FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 33-84336-LA JetFleet III (Exact name of Registrant as specified in its charter) California 94-3208983 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1440 Chapin Avenue, Suite 310 Burlingame, California 94010 (Address of principal executive offices) (Zip code) (650) 340-1880 (Registrant's telephone number including area code) Not applicable (Former name, former address, and former fiscal year, if changed since last report) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Check whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ____ No ____ (APPLICABLE ONLY TO CORPORATE REGISTRANTS) State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title Outstanding Common Stock 815,200 Transitional Small Business Disclosure Format (check one); Yes___ No X Part I. Financial Information Item 1. Financial Statements JETFLEET III Balance Sheets ASSETS March 31, December 31, 1998 1997 (Unaudited) Current assets: Cash $ 730,204 $ 539,626 Deposits 122,847 107,913 Rent receivable 40,139 48,903 Accounts receivable 22,728 19,875 ----------------- ----------------- Total current assets 915,918 716,317 Aircraft under operating lease, net of accumulated depreciation of $911,869 in 1998 and $761,600 in 1997 11,035,483 11,185,752 Debt issue costs, net of accumulated amortization of $384,988 in 1998 and $327,833 in 1997 1,276,464 1,333,619 Other, including deferred tax asset net of valuation allowance 65,000 65,000 ----------------- ----------------- Total assets $ 13,292,865 $ 13,300,688 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ 8,744 $ 17,435 Interest payable 238,880 238,880 Prepaid rents 81,840 57,675 Maintenance reserves 146,511 127,788 ----------------- ----------------- Total current liabilities 475,975 441,778 Medium-term secured bonds 11,076,350 11,076,350 ----------------- ----------------- Total liabilities 11,552,325 11,518,128 Preferred stock, no par value, 300,000 shares authorized, 195,465 issued and outstanding 1,661,452 1,661,452 Common stock, no par value, 1,000,000 shares authorized, 815,200 issued and outstanding 815,200 815,200 Accumulated deficit (736,112) (694,092) ----------------- ----------------- Total shareholders' equity 1,740,540 1,782,560 ----------------- ----------------- Total liabilities and shareholders' equity $ 13,292,865 $ 13,300,688 ================= ================= See accompanying notes. JETFLEET III Statements of Operations (Unaudited) For the Three Months Ended March 31, 1998 1997 Revenues: Rent income, net of finance charges $ 569,310 $ 385,544 Interest income 10,467 40,650 ------------------ ------------------ 579,777 426,194 ------------------ ------------------ Expenses: Depreciation expense 150,269 93,441 Amortization expense 57,155 46,100 Interest expense 358,320 317,257 Professional fees 1,875 6,334 Management fees 48,866 47,441 General and administrative 5,312 488 ------------------- ------------------ 621,797 511,061 ------------------- ------------------ Net loss $ (42,020) $ ( 84,867) =================== ================== Weighted average common shares 815,200 547,792 =================== ================== Net loss per common share $ ( 0.05) $ ( 0.15) =================== ================== See accompanying notes. JETFLEET III Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 1998 1997 Net cash provided by operating activities $ 190,578 $ 99,851 Investing activity - Purchase of interests in aircraft - (991,550) Financing activities: Proceeds from issuance of medium-term secured bonds - 1,625,200 Debt issue costs - (162,520) Proceeds from issuance of preferred stock - 286,800 Offering costs - (28,680) Proceeds from issuance of common stock - 95,600 ------------------ ------------------ Net cash provided by financing activities - 1,816,400 ------------------ ------------------ Net increase in cash 190,578 924,701 Cash, beginning of period 539,626 255,851 ------------------ ------------------ Cash, end of period $ 730,204 $ 1,180,552 ================== ================== 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 totaling $2,294,228, on the secured note for each aircraft, which balances were paid in full by the seller immediately prior to the Company's purchase of each aircraft. See accompanying notes. JETFLEET III Notes to Financial Statements March 31, 1998 (Unaudited) 1. Basis of presentation JetFleet III (the "Company") was incorporated in the state of California on August 23, 1994 ("Inception"). All of the Company's outstanding common stock is owned by JetFleet Management Corp. ("JMC"), a California corporation formed in January 1994. JMC is the management company for the Company, and also manages AeroCentury Corp., a Delaware corporation, and AeroCentury IV, Inc., a California corporation, which are affiliates of the Company and which have objectives similar to the Company's. Neal D. Crispin, the President of the Company, holds the same position with JMC and owns a significant amount of the common stock of JMC. The accompanying balance sheets at March 31, 1998 and December 31, 1997 and statements of operations and cash flows for the quarters ended March 31, 1998 and 1997 reflect all adjustments (consisting of only normal recurring accruals) which are, in the opinion of the Company, necessary for a fair presentation of the financial results. The results of operations of such periods are not necessarily indicative of results of operations for a full year. The statements should be read in conjunction with the Summary of Significant Account Policies and other notes to financial statements included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997. 2. Organization and Capitalization The Company was formed solely for the purpose of acquiring Income Producing Assets, consisting mainly of aircraft, aircraft engines, aircraft parts or other transportation industry equipment subject to operating or full payout leases with third parties. The Company raised $13,031,000 in $1,000 Series A Units (the "Offering") consisting of $850 of bonds maturing on November 1, 2003 (the "Bonds") and $150 of preferred stock (the "Preferred Stock") pursuant to a prospectus dated September 27, 1995 (the "Prospectus"). Organization and offering costs Pursuant to the terms of the Prospectus, the Company paid an Organization and Offering Expense Reimbursement to JMC in cash in an amount up to 2.0% of Aggregate Gross Offering Proceeds for reimbursement of certain costs incurred in connection with the organization of the Company and the Offering. The Company also issued 651,550 shares of common stock to JMC as reimbursement of organization and offering costs JMC incurred in excess of the 2.0% cash reimbursement (collectively, the "Reimbursement"). The Company capitalized the portion of the Reimbursement related to the Bonds (85%) and amortizes such costs over the life of the Bonds (approximately eight years). The remainder of the amount paid by the Company for organization and offering costs was deducted from shareholders' equity. JETFLEET III Notes to Financial Statements March 31, 1998 (Unaudited) 3. Aircraft and Aircraft Engines Under Operating Leases Aircraft and aircraft engines The Company owns a deHavilland DHC-8-100, serial number 13 ("S/N 13"), a Shorts SD3-60, serial number S/N 3611 ("S/N 3611"), a Pratt & Whitney JT8D-9A aircraft engine, serial number 674267 ("S/N 674267"), three deHavilland DHC-6-300 aircraft ("S/Ns 646, 751 and 696"), a Fairchild Metro III SA-227-AC, Serial No. AC-621 ("S/N AC-621") a Shorts SD3-60, serial number S/N 3656 ("S/N 3656") and 50% undivided interests in a Fairchild Metro II SA-226-TC, serial number TC-370 ("S/N TC-370") and a Shorts SD3-60, serial number S/N 3676 ("S/N 3676"). The Company made no investments in aircraft during the first quarter of 1998. 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 British regional airline. 4. Medium-term secured bonds Each $1,000 Unit subscribed in the Offering included an $850 medium-term secured bond maturing on November 1, 2003. During 1997, the Company accepted subscriptions for 2,310 Units aggregating $2,310,000 in Gross Offering Proceeds. Pursuant to the Prospectus, the Company subsequently issued $1,963,500 in Bonds and 40,050 shares of Preferred Stock. The Bonds bear interest at an annual 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. JETFLEET III Notes to Financial Statements March 31, 1998 (Unaudited) 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 quarters of 1998 and 1997, the Company paid a total of $48,866 and $47,441, respectively, in management fees to JMC. JMC may receive a brokerage fee for locating assets for the Company, provided that such fee is not more than the customary and usual brokerage fee that would be paid to an unaffiliated party for such a transaction. The total of the Aggregate Purchase Price plus the brokerage fee cannot exceed the fair market value of the asset based on appraisal. JMC may also receive reimbursement of Chargeable Acquisition Expenses incurred in connection with a transaction which are payable to third parties. Because the Company did not purchase aircraft during the first quarter of 1998, it did not pay any brokerage fees or Chargeable Acquisition Expenses to JMC. The Company paid JMC $77,622 and $3,350 for brokerage fees and Chargeable Acquisition Expenses, respectively, during the first quarter of 1997. As discussed in Note 1, the Company reimburses JMC for certain costs incurred in connection with the organization of the Company and the Offering. Because the Offering was closed to new subscriptions during June 1997, the Company did not reimburse JMC for any organization and offering expenses during the first quarter of 1998. The Company reimbursed JMC $38,240 during the first quarter of 1997. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Capital Resources and Liquidity On March 31, 1998, the Company had cash balances of $853,051. Of this amount, $122,847 was deposits which represent maintenance reserves collected from lessees and interest earned on those funds, as applicable. The remainder of the Company's cash balance was held primarily for the interest payment made to the Unitholders in May 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 ownershipof 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. As discussed in Item 1, the interest rate on the Bonds is 12.94% through October 31, 1998 and a variable rate thereafter. The variable rate will be dependent on the one-year United States Treasury bill rate and, therefore, management believes that the rate will be lower than the current rate. 1998 versus 1997 The increase in cash flow from operations was due partially to a decreased net loss (see Results of Operations). The other significant factor was an increase in prepaid rent received from lessees. The Company did not purchase aircraft during the first quarter of 1998 and, therefore, had no cash flows from investing activities. The Company also had no cash flows from financing activities because the Offering terminated during June 1997. Results of Operations The Company recorded a net loss of ($42,020) or ($0.05) per share and ($84,867) or ($0.15) per share for the three months ended March 31, 1998 and 1997, respectively. 1998 versus 1997 Rental income increased as a result of the additional rent received from aircraft purchased during 1997. Interest income decreased in 1998 because, at the end of January 1997, the Company exercised its purchase options for three aircraft which previously served as collateral for three secured loans. As a result, the Company recognized no interest income for the loans during 1998, compared to one month of interest income during 1997. Amortization and depreciation increased from year to year as a result of the additional funds raised during 1997 and the depreciable aircraft purchased with those funds. Interest expense and management fees also increased in 1998 as a result of the additional proceeds raised. Factors that May Affect Future Results Year 2000 Considerations. The Company's internal and administrative operations are not highly dependent on advanced technological computer or other electronic systems, and, consequently, management believes that the Company's exposure to loss as a result of Year 2000 issues is not significant. Further, management believes that the electronic systems used in the equipment leased by the Company to lessees will not be affected by the Year 2000 issue, and, therefore, this issue should not directly affect the Company's financial performance or the lessees' ability to comply with their respective lease obligations. Of course, to the extent that a lessee has Year 2000 problems that significantly adversely affect its overall financial status, such material problems may affect the lessee's operations and increase the risk of default by a lessee under its lease with the Company. Furthermore, Year 2000 issues may have a material impact on FAA operations and the operations of certain air carriers, which in turn would negatively affect the aircraft industry in general. Part II. Other Information Item 1. Legal Proceedings None. Item 2. Changes in Securities No disclosure required. Item 3. Defaults Upon Senior Securities No disclosure required. Item 4. Submission of Matters to a Vote of Security Holders No disclosure required. Item 5. Other Information No disclosure required. Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit 27. Financial Data Schedule b. Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. JetFleet III May 14, 1998 By: /s/ Neal D. Crispin Date --------------------------------------- Neal D. Crispin, President and Chairman of the Board of Directors of the Registrant, Chief Financial Officer