-----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, EbtGXDJhd++8EQj8693ypxhke4smDrApqZKJL6zqwIHwSroSeeLoPC4uMp3nl1M8 LQDWgsW6onWEEUfkVgz7ag== 0000930832-04-000008.txt : 20040816 0000930832-04-000008.hdr.sgml : 20040816 20040816154448 ACCESSION NUMBER: 0000930832-04-000008 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040816 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: 04978571 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 jf32q04.txt 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, 2004 [ ] 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 16, 2004 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 16, 2004 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 ---- ----- PART I Financial Information 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 belief that a sale of the aircraft is the only feasible means to raise cash to repay the entire Bond indebtedness; 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 anticipation that sales proceeds are likely to be insufficient to repay the entire amount of the Bonds and that, therefore, there will be no distribution with respect to the Preferred Stock; and that the Company does not intend to seek additional capital; 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; and future trends and results that cannot be predicted with certainty. 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. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward-looking statement or risk factor. You should consult the risk factors listed from time to time in the Company's filings with the Securities and Exchange Commission. JETFLEET III Balance Sheet June 30, 2004 Unaudited ASSETS Cash $ $ 200 Taxes receivable 300 ------------- Total assets $ 500 ============= LIABILITIES AND SHAREHOLDERS' EQUITY Total liabilities $ - ------------- 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 (2,476,150) ------------- Total shareholders' deficit 500 ------------- Total liabilities and shareholders' deficit $ 500 ============= The accompanying notes are an integral part of this statement.
JETFLEET III Statements of Operations Unaudited
For the Six Months Ended For the Three Months Ended June 30, June 30, 2004 2003 2004 2003 ---- ---- ---- ---- Revenues: Rent income $ 567,350 $ 706,970 $ 217,610 $ 340,990 Gain on sale of aircraft 1,377,620 - - - Other income 17,530 17,860 6,760 8,430 -------------- ------------- ------------- ------------- 1,962,500 724,830 224,370 349,420 -------------- ------------- ------------- ------------- Expenses: Depreciation - 348,750 - 174,380 Amortization - 114,310 - 57,150 Interest 370,150 456,350 141,970 228,170 Management fees 92,150 97,730 43,290 48,870 Professional fees and general and administrative 58,540 15,190 44,530 9,270 Maintenance 57,460 50,010 5,970 760 Insurance 35,950 104,880 13,730 60,050 -------------- ------------- ------------- ------------- 614,250 1,187,220 249,490 578,650 -------------- ------------- ------------- ------------- Income/(loss) before taxes 1,348,250 (462,390) (25,120) (229,230) Tax provision/(benefit) 800 (156,870) - (77,380) -------------- ------------- ------------- ------------- Income/(loss) before extraordinary item 1,347,450 (305,520) (25,120) (151,850) -------------- ------------- ------------- ------------- Extraordinary item, less applicable income taxes of $0 3,031,580 - 3,031,580 - -------------- ------------- ------------- ------------- Net income/(loss) $ 4,379,030 $ (305,520) $ 3,006,460 $ (151,850) ============== ============= ============= ============= Weighted average common shares outstanding 815,200 815,200 815,200 815,200 ============== ============= ============= ============= Basic income/(loss) per common share: Income/(loss) from continuing operations $ 1.65 $ (0.37) $ (0.03) $ (0.19) Extraordinary item 3.72 - 3.72 - -------------- ------------- ------------- ------------- $ 5.37 $ (0.37) $ 3.69 $ (0.19) ============== ============= ============= ============= The accompanying notes are an integral part of these statements.
JETFLEET III Statements of Cash Flows Unaudited
For the Six Months Ended June 30, 2004 2003 ---- ---- Net provided by operating activities $ (564,830) $ 159,510 -------------- ------------- Investing activities: Purchase of interests in aircraft - (23,680) Proceeds from sale of aircraft 2,404,110 - -------------- ------------- Net cash provided by investing activity 2,404,110 (23,680) -------------- ------------- Financing activity - Cash transferred to Trustee (4,104,240) - -------------- ------------- Net (decrease)/increase in cash (2,264,960) 135,830 Cash, beginning of period 2,265,160 2,065,830 -------------- ------------- Cash, end of period $ 200 $ 2,201,660 ============== ============= Supplemental disclosures of cash flow information: Cash paid during the period for: 2004 2003 ---- ---- Interest (net of amount capitalized) $ 456,350 $ 456,350 Income taxes paid 800 - Assets transferred to Trustee: Rent receivable 20,390 - Accounts receivable 2,030 - Aircraft, at net book value 3,765,940 - Prepaid expenses 258,460 Indebtedness discharged: Interest payable 65,920 - Prepaid rent 39,540 - Security deposits 272,490 - Maintenance reserves 1,752,170 - Medium-term secured notes 11,076,350 - 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"). Under the trust indenture governing the Bonds, there was a provision to extend the maturity date of the Bonds 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, which has objectives similar to the Company's. JMC also acted as manager for AeroCentury IV, Inc., a California corporation, which also had objectives similar to the Company's. AeroCentury Corp. is an affiliate of JHC, as was AeroCentury IV. 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. The Company did not have sufficient cash to fund the repayment of the Bonds on the maturity date of April 30, 2004. The Company was, therefore, in default under the Trust Indenture. In May 2004, the Trustee declared an "Event of Default" under the Trust Indenture. Under the provisions of the Trust Indenture, the Company and the Trustee agreed to execute a transfer of collateral, including the Company's cash balances, which constituted all of the Company's remaining assets.. The transfer was completed in May 2004, after which management of the aircraft portfolio and repayment of the Company's Bond liabilities from the proceeds became the responsibility of the Trustee. 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. The Company's cash balances were transferred to the Trustee in May 2004. Aircraft and Aircraft Engines Under Operating Leases 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. In preparation for the sale of its aircraft, the Company 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, and ceased recognizing depreciation on all aircraft. JETFLEET III Notes to Financial Statements Unaudited 1. Summary of Significant Accounting Policies (continued) 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 recorded on the balance sheet. As discussed in Notes 3 and 4, the Company wrote down four of its assets in September 2003. 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 amortized such costs through the original maturity date of the Bonds on November 1, 2003. The remainder of any of the Initial Contribution and Reimbursement was 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. JETFLEET III Notes to Financial Statements Unaudited 1. Summary of Significant Accounting Policies (continued) 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. Recent Accounting Pronouncements In January 2003, the FASB issued interpretation FIN No. 46, Consolidation of Variable Interest Entities ("FIN 46"), which was subsequently revised in December 2003 ("FIN 46R"). FIN 46R 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 46R also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. FIN 46R was applicable immediately to variable interest entities created after January 31, 2003, and will be effective for all other existing entities in financial statements for periods ending after December 15, 2004. Certain of the disclosure requirements apply in all financial statements issued after December 31, 2003, regardless of when the variable interest entity was established. The Company has no interest in any variable interest entity and, therefore, the full adoption of FIN 46R had no effect on the Company's consolidated financial condition or results of operations. SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, was effective for exit or disposal activities that were initiated after December 31, 2002. SFAS 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that meets the criteria of EITF No. 94-3 prior to the adoption of SFAS 146. The effect of adoption of SFAS 146 will change, on a prospective basis, the timing of when restructuring charges are recorded from a commitment date approach to when the liability is incurred. The adoption of this pronouncement had no effect on the Company's financial statements. SFAS 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equities, addresses how to classify and measure certain financial instruments with characteristics of both liabilities (or an asset in some circumstances) and equity. SFAS 150 requirements apply to issuers classification and measurement of freestanding financial instruments, including those that comprise more than one option or forward contract. It requires that all instruments with characteristics of both liabilities and equity be classified as a liability and remeasured at fair value on each reporting date. SFAS 150 was effective immediately for all financial instruments entered into or modified after May 31, 2003, and for the first interim period beginning after June 15, 2003 for all other instruments. The adoption of SFAS 150 had no impact on the Company's financial statements. JETFLEET III Notes to Financial Statements Unaudited 2. Going Concern The Company's Medium Term Secured Bonds in the aggregate amount of $11,076,350 were due on April 30, 2004. The Company did not have enough current resources to pay the principal and interest on these Bonds by the due date, and did not have any other viable refinancing plan in place. Therefore management believed that a sale of the Company's aircraft portfolio was the only feasible means to raise cash to apply towards the Bond obligations. This matter raises substantial doubt as to the Company's ability to continue as a going concern. In October 2003, management obtained an appraisal of the value of each aircraft and began soliciting buyers for the aircraft. Since the Company's aircraft portfolio served as collateral for the Bond obligations, the Company and the Trustee agreed to execute a transfer of collateral, including the Company's cash balances, which constituted all of the Company's remaining assets. The transfer was completed in May 2004, after which management of the aircraft portfolio and repayment of the Company's Bond liabilities from the proceeds became the responsibility of the Trustee. It is likely that even if the aircraft are sold quickly by the Trustee, the total amount of sales proceeds received, when combined with the Company's cash holdings, will not be sufficient to repay the entire amount of the Bonds. In connection with the transfer of the Company's assets to the Trustee, the Company removed the Bonds obligation from its books during May 2004 and recorded an extraordinary gain of $3,031,580, net of taxes of $0. 3. Aircraft and Aircraft Engines Under Operating Leases In April 2004, the lease for S/N 696 was extended for two years, through April 30, 2006. In May 2004, the Company and the Trustee executed a transfer of collateral as a result of an Event of Default under the Trust Indenture. As a result, the Company owned no aircraft as of June 30, 2004. The Trustee has assumed ownership of the aircraft which the Company had owned and responsibility for administering the terms of the leases. As of June 30, 2004, minimum future lease rent payments receivable under noncancelable leases transferred to the Trustee were as follows: Year Amount 2004 $ 567,000 2005 391,500 2006 78,000 ------------- $ 1,036,500 4. 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 remained at 8.24% through April 30, 2004. The revenue generated from the Income Producing Assets was used to fund interest payments on the Bonds and, after November 2001, deposits to a sinking fund established to facilitate repayment of principal on the Bonds on their maturity. In accordance with the trust indenture, in March 2004, the Company deposited $3,500,000 to the sinking fund account. JETFLEET III Notes to Financial Statements Unaudited 4. Medium Term Secured Bonds (continued) The Company did not have sufficient cash to fund the repayment of the Bonds on the maturity date of April 30, 2004. The Company was, therefore, in default under the Trust Indenture. In May 2004, the Trustee declared an "Event of Default" under the Trust Indenture. Under the provisions of the Trust Indenture, the Company and the Trustee agreed to execute a transfer of collateral, including the Company's cash balances, which constituted all of the Company's remaining assets. The transfer was completed in May 2004, after which management of the aircraft portfolio and repayment of the Company's Bond liabilities from the proceeds became the responsibility of the Trustee. 5. Income Taxes The items comprising income tax expense are as follows:
For the Six Months Ended June 30, 2004 2003 ---- ---- Current tax provision Federal $ - $ - State 800 (3,920) ------------- -------------- Current provision 800 (3,920) ------------- -------------- Deferred tax provision/(benefit) Federal 2,182,900 (156,430) State 4,260 3,480 ------------- -------------- Deferred tax provision/(benefit) 2,187,160 (152,950) Valuation allowance (2,187,160) - ------------- -------------- Total provision/(benefit) for income taxes $ 800 $ (156,870) ============= ==============
The total provision/(benefit) 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, 2004 2003 ---- ---- Income tax expense/(benefit) at statutory federal income tax rate $ 1,489,140 $ (157,210) State tax expense/(benefit) net of federal benefit 2,100 (370) Discharge of indebtedness excluded from taxable income (87,480) - Maintenance reserves deducted from taxable income 582,940 - Current year tax depreciation deducted from taxable income 201,850 - Unearned income included in taxable income (1,570) - Tax refunds - (4,720) Tax rate differences 980 5,430 Valuation allowance (2,187,160) - ------------- -------------- Total provision/(benefit) for income taxes $ 800 $ (156,870) ============= ==============
JETFLEET III Notes to Financial Statements Unaudited 5. Income Taxes (continued) Temporary differences and carryforwards which gave rise to a significant portion of deferred tax assets and liabilities as of June 30, 2004 are as follows: Deferred tax assets: Net operating loss $ 149,470 State franchise taxes 270 ------------- Subtotal 149,740 Valuation allowance (149,740) ------------- Net deferred tax assets $ 0 =============
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 $439,600 may be carried forward for twenty years and begin to expire in 2021. 6. 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, 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 2004 and 2003, the Company accrued a total of $78,820 and $97,730, respectively, in management fees. JMC may receive a remarketing fee in connection with the sale of the Company's assets, provided that such fee is not more than the customary and usual fee that would be paid to an unaffiliated party for such a transaction. JMC may also receive reimbursement of Chargeable Acquisition Expenses incurred in connection with a transaction which are payable to third parties. The Company paid a remarketing fee of $153,450 to JMC in January 2004 in connection with the sale of an aircraft and $13,330 in April 2004 in connection with the re-lease of S/N 696. No such fees were paid in the first six months of 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 the first six months of 2004 or 2003. Item 2. Management's Discussion and Analysis or Plan of Operation. Overview The Company is a lessor of turboprop aircraft and engines which are used by customers pursuant to triple net operating leases. The Company's profitability and cash flow are dependent in large part upon its ability to acquire equipment, obtain and maintain favorable lease rates on such equipment, and re-lease owned equipment that comes off lease. The Company is subject to the credit risk of its lessees, both as to collection of rent and to performance by the lessees of obligations for maintaining the aircraft. The Company's principal expenditures are for interest costs on its Bonds, management fees, and maintenance of its aircraft assets. The most significant non-cash expenses include accruals of maintenance costs in advance of their payment and depreciation of aircraft. Reported financial results are the result of significant estimates. Maintenance expenses are estimated and accrued based upon utilization of the aircraft. Depreciation is recognized based upon the estimated residual value of the aircraft at the end of their estimated lives. Deviation from these estimates could have substantial effect on the Company's cash flow and profitability. The Company did not have sufficient cash to fund the repayment of the Bonds on the maturity date of April 30, 2004. The Company was, therefore, in default under the Trust Indenture. In May 2004, the Trustee declared an "Event of Default" under the Trust Indenture. Under the provisions of the Trust Indenture, the Company and the Trustee agreed to execute a transfer of collateral, including the Company's cash balances, which constituted all of the Company's remaining assets. The transfer was completed in May 2004. Management of the aircraft portfolio and repayment of the Company's Bond liabilities from the proceeds is now the responsibility of the Trustee. The Company has effectively ceased operations, with no cash, revenues or sources of capital available. Results of Operations The Company recorded net income of $4,379,030 or $5.37 per share, including an extraordinary gain of $3,031,580 or $3.72 per share, and net loss of ($305,520) or ($0.37) per share for the six months ended June 30, 2004 and 2003, respectively, and net income of $3,006,460 or $3.69, including an extraordinary gain of $3,031,580 or $3.72 per share, and net loss of ($151,850) or ($0.19) per share for the three months ended June 30, 2004 and 2003, respectively. Rent income was approximately $140,000 and $123,000 lower in the six months and three months ended June 30, 2004, respectively, versus the same periods in 2003, primarily as a result of the transfer of collateral to the Trustee, discussed above. Other income was approximately the same in the six months and three months ended June 30 of both years. Gain on sale of aircraft was approximately $1,378,000 higher in the six months ended June 30, 2004 than in the same period of 2003 due to the sale of S/N 13 in January 2004. Depreciation was approximately $349,000 and $174,000 lower in the six months and three months ended June 30, 2004, respectively, versus the same periods in 2003, because, at September 30, 2003, the Company classified its aircraft as held for re-sale and, therefore, did not record depreciation after that date. Amortization was approximately $114,000 and $57,000 lower in the six-month and three-month periods of 2004, respectively, because the Company's debt issue costs were fully amortized as of the original maturity date of the Bonds, on November 1, 2003. Interest expense was approximately $86,000 lower in both the six months and three months ended June 30, 2004 compared to the same periods in 2003 as a result of the transfer of collateral to the Trustee in May 2004. Management fees were approximately the same in the six-month and three-month periods of both years because, although the Company paid lower management fees to JMC in 2004 than in 2003 as a result of the transfer of assets to the Trustee in May 2004, it paid a remarketing fee of $13,330 to JMC in 2004 in connection with the re-lease of S/N 696. Professional fees and general and administrative expenses were approximately $43,000 and $35,000 higher in the six months and three months ended June 30, 2004, respectively, versus the same periods of 2003, primarily due to trustee fees associated with the transfer of assets to the Trustee. Maintenance expense was approximately the same in the six months and three months ended June 30, 2004 compared to the same periods in 2003. Insurance expense was approximately $69,000 and $46,000 lower in the six months and three months ended June 30, 2004, respectively, compared to the same periods in 2003 because S/N 13, which was sold in January 2004, was off lease and insured for most of the first six months of 2003. Capital Resources and Liquidity The Company has negligible operating cash. The Company's current financial condition is a result of the foreclosure of all of the Company's assets in partial repayment of the Company's obligations under the Bonds. The Company has no remaining sources of capital and does not intend to seek additional capital, as such is unlikely to be available given the Company's financial situation. The Company did not have sufficient cash to fund the repayment of the Bonds on the maturity date of April 30, 2004. The Company was, therefore, in default under the Trust Indenture. In May 2004, the Trustee declared an "Event of Default" under the Trust Indenture. Under the provisions of the Trust Indenture, the Company and the Trustee agreed to execute a transfer of collateral, including the Company's cash balances. The transfer was completed in May 2004. Management of the aircraft portfolio and repayment of the Company's Bond liabilities from the proceeds is now the responsibility of the Trustee. Prior to the transfer of assets to the Trustee in May 2004, the Company had Bonds outstanding with an aggregate principal face value of $11,076,350. The fair value of the collateral securing the Bonds, based upon the net book values of the aircraft and the net working capital of the Company as of that date, was estimated to be approximately $8,045,000, which was approximately 73% of the outstanding principal of the Bonds. The Company's cash flow from operations for the six months ended June 30, 2004 versus the same period in 2003 decreased by approximately $724,000. The change in cash flow was a result of changes in several cash flow items during the year, including principally the following: Lease rents Operating lease collections were approximately $290,000 lower in 2003 than in 2002, primarily due to the transfer of assets to the Trustee in May 2004 and because, in June 2003, the lessee for S/N 13 prepaid three months of rent. Expenditures for maintenance and aircraft equipment Expenditures for maintenance were approximately $440,000 more in the first six months of 2004 versus the same period in 2003, primarily because of maintenance performed to prepare S/N 24 for re-lease or sale and payment for the Company's share, under the lease, of maintenance work to be performed on S/N 751. Insurance premiums Expenditures for aircraft insurance for off-lease aircraft were approximately $50,000 lower during the first six months of 2004 as compared to the same period in 2003, because S/N 13, which had been off lease for most of the 2003 period, was sold in January 2004. Cash flow provided by investing activities was higher in the first six months of 2004 versus the first six months of 2003 because the Company sold S/N 13 in January 2004 versus no such sales in 2003. There were no cash flows from financing activities during the first six months of 2003. Cash flow used by financing activities in 2004 consisted of the Company's cash transferred to the Trustee in May 2004. Outlook As a result of its default under the indenture securing the Bonds, the Company agreed to transfer title to the Company's unsold aircraft and all of its remaining cash to the Trustee. The transfer was completed in May 2004. Management of the aircraft portfolio and repayment of the Company's Bond liabilities from the proceeds is now the responsibility of the Trustee. The Company has been informed by the Trustee that the Trustee has sold three of the aircraft. Two aircraft, one of which is on lease through November 2004, are being marketed for sale. The Trustee may not be able to sell these aircraft in the short term, and therefore, the only proceeds distributable until a purchaser is found with respect to unsold aircraft may be monthly net lease rentals. The Trustee may also experience expenses in order to effectively remarket the aircraft, which would reduce net proceeds to the Bondholders. It is likely that the total amount of sales proceeds received, when combined with the Company's cash holdings of approximately $4,104,430 at the time of the transfer of assets to the Trustee in May 2004, will not be sufficient to repay the entire amount of the Bonds. Because the Bond indebtedness must be repaid before any distributions can be made to the Preferred Shareholders, and there are no other assets of the Company left to distribute to the Preferred Shareholders, it is likely that the Preferred Shareholders will receive no distributions or dividends with respect to their shares upon dissolution of the Company, which is likely to occur later this year. Since the Company has negligible assets and no additional sources of capital, it has ceased operations. It does not intend to seek additional capital to repay remaining Bond indebtedness and resume operations, as such capital is unlikely to be available. Factors that May Affect Future Results Event of Default; Ability to Maximize Returns. As discussed above, in "Outlook," shortly after the maturity date of the Bonds, the Trustee, Wells Fargo Bank Northwest, National Association, declared an Event of Default under the Trust Indenture. The Company, pursuant to an agreement with the Trustee, transferred all of its assets to the Trustee, which were collateral for the Bonds, for the benefit of the Bondholders in lieu of a judicial repossession proceeding. The Company's assets securing the Indenture consist of the aircraft portfolio and leases and all remaining cash held by the Company. The Trustee now has the responsibility to direct the disposition of the collateral with the goal of maximizing value to the Bondholders. While the Trustee is unlikely to realize sufficient proceeds to enable repayment of the entire Note Indebtedness, its ability to maximize repayment to Bondholders will depend on the risk factors described below, particularly those that affect asset values of the Company's portfolio or reduce the cash proceeds that can be applied toward the Bond indebtedness. Further Deterioration of the Air Travel Industry. The Trustee's ability to make a substantial repayment on the Bonds will depend upon its ability to locate buyers and consummate sales transactions. It appears likely that the Trustee will be unable to repay the entire Bond indebtedness out of the aircraft portfolio proceeds. 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. Unanticipated events such as changes in governmental regulations or casualties could create obligations for the Trustee as lessor or owner of the aircraft and require the Trustee to immediately use funds in order to comply with such obligations and reduce amounts available to repay the Bonds. If there is an unanticipated expense with respect to the operations or any of the remaining aircraft that is not covered by the lessee under its lease or by appropriate insurance, the Trustee 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. Ownership Risks. Factors that could affect the short term value of the aircraft are crucial to the ability of the Trustee 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. 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 upon sale. Inability to Sell Asset; Delay in Receiving Sale Proceeds. There is no assurance that the Trustee 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. The Trustee could also determine that it is in the Bondholder's interest to retain title to leased assets and collect rentals for distribution of proceeds, net of Trustee expenses and aircraft operating and maintenance expenses not covered by the lessee, to the Bondholders. In this case, the Bondholders could experience a delay in receiving the full asset value of such retained asset until such time as the Trustee deems it practicable and advisable to liquidate such on-lease assets. Lessee Credit Risk. If a lessee defaults upon its obligations under a lease, the Trustee may be limited in its ability to enforce remedies. The Trustee's lessees are small foreign regional passenger airlines, which may be even more sensitive to airline industry market conditions than the major airlines. 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 Trustee 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 Trustee 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 Trustee'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 Trustee 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. 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. International Risks. The aircraft 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 Trustee 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 Trustee'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 Trustee 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. 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 consolidated 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 errors 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 consolidated 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 10.1 Letter Agreement between JetFleet III and Wells Fargo Bank, Northwest, as Indenture Trustee, dated April 8, 2004 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 On June 2, 2004, the Company filed a Report on Form 8-K disclosing the agreements whereby the Company transferred title to its five remaining aircraft to Wells Fargo Bank, Northwest, NA as Indenture Trustee. 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 16, 2004 By: /s/ Neal D. Crispin ------------------------------- Neal D. Crispin Title: President, Chief Financial Officer EX-31 2 ncex31-1.txt 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 16, 2004 /s/ Neal D. Crispin --------------------------- Neal D. Crispin President, Chief Financial Officer EX-32 3 ncex32-1.txt 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, 2004 (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 16, 2004 /s/ Neal D. Crispin -------------------------- Neal D. Crispin President, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----