-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T7PDnV7+5M1/7Kqc4afOD9kJIePPCDrVbAxTdziZO8guy9HYWu8J60PyPJZQ+H5E AnJBiO34yTTmh3iTpZ0iwg== 0000930832-03-000008.txt : 20030814 0000930832-03-000008.hdr.sgml : 20030814 20030814120718 ACCESSION NUMBER: 0000930832-03-000008 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JETFLEET III CENTRAL INDEX KEY: 0000930832 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 943208983 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 033-84336-LA FILM NUMBER: 03844783 BUSINESS ADDRESS: STREET 1: 1440 CHAPIN AVE STREET 2: STE 310 CITY: BURLINGAME STATE: CA ZIP: 94010 BUSINESS PHONE: 4156963900 MAIL ADDRESS: STREET 1: 1440 CHAPIN AVENUE STREET 2: SUITE 310 CITY: BURLINGAME STATE: CA ZIP: 94010 10QSB 1 jfiii2q0310qsb.txt JFIII 2ND QTR 2003 10-QSB UNITED STATES 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 June 30, 2003 [ ] 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 (Exact 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 August 14, 2003 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 August 14, 2003 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 ----- ----- JETFLEET III Balance Sheet June 30, 2003 Unaudited ASSETS Current assets: Cash $ 2,201,660 Deposits 2,862,060 Accounts receivable 112,940 ------------- Total current assets 5,176,660 Aircraft and aircraft engines under operating leases, net of accumulated depreciation of $3,173,620 10,473,140 Debt issue costs, net of accumulated amortization of $1,585,250 76,210 Deferred rent receivable 17,940 Deferred taxes 395,240 Prepaid expenses 8,470 ------------- Total assets $ 16,147,660 ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 81,990 Interest payable 152,120 Prepaid rents 171,280 Security deposits 369,980 Maintenance deposits 2,576,150 Medium-term secured bonds 11,076,350 ------------- Total liabilities 14,427,870 ------------- 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 (756,860) ------------- Total shareholders' equity 1,719,790 ------------- Total liabilities and shareholders' equity $ 16,147,660 ============= The accompanying notes are an integral part of these statements. JETFLEET III Statements of Operations
For the Six Months Ended June 30, For the Three Months Ended June 30, 2003 2002 2003 2002 ---- ---- ---- ---- Unaudited Unaudited Revenues: Rent income $ 706,970 $ 1,113,610 $ 365,990 $ 542,500 Other income 17,860 23,120 9,430 13,440 ------------- ------------- ------------- ------------- 724,830 1,136,730 375,420 555,940 ------------- ------------- ------------- ------------- Expenses: Depreciation 348,750 348,750 174,380 174,380 Amortization 114,310 114,310 57,150 57,150 Interest 456,350 456,350 228,170 228,170 Maintenance 50,010 1,800 49,250 1,800 Insurance 104,880 11,250 44,820 10,170 Professional fees and general and administrative 15,190 14,970 5,930 7,010 Management fees 97,730 97,730 48,870 48,870 ------------- ------------- ------------- ------------- 1,187,220 1,045,160 608,570 527,550 ------------- ------------- ------------- ------------- (Loss)/income before taxes (462,390) 91,570 (233,150) 28,390 Tax (benefit)/provision (156,870) 37,010 (79,480) 10,550 ------------- ------------- ------------- ------------- Net (loss)/income $ (305,520) $ 54,560 $ (153,670) $ 17,840 ============= ============= ============= ============= Weighted average common shares outstanding 815,200 815,200 815,200 815,200 ============= ============= ============= ============= Basic (loss)/income per common share $ (0.37) $ 0.07 $ (0.19) $ 0.02 ============= ============= ============= =============
The accompanying notes are an integral part of these statements. JETFLEET III Statements of Cash Flows
For the Six Months Ended June 30, 2003 2002 ---- ---- Unaudited Net cash provided by operating activities $ 159,510 $ 291,110 -------------- ------------- Investing activities: Purchase of interests in aircraft (23,680) - Proceeds from sale of aircraft and aircraft engines - 197,000 -------------- ------------- Net cash (used)/provided by investing activities (23,680) 197,000 -------------- ------------- Net increase in cash 135,830 488,110 Cash, beginning of period 2,065,830 1,045,450 -------------- ------------- Cash, end of period $ 2,201,660 $ 1,533,560 ============== ============= Supplemental disclosures of cash flow information: Cash paid during the period for: 2003 2002 ---- ---- Interest, net of amount capitalized $ 456,350 $ 456,350 Income taxes - 2,950
The accompanying notes are an integral part of these statements. JETFLEET III Notes to Financial Statements Unaudited 1. Summary of Significant Accounting Policies Basis of Presentation JetFleet III (the "Company") was incorporated in the state of California in August 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"). In accordance with the trust indenture governing the Bonds, the maturity date of the Bonds may be extended by up to six months at the Company's sole discretion. In August 2003, the Company sent a notice to the indenture trustee extending the maturity date of the Bonds to April 30, 2004. All of the Company's outstanding common stock is owned by JetFleet Holding Corp. ("JHC"), a California corporation formed in January 1994. JHC's wholly owned subsidiary, JetFleet Management Corp. ("JMC") has a management agreement with the Company. 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. Although the Company believes that it has included all adjustments necessary for a fair presentation of the interim periods presented and that the disclosures are adequate to make the information presented not misleading, the Company suggests that these financial statements be read in conjunction with the financial statements and related notes included in the Company's annual report on Form 10-KSB for the fiscal year ended December 31, 2002. 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 June 30, 2003, the Company maintained $4,401,050 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 includes 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. Impairment of Long-lived Assets In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. Periodically, the Company reviews its long-lived assets for impairment based on third party valuations. In the event such valuations are less than the recorded value of the assets, the assets are written down to their estimated realizable value. JETFLEET III Notes to Financial Statements Unaudited 1. Summary of Significant Accounting Policies (continued) 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. 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. The most significant estimates with regards to these financial statements are the residual values of the aircraft, the useful lives of the aircraft, the estimated amount and timing of cash flow associated with each aircraft that are used to evaluate impairment, if any, and accrued maintenance costs in excess of amounts received from lessees. Maintenance Deposits Maintenance costs under the Company's triple net leases are generally the responsibility of the lessees. The Company periodically reviews maintenance deposits for adequacy in light of the number of hours flown, airworthiness directives issued by the manufacturer or government authority, and the return conditions specified in the lease. As a result of such review, when it is probable that the Company has incurred costs for maintenance in excess of amounts received from lessees, the Company accrues its share of costs for work to be performed as a result of hours flown. JETFLEET III Notes to Financial Statements Unaudited 1. Summary of Significant Accounting Policies (continued) Recent Accounting Pronouncements In January 2003, the FASB issued interpretation FIN No. 46, Consolidation of Variable Interest Entities ("FIN No. 46"). FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is the primary beneficiary of the entity. A company is a primary beneficiary if it is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN No. 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. At June 30, 2003, the Company is a beneficiary of the services of one of its affiliates, the details of which are disclosed in Note 5. The Company is currently evaluating the classification of this entity under FIN No. 46. 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 deHavilland DHC-8-102, serial number 106 ("S/N 106"), three deHavilland DHC-6-300 aircraft ("S/Ns 640, 751 and 696") and a Saab 340A, serial number 24 ("S/N 24"). The Company did not acquire any assets during the first six months of 2003 because, in accordance with the trust indenture, the Company's excess cash flow is being held for deposit to a sinking fund account. In June 2003, S/N 13 was re-leased to a new customer, a U.S. company which is using the aircraft in Asia, under a six month lease, with an option to extend for an additional six months. S/N 106 is subject to a lease, expiring in November 2004, with a Caribbean regional carrier. S/N 640 and S/N 751 are leased to a regional carrier in the Maldives for terms expiring in August 2005 and October 2004, respectively. In May 2003, the lease for S/N 696 was extended by the carrier in the United Kingdom through April 2004. S/N 24 was re-delivered to the Company in November 2002 after expiration of the lease. The Company has signed a term sheet for the re-lease of this aircraft to a Puerto Rican carrier. Delivery is expected to occur in the third quarter of 2003. As of June 30, 2003, minimum future lease rent payments receivable under noncancelable leases were as follows: Year Amount ---- ------ 2003 $ 883,750 2004 1,015,000 2005 157,500 ------------- $ 2,056,250 ============= JETFLEET III Notes to Financial Statements Unaudited 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 at the measurement dates, the Bonds have borne interest at the rate of 8.24% per annum for the periods November 1, 1998 through October 31, 2002. The rate will remain at 8.24% through October 31, 2003. The carrying amount of the Bonds approximates fair value. The revenue generated from the Income Producing Assets is used to fund interest payments on the Bonds and, since November 2001, deposits to a sinking fund established to facilitate repayment of principal on the Bonds on their maturity. As of June 30, 2003, the Company had approximately $2,202,000 available for deposit to the sinking fund, interest payments on the Notes and operational expenses. As provided for in the trust indenture, the Company has elected to extend the maturity date of the Bonds to April 30, 2004. As the maturity date of the Bonds nears, it is likely that the Company will seek to refinance the Bonds using bank financing. The proceeds of such financing would be used to repay all or part of the outstanding indebtedness of the Bonds, depending on the appraised value of the aircraft and the amount of the financing that the Company is able to obtain. 4. Income Taxes The items comprising income tax expense are as follows:
For the Six Months Ended June 30, 2003 2002 ---- ---- Current tax (benefit)/provision Federal $ - $ - State (3,920) 3,750 ------------- -------------- Current (benefit)/provision (3,920) 3,750 ------------- -------------- Deferred tax (benefit)/provision Federal (156,430) 31,140 State 3,480 2,120 ------------- -------------- Deferred tax (benefit)/provision (152,950) 33,260 ------------- -------------- Total (benefit)/provision for income taxes $ (156,870) $ 37,010 ============= ============== 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: For the Six Months Ended June 30, 2003 2002 ---- ---- Income tax (benefit)/expense at statutory federal income tax rate $ (157,210) $ 31,140 State tax (benefit)/expense net of federal benefit (370) 800 Tax refunds (4,720) - Tax rate differences 5,430 5,070 ------------- -------------- Total (benefit)/provision for income taxes $ (156,870) $ 37,010 ============= ==============
JETFLEET III Notes to Financial Statements Unaudited 4. Income Taxes (continued) Temporary differences and carryforwards which gave rise to a significant portion of deferred tax assets and liabilities as of June 30, 2003 are as follows: Deferred tax assets: Net operating loss $ 139,150 Maintenance deposits 877,980 Prepaid rent and other 65,100 ------------- Subtotal 1,082,230 Valuation allowance - ------------- Net deferred tax assets 1,082,230 Deferred tax liability - Depreciation of aircraft (678,510) Other (8,480) ------------- $ 395,240 ============= The Company expects to generate adequate future taxable income to realize the benefits of the remaining deferred tax assets on the balance sheet. The Company's net operating losses of $406,200 may be carried forward for twenty years and begin to expire in 2021. 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 six months of 2003 and 2002, the Company accrued a total of $97,730 and $97,730, respectively, in management fees. 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 six months of 2003 or 2002, it did not pay any acquisition fees or Chargeable Acquisitions Expenses to JMC. The Company paid remarketing fees of $3,000 to JMC in the first six months of 2002 in connection with the sale of an aircraft. No such fees were paid in 2003. 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 2003 or 2002. 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 delivery of S/N 24 in the third quarter of 2003; the refinancing of the Bonds using bank financing; the generation of future taxable income sufficient to realize the benefits of the remaining deferred tax asset on the balance sheet; the incurrence of significant operating expenses in connection with its ownership of Income Producing Assets on lease; the sufficiency of reserves to meet immediate cash requirements; the Company's belief that a sale of assets at this time would not yield maximum value for the portfolio; the belief that the Company will be able to obtain sufficient financing to repay the Bondholder indebtedness; the anticipation of a recovery in aircraft prices creating additional value for the Company's shareholders; the belief that the current market value of the aircraft are at a level that will enable it to refinance the entire Bond indebtedness; are forward looking statements. While the Company believes that such statements are accurate, actual results may differ due to availability of refinancing debt on terms acceptable to the Company, market conditions in the air travel industry and demand for turboprop aircraft; lack of unanticipated defaults or terminations by lessees; the depth and length of the current aircraft industry downturn, and future trends and results that cannot be predicted with certainty. There can be no assurance that the Company will actually obtain refinancing debt sufficient to enable full repayment of the Bonds by their maturity date. 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. Critical Accounting Policies In response to the Securities and Exchange Commission's Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies", the Company has identified the most critical accounting policies upon which its financial status depends. It determined the critical policies by considering those that involve the most complex or subjective decisions or assessments. The Company identified these policies to be those related to lease rental revenue recognition, depreciation policies, valuation of aircraft and maintenance deposits. Revenue Recognition Revenue from leasing of aircraft assets is recognized as operating lease revenue on a straight-line basis over the terms of the applicable lease agreements. Depreciation Policies The Company's interests in aircraft are recorded at cost, which includes acquisition costs. Depreciation is computed using the straight-line method over each aircraft's estimated economic life to its estimated residual value. Valuation of Aircraft In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. Periodically, the Company reviews its long-lived assets for impairment based on third party valuations. In the event such valuations are less than the recorded value of the assets, the assets are written down to their estimated realizable value. Maintenance Deposits Maintenance costs under the Company's triple net leases are generally the responsibility of the lessees. The Company periodically reviews maintenance deposits for adequacy in light of the number of hours flown, airworthiness directives issued by the manufacturer or government authority, and the return conditions specified in the lease. As a result of such review, when it is probable that the Company has incurred costs for maintenance in excess of amounts received from lessees, the Company accrues its share of costs for work to be performed as a result of hours flown. Results of Operations The Company recorded net loss of ($305,520) or ($0.37) per share for the six months ended June 30, 2003 versus net income of $54,560 or $0.07 per share for the same period in 2002. The Company recorded net loss of ($153,670) or ($0.19) per share for the three months ended June 30, 2003 versus net income of $17,840 or $0.02 per share for the same period in 2002. Rent income was approximately $407,000 and $177,000 lower in the six months and three months, respectively, ended June 30, 2003 than 2002, primarily because of the loss of rent from aircraft which were returned to the Company in the fourth quarter of 2002 after lease expiration, the effect of which was partially offset by the rent received in 2003 for an aircraft which had been off lease for part of 2002. Other income was lower in the six month and three month periods of 2002 by approximately $5,000 and $4,000, respectively, due to lower cash balances and lower prevailing interest rates. Depreciation, amortization, interest and management fees were the same in both years. Maintenance expense was approximately $48,000 and $47,000 higher in the six months and three months ended June 30, 2003, respectively, versus the same periods in 2002 primarily as a result of work performed on an aircraft to prepare it for delivery to a new customer. Insurance expense was approximately $94,000 and $35,000 higher in the six months and three months ended June 30, 2003, respectively, versus the same periods in 2002 as a result of higher insurance premium costs for coverage of aircraft which were on lease in 2002 (and therefore covered by lessee's insurance) but were off lease in 2003. Professional fees and general and administrative expenses were approximately the same the six month and three month periods of both years. Capital Resources and Liquidity Since Inception, the Company's funds have come primarily in the form of an initial contribution from JHC, proceeds from the Offering and rental income from the Income Producing Assets purchased using those proceeds. The Company's liquidity varies, increasing to the extent cash flows from operations exceed expenses, and decreasing to the extent expenses, including interest payments to the Unitholders, exceed cash flows from leases. The leases for the Company's aircraft expire at varying times through September 2005. The Company's primary use of its operating cash flow is interest payments to its Unitholders. 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 has not and 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. As discussed in Item 1, the interest rate on the Bonds was 12.94% through October 31, 1998 and has been 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 at the measurement dates, the Bonds have borne interest at the rate of 8.24% per annum for the periods November 1, 1998 through October 31, 2002. The Company has determined that the rate will remain at 8.24% through October 31, 2003. The Company's decrease in cash flow from operations was due primarily to a net loss in 2003 versus net income in 2002, and by the effect of the change in deposits and deferred taxes. The effect of these changes was partially offset by the effect of the change in accounts receivable, accounts payable and maintenance deposits. Cash flow provided by investing activities was lower in 2003 versus 2002 because the Company sold no aircraft in 2003 versus one such sale in 2002 and because, in 2003, the Company made equipment purchases of $23,680 for equipment added to aircraft already owned. There were no cash flows from financing activities during 2003 or 2002 because the Offering terminated during June 1997. Outlook The Company has made the strategic decision not to sell assets at this time as a means of funding repayment of the Bonds because it believes that such a sale of the assets would not yield maximum value for the portfolio due to depressed prices for aircraft in the current industry downturn. As provided for in the trust indenture, the Company has elected to extend the maturity date of the Bonds to April 30, 2004. In the coming months prior to the extended maturity date, the Company will be focusing on obtaining bank financing secured by the Company's portfolio, the entire proceeds of which, together with cash from the sinking fund, will be used to repay the Bondholder indebtedness. The Company believes that based on the current value of the aircraft portfolio and loan-to-value ratios on loans negotiated by the management company for other aircraft portfolios, the Company will be able to obtain sufficient financing to repay the Bondholder indebtedness. A critical financing prerequisite will be the on-lease status of the Company's aircraft because, if an asset is not on lease, the aircraft may not be accepted by the lender as collateral for financing. Therefore, the Company will also focus in the coming months on maintaining the Company's assets on lease. The Company currently has one aircraft off lease for which it has a signed term sheet from a lessee for a proposed lease commencing in late September 2003. If, however, the Company has an off-lease asset at the time of the refinancing transaction, the Company may nonetheless need to sell that asset in order to obtain cash needed to timely meet its Bondholder repayment obligations. Even if the bank financing is obtained and the proceeds along with available cash are sufficient to repay the Bonds, the Company anticipates that any refinancing it obtains will be of one year or less, and the Company will need to consider, in the coming year, alternative means to monetize the value of the portfolio and/or provide liquidity for the preferred and common shareholders. Such options may include permanent debt financing, sale of the aircraft portfolio, an orderly sale of individual aircraft over time, or a sale or merger of the Company. The Company anticipates that as the market recovers, aircraft prices will recover to a level more accurately reflecting the true worth of the Company's aircraft portfolio, thereby creating additional value for the Company's preferred and common shareholders. Factors that May Affect Future Results Further Deterioration of the Air Travel Industry. The Company's ability to repay the Bonds at their maturity date will depend upon its ability to refinance the debt obligation and sell any off-lease aircraft at a price sufficient to retire the outstanding Bond principal. The industry is currently on the downside of a business cycle, and it does not appear that the industry will recover significantly prior to maturity of the Bonds. The Company believes that the current market value of its aircraft portfolio is at or near a value that will nonetheless enable it to refinance the entire Bond indebtedness. If, however, the industry weakens further, and there is lower demand for aircraft and lower valuations for aircraft assets, the aggregate market value of the collateral to be leveraged in the refinancing will decrease and may fall below the level necessary to enable the Company to fully repay its Bond indebtedness. Even if values are not significantly affected, a weakening of the aircraft industry may result in the Company being unable to keep all of its aircraft on lease due to lack of renewals, early returns or defaults by existing lessees. Since aircraft off lease at the time of a refinancing transaction are unlikely to be included in the collateral pool for any refinancing debt, the off-lease status of an asset reduces the loan proceeds obtainable by the Company from any refinancing. See "Leasing Risks," below Availability of Debt Financing. The Company's plan for repayment of the Bond indebtedness hinges on its ability to find debt financing collateralized by the Company's aircraft portfolio, in an amount that when combined with available cash is sufficient to repay the Bondholder indebtedness. While the Company's management company has obtained similar suitable financing for similar aircraft portfolios owned by other companies, there is no assurance that such financing will continue to be available, and even if available, on terms that would enable the Company to fund full repayment of the Bondholder indebtedness. If refinancing debt cannot be obtained, the Company may be forced to liquidate the Company's portfolio quickly in order to promptly repay the Bondholder indebtedness. The proceeds of such an expedited sale may not be sufficient to fully repay the entire Bondholder indebtedness. Unexpected Expenses. The Company anticipates that nearly all of the available cash it currently holds will be combined with refinancing proceeds to repay the Bondholder indebtedness. Unanticipated events such as changes in governmental regulations or casualties could create obligations for the Company as lessor or owner of the aircraft and require the Company to immediately use funds in order to comply with such obligations. If there is an unanticipated expense with respect to the Company's operations or any of its aircraft that is not covered by the lessee under its lease or by appropriate insurance, the Company may be required to use cash reserves in order to comply with its lease or other contractual obligations to lessees or other obligations. Any significant unexpected expense may result in a shortfall in the Company's funds needed to fully repay the Bondholder indebtedness at maturity. See, also "Casualties; Insurance Coverage," below. Ownership Risks As the Bond maturity date is approximately nine months from today, factors that could affect the short-to-medium term value of the aircraft are crucial to the ability of the Company to repay the Bond indebtedness. As discussed above, industry conditions will be an important determining factor in the valuation of the aircraft and potential proceeds realizable from their sale or leveraging at Bond maturity. In addition, the condition of the aircraft assets at the time of maturity will also have an effect on their value. Therefore, continued lessee compliance with maintenance obligations and with return conditions if an aircraft is returned, will be a significant factor in what proceeds could be realized from the aircraft assets at the maturity date of the Bonds (either through sale or refinance). 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 carriers. 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 result in a generally higher lease rate on aircraft, but may entail higher risk of default or lessee bankruptcy. Lease Defaults. As discussed above, the on-lease status of the Company's portfolio will be a critical factor in the Company's ability to repay the Bondholder indebtedness at the maturity date. If any of the lessee's of the Company's aircraft default on their lease obligations prior to the Company's closing of the refinancing transaction, this could have a significant adverse impact on the refinancing proceeds obtainable by the Company. Thus, the continued performance of lessees under their leases in the months prior to the maturity date will be a critical condition to the success of the Company's plan for repayment of the Bondholder indebtedness. Reliance on JMC. All management of the Company is performed by JMC pursuant to a management agreement between JMC and the Company. The Company's 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. JMC is also management company for two other aircraft portfolio owners, AeroCentury Corp. and AeroCentury IV, Inc. ("AeroCentury IV") and conflicts may arise as a result of those roles. For instance, AeroCentury Corp. and the Company have common customers, and the management Company's decisions with respect to such shared customers may create a conflict when negotiating with the customer with respect to re-leasing of the respective aircraft owned by the Company and AeroCentury Corp. AeroCentury IV is in the liquidation or wrap-up phase. In the first quarter of 2002, AeroCentury IV defaulted on certain obligations to noteholders. The indenture trustee for AeroCentury IV's noteholders has foreclosed and has taken over management of the remaining two assets. 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 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. Leasing Risks. The Company's successful negotiation of lease extensions, re-leases and sales may be critical to the Company's success, 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 used 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. 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 is 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. Casualties, Insurance Coverage. The Company, as owner of transportation equipment, may be named in a suit claiming damages for injuries or damage to property caused by its assets. As a triple net lessor, the Company is generally protected against such claims, since the lessee would be responsible for, insure against and indemnify the Company for such claims. Further, some protection may be provided by the United States Aviation Act with respect to its aircraft assets. It is, however, 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. Also, although the Company may require a lessee to insure against a risk, there may be certain cases where the loss is not entirely covered by the lessee or its insurance. Though this is a remote possibility, 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. 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. Item 3. Controls and Procedures Quarterly evaluation of the Company's Disclosure Controls and Internal Controls. As of the end of the period covered by this report, the Company evaluated the effectiveness of the design and operation of its "disclosure controls and procedures" ("Disclosure Controls"), and its "internal control over financial reporting" ("Internal Controls"). This evaluation (the "Controls Evaluation") was done under the supervision and with the participation of management, including the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Rules adopted by the SEC require that in this section of the Report the Company present the conclusions of the CEO and the CFO about the effectiveness of our Disclosure Controls and Internal Controls based on and as of the date of the Controls Evaluation. CEO and CFO Certifications. Attached as exhibits to this report are two separate forms of "Certifications" of the CEO and the CFO. The first form of Certification is required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the "Section 302 Certification"). This section of the report which you are currently reading is the information concerning the Controls Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented. Disclosure Controls and Internal Controls. Disclosure Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in the Company's reports filed under the Securities Exchange Act of 1934 (the "Exchange Act"), such as this report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to the Company's management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) the Company's transactions are properly authorized; (2) the Company's assets are safeguarded against unauthorized or improper use; and (3) the Company's transactions are properly recorded and reported, all to permit the preparation of the Company's financial statements in conformity with generally accepted accounting principles. Limitations on the Effectiveness of Controls. The Company's management, including the CEO and CFO, does not expect that its Disclosure Controls or its Internal Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Scope of the Controls Evaluation. The CEO/CFO evaluation of the Company's Disclosure Controls and the Company's Internal Controls included a review of the controls objectives and design, the controls implementation by the company and the effect of the controls on the information generated for use in this report. In the course of the Controls Evaluation, we sought to identify data errors, controls problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. This type of evaluation will be done on a quarterly basis so that the conclusions concerning controls effectiveness can be reported in the Company's quarterly reports on Form 10-QSB and annual report on Form 10-KSB. The Company's Internal Controls are also evaluated on an ongoing basis by other personnel in the Company's finance organization and by the Company's independent auditors in connection with their audit and review activities. The overall goals of these various evaluation activities are to monitor the Company's Disclosure Controls and the Company's Internal Controls and to make modifications as necessary; the Company's intent in this regard is that the Disclosure Controls and the Internal Controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant. Among other matters, the Company sought in its evaluation to determine whether there were any "significant deficiencies" or "material weaknesses" in the Company's Internal Controls, or whether the Company had identified any acts of fraud involving personnel who have a significant role in the Company's Internal Controls. This information was important both for the Controls Evaluation generally and because item 5 in the Section 302 Certifications of the CEO and CFO require that the CEO and CFO disclose that information to the Audit Committee of the Company's Board and to the Company's independent auditors and to report on related matters in this section of the Report. In the professional auditing literature, "significant deficiencies" are referred to as "reportable conditions"; these are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A "material weakness" is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions. The Company also sought to deal with other controls matters in the Controls Evaluation, and in each case if a problem was identified, the Company considered what revision, improvement and/or correction to make in accordance with our on-going procedures. In accordance with SEC requirements, the CEO and CFO note that, there has been no significant change in Internal Controls that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our Internal Controls. Conclusions. Based upon the Controls Evaluation, the Company's CEO and CFO have concluded that, subject to the limitations noted above, the Company's Disclosure Controls are effective to ensure that material information relating to the Company and its consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when periodic reports are being prepared, and that the Company's Internal Controls are effective to provide reasonable assurance that the Company's financial statements are fairly presented in conformity with generally accepted accounting principles. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit Number Description 31.1 Certification of Neal D. Crispin, President, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification of Neal D. Crispin, President, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * This certificate is furnished to, but shall not be deemed to be filed with, the Securities and Exchange Commission. (b) Reports on Form 8-K. None SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. JETFLEET III Date: August 14, 2003 By: /s/ Neal D. Crispin ------------------------------- Neal D. Crispin Title: President, Chief Financial Officer EX-32 2 ex3212q.txt NDC SARBANES Exhibit 32.1 JETFLEET III Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with this quarterly report of JetFleet III (the "Company") on Form 10-QSB for the period ended June 30, 2003 (the "Report"), I, Neal D. Crispin, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to JetFleet III and will be retained by JetFleet III and furnished to the Securities and Exchange Commission or its staff upon request. This Certification has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission. Date: August 14, 2003 /s/ Neal D. Crispin ----------------------------------- Neal D. Crispin President, Chief Financial Officer EX-31 3 ex3112q.txt NDC CERTIFICATION Exhibit 31.1 CERTIFICATION I, Neal D. Crispin, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of JetFleet III; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ Neal D. Crispin -------------------------- Neal D. Crispin President, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----