UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NUMBER: 33-84336-LA JETFLEET III (Exact name of small business issuer as specified in its charter) CALIFORNIA (State or other jurisdiction of incorporation or organization) 94-3208983 (I.R.S. Employer Identification No.) 1440 CHAPIN AVENUE, SUITE 310 BURLINGAME, CALIFORNIA (Address of principal executive office) 94010 (Zip Code) Issuer's telephone number, including area code: (415) 696-3900 Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes X No On August 14, 1997, 815,200 shares of common stock and 195,465 shares of preferred stock were outstanding. Transitional Small Business Disclosure Format (check one): Yes No X PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS JETFLEET III Balance Sheets ASSETS June 30, December 31, 1997 1996 ------ ------- (Unaudited) <BTB> Current assets: Cash $ 2,041,415 $ 255,851 Rent receivable 55,864 13,000 Accounts receivable - 658 ----------- ----------- Total current assets 2,097,279 269,509 ----------- ----------- Aircraft under operating lease, net of accumulated depreciation of $475,672 in 1997 and $258,793 in 1996 9,799,780 6,546,145 Secured notes receivable - 2,311,146 Debt issue costs, net of accumulated amortization of $215,807 in 1997 and $119,850 in 1996 1,274,328 1,143,335 Other 65,000 184,736 ---------- ----------- $ 13,236,387 $ 10,454,871 ============= =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ 539 $ 12,285 Payable to affiliates 53,379 71 Interest payable 238,498 183,053 Prepaid rent 63,300 - Maintenance reserves 101,929 - Other - 13,271 ---------- ----------- Total current liabilities 457,645 208,680 Medium-term secured bonds 11,076,350 8,806,850 ---------- ----------- Total liabilities 11,533,995 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 1,691,685 1,331,235 Common stock, no par value, 1,000,000 shares authorized, 613,650 and 518,050 issued and outstanding in 1997 and 1996, respectively 613,650 518,050 Accumulated deficit (602,943) (409,944) ---------- ----------- Total shareholders' equity 1,702,392 1,439,341 ---------- ----------- $ 13,236,387 $ 10,454,871 =========== =========== <FN> See accompanying notes. JETFLEET III Statements of Operations (Unaudited) For the Six Months For the Three Months Ended June 30, Ended June 30, 1997 1996 1997 1996 ----- ----- ----- ------ Revenues: <BTB> Rent income, net of finance charges $ 858,194 $ 241,177 $ 472,650 $ 161,935 Interest income 44,663 4,419 4,013 4,419 -------- --------- --------- --------- 902,857 245,596 476,663 166,354 -------- --------- --------- --------- Expenses: Depreciation expense 216,879 286,842 123,438 145,421 Amortization expense 95,957 42,924 49,856 24,794 Interest expense 675,141 183,814 357,885 124,119 Professional fees 7,774 14,260 1,440 8,000 Management fees 96,307 37,864 48,866 24,120 General and administrative 3,798 4,482 3,310 674 -------- --------- --------- --------- 1,095,856 570,186 584,795 327,128 -------- --------- --------- --------- Net loss $ (192,999) $(324,590)$(108,132)$(160,774) ======== ========= ========= ========= Weighted average common shares 580,903 500,000 613,650 500,000 ======== ========= ========= ========= Loss per common share $ (0.33) $ (0.65)$ (0.18)$ (0.32) ======== ========= ========= ========= <FN> See accompanying notes. JETFLEET III Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 1997 1996 <BTB> ---- ---- Net cash provided/(used) by operating activities $ 278,514 $ (151,092) Investing activities - Purchase of interests in aircraft (991,550) (3,272,088) Financing activities: Proceeds from issuance of medium-term secured bonds 2,269,500 3,346,450 Debt issue costs (226,950) (334,645) Proceeds from issuance of preferred stock 400,500 590,550 Offering costs (40,050) (59,055) Proceeds from issuance of common stock 95,600 - ---------- --------- Net cash provided by financing activities 2,498,600 3,543,300 ---------- --------- Net increase in cash 1,785,564 120,120 Cash, beginning of period 255,851 68,328 ---------- --------- Cash, end of period $ 2,041,415 $ 188,448 ========== ========= <FN> Supplemental schedule of noncash investing and financing activities: During the first quarter of 1997, the Company exercised its option to purchase three aircraft which previously served as collateral for loans made by the Company during 1996. The purchase price for the three aircraft was equal to the unpaid balance, including principal and interest totalling $2,294,228, on the secured note for each aircraft, which balances were paid in full by the seller immediately prior to the Company's purchase of each aircraft. See accompanying notes. JETFLEET III Notes to Financial Statements June 30, 1997 (Unaudited) 1. Basis of Presentation JetFleet III (the "Company") was incorporated in the state of California on August 23, 1994 ("Inception"). All of the Company's outstanding stock is owned by JetFleet Management Corp. ("JMC"), a California corporation formed in January 1994. JMC is an integrated aircraft management, marketing and financing business, and also manages, on behalf of their respective general partners, the aircraft assets of JetFleet Aircraft, L.P.and JetFleet Aircraft II, L.P., publicly offered limited partnership programs with objectives similar to the Company's. The accompanying balance sheets at June 30, 1997 and December 31, 1996 and statements of operations and cash flows for the six months and three months ended June 30, 1997 and 1996 reflect all adjustments (consisting of only normal recurring accruals) which are, in the opinion of the Company, necessary for a fair presentation of the financial results. The results of operations of such periods are not necessarily indicative of results of operations for a full year. The statements should be read in conjunction with the Summary of Significant Accounting Policies and other notes to financial statements included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996. 2. Organization and Capitalization The Company was formed solely for the purpose of acquiring Income Producing Assets. The Company anticipates that these assets will be Equipment, consisting mainly of aircraft, aircraft engines, aircraft parts or other transportation industry equipment subject to operating or full payout leases with third parties. Between September 1995 and April 1995, the Company raised $13,031,000 in $1,000 Series A Units (the "Offering") consisting of $850 of bonds maturing on November 1, 2003 (the "Bonds") and $150 of preferred stock (the "Preferred Stock") pursuant to a prospectus dated September 27, 1995 (the "Prospectus"). The Bonds bear an annual interest rate of 12.94% from issuance through October 31, 1998, and thereafter, a variable rate, adjusted annually on November 1, equal to the one-year United States Treasury bill rate plus 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 is 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 an amount equal to ten times the per-share dividend paid on the Common Stock. All of the Company's outstanding common stock is owned by JMC. JMC has incurred certain costs in connection with the organization of the Company and the Offering. The Company will pay an Organization and Offering Expenses reimbursement (the "Reimbursement") to JMC in an amount up to 2.0% of Aggregate Offering Proceeds. The Reimbursement is limited to $400,000 or the amount paid by JMC in excess of $450,000, whichever is less. JMC contributed $450,000 of the total it estimates it will 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 incurs expenses in excess of the 2.0% cash limit, such excess expenses will be 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 JETFLEET III Notes to Financial Statements June 30, 1997 (Unaudited) 2. Organization and Capitalization (continued) 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 8 years). The remainder of any of the Initial Contribution and Reimbursement is deducted from shareholders' equity. On December 31, 1996 and March 4, 1997, JMC purchased an additional 18,050 and 95,600 shares of common stock, respectively, in the Company at a price of $1.00 per share in order to make its investment in common stock equal to 5% of the proceeds raised by the Company. 3. Aircraft and Aircraft Engines Under Operating Leases Aircraft and aircraft engines The Company owns interests in a deHavilland DHC-8-100, serial number 13 ("S/N 13"), a Fairchild Metro II SA-226-TC, serial number TC-370 ("S/N TC-370"), a Shorts SD-360, serial number S/N 3611 ("S/N 3611"), a Fairchild Metro III SA227-AC, serial number AC621 ("S/N AC621"), three deHavilland DHC-6-300 aircraft (the "Dash-6's") and a Pratt & Whitney JT8D-9A aircraft engine, serial number 674267 ("S/N 674267"). The Company invested approximately $992,000, including reimbursement for chargeable acquisition costs and brokerage fees of approximately $77,000, in aircraft assets during the first six months of 1997. The Company also exercised its option to purchase three aircraft which previously served as collateral for loans made by the Company during 1996. The purchase price for the three aircraft was equal to the unpaid balance, including principal and interest, 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. 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, beginning at the end of the first 36 months of the lease. 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 JetFleet II, 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 AC621 is subject to a three year lease with a regional carrier in Alaska. The Dash-6's are subject to a 48-month lease with a United States regional carrier. S/N 674267 is subject to a 60-month sublease between the seller and a Mexican based regional carrier which operates between the United States and Mexico. JETFLEET III Notes to Financial Statements June 30, 1997 (Unaudited) 4. Medium-term secured bonds As mentioned above, the Company raised funds through the Offering which closed during April 1997. Each $1,000 Unit subscribed in the offering includes an $850 medium-term secured bond maturing on November 1, 2003. During the second quarter of 1997, the Company accepted subscriptions for 758 Units aggregating $758,000 in Gross Offering Proceeds and, pursuant to the Prospectus, issued $644,300 in Bonds and 11,370 shares of Preferred Stock. 5. Related Party Transactions The Company's Income Producing Asset portfolio is managed and administered under the terms of a management agreement with JMC. Under this agreement, on the last day of each calendar quarter, JMC receives a quarterly management fee equal to 0.375% of the Company's Aggregate Gross Proceeds received through the last day of such quarter. During the first six months of 1997 and 1996, the Company accrued a total of $96,307 and $37,864, respectively, in management fees due JMC. Capital Management Associates ("CMA"), an affiliate of JMC, provides certain administrative services to the Company. The 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 receives 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 and provided that the total of the Aggregate Purchase Price plus the brokerage fee does not exceed the fair market value of the asset based on appraisal. During the first six months of 1997 and 1996, the Company paid JMC a total of $73,200 and $238,099, respectively, in brokerage fees, and reimbursed JMC for $3,350 and $9,750, respectively, in Chargeable Acquisition Expenses. As discussed in Note 2, the Company reimburses JMC for certain costs incurred in connection with the organization of the Company and the Offering. In the first six months of 1997 and 1996, the Company paid $53,400 and $78,740, respectively, to JMC. Crispin Koehler Securities (formerly CKS Securities, Incorporated), a member of the National Association of Securities Dealers, Inc. and a related party of JMC, serves as underwriter of the Offering and, as such, receives retail commissions and underwriter, due diligence and marketing fees, portions of which are paid to third parties. The Company paid Crispin Koehler Securities a total of $213,600 and $314,960 in commissions and underwriter, due diligence and marketing fees during the first six months of 1997 and 1996, respectively. 5. Subsequent Events During July 1997, JetFleet III purchased 100% and 50% undivided interests in two Shorts 360 aircraft, serial numbers SH3656 ("S/N SH3656") and SH3676 ("S/N SH3676"), respectively. The remaining undivided interest in SH3676 is owned by AeroCenturyIV, Inc., an affiliate of JetFleet III. Both aircraft are subject to a 48-month lease with a regional carrier in the United Kingdom. As discussed in Note 2, JMC is entitled to receive Excess Stock in the Company, issued at a price of $1.00 per share, as repayment for Organization and Offering Expenses it incurs in excess of the 2.0% Reimbursement. Pursuant to this arrangement, on August 11, 1997, the Company issued an additional 201,550 shares of common stock in the Company to JMC, as repayment of an equal amount of expenses incurred by JMC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Resources and Liquidity At the end of the second quarter of 1997, the Company had cash balances of $2,041,415. This amount was held for the interest payments to the Unitholders, for the purchase of additional aircraft in July 1997 and for normally recurring expenses. Since Inception, the Company's source of capital has come in the form of an initial contribution from JMC, proceeds from the Offering and rental revenue from the Income Producing Asset 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. JetFleet currently has available adequate reserves to meet its immediate cash requirements. 1997 versus 1996 Cash flow from operations was $278,514 and ($151,092) for thesix months ended June 30, 1997 and 1996, respectively. The increase from year to year was partially due to a decrease in net loss of approximately $132,000, discussed below. During 1997, JetFleet III had cash inflows of approximately $89,000 and $63,000 for maintenance reserves and prepaid rent, respectively, and payments on receivables of approximately $18,000. JetFleet III also recorded payables of $97,000, which was offset by recording receivables of $108,000. During 1996, JetFleet III had cash outflows of approximately $165,000 as a result of a net change in payables, with no offsetting cash inflows. Results of Operations The Company recorded net losses of ($192,999) or ($0.33) per share and ($324,590) or ($0.65) per share for the six months ended June 30, 1997 and 1996, respectively and ($108,132) or ($0.18) per share and ($160,774) or ($0.32) per share for the three months ended June 30, 1997 and 1996, respectively. The decreased loss was a result of lease-related revenue from additional assets purchased during the latter part of 1996 and the first quarter of 1997, as well as a higher average lease rate. These increases were only partially offset by a related increase in interest expense and management fees. 1997 versus 1996 Rental income increased approximately $617,000 and $311,000 for the six and three month periods. The increase from 1996 to 1997 was due to the rental income received as a result of the purchase of additional aircraft. During the first quarter of 1997, the Company also recorded $23,882 of interest income attributable to secured loans which were made by the Company during the second half of 1996. As discussed in Note 3, during the first quarter of 1997, JetFleet III exercised its purchase options for the three aircraft which previously served as collateral for the secured loans and capitalized its investment in the three aircraft. Depreciation was approximately $70,000 and $22,000 lower in the six and three month periods ended June 30, 1997, respectively, than in the same periods of 1996. The decrease from 1996 to 1997 was due to a change in estimate of the residual value of S/N 13, which change was only partially offset by depreciation associated with the additional assets purchased during 1996 and the first quarter of 1997. Management fees increased approximately $58,000 and $25,000 for the six and three month periods ended June 30, 1997, over the same periods in 1996. The increase in management fees was due to the additional proceeds raised by the Company in the Offering during 1996 and 1997. The Company uses substantially all its operating cash flow to make interest payments to its Unitholders. Any excess funds, after interest payment, will be aggregated and invested in additional Income Producing Assets. Since the Company plans to acquire 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. 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 August 14, 1997. 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 August 14, 1997. Signature Title /s/ Neal D. Crispin President and Chairman of the - ------------------------- Board of Directors of the Registrant Neal D. Crispin Chief Financial Officer EXHIBIT INDEX Exhibit No. Description Page No. - ------------ ------------ --------- EX-27 Financial Data Schedule