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, 1999
[ ] 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
(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, 1999 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, 1999 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
Item 1. Financial Statements.
JETFLEET III
Balance Sheet
June 30, 1999
ASSETS
Current assets:
Cash $ 3,117,980
Deposits 662,760
Accounts receivable 3,430
Rent receivable 60,360
-------------
Total current assets 3,844,530
Aircraft and aircraft engines under operating leases,
net of accumulated depreciation of $1,472,290 8,923,900
Debt issue costs, net of accumulated
amortization of $670,760 990,690
Other assets 6,590
-------------
Total assets $ 13,765,710
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,530
Interest payable 152,120
Prepaid rents 92,960
Security deposits 56,000
Maintenance deposits 606,760
-------------
Total current liabilities 914,370
Medium-term secured bonds 11,076,350
Total liabilities 11,990,720
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 (701,660)
-------------
Total shareholders' equity 1,774,990
-------------
Total liabilities and shareholders' equity $ 13,765,710
=============
See accompanying notes.
JETFLEET III
Statements of Operations
For the Six Months Ended For the Three Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Rent income $ 950,990 $ 1,138,620 $ 409,110 $ 569,310
Gain on sale of aircraft 12,900 - - -
Interest income 58,300 20,680 34,800 10,210
------------- -------------- ------------- --------------
1,022,190 1,159,300 443,910 579,520
------------- -------------- ------------- --------------
Expenses:
Depreciation 273,790 300,540 132,020 150,270
Amortization 114,310 114,310 57,150 57,150
Interest 456,350 716,640 228,170 358,320
Professional fees and
general and administrative 32,980 14,380 24,240 7,190
Management fees 97,730 97,730 48,870 48,870
------------- -------------- ------------- --------------
975,160 1,243,600 490,450 621,800
------------- -------------- ------------- --------------
Income/(loss) before taxes 47,030 (84,300) (46,540) (42,280)
Provision for income taxes 920 - - -
------------- -------------- ------------- --------------
Net income/(loss) $ 46,110 $ (84,300) $ (46,540) $ (42,280)
============= ============== ============= ==============
Weighted average common shares outstanding 815,200 815,200 815,200 815,200
============= ============== ============= ==============
Basic earnings/(loss) per common share $ 0.06 $ (0.10) $ (0.06) $ (0.05)
============= ============== ============= ==============
See accompanying notes.
JETFLEET III
Statements of Cash Flows
For the Six Months Ended June 30,
1999 1998
Net cash provided by operating activities $ 403,250 $ 349,480
Investing activity -
Proceeds from sale of aircraft 1,074,970 -
-------------- -------------
Net increase in cash 1,478,220 349,480
Cash, beginning of period 1,639,760 539,620
-------------- -------------
Cash, end of period $ 3,117,980 $ 889,100
============== =============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 456,350 $ 716,640
Income taxes 920 1,080
See accompanying notes.
JETFLEET III
Notes to Financial Statements
June 30, 1999
1. Basis of Presentation
JetFleet III (the "Company") was incorporated in the state of
California on August 23, 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 an $850 bond
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").
The accompanying balance sheet at June 30, 1999 and statements of
operations and cash flows for the six months and three months ended June 30,
1999 and 1998 reflect all adjustments (consisting of only normal recurring
accruals) which are, in the opinion of the Company, necessary for a fair
presentation of the financial results. The results of operations of such periods
are not necessarily indicative of results of operations for a full year. The
statements should be read in conjunction with the Summary of Significant Account
Policies and other notes to financial statements included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998.
Organization and Capitalization
All of the Company's outstanding common stock is owned by JetFleet
Holding Corp. ("JHC"), a California corporation formed in January 1994. In May
1998, JetFleet Management Corp., the sole shareholder of the Company was renamed
JetFleet Holding Corp. The rights and obligations under the management agreement
between the Company and JHC were assigned by JHC to its newly-created
wholly-owned subsidiary named "JetFleet Management Corp." ("JMC"). JMC also
manages AeroCentury Corp., a Delaware corporation, and AeroCentury IV, Inc., a
California corporation ("AeroCentury IV"), which are affiliates of the Company
and which have objectives similar to the Company's. Neal D. Crispin, the
President of the Company, holds the same position with JHC and JMC and owns a
significant amount of the common stock of JHC.
Aircraft and Aircraft Engines Under Operating Leases
The Company's interests in aircraft are recorded at cost, which include
acquisition costs (see Note 2). Depreciation is computed using the straight-line
method over each aircraft's estimated economic life (generally assumed to be
twelve years) to its estimated residual value.
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 estimated it would pay 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 by
the Company 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.
JETFLEET III
Notes to Financial Statements
June 30, 1999
1. Basis of Presentation (continued)
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.
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 and
are subject to withdrawal restrictions. As of June 30, 1999, the Company
maintained $3,417,590 of its cash balances in a money market fund held by a
regional brokerage firm, which is not federally insured.
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.
2. Aircraft and Aircraft Engines Under Operating Leases
Aircraft and Aircraft Engines
At June 30, 1999, the Company owns a deHavilland DHC-8-100, serial
number 13 ("S/N 13") a Pratt & Whitney JT8D-9A aircraft engine, serial number
674267 ("S/N 674267"), three deHavilland DHC-6-300 aircraft ("S/Ns 646, 751 and
696"), a Fairchild Metro III SA-227-AC, Serial No. AC-621 ("S/N AC-621") a
Shorts SD3-60, serial number S/N 3656 ("S/N 3656") and a 50% undivided interest
in a Shorts SD3-60, serial number S/N 3676 ("S/N 3676").
The Company did not invest in any aircraft during the first six months
of 1999. During March 1999, the Company sold its Shorts SD3-60, serial number
3611 ("S/N 3611"). The Company recognized a gain of approximately $12,900 in
connection with the sale.
Aircraft and Aircraft Engines Leases
S/N 13 was re-leased on June 15, 1999 to the previous sub-lessee, an
Australian carrier, for a one-year term.
S/N 674267 is used on a McDonnell Douglas DC-9 and is subject to a
60-month sublease, expiring on November 1, 2001, between the seller and a
Mexican based regional carrier.
S/Ns 646, 751 and 696 are subject to similar 36-month leases,
expiring on July 1, 2001, with a U.S. regional carrier in Hawaii.
S/N AC-621 is subject to a 36-month lease expiring on May 31, 1999 with
a U.S. regional carrier in Alaska. The lessee has agreed to extend the lease to
August 31, 1999.
S/N 3656 and S/N 3676 are subject to similar 48-month leases, expiring
on July 27, 2001, with an English regional airline.
JETFLEET III
Notes to Financial Statements
June 30, 1999
3. Medium-term secured bonds
As mentioned above, the Company raised funds 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. During 1997, the
Company accepted subscriptions for 2,310 Units aggregating $2,310,000 in Gross
Offering Proceeds. Pursuant to the Prospectus, the Company subsequently issued
$1,963,500 in Bonds and 40,050 shares of Preferred Stock. The Bonds bear
interest at an annual rate of 12.94% through October 31, 1998 and, thereafter, a
variable rate, adjusted annually on November 1, equal to the one-year United
States Treasury bill rate plus 2%, but not less than 8.24%. Interest is due and
payable on a quarterly basis, in arrears, on the first business day of February,
May, August and November. Based on the one-year Treasury bill rate on October
31, 1998, the Bonds bear interest at the minimum rate of 8.24% per annum for the
period November 1, 1998 through October 31, 1999. The carrying amount of the
Bonds approximates fair value.
4. Income taxes
The items comprising income tax expense for the six months ended June
30, 1999 are as follows:
Current tax provision:
Federal $ -
State 920
--------------
Current tax provision 920
--------------
Deferred tax provision:
Federal 15,410
State 29,950
--------------
Deferred tax provision 45,360
Valuation allowance (45,360)
--------------
Total provision for income taxes $ 920
=============
Total income tax expense differs from the amount which would be
provided by applying the statutory federal income tax rate to pretax earnings as
illustrated below:
Income tax expense at
statutory federal income tax rate $ 15,990
State taxes net of federal benefit 640
State franchise taxes 920
Tax rate differences 28,730
Valuation allowance (45,360)
--------------
Total provision for income taxes $ 920
=============
JETFLEET III
Notes to Financial Statements
June 30, 1999
4. Income taxes (continued)
Temporary differences and carryforwards which gave rise to a
significant portion of deferred tax assets and liabilities as of June 30, 1999
are as follows:
Deferred tax assets:
Net operating loss $ 365,400
Maintenance reserves 172,150
Prepaid rent 32,880
State franchise taxes 270
Amortization of organizational costs 100
--------------
Subtotal 570,800
Valuation allowance (248,420)
--------------
Net deferred tax assets $ 322,380
Deferred tax liability:
Depreciation on aircraft (322,380)
$ -
==============
The Company anticipates that the deferred tax liability will be offset
by deferred tax assets and has recorded a valuation allowance for the remaining
portion of deferred tax assets as the Company does not anticipate generating
adequate future taxable income to realize the benefits of the remaining deferred
tax assets on the balance sheet. The Company's net operating losses may be
carried forward for fifteen or twenty years depending on when they were created
and begin to expire in 2009.
5. Related Party Transactions
The Company's Income Producing Asset portfolio is managed and
administered under the terms of a management agreement with JMC. Under this
agreement, on the last day of each calendar quarter, JMC receives a quarterly
management fee equal to 0.375% of the Company's Aggregate Gross Proceeds
received through the last day of such quarter. In the first six months of 1999,
the Company paid a total of $48,870 in management fees due JMC. The same amount
was accrued during the first six months of 1998.
JMC may receive a brokerage 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 brokerage fee cannot exceed the fair market value of the
asset based on appraisal. JMC may also receive reimbursement of Chargeable
Acquisition Expenses incurred in connection with a transaction which are payable
to third parties. Because the Company did not purchase aircraft during the first
six months of 1999 or 1998, it did not pay any brokerage fees or Chargeable
Acquisition Expenses to JMC. No remarketing fee was paid to JMC in connection
with the sale of S/N 3611.
As discussed in Note 2, the Company owns a 50% undivided interest in
S/N 3676. The remaining 50% undivided interest is owned by AeroCentury IV. Each
co-owner of S/N 3676 receives its pro-rata share of rent income received from
the lessee.
5. Subsequent Events
During July 1999, the Company purchased a 33% interest in a deHavilland
DHC-6 aircraft subject to a lease with a regional carrier in Colombia. The
remaining interest is owned by AeroCentury IV. During August 1999, the Company
purchased a Saab 340A aircraft subject to a lease with a regional carrier based
in Memphis, Tennessee.
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 lack of significant operating expenses for assets that
remain on lease and the Company's exposure to loss as a result of Year 2000
issues are forward looking statements. While the Company believes that such
statements are accurate, the Company's business is dependent upon general
economic conditions, particularly those that affect the demand for turboprop
aircraft and engines, including competition for turboprop and other aircraft,
and future trends and results cannot be predicted with certainty. The Company's
actual results could differ materially from those discussed in such forward
looking statements. 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. Factors that could cause or contribute to such
differences include those discussed below in the section entitled "Factors that
May Affect Future Results."
Capital Resources and Liquidity
At the end of June 1999, the Company had cash balances of $3,117,980 and
deposits of $662,760. The Company's cash balances were held for the interest
payment made to the Unitholders in August 1999, for normally recurring expenses
and for investment in additional Income Producing Assets. In July and August
1999 the Company purchased additional Income Producing Assets totaling
approximately $2,800,000.
The primary source of the Company's funds is rental revenue from the Income
Producing Assets. The Company's liquidity will vary in the future, increasing to
the extent cash flows from operations exceed expenses, and decreasing as
interest payments are made to the Unitholders and to the extent expenses exceed
cash flows from leases.
The Company's primary use of its operating cash flow is interest payments to its
Unitholders. Excess cash flow, after payment of interest and operating expenses
is held for investment in additional Income Producing Assets. Since the Company
has acquired Income Producing Assets which are subject to triple net leases (the
lessee pays operating and maintenance expenses, insurance and taxes), the
Company does not anticipate that it will incur significant operating expenses in
connection with ownership of its Income Producing Assets as long as they remain
on lease.
The Company currently has available adequate reserves to meet its immediate cash
requirements. The leases for the Company's aircraft expire at varying times
between August 1999 and November 2001. The only lease expiring during the
remainder of 1999 is for S/N AC-621, for which management is currently seeking
re-lease opportunities. S/N 3611 was sold in March 1999 at the time it came off
lease and the sales proceeds are being held for investment in additional Income
Producing Assets.
As discussed in Item 1, the interest rate on the Bonds was 12.94% through
October 31, 1998 and 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%. On October 31, 1998, the one-year United States Treasury bill
rate was 4.10% which would result in a bond rate of 6.10%. Therefore, for the
period November 1, 1998 through October 31, 1999, the variable rate is equal to
8.24%.
The increase in cash flow from operations was due primarily to the Company
having net income in the first six months of 1999 versus a net loss in the first
six months of 1998 (see Results of Operations, below). This effect was partially
offset by an increase in rent receivable in 1999.
The increase in cash flow provided by investing activities was due to the
Company's sale of S/N 3611 during March 1999. There were no cash flows from
financing activities during 1999 or 1998 because the Offering terminated during
June 1997.
Results of Operations
The Company recorded net income of $47,030 or $0.06 and net loss of ($84,011) or
($0.10) per share for the six months ended June 30, 1999 and 1998, respectively,
and net loss of ($46,540) and ($42,280) or ($0.06) and ($0.05) per share for the
three months ended June 30, 1999 and 1998, respectively.
Rental income decreased by approximately $187,000 and $160,000 during the six
months ended June 30, 1999 and 1998, respectively, as a result of the sale of an
aircraft during October 1998, the sale of S/N 3611 during March 1999 and the
one-month off-lease period for S/N 13 during the second quarter of 1999.
Interest income increased by approximately $37,000 and $24,000 for the six month
and three month periods, respectively, in 1999 because the Company had higher
cash balances in 1999 as a result of the aircraft sales in October 1998 and
March 1999. During 1999, the Company recognized a gain in connection with the
sale of S/N 3611.
Depreciation decreased by approximately $27,000 and $18,000 during the six
months and three months ended June 30, 1999 versus 1998 as a result of the sale
of two aircraft, discussed above. Interest expense decreased by approximately
$261,000 and $130,000 during the six months and three months of 1999 due to the
decrease in the rate payable on the Company's Bonds from 12.94% to 8.24%,
effective November 1, 1998.
Factors that May Affect Future Results
General Economic Conditions. The market for used aircraft has been cyclical, and
usually reflects economic conditions and the strength of the travel and
transportation industry. At any time, the market for used aircraft may be
adversely affected by such factors as airline financial difficulties, higher
fuel costs, and improved availability and economics of new replacement aircraft.
An adverse change in the global air travel industry, however, could result in
reduced carrier revenue and excess capacity and increase the risk of failure of
some weaker regional air carriers. While the Company believes that with proper
asset and lessee selection the impact of such changes on the Company can be
reduced, there is no assurance that the Company's business will escape the
effects of such a global downturn, or a regional downturn in an area where the
Company has placed a significant amount of its assets.
Reliance on JMC. All management of the Company is performed by JMC pursuant to a
management agreement between JMC and the Company. The 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.
Ownership Risks. Most of the Company's portfolio is leased under operating
leases, where the terms of the leases do not take up the entire useful life of
an asset. The Company's ability to recover its purchase investment in an asset
subject to an operating lease is dependent upon the Company's ability to
profitably re-lease or re-sell the asset after the expiration of the initial
lease term. Some of the factors that have an impact on the Company's ability to
re-lease or re-sell include worldwide economic conditions, general aircraft
market conditions, regulatory changes that may make an asset's use more
expensive or preclude use unless the asset is modified, changes in the supply or
cost of aircraft equipment and technological developments which cause the asset
to become obsolete. In addition, a successful investment in an asset subject to
an operating lease depends in part upon having the asset returned by the lessee
in serviceable condition as required under the lease. If the Company is unable
to remarket or sell its aircraft equipment on favorable terms when the operating
lease for such equipment expires, the Company's business, financial condition,
cash flow, ability to service debt and results of operation could be adversely
affected.
Lessee Credit Risk. If a lessee defaults upon his obligations under a lease, the
Company may be limited in its ability to enforce remedies. Most of the Company's
lessees are small domestic and foreign regional passenger airlines, which may be
even more sensitive to airline industry market conditions than the major
airlines. As a result, the Company's inability to collect rent under a
significant lease or to repossess equipment in the event of a default by a
lessee could have a material adverse effect on the Company's revenue. If a
lessee that is a certified U.S. airline is in default under the lease and seeks
protection under Chapter 11 of the United States Bankruptcy Code, under Section
1110 of the Bankruptcy Code, the Company would be automatically prevented from
exercising any remedies for a period of 60 days. By the end of the 60 day
period, the lessee must agree to perform the obligations and cure any defaults,
or the Company would have the right to repossess the equipment. This procedure
under the Bankruptcy Code has been subject to significant recent 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.
International Risks. The Company's portfolio includes leases with foreign air
carriers. Leases with foreign lessees, however, 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 engine 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
remains strong. On the other hand, a foreign economy may remain strong even
though the domestic U.S. economy is not. A foreign economic downturn may occur
and impact a foreign lessee's ability to make lease payments, even though the
U.S. and other economies remain stable. Furthermore, foreign lessees are subject
to risks related to currency conversion fluctuations. Although the Company's
current leases are all payable in U.S. dollars, in the future, the Company may
agree to leases that permit payment in foreign currency, which would subject
such lease revenue to monetary risk due to currency fluctuations. Even with
dollar-denominated lease payment provisions, the Company could still be affected
by a devaluation of the lessee's local currency which makes 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.
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.
Casualties, Insurance Coverage. The Company, as owner of transportation
equipment, could be held liable for injuries or damage to property caused by its
assets. Though some protection may be provided by the United States Aviation Act
with respect to its aircraft assets, it is 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. Though the Company may carry
insurance or require a lessee to insure against a risk, some risks of loss may
not be insurable. 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.
Leasing Risks. The Company's successful negotiation of lease extensions,
re-leases and sales may be critical to its ability to achieve its financial
objectives, and will involve a number of substantial risks. Demand for lease or
purchase of the assets depends on the economic condition of the airline industry
which is in turn highly sensitive to general economic conditions. Ability to
re-lease or re-sell equipment at acceptable rates may depend on the demand and
market values at the time of re-lease or re-sale. 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 re-sale
value of many types of older aircraft in the recent past has been depressed by
such factors as airline financial difficulties, increased fuel costs, the number
of new aircraft on order and the number of older aircraft coming off lease. The
Company's concentration in a limited number of airframe and aircraft engine
types (generally, turboprop equipment) subjects the Company to economic risks if
those airframe or engine types should decline in value. The recent introduction
of "regional jets" to serve on short routes previously thought to be economical
only for turboprop aircraft operation could decrease the demand for turboprop
aircraft, while at the same time increasing the supply of used turboprop
aircraft. This could result in lower lease rates and values for the Company's
turboprop aircraft.
Risks Related to Regional Air Carriers. Because the Company has concentrated its
existing leases on leases to 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 carrier. 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
results in a generally higher lease rate on aircraft, but may entail higher risk
of default or lessee bankruptcy.
Year 2000 Considerations. Because all administrative and management functions of
the Company are carried out by its management company, JMC, JMC's readiness for
Year 2000 will determine the Company's status. JMC has reported to the Company
that it has directed its information technology ("IT") manager to require any
software or hardware purchased for use by the Company's management to have a
warranty of Year 2000 compliance. It has also directed its IT manager to study
any systems that may require Year 2000 remediation.
The IT manager has determined that, because JMC's IT system is based on a
"MacOS" system, JMC's internal technology systems are ready for Year 2000, and
there should not be any material costs associated with such remediation.
Furthermore, the phone and internet systems have been warranted by their vendors
for Year 2000 compliance. The Company's internal and administrative operations
are not highly dependent on any other advanced technology system, and,
consequently, management believes that the Company's exposure to loss as a
result of Year 2000 issues in its internal and administrative operations is not
significant.
Management believes that the electronic systems used in the equipment leased by
the Company to lessees will not be materially affected by the Year 2000 and that
any remediation of the technology systems embedded in the aircraft that it
leases will not be a material expense to the Company. The Company has notified
all lessees of the Year 2000 problem and has requested information on the status
of each lessee's study and remediation plans. To date, all lessees (except for
two who have yet to respond) have reported Year 2000 compliance with respect to
the aircraft leased by the Company to the lessee. The Company is following up
with those that have not responded, as well as each new additional lessee.
The Company has also been consulting with all the manufacturers of its leased
equipment to confirm Year 2000 compliance, who have all indicated that they have
already notified or will shortly notify all lessee operators of their respective
Year 2000 issues. Generally, the type of used turboprop aircraft owned by the
Company are not highly dependent upon date-sensitive electronics, unless the
lessee has added upgraded electronics to the aircraft.
In any event, since the Company's leases generally place all maintenance and
repair obligations on the lessees, to the extent that the aircraft are on lease
when the Year 2000 problem is identified, it would generally be the lessee's and
not the Company's responsibility to remediate any Year 2000 problem with the
leased aircraft or additional upgraded electronics.
To the extent that a lessee has Year 2000 problems that significantly adversely
affect its overall financial status, such material problems may affect the
lessee's operations and increase the risk of default by a lessee under its lease
with the Company. The Company has also inquired with its lessees regarding Year
2000 compliance of its administrative and operational activities. It appears
responding lessees are generally aware of the Year 2000 issue and have either
completed a plan or are in progress toward Year 2000 compliance. There is no
assurance that their compliance plans will be successful, however, and the
Company is not independently verifying any information provided by its lessees.
The Company continues to monitor its current lessees and each additional lessee.
Year 2000 issues may have a material impact on FAA operations and the operations
of certain air carriers, which in turn would negatively affect the aircraft
industry in general. This, of course, may affect the business of the Company's
existing and potential lessees, and in turn, the Company.
The essential functions of JMC and the Company are not dependent upon any key
third party vendors or service providers related to the leasing or finance
business, and consequently, the interruption of goods and services from any such
industry-specific third party vendor or service provider to JMC or the Company
is not likely to cause a material loss to the Company. Of course, the Company's
ordinary business operation is dependent upon vendors that provide basic
services to businesses generally, such as utility companies, phone and long
distance companies, courier services and banking institutions. The Company,
through its managment and JMC, is monitoring the Year 2000 readiness of such
providers. Management believes that a temporary interruption in services to the
Company by these types of service providers caused by Year 2000 problems would
not cause material losses to the Company. An extended loss of these services,
however, could adversely affect the Company's business and financial
performance. The Company has not yet made any contingency plans for the extended
loss of these basic services.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on August 16, 1999.
JETFLEET III
====================
By: /s/ Neal D. Crispin
Neal D. Crispin
Title: President
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons in the capacities indicated on August
16, 1999.
Signature Title
/s/ Neal D. Crispin
==================== President and Chairman of the
Neal D. Crispin Board of Directors of the Registrant
Chief Financial Officer