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, 2000
[ ] 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 15, 2000 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 15, 2000 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.
JETFLEET III
Balance Sheet
March 31, 2000
<TABLE>
ASSETS
<S> <C>
Current assets:
Cash $ 1,069,000
Deposits 912,640
Accounts receivable 106,070
Rent receivable 48,970
-------------
Total current assets 2,136,680
Aircraft and aircraft engines under operating leases,
net of accumulated depreciation of $1,934,940 11,261,300
Debt issue costs, net of accumulated
amortization of $842,220 819,230
Deferred taxes 165,420
Prepaid expenses 12,100
-------------
Total assets $ 14,394,730
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,680
Interest payable 152,120
Prepaid rents 97,300
Security deposits 88,800
Maintenance deposits 785,650
Taxes payable 1,680
-------------
Total current liabilities 1,137,230
Medium-term secured bonds 11,076,350
-------------
Total liabilities 12,213,580
-------------
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 (295,500)
-------------
Total shareholders' equity 2,181,150
-------------
Total liabilities and shareholders' equity $ 14,394,730
=============
</TABLE>
See accompanying notes.
<PAGE>
JETFLEET III
Statements of Operations
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
<S> <C> <C>
2000 1999
---- ----
Revenues:
Rent income $ 572,990 $ 541,880
Gain on sale of aircraft - 12,900
Interest income 24,390 23,490
------------- -------------
597,380 578,270
------------- -------------
Expenses:
Depreciation 158,220 141,780
Amortization 57,150 57,150
Interest 228,170 228,170
Professional fees and general and administrative 3,110 8,610
Management fees 48,870 48,870
------------- -------------
495,520 484,580
------------- -------------
Income before taxes 101,860 93,690
Tax provision 31,010 120
------------- -------------
Net income/(loss) $ 70,850 $ 93,570
============= =============
Weighted average common shares outstanding 815,200 815,200
============= =============
Basic earnings/(loss) per common share $ 0.09 $ 0.11
============= =============
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
JETFLEET III
Statements of Cash Flows
<CAPTION>
For the Three Months Ended March 31,
<S> <C> <C>
2000 1999
---- ----
Net cash provided by operating activities $ 180,760 $ 269,760
Investing activities:
Proceeds from sale of aircraft - 1,074,970
-------------- -------------
Net increase in cash 180,760 1,344,730
Cash, beginning of period 888,240 1,639,760
-------------- -------------
Cash, end of period $ 1,069,000 $ 2,984,490
============== =============
Supplemental disclosures of cash flow information:
Cash paid during the period for: 2000 1999
---- ----
Interest $ 228,170 $ 228,170
Income taxes 8,500 -
</TABLE>
See accompanying notes.
<PAGE>
JETFLEET III
Notes to Financial Statements
1. Summary of Significant Accounting Policies
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 $850 of
bonds maturing on November 1, 2003 (the "Bonds") and $150 of preferred stock
(the "Preferred Stock") pursuant to a prospectus dated September 27, 1995 (the
"Prospectus").
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, which are affiliates of JHC and which have objectives
similar to the Company's. Neal D. Crispin, the President of the Company, holds
the same position with JHC and JMC and owns a significant amount of the common
stock of JHC.
Cash and Cash Equivalents/Deposits
The Company considers highly liquid investments readily convertible
into known amounts of cash, with original maturities of 90 days or less, as cash
equivalents. Deposits represent cash balances held related to maintenance
reserves and security deposits and generally are subject to withdrawal
restrictions. As of March 31, 2000, the Company maintained $1,940,200 of its
cash balances in two money market funds held by regional brokerage firms, which
are not federally insured.
Aircraft and Aircraft Engines Under Operating Leases
The Company's interests in aircraft are recorded at cost, which include
acquisition costs (see Note 2). Depreciation is computed using the straight-line
method over each aircraft's estimated economic life to its estimated residual
value.
Organization and Offering Costs
Pursuant to the terms of the Prospectus, the Company paid an
Organization and Offering Expense Reimbursement to JHC in cash in an amount up
to 2.0% of Aggregate Gross Offering Proceeds for reimbursement of certain costs
incurred in connection with the organization of the Company and the Offering
(the "Reimbursement").
JHC contributed $450,000 of the total it paid for organization and
offering expenses as a common stock investment in the Company (the "Initial
Contribution"). The Company issued 450,000 shares of common stock to JHC in
return for the Initial Contribution. To the extent that JHC incurred expenses in
excess of the 2.0% cash limit, such excess expenses were repaid to JHC in the
form of Common Stock issued by the Company at a price of $1.00 per share (the
"Excess Stock"). The amount of Excess Stock that the Company issued was limited
according to the amount of Aggregate Gross Offering Proceeds raised by the
Company.
The Company capitalized the portions of both the Reimbursement paid and
the Initial Contribution related to the Bonds (85%) and amortizes such costs
over the life of the Bonds (approximately eight years). The remainder of any of
the Initial Contribution and Reimbursement is deducted from shareholders'
equity.
<PAGE>
JETFLEET III
Notes to Financial Statements
1. Summary of Significant Accounting Policies (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.
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
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"), 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"). The
Company did not purchase any aircraft during the first three months of 2000.
S/N 13 was re-leased in June 1999 to the same sub-lessee, an Australian
carrier, for a one-year term. The Company is in discussions with the sub-lessee
regarding its option to exercise a one-year extension of the lease at the same
rent.
S/N 674267 is used on a McDonnell Douglas DC-9 and is subject to a
60-month sublease, expiring in November 2001, between the seller and a Mexican
based regional carrier.
S/Ns 646, 751 and 696 are subject to similar 36-month leases, expiring
in July 2001, with a U.S. regional carrier.
S/N AC-621 was leased to a regional carrier in North America for a
six-month term, expiring in April 2000. The lessee extended the lease to July
2000.
<PAGE>
JETFLEET III
Notes to Financial Statements
2. Aircraft and Aircraft Engines Under Operating Leases (continued)
Aircraft and Aircraft Engines Leases (continued)
At the time of purchase, S/N 3656 and S/N 3676 were subject to similar
48-month leases, expiring in July 2001, with a British regional airline. On
February 24, 2000, the lessee of these two 30-seat aircraft filed for
reorganization. The lessee is continuing to operate, and, under the
reorganization plan, the lessee has agreed to continue leasing S/N 3676, in
which the Company owns a 50% interest, on a month to month basis at the same
rent. The lessee has also agreed to begin paying monthly maintenance reserves
based on the hours flown. The Company is in the process of identifying any
unfunded maintenance reserves related to the pre-reorganization period related
to both aircraft for which it will submit an unsecured claim to the
reorganization administrator. The lessee plans to return S/N 3656, and the
Company is negotiating a lease with another regional airline, headquartered in
Ireland, for the lease of this aircraft.
S/N 668 is subject to a 60-month lease expiring, in July 2004, with a
regional carrier in Colombia.
S/N 24 is subject to a lease, expiring in October 2002, with a regional
carrier in North America.
3. Medium-Term Secured Bonds
The Company raised $13,031,000 through the Offering from November 1995
to June 1997. Each $1,000 Unit subscribed in the offering included an $850
medium-term secured bond maturing on November 1, 2003. The Bonds bore interest
at an annual rate of 12.94% through October 31, 1998 and, thereafter, a variable
rate, adjusted annually on November 1, equal to the one-year United States
Treasury bill rate plus 2%, but not less than 8.24%. Based on the one-year
Treasury bill rate on October 31, 1998 and October 31, 1999, the Bonds bear
interest at the rate of 8.24% per annum for the periods November 1, 1998 through
October 31, 1999 and November 1, 1999 through October 31, 2000. Interest is due
and payable on a quarterly basis, in arrears, on the first business day of
February, May, August and November. The carrying amount of the Bonds
approximates fair value.
4. Income Taxes
The items comprising income tax expense are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
<S> <C> <C>
2000 1999
---- ----
Current tax provision
Federal $ - $ -
State 1,680 1,080
------------- --------------
Current provision 1,680 1,080
------------- --------------
Deferred tax provision
Federal 32,140 (18,250)
State (3,100) (2,360)
------------- --------------
Deferred tax provision 29,040 (20,610)
Change in valuation allowance - 20,610
------------- --------------
Subtotal 29,040 -
------------- --------------
Total provision for income taxes $ 30,720 $ 1,080
</TABLE>
<PAGE>
JETFLEET III
Notes to Financial Statements
4. Income Taxes (continued)
The total provision for income taxes differs from the amount which
would be provided by applying the statutory federal income tax rate to pretax
earnings as illustrated below:
<TABLE>
<S> <C> <C>
Income tax expense at statutory federal income tax rate $ 34,630 $ (17,880)
State taxes net of federal benefit 1,930 (2,730)
State franchise taxes - 1,080
Tax rate differences (5,840) -
Change in valuation allowance - 20,610
------------- --------------
Total provision for income taxes $ 30,720 $ 1,080
============= ==============
Temporary differences and carryforwards which gave rise to a
significant portion of deferred tax assets and liabilities as of March 31, 2000
are as follows:
Deferred tax assets:
Net operating loss $ 305,420
Maintenance deposits 238,960
Prepaid rent 34,930
State franchise taxes 270
Amortization of organization costs 70
-------------
Subtotal 579,650
Valuation allowance -
-------------
Net deferred tax assets 579,650
Deferred tax liability -
Depreciation of aircraft (414,230)
-------------
$ 165,420
</TABLE>
The Company 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 2000
and 1999, the Company accrued a total of $48,870 and $48,870, respectively, in
management fees due JMC.
JMC may receive an acquisition fee for locating assets for the Company
and a remarketing fee in connection with the sale of the Company's assets,
provided that such fees are not more than the customary and usual fees that
would be paid to an unaffiliated party for such a transaction. The total of the
Aggregate Purchase Price plus the acquisition fee cannot exceed the fair market
value of the asset based on appraisal. JMC may also receive reimbursement of
Chargeable Acquisition Expenses incurred in connection with a transaction which
are payable to third parties. Because the Company did not purchase aircraft
during the first quarters of 2000 or 1999, it did not pay any acquisition fees
or Chargeable Acquisitions Expenses to JMC.
As discussed in Note 1, the Company reimbursed JHC for certain costs
incurred in connection with the organization of the Company and the Offering.
The Company made no such payments during the first quarters of 2000 or 1999.
<PAGE>
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: generation of future taxable income to realize the benefits of the
remaining deferred tax assets on the balance sheet 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, a favorable outcome with respect
to the aircraft leased to the defaulting British regional air carrier and the
Company's claim with respect thereto, 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 March 31, 2000, the Company had cash balances of $1,069,000 and deposits of
$912,640. The Company's cash balances were held for the interest payment made to
the Unitholders in May 2000, for normally recurring expenses and for investment
in additional Income Producing Assets.
Since Inception, the Company's funds have come in the form of an initial
contribution from JMC, proceeds from the Offering and rental revenue from the
Income Producing Assets purchased using those proceeds. 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 while 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 July 2000 and July 2004. Leases expiring during 2000 include those for
S/N AC-621 and S/N 13. Management is currently negotiating extensions of the
leases for both of these aircraft.
As discussed in Item 1, the interest rate on the Bonds was 12.94% through
October 31, 1998 and is a variable rate thereafter, calculated annually on
November 1. The variable rate is equal to the higher of (i) 2% plus the annual
yield rate on one-year U.S. Treasury Bills on the last business day of October
of that year or (ii) 8.24%. Based on the one-year Treasury bill rate on October
31, 1998 and October 31, 1999, the Bonds bear interest at the rate of 8.24% per
annum for the periods November 1, 1998 through October 31, 1999 and November 1,
1999 through October 31, 2000.
The decrease in cash flow from operations from year to year was due primarily to
the Company having lower net income during 2000 versus 1999 (see Results of
Operations, below), and an increase in cash classified as deposits and accounts
receivable. This effect was partially offset by the collection of rent
receivable from lessees and an increase in deferred taxes.
The decrease in cash flow provided by investing activities was due to the
Company's sale of an aircraft during March 1999 versus no such sales in 2000.
There were no cash flows from financing activities during the first three months
of 2000 or 1999 because the Offering terminated during June 1997.
<PAGE>
Results of Operations
The Company recorded net income of $70,850 or $0.09 and $93,570 or $0.11 per
share for the three months ended March 31, 2000 and 1999, respectively.
Rental income increased by approximately $31,000 during the first three months
of 2000 versus the same period in 1999 as a result of the purchases of the
undivided interests in aircraft in July and August 1999. This increase was only
partially offset by the sale of an aircraft during March 1999. During 1999, the
Company recognized a gain in connection with the sale of S/N 3611.
Depreciation increased by approximately $16,000 during the first three months of
2000 versus 1999 as a result of the purchases discussed above. This effect was
only partially offset by the decrease in depreciation expense as a result of the
aircraft sold during March 1999.
Factors that May Affect Future Results
Concentration of Leases. The Company owns 100% of one aircraft (S/N 3656), and
50% of a second aircraft (S/N 3676) leased to a British regional carrier, which
in the aggregate represent 16% of the Company's monthly revenue. The lessee has
recently filed for reorganization under U.K. law. The lessee is continuing to
operate, and, under the reorganization plan, the lessee has agreed to continue
leasing S/N 3676, on a month-to-month basis at the same rent. The lessee has
also agreed to begin paying monthly maintenance reserves for S/N 3676 based on
the hours flown. The lessee has suspended payments on the second aircraft, S/N
3656, and will return the aircraft to the Company. The Company is negotiating a
lease with another regional airline, headquartered in Ireland, for the lease of
S/N 3656. It is likely that the Company will incur costs associated with the
re-lease of this aircraft; however, the Company has not yet determined the
amount of such costs. The Company is in the process of identifying any
pre-reorganization claims, such as unfunded maintenance reserves or unpaid lease
rentals, which will be submitted to the administrators of the lessee, and will
be considered an unsecured claim against the lessee. It is unlikely, however,
that the Company will recover the full amount of such claims from the lessee.
Ability to Repay Bonds. The Company's ability to repay the Bonds at their
maturity date is dependent in part upon reinvestment of excess cash flows in
additional Income Producing Assets. To the extent that the Company realizes less
than anticipated lease rentals due to lessee rental defaults, early termination
of leases, or lower than expected remarketing proceeds during the term of the
Bonds or realizes significant unexpected expenses due to lessee defaults in rent
or other obligations, this may result in lower than expected excess cash flow
available for reinvestment in additional Assets. As a result, the Company's
ability to repay the Bonds in full at maturity may be negatively affected by
such events even if the Company is able to meet its scheduled interest payments.
The Company's ability to repay the Bonds at their maturity date is also
dependent in part upon its ability to refinance the Bonds or sell its aircraft
portfolio at a price sufficient to retire the outstanding Bond principal. If due
to the risks described below in the risk factors entitled "Ownership Risks" and
"Leasing Risks", the values of the Company's aircraft portfolio are in a
depressed state at the maturity date of the Bonds, the Company may be unable to
repay the entire Bond indebtedness on the maturity date.
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 its 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. Even if an aircraft can be repossessed, the Company may be unable to
recover damages from the lessee if the condition of the aircraft when
repossessed was worse than that required by the lease.
International Risks. The Company's portfolio includes leases with foreign air
carriers. Leases with foreign lessees may present somewhat different credit
risks than those with domestic lessees.
Foreign laws, regulations and judicial procedures may be more or less protective
of lessor rights as those which apply in the United States. The Company could
experience collection problems related to the enforcement of its lease
agreements under foreign local laws and the remedies in foreign jurisdictions.
The protections potentially offered by Section 1110 of the Bankruptcy Code would
not apply to non-U.S. carriers, and applicable local law may not offer similar
protections. Certain countries do not have a central registration or recording
system with which to locally establish the Company's interest in equipment and
related leases. This could add difficulty in recovering an aircraft in the event
that a foreign lessee defaults.
Leases with foreign lessees are subject to risks related to the economy of the
country or region in which such lessee is located even if the U.S. economy
remains strong. On the other hand, a foreign economy may remain strong even
though the domestic U.S. economy does not. A foreign economic downturn may occur
and impact a foreign lessee's ability to make lease payments, even though the
U.S. and other economies remain stable. Furthermore, foreign lessees are subject
to risks related to currency conversion fluctuations. 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 would make it more
difficult for a lessee to meet its dollar-denominated lease payments, increasing
the risk of default of that lessee, particularly if that carrier's revenue is
primarily derived in the local currency.
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.
<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 15, 2000.
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 15,
2000.
Signature Title
/s/ Neal D. Crispin President and Chairman of the
- ------------------- Board of Directors of the Registrant
Neal D. Crispin Chief Financial Officer
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