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 March 31, 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 May 14, 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 May 14, 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
<PAGE>
Part I. Financial Information
Item 1. Financial Statements.
<TABLE>
<CAPTION>
JETFLEET III
Balance Sheet
March 31, 1999
ASSETS
<S> <C>
Current assets:
Cash $ 2,984,490
Deposits 246,500
Accounts receivable 1,150
Rent receivable 33,000
-------------
Total current assets 3,265,140
Aircraft and aircraft engines under operating leases,
net of accumulated depreciation of $1,340,270 9,055,910
Debt issue costs, net of accumulated
amortization of $613,610 1,047,840
Other assets 6,410
-------------
Total assets $ 13,375,300
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,500
Interest payable 152,120
Prepaid rents 64,960
Maintenance deposits 247,920
-------------
Total current liabilities 476,500
Medium-term secured bonds 11,076,350
Total liabilities 11,552,850
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 (654,200)
-------------
Total shareholders' equity 1,822,450
-------------
Total liabilities and shareholders' equity $ 13,375,300
=============
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
JETFLEET III
Statements of Operations
For the Three Months Ended March 31,
<S> <C> <C>
1999 1998
Revenues:
Rent income $ 541,880 $ 569,310
Gain on sale of aircraft 12,900 -
Interest income 23,490 10,470
------------- -------------
578,270 579,780
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Expenses:
Depreciation 141,780 150,270
Amortization 57,150 57,150
Interest 228,170 358,320
Professional fees and general and administrative 8,610 7,190
Management fees 48,870 48,870
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484,580 621,800
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Income/(loss) before taxes 93,690 (42,020)
Provision for income taxes 120 -
------------- -------------
Net income/(loss) $ 93,570 $ (42,020)
============= =============
Weighted average common shares outstanding 815,200 815,200
============= =============
Basic earnings/(loss) per common share $ 0.11 $ (0.05)
============= =============
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
JETFLEET III
Statements of Cash Flows
For the Three Months Ended March 31,
<S> <C> <C>
1999 1998
Net cash provided by operating activities $ 269,760 $ 190,580
Investing activity -
Proceeds from sale of aircraft 1,074,970 -
-------------- -------------
Net increase in cash 1,344,730 190,580
Cash, beginning of period 1,639,760 539,620
-------------- -------------
Cash, end of period $ 2,984,490 $ 730,200
============== =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 228,170 $ 358,320
Income taxes - -
</TABLE>
See accompanying notes.
<PAGE>
JETFLEET III
Notes to Financial Statements
March 31, 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 March 31, 1999 and statements of
operations and cash flows for the three months ended March 31, 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.
<PAGE>
JETFLEET III
Notes to Financial Statements
March 31, 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 March 31, 1999, the Company
maintained $3,134,480 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 March 31, 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 quarter 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 is subject to a 120-month lease with the seller. The lessee
provided notice to terminate the lease on November 30, 1998, but subsequently
extended the lease through May 7, 1999. Management is currently negotiating with
the sub-lessee, an Australian carrier, regarding its continued use of S/N 13.
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.
<PAGE>
JETFLEET III
Notes to Financial Statements
March 31, 1999
2. Aircraft and Aircraft Engines Under Operating Leases (continued)
Aircraft and Aircraft Engines Leases (continued)
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 a Scottish regional airline.
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 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 are as follows:
Current tax provision:
Federal $ 0
State 121
--------------
Current tax provision 121
--------------
Deferred tax provision:
Federal 31,270
State 30,589
--------------
Deferred tax provision 61,859
Valuation Allowance (61,859)
--------------
Total provision for income taxes $ 121
=============
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 $ 31,856
State taxes net of federal benefit 1,280
State franchise taxes 121
Tax rate differences 28,723
Valuation allowance (61,859)
--------------
Total provision for income taxes $ 121
=============
<PAGE>
JETFLEET III
Notes to Financial Statements
March 31, 1999
4. Income taxes (continued)
Temporary differences and carryforwards which gave rise to a
significant portion of deferred tax assets and liabilities as of March 31, 1999
are as follows:
Deferred tax assets:
Net operating loss $ 455,784
Maintenance reserves 45,241
Prepaid rent 22,975
State franchise taxes 272
Amortization of organizational costs 116
--------------
Subtotal 524,388
Valuation allowance (231,916)
--------------
Net deferred tax assets $ 292,472
Deferred tax liability:
Depreciation on aircraft (292,472)
$ -
==============
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 anticipates 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 three months of
1999, the Company paid a total of $48,870 in management fees due JMC. The same
amount was accrued during the first three 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
quarters 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.
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Capital Resources and Liquidity
At the end of March 1999, the Company had cash balances of $2,984,490 and
deposits of $246,500. The Company's cash balances were held for the interest
payment made to the Unitholders in May 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 May 1999 and November 2001. Leases expiring during the remainder of 1999
include those for S/N 13 and S/N AC-621. Management is currently negotiating
with the sub-lessee of S/N 13 regarding its continued use of S/N 13, and the
lessee of S/N AC-621 has agreed to extend its lease to August 31, 1999. 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 quarter of 1999 versus a net loss in the first
quarter of 1998 (see Results of Operations, below). This effect was partially
offset by an increase in accounts receivable and rent receivable and a decrease
in the amount of prepaid rent and maintenance reserves collected from lessees at
March 31, 1999 compared to 1998.
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 $93,570 or $0.11 per share and net loss of
1998, respectively.
Rental income decreased by approximately $27,000 during 1999 as a result of the
sale of an aircraft during October 1998 and the sale of S/N 3611 during March
1999. Interest income increased by approximately $13,000 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 an aircraft.
Depreciation decreased by approximately $8,000 from year to year as a result of
the sale of two aircraft during October 1998 and March 1999. Interest expense
decreased by approximately $130,000 during 1999 due to the decrease in the rate
payable on the Company's Bonds from 12.94% to 8.24%, effective November 1, 1998.
<PAGE>
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 attendant 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.
<PAGE>
Leases with foreign lessees are subject to risks related to the economy of the
country or region that 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 aircraft 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. Management of the Company has directed its information
technology ("IT") manager to require any software or hardware purchased for use
by the Company 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 the Company's IT system is based on a
"MacOS" system, the Company'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. The Company believes that there
should not be any material costs in connection with such a study. The Company
has been consulting with all the manufacturers of its leased equipment to
confirm Year 2000 compliance. 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.
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. Furthermore, 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.
The Company's essential functions 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 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, banking institutions. The Company 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.
<PAGE>
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 May 14, 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 May 17,
1999.
Signature Title
/s/ Neal D. Crispin President and Chairman of the
Neal D. Crispin Board of Directors of the Registrant
Chief Financial Officer
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