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 September 30, 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
September 30, December 31,
1998 1997
(Unaudited)
Current assets:
Cash $ 1,046,370 $ 539,630
Deposits 284,210 107,910
Rent receivable 55,220 48,900
Accounts receivable 2,650 19,880
----------------- -----------------
Total current assets 1,388,450 716,320
Aircraft under operating lease, net of
accumulated depreciation of $1,212,410
in 1998 and $761,600 in 1997 10,734,950 11,185,750
Debt issue costs, net of accumulated
amortization of $499,300 in 1998
and $327,830 in 1997 1,162,150 1,333,620
Other, including deferred tax asset
net of valuation allowance 65,000 65,000
----------------- -----------------
Total assets $ 13,350,550 $ 13,300,690
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 1,350 $ 17,430
Interest payable 238,880 238,880
Prepaid rents 81,840 57,680
Maintenance reserves 286,530 127,790
----------------- -----------------
Total current liabilities 608,600 441,780
Medium-term secured bonds 11,076,350 11,076,350
----------------- -----------------
Total liabilities 11,684,950 11,518,130
Preferred stock, no par value,
300,000 shares authorized, 195,465
issued and outstanding 1,661,450 1,661,450
Common stock, no par value,
1,000,000 shares authorized, 815,200
issued and outstanding 815,200 815,200
Accumulated deficit (811,050) (694,090)
----------------- -----------------
Total shareholders' equity 1,665,600 1,782,560
----------------- -----------------
Total liabilities and shareholders' equity $ 13,350,550 $ 13,300,690
================= =================
See accompanying notes.
JETFLEET III
Statements of Operations
(Unaudited)
For the Nine Months For the Three Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
Revenues:
Rent income $ 1,707,930 $ 1,427,510 $ 569,310 $ 569,310
Interest income 34,370 72,890 13,690 28,230
--------------- --------------- --------------- ----------------
1,742,300 1,500,400 583,000 597,540
--------------- --------------- --------------- ----------------
Expenses:
Depreciation expense 450,810 363,520 150,270 146,640
Amortization expense 171,470 150,830 57,160 54,870
Interest expense 1,074,960 1,033,460 358,320 358,320
Management fees 146,600 145,170 48,860 48,860
General and administrative 15,430 20,090 1,050 8,520
--------------- --------------- --------------- ----------------
1,859,260 1,713,070 615,660 617,210
--------------- --------------- --------------- ----------------
Net loss $ (116,960) $ (212,670) $(32,660) $ (19,670)
=============== =============== =============== ================
Weighted average common shares 815,200 629,591 815,200 725,379
=============== =============== =============== ================
Net loss per common share $ ( 0.14) $ ( 0.34) $(0.04) $ (0.03)
=============== =============== =============== ================
See accompanying notes.
JETFLEET III
Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
1998 1997
Net cash provided by operating activities $ 506,740 $ 460,250
Investing activity -
Purchase of interests in aircraft - (2,661,950)
Financing activities:
Proceeds from issuance of
medium-term secured bonds - 2,269,500
Debt issue costs - (226,950)
Proceeds from issuance of preferred stock - 400,500
Offering costs - (40,050)
Proceeds from issuance of common stock - 95,600
------------------ ------------------
Net cash provided by financing activities - 2,498,600
------------------ ------------------
Net increase in cash 506,740 296,900
Cash, beginning of period 539,630 255,850
------------------ ------------------
Cash, end of period $ 1,046,370 $ 552,750
================== ==================
Supplemental schedule of noncash investing and financing activities: During
January 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
September 30, 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 Holding Corp. ("JHC"), a California corporation formed in
January 1994. JetFleet Management Corp. ("JMC"), a subsidiary of JHC, 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 JHC and JMC and owns a significant amount of the common stock of
both companies.
The accompanying balance sheets at September 30, 1998 and December 31, 1997
and statements of operations and cash flows for the nine months and three months
ended September 30, 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.
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 etimates.
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 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 Company
also issued 651,550 shares of common stock to JHC as reimbursement of
organization and offering costs JHC 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
September 30, 1998
(Unaudited)
3. Aircraft and Aircraft Engines Under Operating Leases
Aircraft and aircraft engines
The Company's interests in aircraft are recorded at cost, which include
acquisition costs. Depreciation is computed using the straight-line method over
each aircraft's estimated economic life to its estimated residual value.
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 nine months of
1998.
Aircraft and aircraft engines leases
S/N 13 is subject to a 120-month lease with the seller. The 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 lessee has provided notice to
terminate the lease on November 30, 1998. Management is currently negotiating
with the sub-lessee, an Australian carrier, regarding its continued use of S/N
13.
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.
S/N 3656 and S/N 3676 are subject to similar 48-month leases with a British
regional airline.
JETFLEET III
Notes to Financial Statements
September 30, 1998
(Unaudited)
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 the year ended 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% 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 2%, but not less than 8.24%.
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
notes payable approximates fair value.
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 1998 and 1997, the Company
paid a total of $146,600 and $145,170, 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 nine months of 1998, it did not pay any brokerage fees
or Chargeable Acquisition Expenses to JMC. The Company paid JMC $276,200 and
$20,750 for brokerage fees and Chargeable Acquisition Expenses, respectively,
during the first nine months of 1997.
As discussed in Note 1, the Company reimburses JHC 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 JHC for any organization and offering expenses during
the first nine months of 1998. The Company reimbursed JHC $53,400 during the
first nine months of 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Capital Resources and Liquidity
On September 30, 1998, the Company had cash balances of $1,330,580. Of this
amount, $284,210 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 for the interest payment made to the
Unitholders in November 1998, for normally recurring expenses and for investment
in additional aircraft. At September 30, 1998, the Company had approximately
$500,000 available for investment.
Since Inception, the Company's funds have come in the form of an initial
contribution from JHC, proceeds from the Offering and rental revenue from the
Income Producing Assets purchased using those proceeds. The Company's liquidity
will vary in the future, increasing to the extent cash flows from operations
exceed expenses, and decreasing as interest payments are made to the Unitholders
and to the extent expenses exceed cash flows from leases.
The Company's primary use of its operating cash flow is interest payments
to its Unitholders. Excess cash flow, after payment of interest and operating
expenses is held for investment in additional Income Producing Assets. Since the
Company has acquired Income Producing Assets which are subject to triple net
leases (the lessee pays operating and maintenance expenses, insurance and
taxes), the Company does not anticipate that it will incur significant operating
expenses in connection with ownership of its Income Producing Assets as long as
they remain on lease.
The Company currently has available adequate reserves to meet its immediate
cash requirements. The leases for the Company's aircraft expire at varying times
between November 1998 and November 2001. The lessee for S/N 13 has provided
notice to terminate the lease on November 30, 1998 and, therefore management is
negotiating with the sub-lessee, an Australian carrier, regarding its continued
use of S/N 13. Management believes that, even if the sub-lessee does not
continue to lease S/N 13, the Company will continue to have sufficient cash to
meet its immediate requirements.
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 nine months 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 ($116,960) or ($0.14) per share and
($212,670) or ($0.34) per share for the nine months ended September 30, 1998 and
1997, respectively and ($32,660) or ($0.04) and ($19,670) or ($0.03) per share
for the three months ended September 30, 1998 and 1997, respectively.
1998 versus 1997
Rental income for the nine month period of 1998 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 the
first nine months of 1998 as a result of the additional proceeds raised.
Factors that May Affect Future Results
Year 2000 Considerations. Management of the Company has directed its
information technology ("IT") manager to require any software or hardware
purchased for use by the Company to have a warranty of Year 2000 compliance. It
has also directed its IT manager to study any systems that may require Year 2000
remediation. The IT manager has determined that, because the Company's IT system
is based on a "MacOS" system, the Company's internal technology systems are
ready for Year 2000, and there should not be any material costs associated with
such remediation. Furthermore, the phone and internet systems have been
warranted by their vendors for Year 2000 compliance. The Company's internal and
administrative operations are not highly dependent on any other advanced
technology system, and, consequently, management believes that the Company's
exposure to loss as a result of Year 2000 issues in its internal and
administrative operations is not significant.
Management believes that the electronic systems used in the equipment
leased by the Company to lessees will not be materially affected by the Year
2000 and that any remediation of the technology systems embedded in the aircraft
that it leases will not be a material expense to the Company; however, a formal
study has not yet been undertaken of the aircraft equipment on lease. The
Company will be consulting with all the manufacturers of its leased equipment to
confirm Year 2000 compliance. Since the Company's leases generally place all
maintenance and repair obligations on the lessees, to the extent that the
aircraft are on lease when the Year 2000 problem is identified, it would
generally be the lessee's and not the Company's responsibility to remediate any
Year 2000 problem with the leased aircraft
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.
The Company's essential functions are not dependent upon any key third
party vendors or service providers related to the leasing or finance business,
and consequently, the interruption of goods and services from any such
industry-specific third party vendor or service provider to the Company is not
likely to cause a material loss to the Company. Of course, the Company' ordinary
business operation is dependent upon vendors that provide basic services to
businesses generally, such as utility companies, phone and long distance
companies, courier services, banking institutions. The state of Year 2000
readiness of these third parties cannot be assessed by the Company; however,
management believes that a temporary interrruption in services to the Company by
these types of service providers caused by Year 2000 problems would not cause
material losses to the Company. An extended loss of these services, however,
could adversely affect the Company's business and financial performance. The
Company has not yet made any contingency plans for the extended loss of these
basic services.
Part II. Other Information
Item 1. Legal Proceedings
No disclosure required.
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
1. Exhibit 27. Financial Data Schedule
2. 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
November 5, 1998 By:/s/ Neal D. Crispin
- ----------------- ---------------------------------------
Date Neal D. Crispin, President and Chairman
of the Board of Directors of the
Registrant, Chief Financial Officer