-----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, DTlppcJkNHEZq+8QEpe2n1phdMYBWy2Z/541MNy+IOBAlOnT2i6KJqCPLv1FO7R2 ZoFCWgvc7LXPUmOSW8X/hA== 0000930832-03-000012.txt : 20031114 0000930832-03-000012.hdr.sgml : 20031114 20031114112451 ACCESSION NUMBER: 0000930832-03-000012 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 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: 031001396 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 jfiii3q10qsb.txt JETFLEET III 3RD QUARTER 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 September 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 November 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 November 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 September 30, 2003 Unaudited ASSETS Current assets: Cash $ 2,193,930 Deposits 3,018,090 Accounts receivable 110,940 ------------- Total current assets 5,322,960 Aircraft and aircraft engines under operating leases, net of accumulated depreciation of $498,130 4,792,430 Debt issue costs, net of accumulated amortization of $1,642,400 19,050 Deferred rent receivable 11,090 Prepaid expenses 16,660 ------------- Total assets $ 10,162,190 ============= LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable $ 27,950 Interest payable 152,120 Prepaid rents 106,280 Security deposits 369,980 Maintenance deposits 2,730,140 Medium-term secured bonds 11,076,350 ------------- Total liabilities 14,462,820 ------------- 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 (6,777,280) ------------- Total shareholders' deficit (4,300,630) ------------- Total liabilities and shareholders' deficit $ 10,162,190 ============= The accompanying notes are an integral part of these statements. JETFLEET III Statements of Operations
For the Nine Months Ended For the Three Months Ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ---- Unaudited Unaudited Revenues: Rent income $ 1,154,210 $ 1,679,270 $ 447,240 $ 565,660 Other income 26,160 41,140 8,290 18,010 ------------- ------------- ------------- ------------- 1,180,370 1,720,410 455,530 583,670 ------------- ------------- ------------- ------------- Expenses: Depreciation 524,470 523,130 175,720 174,380 Amortization 171,470 171,470 57,160 57,160 Provision for impairment in value of aircraft 5,505,000 - 5,505,000 - Interest 684,520 684,520 228,170 228,170 Maintenance 75,240 8,780 25,230 6,980 Insurance 126,030 16,150 21,150 4,890 Professional fees and general and administrative 34,600 21,540 19,410 6,590 Management fees 146,600 146,600 48,860 48,860 ------------- ------------- ------------- ------------- 7,267,930 1,572,190 6,080,700 527,030 ------------- ------------- ------------- ------------- (Loss)/income before taxes (6,087,560) 148,220 (5,625,170) 56,640 Tax provision 238,380 56,900 395,250 19,880 ------------- ------------- ------------- ------------- Net (loss)/income $ (6,325,940) $ 91,320 $ (6,020,420) $ 36,760 ============= ============= ============= ============= Weighted average common shares outstanding 815,200 815,200 815,200 815,200 ============= ============= ============= ============= Basic (loss)/income per common share $ (7.76) $ 0.11 $ (7.39) $ 0.05 ============= ============= ============= =============
The accompanying notes are an integral part of these statements. JETFLEET III Statements of Cash Flows
For the Nine Months Ended September 30, 2003 2002 ---- ---- Unaudited Net cash provided by operating activities $ 151,780 $ 590,640 -------------- ------------- 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 activity (23,680) 197,000 -------------- ------------- Net increase in cash 128,100 787,640 Cash, beginning of period 2,065,830 1,045,450 -------------- ------------- Cash, end of period $ 2,193,930 $ 1,833,090 ============== ============= Supplemental disclosures of cash flow information: Cash paid during the period for: 2003 2002 ---- ---- Interest, net of amount capitalized $ 684,520 $ 684,520 Income taxes - 4,430
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 has acted as manager for 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 September 30, 2003, the Company maintained $4,909,340 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 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. For those assets on which an impairment is realized, accumulated depreciation and impairment loss are netted against the original cost basis and a new cost basis for such assets is then listed on the balance sheet. As discussed in Notes 2 and 3, the Company wrote down four of its assets in September 2003. 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 has been 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. 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 Company has no material interest in any variable interest entity. 2. Aircraft and Aircraft Engines Under Operating Leases 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 nine 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. The Customer has indicated that it will return the aircraft at the expiration of the initial six month lease. 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. Although the Company had signed a term sheet for the re-lease of this aircraft, during the third quarter, the potential lessee decided not to take delivery of the aircraft. The Company is seeking re-lease or sale possibilities for S/N 24. In preparation for the sale of its aircraft prior to the maturity date of the Bonds on April 30, 2004, the Company has obtained an appraisal of its aircraft portfolio. Based on the projected net sales values for the Company's aircraft, in September 2003, the Company recorded a provision for impairment in value for S/N 13, S/N 106, S/N 696 and S/N 24, totaling $5,505,000. The Company has begun seeking buyers for its aircraft and intends to complete sales transactions for all its aircraft prior to the maturity date of the Bonds. JETFLEET III Notes to Financial Statements Unaudited 2. Aircraft and Aircraft Engines Under Operating Leases (continued) As of September 30, 2003, minimum future lease rent payments receivable under noncancelable leases were as follows: Year Amount 2003 $ 433,750 2004 1,025,000 2005 157,500 ------------- $ 1,616,250 ============= 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 April 30, 2004. 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 September 30, 2003, the Company had approximately $2,194,000 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 discussed in Note 2, the Company has obtained an appraisal of its assets and recorded a provision for impairment in value for four of its aircraft. The Company has also begun seeking buyers for its aircraft. The proceeds of such sales would be used to repay all or part of the outstanding indebtedness of the Bonds, depending on the sales proceeds obtained. It is likely, however, that the total amount of sales proceeds received will not be sufficient to repay the entire amount of the Bonds. JETFLEET III Notes to Financial Statements Unaudited 4. Income Taxes The items comprising income tax expense are as follows:
For the Nine Months Ended September 30, 2003 2002 ---- ---- Current tax (benefit)/provision Federal $ - $ - State (3,920) 4,850 ------------- -------------- Current (benefit)/provision (3,920) 4,850 ------------- -------------- Deferred tax (benefit)/provision Federal (2,068,980) 49,380 State (410) 2,670 ------------- -------------- Deferred tax (benefit)/provision (2,069,390) 52,050 Valuation allowance 2,311,690 - ------------- -------------- Total provision for income taxes $ 238,380 $ 56,900 ============= ============== 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 Nine Months Ended September 30, 2003 2002 ---- ---- Income tax (benefit)/expense at statutory federal income tax rate $ (2,069,770) $ 50,390 State tax (benefit)/expense net of federal benefit (4,320) 890 Tax refunds (4,720) - Tax rate differences 5,500 5,620 Valuation allowance 2,311,690 - ------------- -------------- Total (benefit)/provision for income taxes $ 238,380 $ 56,900 ============= ============== Temporary differences and carryforwards which gave rise to a significant portion of deferred tax assets and liabilities as of September 30, 2003 are as follows: Deferred tax assets: Amortization of offering costs $ 9,720 Depreciation and impairment on aircraft 1,187,930 Maintenance deposits 930,180 Net operating loss 154,900 Prepaid rent and other 36,480 ------------- Subtotal 2,319,210 Valuation allowance (2,311,680) ------------- Net deferred tax assets 7,530 Deferred tax liability - Unearned income (7,530) ------------- Net deferred tax assets $ - =============
JETFLEET III Notes to Financial Statements Unaudited 4. Income Taxes (continued) The Company does not expect to generate adequate future taxable income to realize the benefits of the remaining deferred tax assets on the balance sheet. Therefore, the Company has recognized a valuation allowance equal to the net deferred tax asset. The Company's net operating losses of $452,500 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 nine months of 2003 and 2002, the Company accrued a total of $146,600 and $146,600, 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 nine 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 nine 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 the Company's intention to sell all of the aircraft prior to the maturity date of the Bonds; the likelihood that the sales proceeds for the aircraft will not be sufficient to fully repay the Bonds; 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 for off-lease aircraft; the Company's belief that a sale of assets at this time is the only feasible means to raise cash to apply toward the Bond obligations; the Company's intention to complete aircraft portfolio sales prior to the Bond maturity date; management's intention to seek sales opportunities for the assets at or above the appraised amount; the anticipation that sales proceeds are likely to be insufficient to repay the entire amount of the Bonds; are forward looking statements. While the Company believes that such statements are accurate, actual results may differ due to the short-term market for used turboprop aircraft; the condition and marketability of the aircraft in lessee's possession at the time of sale of such aircraft; the costs for repair and maintenance of returned aircraft, market conditions in the air travel industry; lack of unanticipated defaults or terminations by lessees; and future trends and results that cannot be predicted with certainty. There can be no assurance that the Company will actually be able to sell all of its aircraft assets prior to the maturity date of the Bonds. 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 ($6,325,940) or ($7.76) per share for the nine months ended September 30, 2003 versus net income of $91,320 or $0.11 per share for the same period in 2002. The Company recorded net loss of ($6,020,420) or ($7.39) per share for the three months ended September 30, 2003 versus net income of $36,760 or $0.05 per share for the same period in 2002. Rent income was approximately $525,000 and $118,000 lower in the nine months and three months, respectively, ended September 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 nine month and three month periods of 2002 by approximately $15,000 and $10,000, respectively, due to lower cash balances and lower prevailing interest rates. Depreciation, amortization, interest and management fees were approximately the same in both years. Although the Company obtains periodic appraisals for compliance with SFAS No. 144, it has recently obtained a liquidation value appraisal in connection with management's plan to sell the Company's aircraft portfolio. Based on that appraisal and the projected net sales values for the Company's aircraft, in September 2003, the Company recorded a provision for impairment in value for S/N 13, S/N 106, S/N 696 and S/N 24, totaling $5,505,000. Given the current depressed market for aircraft such as that owned by the Company, the Company has extended the maturity date of the Bonds to April 30, 2004, in an effort to increase the likelihood of locating buyers for the aircraft and to maximize proceeds realizable from the aircraft sale applicable toward repayment on the Bonds. See "Outlook," below. Maintenance expense was approximately $66,000 and $18,000 higher in the nine months and three months ended September 30, 2003, respectively, versus the same periods in 2002 primarily as a result of work performed on two aircraft to prepare them for delivery to a new customer. Insurance expense was approximately $110,000 and $16,000 higher in the nine months and three months ended September 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 $13,000 higher in both the nine month and three month periods of 2003 due to legal fees incurred in connection with the potential re-lease of one of the Company's aircraft. These fees, which would have been amortized over the lease term, were expensed in September 2003 as a result of the lessee's decision not to take delivery of the aircraft. 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. Although the Company currently has available adequate reserves to meet any cash requirements for off-lease aircraft, the Company does not expect that sales proceeds, when combined with the Company's cash holdings, will be sufficient to repay the entire amount of the Bonds. See "Outlook," below. 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 April 30, 2004. The Company's decrease in cash flow from operations was due primarily to decreased rent income, increased insurance expense and the effect of the change in deposits. The effect of these changes was partially offset by the effect of the change in accounts receivable, deferred taxes and accounts payable. 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 As provided for in the trust indenture, the Company has elected to extend the maturity date of the Bonds to April 30, 2004. Although the Company had previously anticipated obtaining bank financing secured by the Company's portfolio, management was unable to find suitable financing sources for the aircraft. Therefore, management believes that a sale of the aircraft portfolio is the only feasible means to raise cash to apply toward the Bond obligations. In connection therewith, management has begun soliciting buyers for the aircraft and has obtained a liquidation value appraisal for each of the aircraft assets. Although the Company intends to complete sales transactions for all its aircraft prior to the maturity date of the Bonds in April 2004, given the current market for aircraft such as those owned by the Company, there is no assurance that the Company will locate willing buyers, or if located, that the buyers will pay a price for the asset at least equal to the appraised value. As a result of the aircraft appraisals received by management, in September 2003, the Company recorded a provision for impairment in value, totaling $5,505,000, for four of its aircraft. The Bond indebtedness exceeds the aggregate appraised value of the aircraft by approximately $5,842,000. Though management will seek sales opportunities for all of its assets at or above the appraised amounts, it is likely, that the total amount of sales proceeds received, when combined with the Company's cash holdings of approximately $2,194,000, will not be sufficient to repay the entire amount of the Bonds. Factors that May Affect Future Results Further Deterioration of the Air Travel Industry. The Company's ability to make a substantial repayment on the Bonds at their maturity date will depend upon its ability to locate buyers and consummate sales transactions by that date. Based on the most recent appraisals, it appears likely that the Company will be unable to repay the entire Bond indebtedness when it comes due on April 30, 2003. The aircraft leasing industry is currently on the downside of a business cycle, and this has resulted in depressed sales prices for assets such as the Company's aircraft. See "Leasing Risks," below. It does not appear that the industry will recover significantly prior to maturity of the Bonds. Moreover, any further weakening of the industry could cause the proceeds realized from the sale of aircraft to be even less than suggested by the Company's recent appraisal. Unexpected Expenses. The Company anticipates that nearly all of the available cash it currently holds will be combined with sales 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 decrease in funds available to repay the Bondholder indebtedness at maturity. See, also "Casualties; Insurance Coverage," below. Ownership Risks. As the Bond maturity date is within six months, factors that could affect the short term value of the aircraft are crucial to the ability of the Company to maximize its repayment to the Bondholders. As discussed above, industry conditions will be an important determining factor in the potential proceeds realizable from their sale 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. Inability to Sell Assets. The Company intends to sell all of its aircraft before the April 30, 2004 Bond maturity date. There is no assurance that the Company will locate a willing buyer, or if one is located, that the buyer will pay a price for the asset at least equal to the appraised value. ,If any aircraft remain unsold at the Bond Maturity Date, it is likely that after the required cure period passes, the Indenture Trustee will declare a default on the Bond indebtedness. One remedy available to the Trustee is to repossess the unsold aircraft unsold and engage a third party agent to liquidate the remaining JetFleet III assets. This is likely to result in higher costs than would have been the case had the Company been able to consummate the sale of the aircraft portfolio without the involvement of the Trustee. 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. 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. In particular, JMC is management company for AeroCentury Corp ("ACY"), which specializes in owning and leasing the same type of regional aircraft as the Company. In fact, ACY and the Company have two common lessees, and in any sale of an asset, ACY may be a potential purchaser. The Company is mindful of the inherent conflict of interests in such a sale and intends to take steps, such as the hiring of third parties to provide objective information regarding aircraft, sale pricing and potential customers to help ensure that any sale to ACY is conducted as an arms-length, third party market transaction. JMC was also management company for another aircraft portfolio owner, AeroCentury IV, Inc. ("AeroCentury IV) AeroCentury IV is in the final stages of liquidation or wrap-up phase. In the first quarter of 2002, AeroCentury IV defaulted on certain obligations to noteholders. In June 2002, the indenture trustee for AeroCentury IV's noteholders repossessed AeroCentury IV's assets and took over management of AeroCentury IV's remaining 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. 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. As discussed above, in "Further Deterioration of the Air Travel Industry" the aircraft industry is currently in the midst of a severe downturn, and it does not appear likely that a recovery in aircraft prices will occur prior to the Bond maturity date. Demand for 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 prices 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 and remains 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 further in value. . 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. 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: November 14, 2003 By: /s/ Neal D. Crispin ------------------------------- Neal D. Crispin Title: President, Chief Financial Officer EX-31 2 ndcex311.txt NDC EXHIBIT 31.1 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: November 14, 2003 /s/ Neal D. Crispin ------------------------------------ Neal D. Crispin President, Chief Financial Officer EX-32 3 ndc321.txt NDC EXHIBIT 32.1 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: November 14, 2003 /s/ Neal D. Crispin -------------------------- Neal D. Crispin President, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----