SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[ X ] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the quarterly period ended September 30, 2000
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from to
---------------- ----------------
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 Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
On November 15, 2000 the aggregate market value of the voting and non voting
Common equity held by non-affiliates (computed by reference to the price at
which the common equity was sold) was $0.
As of November 15, 2000 the Issuer has 815,200 Shares of Common Stock and
195,465 Shares of Series A Preferred Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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<PAGE>
Part I. Financial Information
Item 1. Financial Statements.
<TABLE>
JETFLEET III
Balance Sheet
September 30, 2000
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash $ 1,409,690
Deposits 1,303,980
Accounts receivable 181,640
Rent receivable 6,670
-------------
Total current assets 2,901,980
Aircraft and aircraft engines under operating leases,
net of accumulated depreciation of $2,255,860 11,246,430
Debt issue costs, net of accumulated
amortization of $956,540 704,910
Deferred taxes 223,920
Prepaid expenses 4,080
-------------
Total assets $ 15,081,320
=============
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C>
Current liabilities:
Accounts payable $ 280,470
Interest payable 152,120
Prepaid rents 83,180
Security deposits 155,960
Maintenance deposits 1,260,330
Taxes payable (4,370)
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Total current liabilities 1,927,690
Medium-term secured bonds 11,076,350
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Total liabilities 13,004,040
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Preferred stock, no par value,
300,000 shares authorized, 195,465
issued and outstanding 1,661,450
Common stock, no par value,
1,000,000 shares authorized, 815,200
issued and outstanding 815,200
Accumulated deficit (399,370)
-------------
Total shareholders' equity 2,077,280
-------------
Total liabilities and shareholders' equity $ 15,081,320
=============
See accompanying notes.
</TABLE>
<PAGE>
JETFLEET III
Statements of Operations
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
Rent income $ 1,703,390 $ 1,503,220 $ 567,250 $ 552,230
Gain on sale of aircraft - 12,900 - -
Interest income 93,760 83,670 38,490 25,370
------------- ------------- ------------- -------------
1,797,150 1,599,790 605,740 577,600
------------- ------------- ------------- -------------
Expenses:
Depreciation 479,140 420,010 162,710 146,220
Provision for impairment in
value of aircraft 150,700 - 150,700 -
Amortization 171,470 171,470 57,160 57,160
Interest 684,520 684,520 228,170 228,170
Maintenance 140,730 - 112,140 -
Professional fees and
general and administrative 77,660 60,610 47,500 27,640
Management fees 146,600 146,600 48,860 48,860
------------- ------------- ------------- -------------
1,850,820 1,483,210 807,240 508,050
------------- ------------- ------------- -------------
Loss/(income) before taxes (53,670) 116,580 (201,500) 69,550
Tax (benefit)/provision (20,650) 2,880 (70,220) 1,960
------------- ------------- ------------- -------------
Net (loss)/income $ (33,020) $ 113,700 $ (131,280) $ 67,590
============= ============= ============= =============
Weighted average common
shares outstanding 815,200 815,200 815,200 815,200
============= ============= ============= =============
Basic (loss/)earnings per common share $ (0.04) $ 0.14 $ (0.16) $ 0.08
============= ============= ============= =============
See accompanying notes.
</TABLE>
<PAGE>
JETFLEET III
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
<S> <C> <C>
2000 1999
---- ----
Net cash provided by operating activities $ 978,200 $ 726,980
Investing activities:
Purchase of interests in aircraft (456,750) (2,800,050)
Proceeds from sale of aircraft - 1,074,970
-------------- -------------
Net cash used by investing activities: (456,750) (1,725,080)
Net increase/(decrease) in cash 521,450 (998,100)
Cash, beginning of period 888,240 1,639,760
-------------- -------------
Cash, end of period $ 1,409,690 $ 641,660
============== =============
Supplemental disclosures of cash flow information:
Cash paid during the period for: 2000 1999
---- ----
Interest $ 684,520 $ 694,520
Income taxes 21,400 920
See accompanying notes.
</TABLE>
<PAGE>
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
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., a Delaware corporation, and AeroCentury IV, Inc., 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 generally are subject to withdrawal
restrictions. As of September 30, 2000, the Company maintained $2,670,580 of its
cash balances in two money market funds held by regional brokerage firms, which
are not federally insured.
Aircraft and Aircraft Engines Under Operating Leases
The Company's interests in aircraft are recorded at cost, which include
acquisition costs (see Note 2). Depreciation is computed using the straight-line
method over each aircraft's estimated economic life to its estimated residual
value.
Organization and Offering 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").
JHC contributed $450,000 of the total it paid 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 JHC in
return for the Initial Contribution. 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 issued was limited
according to the amount of Aggregate Gross Offering Proceeds raised by the
Company.
The Company capitalized the portions of both the Reimbursement paid 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.
<PAGE>
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.
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 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 number AC-621 ("S/N AC-621"), a Shorts SD3-60,
serial number S/N 3656 ("S/N 3656"), a 50% undivided interest in a Shorts
SD3-60, serial number S/N 3676 ("S/N 3676"), a 33% interest in a deHavilland
DHC-6, serial number 668 ("S/N 668") and a Saab 340A, serial number 24 ("S/N
24"). The Company did not purchase any aircraft during the first nine months of
2000, but did capitalize a total of $456,750 of equipment added to S/N 696 and
S/N 668.
S/N 13 was re-leased in June 2000 to the same sub-lessee, an Australian
carrier, for a one-year term.
S/N 674267 is used on a McDonnell Douglas DC-9 and is subject to a
60-month sublease, expiring in November 2001, between the seller and a Mexican
based regional carrier.
S/Ns 646 and 751 are subject to similar 36-month leases, expiring in
July 2001, with a U.S. regional carrier. During the second quarter of 2000, the
Company and the lessee for S/N 696, which had been leased to the same carrier as
S/Ns 646 and 751, agreed to an early termination of the lease for S/N 696. S/N
696 was returned by the lessee and, after undergoing certain maintenance and
upgrade work, was re-leased to a regional carrier in the United Kingdom for a
term expiring in April 2003.
S/N AC-621 was leased to a regional carrier in North America for a
six-month term, expiring in April 2000. The lessee extended the lease to August
2000 and, subsequently, to October 2000. S/N AC-621 was returned by the lessee
and, during November, the Company sold the aircraft and recognized a gain of
approximately $173,000 in connection with the sale.
<PAGE>
JETFLEET III
Notes to Financial Statements
2. Aircraft and Aircraft Engines Under Operating Leases (continued)
Aircraft and Aircraft Engines Leases (continued)
At the time of purchase, S/N 3656 and S/N 3676 were subject to similar
48-month leases, expiring in July 2001, with a British regional airline. The
original lease, entered into in 1997, did not require that the lessee pay
maintenance reserves based on usage because, at the time, the lessee was
considered creditworthy and had its own facility which was certified to perform
any required maintenance. On February 24, 2000, the lessee filed for
reorganization. The lessee has continued to operate, and, under the
reorganization plan, the lessee is continuing to lease S/N 3676, in which the
Company owns a 50% interest, on a month-to-month basis at the same rent as under
the original lease. The lessee also began paying monthly maintenance reserves
based on the hours flown. Under British law, the owners were precluded from
repossessing the aircraft so long as the lessee was operating it and paying rent
and maintenance reserves under its reorganization plan. The owners of the
aircraft now believe that S/N 3676 will be returned by the lessee by year-end
2000 and that collection on any claim for the maintenance related to usage by
the lessee prior to the reorganization date but not required to be performed
until after the reorganization date is doubtful. The owners believe that they
will realize a greater benefit if they sell the aircraft "as is" rather than
fund the maintenance work necessary to return the aircraft to a condition which
would allow it to possibly be re-leased to a new lessee. Because such
maintenance will likely not be performed, the Company believes that there has
been an impairment of the asset. The Company has, therefore, reduced the
carrying value of the aircraft from $425,700 to $275,000 and recognized a
provision for impairment estimated to be $150,700 at September 30, 2000. (See
also Note 6, Subsequent Events.)
During May 2000, S/N 3656 was re-leased to a regional airline,
headquartered in Ireland, for a three-year term expiring in May 2003.
S/N 668, in which the Company owns a 33% interest, was subject to a
60-month lease, expiring in July 2004, with a regional carrier in Colombia.
During the third quarter of 2000, due to non-payment of rent and reserves by the
lessee, the Company notified the lessee of its intent to repossess the aircraft.
The Company recorded a write-off of $45,860 of rent receivable which amount was
net of the security deposit held by the Company, and reduced its reserves
receivable and related liability by $60,390. During November, the owners
repossessed S/N 668. At September 30, 2000, the Company has also accrued $66,000
of estimated maintenance related to usage by the lessee. The owners believe that
there are limited re-lease opportunities for this type of aircraft. Therefore,
in November 2000, the owners signed a non-binding term sheet for the sale of the
aircraft to be consummated on November 30, 2000 which, if successful, would
allow the Company to realize a gain on the sale of approximately $35,000. (See
also Note 6, Subsequent Events.)
S/N 24 is subject to a lease, expiring in October 2002, with a regional
carrier in North America.
3. Medium-Term Secured Bonds
The Company raised $13,031,000 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. The Bonds bore interest
at an annual rate of 12.94% 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%. Based on the one-year
Treasury bill rate on October 31, 1998 and October 31, 1999, the Bonds bear
interest at the rate of 8.24% per annum for the periods November 1, 1998 through
October 31, 1999 and November 1, 1999 through October 31, 2000. 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 Bonds
approximates fair value.
<PAGE>
JETFLEET III
Notes to Financial Statements
4. Income Taxes
The items comprising income tax expense are as follows:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
<S> <C> <C>
2000 1999
---- ----
Current tax provision
Federal $ - $ -
State 8,820 2,880
------------- --------------
Current provision 8,820 2,880
------------- --------------
Deferred tax provision
Federal (23,270) 39,050
State (6,200) 33,790
------------- --------------
Deferred tax provision (29,470) 72,840
Change in valuation allowance - (72,840)
------------- --------------
Subtotal (29,470) -
------------- --------------
Total provision for income taxes $ (20,650) $ 2,880
============= ==============
</TABLE>
The total provision for income taxes differs from the amount which
would be provided by applying the statutory federal income tax rate to pretax
earnings as illustrated below:
<TABLE>
<S> <C> <C>
Income tax expense at statutory federal income tax rate $ (18,250) $ 39,630
State taxes net of federal benefit (1,020) 1,650
State franchise taxes - 2,880
Tax rate differences (1,380) 31,560
Change in valuation allowance - (72,840)
------------- --------------
Total provision for income taxes $ (20,650) $ 2,880
============= ==============
</TABLE>
Temporary differences and carryforwards which gave rise to a
significant portion of deferred tax assets and liabilities as of September 30,
2000 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss $ 232,730
Maintenance deposits 409,360
Prepaid rent 29,860
State franchise taxes 270
Amortization of organization costs 40
-------------
Subtotal 672,260
Valuation allowance -
-------------
Net deferred tax assets 672,030
Deferred tax liability -
Depreciation of aircraft (448,340)
-------------
$ 223,920
=============
</TABLE>
The Company anticipates generating adequate future taxable income to
realize the benefits of the remaining deferred tax assets on the balance sheet.
The Company's net operating losses may be carried forward for fifteen or twenty
years, depending on when they were created, and begin to expire in 2009.
<PAGE>
JETFLEET III
Notes to Financial Statements
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. In the first nine months of 2000
and 1999, the Company paid a total of $146,600 and $146,600, respectively, in
management fees to JMC.
JMC may receive an acquisition fee for locating assets for the Company
and a remarketing fee in connection with the sale of the Company's assets,
provided that such fees are not more than the customary and usual fees that
would be paid to an unaffiliated party for such a transaction. The total of the
Aggregate Purchase Price plus the acquisition fee cannot exceed the fair market
value of the asset based on appraisal. JMC may also receive reimbursement of
Chargeable Acquisition Expenses incurred in connection with a transaction which
are payable to third parties. Because the Company did not purchase aircraft
during the first nine months of 2000, it did not pay any acquisition fees or
Chargeable Acquisitions Expenses to JMC. During the first nine months of 1999,
the Company paid JMC a total of $112,870 in acquisition fees.
As discussed in Note 1, the Company reimbursed JHC for certain costs
incurred in connection with the organization of the Company and the Offering.
The Company made no such payments during the first nine months of 2000 or 1999.
6. Subsequent Events
During November 2000, the Company sold S/N AC-621 and recognized a gain
of approximately $173,000 in connection with the sale. The Company intends to
use the sales proceeds along with excess cash flow to purchase an additional
income-producing asset.
At the time of purchase in July 1997, S/N 3676, in which the Company
owns a 50% interest, was under a lease with a British regional airline. The
original lease, entered into in 1997, did not require that the lessee pay
maintenance reserves based on usage because, at the time, the lessee was
considered creditworthy and had its own facility which was certified to perform
any required maintenance. In February 2000, the lessee filed for reorganization.
The lessee has continued to operate, and, under the reorganization plan, the
lessee has continued to lease S/N 3676 on a month-to-month basis at the same
rent as under the original lease. The lessee also began paying monthly
maintenance reserves based on the hours flown. Under British law, the owners
were precluded from repossessing the aircraft so long as the lessee was
operating it and paying rent and maintenance reserves under its reorganization
plan. The owners of the aircraft now believe that S/N 3676 will be returned by
the lessee by year-end 2000 and that collection on any claim for the maintenance
related to usage by the lessee prior to the reorganization date but not required
to be performed until after the reorganization date is doubtful. The owners
believe that they will realize a greater benefit if they sell the aircraft "as
is" rather than fund the maintenance work necessary to return the aircraft to a
condition which would allow it to possibly be re-leased to a new lessee. Because
such maintenance will likely not be performed, the Company believes that there
has been an impairment of the asset. The Company has, therefore, reduced the
carrying value of the aircraft from $425,700 to $275,000 and recognized a
provision for impairment estimated to be $150,700 at September 30, 2000. If, as
the Company anticipates, it is unable to collect a substantial portion of its
claim in bankruptcy for unfunded maintenance requirements, this possibility,
along with the asset impairment for S/N 3676 recognized during the third quarter
of 2000, may have an adverse affect upon the Company's ability to repay its Bond
indebtedness in full at maturity.
<PAGE>
JETFLEET III
Notes to Financial Statements
6. Subsequent Events (continued)
The Company owns a 33% interest in S/N 668. Over the last several
months, the owners of the aircraft have tried to work out a payment plan under
which the lessee of S/N 668, a Colombian regional carrier, could continue to use
the aircraft while paying reduced rent and deferring the shortfall until the
lessee became more profitable. The owners attempted to perfect a first priority
secured interest in real estate owned by the lessee, the estimated fair market
value of which approximated the monies owed the owners. However, after
protracted negotiations, the lessee failed to sign the necessary documents, and
the owners began repossession efforts which were completed in November 2000. The
owners believe that there are limited re-lease opportunities for this type of
aircraft. Therefore, in November 2000, the owners signed a non-binding term
sheet for the sale of the aircraft to be consummated on November 30, 2000 which,
if successful, would allow the Company to realize a gain on the sale of
approximately $35,000. The proceeds of such sale would then be used along with
the proceeds from the sale of S/N AC-621 noted above, along with excess cash
flow, to purchase an additional income-producing asset.
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Forward-Looking Statements
Certain statements contained in this report and, in particular, the discussion
regarding the Company's beliefs, plans, objectives, expectations and intentions
regarding the return of S/N 3676, collection of unfunded maintenance
requirements for S/N 3676, realization of a greater benefit from sale of S/N
3676 rather than re-leasing to a new lessee, the limited re-lease opportunities
for S/N 668, the possible sale of S/N 668 and use of proceeds to purchase
assets, the effect of the impairment of S/N 3676 on the Company's ability to
repay its indebtedness, the Company's lack of significant operating expenses in
connection with assets that remain on lease, the adequacy of the Company's
reserves to meet its immediate cash requirements, recovery of unfunded
maintenance requirements from the Company's lessee under reorganization, and
generation of future taxable income to realize the benefits of the remaining
deferred tax assets on the balance sheet are forward looking statements. While
the Company believes that such statements are accurate, actual results may
differ due to further defaults or terminations by lessees, failure to recover
fully on claims against defaulting lessees, availability of appropriate assets
for acquisition, and general economic conditions, particularly those that affect
the demand for turboprop aircraft and engines, including competition for
turboprop and other aircraft, and future trends and results that cannot be
predicted with certainty. The Company's actual results could differ materially
from those discussed in such forward looking statements. Factors that could
cause or contribute to such differences include those discussed below in the
section entitled "Factors that May Affect Future Results." The cautionary
statements made in this Report should be read as being applicable to all related
forward-looking statements wherever they appear in this Report.
Capital Resources and Liquidity
At September 30, 2000, the Company had cash balances of $1,409,690 and deposits
of $1,303,980. The Company's cash balances were held for the interest payment
made to the Unitholders in November 2000, for normally recurring expenses and
for investment in additional Income Producing Assets.
Since Inception, the Company's funds have come in primarily 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
has been 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 while 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 July 2001 and May 2003. During November 2000, the Company sold S/N
AC-621 and recognized a gain of approximately $173,000 in connection with the
sale. S/N 668 was repossessed in November 2000 due to non-payment of rent and
reserves by the lessee and a non-binding term sheet has been signed for the sale
of the aircraft to be consummated on November 30, 2000 which, if successful,
would allow the Company to realize a gain on the sale of approximately $35,000.
The proceeds of such sale would then be used along with the proceeds from the
sale of S/N AC-621 noted above, along with excess cash flow, to purchase an
additional income-producing asset.
As discussed in Item 1, the interest rate on the Bonds was 12.94% through
October 31, 1998 and is a variable rate thereafter, calculated annually on
November 1. The variable rate is equal to the higher of (i) 2% plus the annual
yield rate on one-year U.S. Treasury Bills on the last business day of October
of that year or (ii) 8.24%. Based on the one-year Treasury bill rate on October
31, 1998 and October 31, 1999, the Bonds have borne interest at the rate of
8.24% per annum for the periods November 1, 1998 through October 31, 1999 and
November 1, 1999 through October 31, 2000. The Company has determined that the
rate will remain at 8.24% for the period November 1, 2000 through October 31,
2001.
Although the Company had a net loss in the first nine months of 2000 versus net
income for the same period in 1999, it also recognized additional depreciation
and a provision for impairment in the value of an aircraft during 2000, the net
effect of which contributed to an increase in cash flow from operations from
year to year. The increase was also due to a decrease in rent receivable and an
increase in accounts payable from year to year. The effect of these changes was
only partially offset by an increase in cash classified as deposits, accounts
receivable and deferred taxes and a decrease in prepaid rents.
The decrease in cash flow used by investing activities was due to the Company's
purchase of an aircraft during August 1999 versus no such purchases, other than
capitalizing the cost of equipment added to two planes already owned, in 2000.
There were no cash flows from financing activities during the first nine months
of 2000 or 1999 because the Offering terminated during June 1997.
Results of Operations
The Company recorded net loss of ($33,020) and net income of $113,700 or ($0.04)
and $0.14 per share for the nine months ended September 30, 2000 and 1999,
respectively. The Company recorded net loss of ($131,280) and net income of
$67,590 or ($0.16) and $0.08 per share for the three months ended September 30,
2000 and 1999, respectively.
Rental income increased by approximately $200,000 and $15,000 during the nine
months and three months ended September 30, 2000 and 1999, respectively, as a
result of the purchase of S/N 24 during August 1999. This increase was partially
offset by the sale of an aircraft during March 1999, the one-month off-lease
period for S/N 13 during the second quarter of 1999 and the repossession of S/N
668 and the associated write-off of rent receivable during the third quarter of
2000.
Depreciation increased by approximately $59,000 and $16,000 during the nine
months and three months ended September 30, 2000 versus 1999 as a result of the
depreciation expense incurred as a result of the purchases of S/N 668 and S/N 24
during July and August 1999, respectively. This effect was only partially offset
by the sale of an aircraft during March 1999. Maintenance expense increased by
approximately $140,000 and $112,000 in the nine month and three periods of 2000
as a result of maintenance work performed on S/N 3656 in order to prepare it for
re-lease and the accrual of estimated maintenance to be performed on S/N 668, as
a result of reserves which the Company was unable to collect from the lessee.
The company wrote off the receivable for uncollected maintenance during
September 2000. During the third quarter of 2000, the Company recorded a
provision for impairment in value of S/N 3676 based on its estimated fair value.
If, as the Company anticipates, it is unable to collect a substantial portion of
its claim in bankruptcy for unfunded maintenance requirements, this possibility,
along with the asset impairment for S/N 3676 recognized during the third quarter
of 2000, may have an adverse affect upon the Company's ability to repay its Bond
indebtedness in full at maturity.
Factors that May Affect Future Results
Claims Against Bankrupt Lessee. The Company owns 100% of one aircraft (S/N
3656), and 50% of a second aircraft (S/N 3676) leased to a British regional
carrier. The lessee filed for reorganization under U.K. law in February 2000.
The lessee is continuing to operate, and, under a reorganization plan adopted by
the trustee managing the reorganization, the lessee agreed to continue leasing
S/N 3676, on a month-to-month basis at the same rent as under the original
lease, which represents 6% of the Company's current monthly lease revenue. The
lessee also agreed to begin paying monthly maintenance reserves for S/N 3676
based on the hours flown. The original lease, entered into in 1997, did not
require that the lessee pay maintenance reserves based on usage because, at the
time, the lessee was considered creditworthy and had its own facility which was
certified to perform any required maintenance. In February 2000, the lessee
suspended payments for and returned S/N 3656, and the Company has since
re-leased the aircraft to an Irish regional carrier. Costs incurred by the
Company in connection with the re-lease of S/N 3656 have been expensed during
the second quarter of 2000. The Company has identified its pre-reorganization
claims, such as costs related to the maintenance of the aircraft prior to the
reorganization but not required to be performed until after the reorganization,
and any unpaid lease rentals for both aircraft, which will be considered an
unsecured claim against the lessee. It is unlikely, however, that the Company
will recover the full amount of such claims from the lessee, and a substantial
deficiency in recovery could adversely affect the Company's ability to repay its
Bond indebtedness in full at maturity.
Ability to Repay Bonds. The Company's ability to repay the Bonds at their
maturity date is dependent in part upon reinvestment of excess cash flows in
additional Income Producing Assets. To the extent that the Company realizes less
than anticipated lease rentals due to lessee rental defaults, early termination
of leases, or lower than expected remarketing proceeds during the term of the
Bonds or realizes significant unexpected expenses due to lessee defaults in rent
or other obligations, this may result in lower than expected excess cash flow
available for reinvestment in additional Assets. As a result, the Company's
ability to repay the Bonds in full at maturity may be negatively affected by
such events even if the Company is able to meet its scheduled interest payments.
The Company's ability to repay the Bonds at their maturity date is also
dependent in part upon its ability to refinance the Bonds or sell its aircraft
portfolio at a price sufficient to retire the outstanding Bond principal. If due
to the impairment of S/N 3676 described in "Results of Operations" above and/or
other risks described below in the risk factors entitled "Ownership Risks" and
"Leasing Risks", the values of the Company's aircraft portfolio are in a
depressed state at the maturity date of the Bonds, the Company may be unable to
repay the entire Bond indebtedness on the maturity date.
Risks Related to Regional Air Carriers. Because the Company's leases are all
with regional air carriers, it will be subject to certain risks. First, lessees
in the regional air carrier market include a number of companies that are
start-up, low capital, 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.
General Economic Conditions. The market for used aircraft has been cyclical, and
usually reflects economic conditions and the strength of the travel and
transportation industry. At any time, the market for used aircraft may be
adversely affected by such factors as airline financial difficulties, higher
fuel costs, and improved availability and economics of new replacement aircraft.
An adverse change in the global air travel industry, however, could result in
reduced carrier revenue and excess capacity and increase the risk of failure of
some weaker regional air carriers. While the Company believes that with proper
asset and lessee selection the impact of such changes on the Company can be
reduced, there is no assurance that the Company's business will escape the
effects of such a global downturn, or a regional downturn in an area where the
Company has placed a significant amount of its assets.
Reliance on JMC. All management of the Company is performed by JMC pursuant to a
management agreement between JMC and the Company. The Board of Directors does,
however, have ultimate control and supervisory responsibility over all aspects
of the Company and does owe fiduciary duties to the Company and its
stockholders. In addition, while JMC may not owe any fiduciary duties to the
Company by virtue of the management agreement, the officers of the Company are
also officers or employees of JMC, and in that capacity owe fiduciary duties to
the Company and the stockholders by virtue of holding such offices. Although the
Company has taken steps to prevent such conflicts, such conflicts of interest
arising from such dual roles may still occur.
Ownership Risks. All of the Company's portfolio is leased under operating
leases, where the terms of the leases do not take up the entire useful life of
an asset. The Company's ability to recover its purchase investment in an asset
subject to an operating lease is dependent upon the Company's ability to
profitably re-lease or sell the asset after the expiration of the initial lease
term. Some of the factors that have an impact on the Company's ability to
re-lease or sell include worldwide economic conditions, general aircraft market
conditions, regulatory changes that may make an asset's use more expensive or
preclude use unless the asset is modified, changes in the supply or cost of
aircraft equipment and technological developments which cause the asset to
become obsolete. In addition, a successful investment in an asset subject to an
operating lease depends in part upon having the asset returned by the lessee in
serviceable condition as required under the lease. If the Company is unable to
remarket its aircraft equipment on favorable terms when the operating lease for
such equipment expires, the Company's business, financial condition, cash flow,
ability to service debt and results of operation could be adversely affected.
Lessee Credit Risk. If a lessee defaults upon its obligations under a lease, the
Company may be limited in its ability to enforce remedies. Most of the Company's
lessees are small domestic and foreign regional passenger airlines, which may be
even more sensitive to airline industry market conditions than the major
airlines. As a result, the Company's inability to collect rent under a
significant lease or to repossess equipment in the event of a default by a
lessee could have a material adverse effect on the Company's revenue. If a
lessee that is a certified U.S. airline is in default under the lease and seeks
protection under Chapter 11 of the United States Bankruptcy Code, under Section
1110 of the Bankruptcy Code, the Company would be automatically prevented from
exercising any remedies for a period of 60 days. By the end of the 60 day
period, the lessee must agree to perform the obligations and cure any defaults,
or the Company would have the right to repossess the equipment. This procedure
under the Bankruptcy Code has been subject to significant recent litigation,
however, and it is possible that the Company's enforcement rights may still be
further adversely affected by a declaration of bankruptcy by a defaulting
lessee. Even if an aircraft can be repossessed, the Company may be unable to
recover damages from the lessee if the condition of the aircraft when
repossessed was worse than that required by the lease.
International Risks. The Company's portfolio includes leases with foreign air
carriers. Leases with foreign lessees may present somewhat different credit
risks than those with domestic lessees.
Foreign laws, regulations and judicial procedures may be more or less protective
of lessor rights as those which apply in the United States. The Company could
experience collection problems related to the enforcement of its lease
agreements under foreign local laws and the remedies in foreign jurisdictions.
The protections potentially offered by Section 1110 of the Bankruptcy Code would
not apply to non-U.S. carriers, and applicable local law may not offer similar
protections. Certain countries do not have a central registration or recording
system with which to locally establish the Company's interest in equipment and
related leases. This could add difficulty in recovering an aircraft in the event
that a foreign lessee defaults.
Leases with foreign lessees are subject to risks related to the economy of the
country or region in which such lessee is located even if the U.S. economy
remains strong. On the other hand, a foreign economy may remain strong even
though the domestic U.S. economy does not. A foreign economic downturn may occur
and impact a foreign lessee's ability to make lease payments, even though the
U.S. and other economies remain stable. Furthermore, foreign lessees are subject
to risks related to currency conversion fluctuations. Although the Company's
current leases are all payable in U.S. dollars, in the future, the Company may
agree to leases that permit payment in foreign currency, which would subject
such lease revenue to monetary risk due to currency fluctuations. Even with
dollar-denominated lease payment provisions, the Company could still be affected
by a devaluation of the lessee's local currency which would make it more
difficult for a lessee to meet its dollar-denominated lease payments, increasing
the risk of default of that lessee, particularly if that carrier's revenue is
primarily derived in the local currency.
Competition. The Company has many competitors in the aircraft leasing industry,
including leasing companies, banks and other financial institutions and aircraft
leasing partnerships. The market is highly competitive. Most of the Company's
competitors have substantially greater financial and other resources than the
Company.
Casualties, Insurance Coverage. The Company, as owner of transportation
equipment, could be held liable for injuries or damage to property caused by its
assets. Though some protection may be provided by the United States Aviation Act
with respect to its aircraft assets, it is not clear to what extent such
statutory protection would be available to the Company and such act may not
apply to aircraft operated in foreign countries. Though the Company may carry
insurance or require a lessee to insure against a risk, some risks of loss may
not be insurable. An uninsured loss with respect to the Equipment or an insured
loss for which insurance proceeds are inadequate, would result in a possible
loss of invested capital in and any profits anticipated from such equipment.
Leasing Risks. The Company's successful negotiation of lease extensions,
re-leases and sales may be critical to its ability to achieve its financial
objectives, and will involve a number of substantial risks. Demand for lease or
purchase of the assets depends on the economic condition of the airline industry
which is in turn highly sensitive to general economic conditions. Ability to
remarket equipment at acceptable rates may depend on the demand and market
values at the time of remarketing. The market for used aircraft is cyclical, and
generally, but not always, reflects economic conditions and the strength of the
travel and transportation industry. The demand for and value of many types of
older aircraft in the recent past has been depressed by such factors as airline
financial difficulties, increased fuel costs, the number of new aircraft on
order and the number of older aircraft coming off lease. The Company's
concentration in a limited number of airframe and aircraft engine types
(generally, turboprop equipment) subjects the Company to economic risks if those
airframe or engine types should decline in value. The recent introduction of
"regional jets" to serve on short routes previously thought to be economical
only for turboprop aircraft operation could decrease the demand for turboprop
aircraft, while at the same time increasing the supply of used turboprop
aircraft. This could result in lower lease rates and values for the Company's
turboprop aircraft.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on November 15, 2000.
JETFLEET III
By: /s/ Neal D. Crispin
----------------------
Neal D. Crispin
Title: President
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons in the capacities indicated on November
15, 2000.
Signature Title
/s/ Neal D. Crispin President and Chairman of the
-------------------
Neal D. Crispin Board of Directors of the Registrant
Chief Financial Officer
