SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB (Mark One) [ X ] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 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 November 15, 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 November 15, 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 September 30, 1999 ASSETS Current assets: Cash $ 641,660 Deposits 690,550 Accounts receivable 69,780 Rent receivable 61,580 ------------- Total current assets 1,463,570 Aircraft and aircraft engines under operating leases, net of accumulated depreciation of $1,618,510 11,577,730 Debt issue costs, net of accumulated amortization of $727,920 933,530 Other assets 3,330 ------------- Total assets $ 13,978,160 ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,790 Taxes payable 1,950 Interest payable 152,120 Prepaid rents 113,160 Security deposits 75,800 Maintenance deposits 710,410 ------------- Total current liabilities 1,059,230 Medium-term secured bonds 11,076,350 Total liabilities 12,135,580 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 (634,070) ------------- Total shareholders' equity 1,842,580 ------------- Total liabilities and shareholders' equity $ 13,978,160 ============= See accompanying notes. JETFLEET III Statements of Operations For the Nine Months Ended For the Three Months Ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Revenues: Rent income $ 1,503,220 $ 1,707,930 $ 552,230 $ 569,310 Gain on sale of aircraft 12,900 - - - Interest income 83,670 34,370 25,370 13,690 ------------- -------------- ------------- -------------- 1,599,790 1,742,300 577,600 583,000 ------------- -------------- ------------- -------------- Expenses: Depreciation 420,010 450,810 146,220 150,270 Amortization 171,470 171,470 57,160 57,160 Interest 684,520 1,074,960 228,170 358,320 Professional fees and general and administrative 60,610 15,420 27,640 1,050 Management fees 146,600 146,600 48,860 48,860 ------------- -------------- ------------- -------------- 1,483,210 1,859,260 508,050 615,660 ------------- -------------- ------------- -------------- Income/(loss) before taxes 116,580 (116,960) 69,550 (32,660) Provision for income taxes 2,880 - 1,960 - ------------- -------------- ------------- -------------- Net income/(loss) $ 113,700 $ (116,960) $ 67,590 $ (32,660) ============= ============== ============= ============== Weighted average common shares outstanding 815,200 815,200 815,200 815,200 ============= ============== ============= ============== Basic earnings/(loss) per common share $ 0.14 $ (0.14) $ 0.08 $ (0.04) ============= ============== ============= ============== See accompanying notes. JETFLEET III Statements of Cash Flows For the Nine Months Ended September 30, 1999 1998 Net cash provided by operating activities $ 726,980 $ 506,740 Investing activities: Purchase of interests in aircraft (2,800,050) - Proceeds from sale of aircraft 1,074,970 - -------------- ------------- Net cash used by investing activities (1,725,080) - -------------- ------------- Net (decrease)/increase in cash (998,100) 506,740 Cash, beginning of period 1,639,760 539,630 -------------- ------------- Cash, end of period $ 641,660 $ 1,046,370 ============== ============= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 684,520 $ 1,433,280 Income taxes 920 1,080 See accompanying notes. JETFLEET III Notes to Financial Statements September 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 September 30, 1999 and statements of operations and cash flows for the nine months and three months ended September 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 an 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 September 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 September 30, 1999, the Company maintained $1,289,950 of its cash balances in two money market funds held by regional brokerage firms, which are 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 September 30, 1999, the Company's aircraft assets consist of 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"), a 50% undivided interest in a Shorts SD3-60, serial number S/N 3676 ("S/N 3676"), a 33% interest in a deHavilland DHC-6, serial number 668 ("S/N 668") and a Saab 340A, serial number 24 ("S/N 24"). During July 1999, the Company purchased the 33% interest in S/N 668. The remaining interest is owned by AeroCentury IV. During August 1999, the Company purchased S/N 24. The interests in the two aircraft were purchased for a total of approximately $2,800,000, including acquisition costs. 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. As discussed in Note 6, S/N AC-621 was returned by the original lessee during October 1999 and has been re-leased. JETFLEET III Notes to Financial Statements September 30, 1999 2. Aircraft and Aircraft Engines Under Operating Leases (continued) Aircraft and Aircraft Engines Leases (continued) S/N 3656 and S/N 3676 are subject to similar 48-month leases, expiring on July 27, 2001, with an English regional airline. S/N 668 is subject to a 60-month lease expiring on July 8, 2004 with a regional carrier in Colombia. S/N 24 is subject to a lease expiring on October 31, 2002 with a regional carrier in North America. 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 nine months ended September 30, 1999 are as follows: Current tax provision: Federal $ - State 2,877 -------------- Current tax provision 2,877 Deferred tax provision: Federal 39,050 State 33,790 Deferred tax provision 72,840 Valuation allowance (72,840) Total provision for income taxes $ 2,877 ============== 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 $ 39,636 State taxes net of federal benefit 1,648 State franchise taxes 2,877 Tax rate differences 31,556 Valuation allowance (72,840) -------------- Total provision for income taxes $ 2,877 ============== JETFLEET III Notes to Financial Statements September 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 September 30, 1999 are as follows: Deferred tax assets: Net operating loss $ 350,141 Maintenance reserves 209,083 Prepaid rent 40,073 State franchise taxes 272 Amortization of organizational costs 92 -------------- Subtotal 599,661 Valuation allowance (220,935) -------------- Net deferred tax assets 378,726 Deferred tax liability: Depreciation on aircraft 378,726 $ - ============== 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 nine months of 1999, the Company paid a total of $146,600 in management fees to JMC. 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. In connection with the purchases of S/N 668 and S/N 24, the Company paid JMC a total of $112,870 in brokerage fees. No remarketing fee was paid to JMC in connection with the sale of S/N 3611 or the re-lease of S/N AC-621. As discussed in Note 2, the Company owns 50% and 33% undivided interests in S/N 3676 and S/N 668, respectively. The remaining 50% and 67% undivided interests are owned by AeroCentury IV. Each co-owner of S/N 3676 and S/N 668 receives its pro-rata share of rent income received from the lessee. 6. Subsequent Event S/N AC-621 was returned by the original lessee during October 1999, after extending the lease from its original expiration date of May 31, 1999. S/N AC-621 has been re-leased to a regional carrier in North America for a term of six months. 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. 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. Capital Resources and Liquidity At the end of September 1999, the Company had cash balances of $641,660 and deposits of $690,550. The Company's cash balances were held for the interest payment made to the Unitholders in November 1999, for normally recurring expenses and for investment in additional Income Producing Assets. 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 April 2000 and July 2004. The lease for S/N AC-621 originally expired during May 1999, but was extended until October 1999, at which time the aircraft was re-leased to a different carrier for a period of six months. S/N 3611 was sold in March 1999 at the time it came off lease and the sales proceeds were used to purchase the undivided interests in S/N 668 and S/N 24. 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 Company has determined that the rate will remain at 8.24% for the period November 1, 1999 through October 31, 2000. The increase in cash flow from operations was due primarily to the Company having net income in the first nine months of 1999 versus a net loss in the first nine months of 1998 (see Results of Operations, below) and the collection of prepaid rent and maintenance reserves from lessees. This effect was partially offset by an increase in rent receivable, accounts receivable and cash classified as deposits in 1999. The increase in cash flow used by investing activities was due to the Company's purchases of the undivided interests in S/N 668 and S/N 24 during July 1999 and August 1999, respectively, which were partially offset by the 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 $113,700 or $0.14 and net loss of ($116,960) or ($0.14) per share for the nine months ended September 30, 1999 and 1998, respectively, and net income of $67,590 or $0.08 and net loss of ($19,670) or ($0.04) per share for the three months ended September 30, 1999 and 1998, respectively. Rental income decreased by approximately $205,000 and $17,000 for the nine month and three months ended September 30, 1999 versus 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. This decrease was partially offset by the purchases of the undivided interests in S/N 668 and S/N 24 in July and August 1999, respectively. Interest income increased by approximately $49,000 and $12,000 for the nine 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 $31,000 and $4,000 during the nine months and three months ended September 30, 1999 versus 1998 as a result of the sale of two aircraft during October 1998 and March 1999. This effect was only partially offset by the depreciation expense incurred as a result of the aircraft purchases during July and August 1999, discussed above. Interest expense decreased by approximately $390,000 and $130,000 during the nine 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. Professional fees increased by approximately $45,000 and $27,000 during the nine months and three months ended September 30, 1999 versus 1998 due to legal fees incurred in connection with the sale of S/N 3611 and the re-lease of S/N 13 and S/N AC-621. 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. All 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 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 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 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. Concentration of Leases. Currently, three of the Company's aircraft, representing 20% of the Company's monthly revenue, are on lease to a U.S. regional carrier. If such lessee should default on its lease obligations, the Company would endeavor to gain immediate return of those aircraft. However, because all three aircraft would have to be remarketed simultaneously, there is no assurance that the Company could remarket all three aircraft immediately. If such remarketing required an extended period of time, the Company's ability to meet its obligations under the Bonds could be affected. International Risks. The Company's portfolio includes leases with foreign air carriers. Leases with foreign lessees may present somewhat different credit risks than those with domestic lessees. Foreign laws, regulations and judicial procedures may be more or less protective of lessor rights as those which apply in the United States. The Company could experience collection problems related to the enforcement of its lease agreements under foreign local laws and the remedies in foreign jurisdictions. The protections potentially offered by Section 1110 of the Bankruptcy Code would not apply to non-U.S. carriers, and applicable local law may not offer similar protections. Certain countries do not have a central registration or recording system with which to locally establish the Company's interest in equipment, and related leases. This could add difficulty in recovering an 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 remarket equipment at acceptable rates may depend on the demand and market values at the time of remarketing. The market for used aircraft is cyclical, and generally, but not always, reflects economic conditions and the strength of the travel and transportation industry. The demand for and value of many types of 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 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 of the Company's lessees have reported Year 2000 compliance with respect to the aircraft leased by the Company to the lessee. The Company will request Year 2000 compliance information from any new additional lessees, if any. 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 made any contingency plans for the extended loss of these basic services. The Company has not incurred and does not anticipate any significant costs related to the Year 2000 issue. 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 November 15, 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 November 15, 1999. Signature Title /s/ Neal D. Crispin - ---------------------- President and Chairman of the Neal D. Crispin Board of Directors of the Registrant Chief Financial Officer