4, 1997, respectively, in order
to make JMC's investment in common stock equal to 5% of the proceeds raised by
the Company.
17
<PAGE> 19
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
FINANCIAL DISCLOSURE
None
PART III
ITEM 9: DIRECTORS AND EXECUTIVE OFFICERS
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 Bonds and Preferred Stock.
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.
The JMC Advisory Board has responsibilities including, but not
limited to, attendance at meetings of the Board of Directors and its committees
in a non-voting, advisory capacity, giving advice to the Directors and officers
and reviewing JMC's strategic plans, financial affairs and offering advice,
analysis and insight about them.
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 and Chairman of the Board of Directors
of the Company and Chief Financial Officer of the
Company
Edwin S. Nakamura Director of the Company
Marc J. Anderson Senior Vice President of the Company
Frank Duckstein Vice President of the Company
Glenn Roberts Secretary of the Company
Sidney F. Gage Member of JMC's Advisory Board
Neal D. Crispin, age 52, President and Chairman of the Board
of Directors. He is also President and Director of JMC and Chief Executive
Officer and Chairman of the Board of Directors of CMA Consolidated, Inc.
("CMA"), and the Chief Executive Officer of CMA's wholly-owned subsidiaries,
Capital Management Associates, founded in 1983, and CMA Capital Management, Inc.
Prior to forming CMA, Mr. Crispin was vice president - finance of an oil and gas
company. Previously, Mr. Crispin had been associated with Arthur Young & Co.,
Certified Public
18
<PAGE> 20
Accountants. Prior to joining Arthur Young & Co., Mr. Crispin served as a
management consultant, specializing in financial consulting. Mr. Crispin is the
husband of Toni M. Perazzo, a Director and Officer of JMC. He received a
Bachelors degree in Economics from the University of California, 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 61, Senior Vice President is also Senior
Vice President of JMC. Mr. Anderson is in charge of portfolio management and
aircraft marketing and financing. Prior to joining JMC in 1994 , Mr. Anderson
spent seven years as Senior Vice President-Marketing for PLM International, a
transportation equipment leasing company which is also the sponsor of syndicated
investment programs. While at PLM, he established the company's first aircraft
marketing group, closing in excess of 150 aircraft transactions representing
over $400 million. He was responsible for the acquisition, modification, leasing
and remarketing of all aircraft. During his tenure, Mr. Anderson had an average
on-lease record of 96%. Previously, he was with two aircraft manufacturers where
he was responsible for customer contracting, negotiation and documentation of
sales agreements and leases and in obtaining debt and lease financing. Prior to
that, Mr. Anderson was with several airlines in various roles of increasing
responsibility.
Frank Duckstein, age 44, Vice President is also Vice President
of JMC. Mr. Duckstein is in charge of market development and remarketing of
aircraft portfolios. Prior to joining JMC in 1995, Mr. Duckstein spent five
years as Director of Marketing for PLM International, a transportation equipment
leasing company. While at PLM, he was responsible for sales and remarketing,
market research and development, both domestically and internationally, of PLM's
corporate and commuter aircraft, as well as their helicopter fleet. Previously,
he was with international and regional airlines operating within Europe and the
U.S. with responsibility for operation, market development and sales. He was
involved in the development of several turn-key, start-up operations in Berlin,
Germany and the United States. Mr. Duckstein attended the Technical University
of Berlin, majoring in Economics.
Glenn Roberts, age 33, Secretary, is also the Controller of
JMC. Mr. Roberts has been employed by JMC and CMA since 1989. He has also served
as Manager of Investor Relations for several equipment leasing programs
sponsored by JMC and CMA and as a financial analyst for JMC. Mr. Roberts was
previously employed as a production manager for a database publishing firm
specializing in company and industry research reports.
Edwin S. Nakamura, age 60, Director. Mr. Nakamura holds a B.S.
in Business from San Francisco State University. A Certified Public Accountant,
Mr. Nakamura has been the Chief Executive Officer and owner of U.S.A.
Publishing, Inc. since 1981.
Sidney F. Gage, age 54, Member of JMC Advisory Board. Mr. Gage
has been a partner of Gage & Baumgarten, a management consulting firm
specializing in strategic business planning, since 1980. Previously, he was
Executive Vice President and Director of Mission Resources, Inc., the managing
general partner of Mission Resource Partners, an oil and gas company on the
American Stock Exchange, and President of Mission Securities, Inc., its NASD
broker-dealer affiliate. Mr. Gage is also a member of the advisory board of
Bakersfield Energy Resources, Inc., a privately
19
<PAGE> 21
held oil and gas concern. He is a CPA with degrees from the University of Notre
Dame and the Stanford University Graduate School of Business. Mr. Gage has
served as a consultant to the CMA Group of companies since 1990.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's officers, directors and persons who own more than 10% of the
Company's Units, to file with the SEC initial reports of ownership and reports
of changes in ownership of Units and other equity securities of the Company.
Officers and directors and 10% Unitholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely upon a review of
Forms 3 furnished to the Company pursuant to Rule 16a-3(e) during 1997, no
person who, at any time during 1997, was an officer or director or beneficial
owner of more than 10% of the Units failed to file on a timely basis, as
disclosed in the above forms, reports required by Section 16(a) during 1997 or
prior years.
ITEM 10: EXECUTIVE COMPENSATION
The Company has no employees. The following is a summary of
the compensation and reimbursements paid to the parent of the Company and
related parties by the Company for the years ended December 31, 1995, 1996 and
1997.
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 0.375% of the Company's Aggregate Gross Proceeds
received through the last day of such quarter. In 1995, 1996 and 1997, the
Company accrued a total of $5,854, $112,009 and $194,040 in management fees due
JMC. As mentioned above, CMA provides certain administrative services to the
Company. The Company does not reimburse CMA for those services. JMC may reallow
a portion of its management fee to CMA in connection with services rendered for
the Company.
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
shall not exceed the fair market value of the asset based on appraisal. The
Company paid JMC a total of $97,406, $385,338 and $276,200 in brokerage fees and
reimbursed JMC for $9,210, $37,884 and $22,250 in Chargeable Acquisition
Expenses during 1995, 1996 and 1997, respectively.
The Company reimburses JMC for certain costs incurred in
connection with the organization of the Company and the Offering (the
"Reimbursement"). In 1995, 1996 and 1997, the Company paid $31,220, $176,000 and
$46,200, respectively to JMC. In addition, during 1995 and 1997, JMC contributed
$450,000 and $201,550 of the total it paid for organization and offering
expenses as a common stock investment in the Company.
20
<PAGE> 22
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No person is known to the Company to be the beneficial owner
of more than 5% of the Units. No officer or director of JMC or any of its
related parties beneficially owns any Units.
JMC owns 100% of the issued and outstanding common stock of
the Company. Mr. Crispin and Toni M. Perazzo, Vice President-Finance of JMC,
collectively own the majority of the issued and outstanding common stock of JMC,
including shares owned by CMA Consolidated, an affiliated company controlled by
Mr. Crispin. Marc J. Anderson, Senior Vice President of JMC owns 1% of JMC's
common stock.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Crispin Koehler Securities, the managing broker-dealer of the
Offering, is a wholly-owned subsidiary of Crispin Koehler Holding Corp. Crispin
Koehler Securities was formerly named CKS Securities, Incorporated, but changed
its name in connection with its sale by CMA Capital Corporation during 1996.
Crispin Koehler Holding Corp., in turn, is owned 9% and 91% by Messrs Crispin
and Koehler, respectively. Crispin Koehler Securities has acted as the
dealer-manager with respect to the vast majority of the prior programs sponsored
by related parties of JMC. Over the term of the Offering, compensation was paid
to Crispin Koehler Securities for sales commissions, investment banking and due
diligence fees in accordance with the Prospectus dated September 27, 1995.
CMA Consolidated, Inc., which provides certain administrative
services for the Company, is owned 100% by Mr. Crispin.
21
<PAGE> 23
PART IV
ITEM 13: EXHIBITS AND FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
(1) Financial Statements for JetFleet III
Report of Independent Auditors - Vocker Kristofferson and Co.
Balance Sheets as of December 31, 1997 and 1996
Statements of Operations for the years ended December 31, 1997
1996 and 1995
Statements of Shareholders' Equity for the year ended
December 31, 1997, 1996 and 1995
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
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.
(b) Reports on Form 8-K for the Fourth Quarter of 1997
None
(c) Exhibits
None
22
<PAGE> 24
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on March 27, 1998.
JETFLEET III
By:
By: /s/ Neal D. Crispin
------------------------------
Neal D. Crispin
Title: President
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on March 27, 1998.
Signature Title
--------- --------------------------
/s/ Neal D. Crispin President and Chairman of the
- ------------------------------------ Board of Directors of the Registrant
Neal D. Crispin Chief Financial Officer
23
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 647,539
<SECURITIES> 0
<RECEIVABLES> 68,778
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 716,317
<PP&E> 11,947,352
<DEPRECIATION> 761,600
<TOTAL-ASSETS> 13,300,688
<CURRENT-LIABILITIES> 441,778
<BONDS> 11,076,350
0
1,661,452
<COMMON> 815,200
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,300,688
<SALES> 0
<TOTAL-REVENUES> 2,059,922
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 952,289
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,391,781
<INCOME-PRETAX> (284,148)
<INCOME-TAX> 0
<INCOME-CONTINUING> (284,148)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (284,148)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
