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 September 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 94-3208983 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1440 Chapin Avenue, Suite 310 94010 Burlingame, California (Zip Code) (Address of principal executive office) Issuer's telephone number, including area code: (650) 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 November 12, 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 September 30, December 31, 1997 1996 ------ ------ (Unaudited) <BTB> Current assets: Cash $ 552,751 $ 255,851 Rent receivable 64,056 13,000 Accounts receivable 37,848 658 ---------- ---------- Total current assets 654,655 269,509 ---------- ---------- Aircraft under operating lease, net of accumulated depreciation of $622,310 in 1997 and $258,793 in 1996 11,323,542 6,546,145 Secured notes receivable - 2,311,146 Debt issue costs, net of accumulated amortization of $270,678 in 1997 and $119,850 in 1996 1,390,775 1,143,335 Other 65,000 184,736 ---------- ---------- $ 13,433,972 $ 10,454,871 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ 15,240 $ 12,285 Payable to affiliates 53,378 71 Interest payable 238,880 183,053 Prepaid rent 63,300 - Maintenance reserves 132,787 - Other - 13,271 ---------- ---------- Total current liabilities 503,585 208,680 Medium-term secured bonds 11,076,350 8,806,850 ---------- ---------- Total liabilities 11,579,935 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, 613,650 and 518,050 issued and outstanding in 1997 and 1996, respectively 815,200 518,050 Accumulated deficit (622,615) (409,944) ---------- ---------- Total shareholders' equity 1,854,037 1,439,341 ---------- ---------- $ 13,433,972 $ 10,454,871 ========== ========== See accompanying notes. JETFLEET III Statements of Operations (Unaudited) For the Nine Months For the Three Months Ended September 30, Ended September 30, 1997 1996 1997 1996 ---- ---- ---- ---- Revenues: Rent income, net of finance charges $ 1,427,504 $ 435,427 $ 569,310 $ 194,250 Interest income 72,891 52,133 28,228 47,714 ---------- -------- -------- --------- 1,500,395 487,560 597,538 241,964 Expenses: Depreciation expense 363,517 439,808 146,638 152,966 Amortization expense 150,827 75,216 54,871 32,292 Interest expense 1,033,462 381,743 358,320 197,929 Professional fees 11,319 19,499 3,545 5,239 Management fees 145,173 70,909 48,866 33,045 General and administrative 8,769 9,401 4,971 4,919 --------- -------- -------- -------- 1,713,067 996,576 617,211 426,390 --------- -------- -------- -------- Net loss $ (212,672) $ (509,016) $ (19,673) $(184,426) ========= ======== ======== ======== Weighted average common shares 629,591 500,000 725,379 500,000 ========= ======== ======== ======== Loss per common share $ (0.34) $ (1.02) $ (0.03) $ (0.37) ========= ======== ========= ======== <FN> See accompanying notes. JETFLEET III Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 1997 1996 ---- ---- <BTB> Net cash provided/(used) by operating activities $ 460,250 $ (287,851) Investing activities - Purchase of interests in aircraft (2,661,950) (3,272,088) Loans secured by aircraft - (2,361,635) ----------- ----------- Net cash used in investing activities (2,661,950) (5,633,723) Financing activities: Proceeds from issuance of medium-term secured bonds 2,269,500 5,746,000 Debt issue costs (226,950) (574,600) Proceeds from issuance of preferred stock 400,500 1,014,000 Offering costs (40,050) (101,400) Proceeds from issuance of common stock 95,600 - ----------- ----------- Net cash provided by financing activities 2,498,600 6,084,000 ----------- ----------- Net increase in cash 296,900 162,426 Cash, beginning of period 255,851 68,328 ----------- ----------- Cash, end of period $ 552,751 $ 230,754 =========== =========== 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. <FN> See accompanying notes. JETFLEET III Notes to Financial Statements September 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 common 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 unaudited financial statements 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 27, 1995 and June 2, 1997, 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 has paid 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 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 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 JETFLEET III Notes to Financial Statements September 30, 1997 (Unaudited) 2. Organization and Capitalization (continued) at a price of $1.00 per share (the "Excess Stock"), limited according to the amount of Aggregate Gross Offering Proceeds raised by the Company. During August 1997, the Company issued 201,550 shares of common stock to JMC as payment for unreimbursed Organization and Offering Expenses. 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 maintain 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 a deHavilland DHC-8-100, serial number 13 ("S/N 13"), a 50% interest in 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"), and 50% and 100% interests in two Shorts SD-360 aircraft, serial numbers 3676 and 3656, respectively ("S/N 3676" and "S/N 3656"). The Company invested approximately $2,662,000, including reimbursement for chargeable acquisition costs and brokerage fees of approximately $297,000, in aircraft assets during the first nine 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. JETFLEET III Notes to Financial Statements September 30, 1997 (Unaudited) 3. Aircraft and Aircraft Engines Under Operating Leases (continued) Aircraft and aircraft engines leases (continued) 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. S/N 3676 and S/N 3656 are subject to a 48-month lease with a regional carrier in the United Kingdom. 4. Medium-term secured bonds As mentioned above, the Company raised funds through the Offering which closed during June 1997. Each $1,000 Unit subscribed in the offering includes an $850 medium-term secured bond maturing on November 1, 2003. 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 nine months of 1997 and 1996, the Company accrued a total of $145,173 and $70,909, respectively, in management fees due JMC. Capital Management Associates ("CMA"), an affiliate of JMC, 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 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 nine months of 1997 and 1996, the Company paid JMC a total of $276,200 and $406,697, respectively, in brokerage fees, and reimbursed JMC for $20,750 and $25,788, 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 nine months of 1997 and 1996, the Company paid $53,400 and $135,200 , 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 $540,800 in commissions and underwriter, due diligence and marketing fees during the first nine months of 1997 and 1996, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Resources and Liquidity At the end of the third quarter of 1997, the Company had cash balances of $552,751. This amount was held for the interest payments to the Unitholders 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 $460,250 and ($287,851) for the nine months ended September 30, 1997 and 1996, respectively. The increase from year to year was partially due to a decrease in net loss of approximately $296,000, discussed below. During 1997, JetFleet III had cash inflows of approximately $133,000 and $63,000 for maintenance reserves and prepaid rent, respectively. JetFleet III also recorded payables of $112,000, which was offset by recording receivables of $136,000. During 1996, JetFleet III received approximately $10,000 in receivables and recorded payables of approximately $129,000. These items were offset by payment of previously accrued amounts due affiliates totalling approximately $230,000 and costs associated with loans collateralized by three aircraft totalling approximately $185,000. Results of Operations The Company recorded net losses of ($212,672) or ($0.34) per share and ($509,016) or ($1.02) per share for the nine months ended September 30, 1997 and 1996, respectively and ($19,673) or ($0.03) per share and ($184,426) or ($0.37) per share for the three months ended September 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 nine months of 1997, as well as a higher average lease rate. These increases were only partially offset by a related increase in interest expense, depreciation and management fees. 1997 versus 1996 Rental income increased approximately $992,000 and $375,000 for the nine 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 $76,000 and $6,000 lower in the nine and three month periods ended September 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 nine months of 1997. Management fees increased approximately $74,000 and $16,000 for the nine and three month periods ended September 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 payments, are 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 November 12, 1997. JETFLEET III <BTB> 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 12, 1997. Signature Title --------- ----- <BTB> /s/ Neal D. Crispin President and Chairman of the ---------------------- Board of Directors of Neal D. Crispin the Registrant Chief Financial Officer EXHIBIT INDEX Exhibit No. Description Page No. - ------------ ------------ --------- EX-27 Financial Data Schedule