UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number: 0-16838
JETSTREAM II, L.P.
Exact name of registrant as specified in its charter
Delaware 84-1068932
State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.
Attn: Andre Anderson,
3 World Financial Center, 29th Floor,
New York, New York 10285
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (212) 526-3237
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
LIMITED PARTNERSHIP DEPOSITARY UNITS (the "Units")
LIMITED PARTNERSHIP INTERESTS (underlying the Units)
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: Not applicable
DOCUMENTS INCORPORATED BY REFERENCE:
Prospectus of the registrant dated November 10, 1987, as filed pursuant to rule
424(c) of the Securities Act of 1933, as amended, is incorporated by reference
in Parts I, II, III and IV of this Annual Report on Form 10-K.
Annual Report to Unitholders for the year ended December 31, 1996 (Portions of
Parts I, II, III & IV).
PART I
Item 1. Business
General
JetStream II, L.P. (the "Partnership") is a limited partnership organized under
the laws of the State of Delaware on October 15, 1987. The general partners of
the Partnership (the "General Partners") are CIS Aircraft Partners, Inc., the
Managing General Partner ("CAP"), a Delaware corporation that is an affiliate
of Continental Information Systems Corporation, and Jet Aircraft Leasing Inc.,
the Administrative General Partner, a Delaware corporation that is an affiliate
of Lehman Brothers Inc. ("Lehman") (See Item 10).
Although the Partnership was organized on October 15, 1987, the Partnership
conducted no activities and recognized no revenues, profits or losses prior to
January 14, 1988, at which time the Partnership commenced operations. During
the period between January 15, 1988 and February 25, 1988 the Partnership
acquired for cash nine used commercial aircraft (together, the "Aircraft"). As
of December 31, 1996, the Partnership had six of the nine original Aircraft
remaining in its portfolio. For a description of the investments in the
Aircraft, please refer to the Message to Investors and Note 4 to the Financial
Statements of the Partnership's Annual Report to Unitholders for the year ended
December 31, 1996, which is filed as an exhibit under Item 14 and incorporated
herein by reference.
On November 10, 1987, the Partnership commenced an offering (the "Offering") on
a "best efforts basis" of $96,750,000 of limited partnership depositary units
("Units"). The closing of the offering occurred on February 24, 1988, with a
total of 4,837,505 Units being sold at a price of $20.00 per Unit, for a total
of approximately $96,750,000. The net proceeds of the offering after payment
of offering and organization costs and acquisition fees aggregated $85,938,000.
Narrative Description of Business
The Partnership is engaged in the business of managing a portfolio of used
commercial aircraft subject to triple net operating leases with commercial air
carriers. The Partnership is required to dissolve and distribute all of its
assets not later than December 31, 2027. The Partnership may reinvest the
proceeds of sales of Aircraft occurring prior to February 24, 1999; thereafter,
the net proceeds of sales of Aircraft will be distributed to the partners,
after deductions of amounts necessary for working capital and certain reserves.
The Partnership's investment objectives are to:
(1) generate quarterly cash distributions to holders of Units (the
"Unitholders"), substantially tax-sheltered during the initial years of
the Partnership's operations, initially at a rate of approximately 12%,
subject to conditions stated in the prospectus pursuant to which the
Units were offered and sold (the "Prospectus"), dated November 10, 1987;
(2) preserve and protect the value of the Partnership's assets.
The following table describes the Partnership's portfolio of Aircraft as of
December 31, 1996. This table provides certain operational statistics and
estimated market values for the Aircraft in the portfolio. The estimated
market values of the Aircraft are affected by, and subject to, future changes
in a variety of factors, including, but not limited to, the Aircraft's usage,
age and lease rate, the credit worthiness of the lessee, government maintenance
and noise regulations and the supply and demand of aircraft in the market place
with similar lift capacity. Reference is made to Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations of
this Form 10-K, and the Message to Investors and Note 4 to the Financial
Statements of the Partnership's Annual Report to Unitholders for the year ended
December 31, 1996 for additional information on the lease terms for each
Aircraft. Reference is also made to the Message to Investors section of the
Partners hip's Annual Report to Unitholders for the year ended December 31,
1996 for an overview of the aircraft leasing industry.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated Cumulative Cumulative
Aircraft Model Acquisition Net Book Market Lease Noise Flight Flight
Year Delivered Lessee Cost (1) Value (2) Value (3) Expiration (4) Compliance Cycles (5) Hours (5)
B-727-200 TWA $5,451,231 $0 $818,500 N/A (6) Stage 2 44,877 66,901
1969
DC-9-30 Northwest $7,230,460 $759,992 $3,296,000 4/21/07 Stage 2 58,892 61,273
1968
DC-9-30 Northwest $7,230,460 $759,992 $3,296,000 1/31/07 Stage 2 75,012 70,846
1970
DC-9-30 Northwest $7,230,461 $759,992 $3,296,000 1/31/07 Stage 2 62,613 58,780
1970
B-737-200 ADV Delta $14,380,390 $2,751,656 $5,060,800 9/30/99 Stage 2 35,074 53,768
1979
MD-80 Series Continental $27,313,020 $8,946,633 $16,564,900 3/15/98 Stage 3 14,862 30,051
1986
TOTALS $68,836,022 $13,978,265 $32,332,200
</TABLE>
_________________
NOTES:
(1) Includes a 1.5% fee paid to the Managing General Partner at the acquisition
of the Aircraft. Totals do not include aircraft which have been sold.
(2) As of December 31, 1996.
(3) Estimated market values for the Aircraft are based upon annual independent
appraisals. These estimates are subject to a variety of assumptions.
Additionally, there can be no assurance that the Partnership would receive
an amount equal to the market value shown above upon the sale of any of the
Aircraft.
(4) Lease expiration dates do not include renewal options.
(5) TWA data as of 11/5/96; Delta data as of 11/17/96; Northwest data as of
11/7/96; and Continental data as of 11/13/96.
(6) TWA currently leases the Partnership's remaining 727-200 non-advanced
aircraft on a month-to-month basis.
Aging Aircraft Maintenance - The Federal Aviation Administration (the "FAA"),
acting on recommendations from industry trade groups, has adopted a series of
Airworthiness Directives ("AD's") for certain Boeing and McDonnell Douglas
aircraft models. AD's are mandates requiring the airline to perform a specific
maintenance task within a specified period of time. The FAA imposes strict
requirements governing aircraft inspection and certification, maintenance,
equipment requirements, corrosion control, noise levels and general operating
and flight rules. In addition to mandating more intensive inspections of
certain structural components, including the fuselage, wing and tail sections,
certain of these AD's mandate that structural modifications to certain aircraft
be completed within specified periods, generally not less than 48 months from
the effective date of the relevant AD. Aircraft are generally subject to these
structural modification requirements based on flight cycle, flight hou r and
chronological age thresholds.
The Partnership's B-727-200 non-advanced aircraft, which is currently on-lease
to TWA, is subject to AD's mandating structural modification. AD's presently
applicable to the Boeing aircraft owned by the Partnership require extensive
repetitive inspections of such aircraft. There can be no assurance that such
inspections will not lead to mandatory structural modifications similar to
those noted above.
The Partnership's existing leases require the lessees to maintain the
Partnership's Aircraft in accordance with FAA approved maintenance programs
during the lease term. At the end of the leases, each lessee is required to
return the Aircraft in airworthy condition, including compliance with all AD's
for which action is mandated by the FAA during the lease term. Thus, certain
of the modifications required by the new AD's may not be effected by the
Partnership's lessees prior to the expiration of the current leases since, in
many cases, the relevant AD will not require action before the expiration of
the lease term.
In negotiating future leases or in selling aircraft now owned by the
Partnership, the Partnership may be required to bear some or all of the costs
of compliance with future AD's or AD's that have been issued but which did not
mandate action during the previous lessee's lease term or in respect of which
the previous lessee failed to comply. The aggregate effect on the Partnership
of compliance with these standards is not determinable at this time and will
depend upon a variety of factors, including, but not limited to, the state of
the commercial aircraft market, the extent of the AD, the availability of
capable repair facilities and the effect, if any, that such compliance may have
on the service lives of the affected aircraft. As described above, the cost to
the Partnership of such compliance may be reduced to the extent that current or
future lessees of the Partnership's Aircraft effect such modifications under
the terms of the current or future operating leases.
Aircraft Noise - Beginning in 1985, the FAA and various airport industry task
forces released reports suggesting various alternatives for reducing the number
of Stage 2 aircraft operating in the United States, including a proposed
requirement to bring all aircraft operating in the United States into
compliance with Stage 3 requirements in the 1990s or shortly thereafter. The
FAA has categorized aircraft types according to engine noise decibel levels.
Stage 1 aircraft, which have the highest noise level, are no longer allowed to
operate from civil airports in the United States. Stage 2 aircraft meet
current FAA requirements. Stage 3 aircraft are the most quiet and will be the
future standard of all aircraft. Only one of the Aircraft owned by the
Partnership is Stage 3, the remainder are Stage 2 aircraft. However, in
connection with lease extensions executed with Northwest in August 1996, each
of the Partnership's three DC-9-30 aircraft on-lease to Northwest will be
hushkitted, whi ch, as discussed below, entails upgrading the current engines
to comply with Stage 3 noise requirements. Northwest has agreed to fund the
cost of the hushkitting and, in turn, will be entitled to 50% of the proceeds
from the eventual sale of the aircraft.
Effective November 6, 1990, Congress passed the Airport Noise and Capacity Act
of 1990 (the "Act") which required the development of a National Noise Policy.
On September 25, 1991, final regulations (the "Regulations") were announced and
became effective immediately. The Regulations provide, among other things,
phase-out and non-addition rules under which the number of Stage 2 aircraft
operated by domestic carriers were limited to 75% of 1990 base levels by the
end of 1994, with further reductions to 50% of 1990 base levels by the end of
1996, 25% of 1990 base levels by the end of 1998 and ultimately to 0% by
December 31, 1999. The Regulations would allow the issuance of transferable
Stage 2 operating rights that expire in increments over the life of the
phase-out period. These transferable rights would allow an operator that at
any time reduced its Stage 2 fleet below that required by the phase-out
schedule to transfer the "unused" base level to another operator.
Several modification programs to hushkit or re-engine an aircraft to meet Stage
3 requirements have been announced, including programs for the B-727 series,
the B-737 and the DC-9 series. Hushkitting is a procedure for retrofitting
existing engines to comply with Stage 3 requirements. Re-engining is the
replacement of existing engines with technologically-advanced engines complying
with Stage 3 requirements. The decision whether to hushkit or re-engine an
aircraft will depend upon a variety of factors, including, without limitation,
the differential effects of the two approaches on the operating costs of the
aircraft, the relative costs and feasibility of the two approaches and the
General Partners' assessment of the remaining useful life and fair market value
of the aircraft. Where available, hushkits currently can cost up to $3.0
million per aircraft while the costs of re-engining programs are significantly
higher. No assurances are possible in respect to the actual cost which t he
Partnership would be required to pay in order to effect a hushkit or
re-engining modification as now available or as may be developed in the future.
In addition to FAA activity in noise abatement, other countries have adopted or
are considering adopting noise compliance standards which would have a similar
effect of reducing the ability of an airline to operate Stage 2 aircraft in
such jurisdictions. In 1989, the European Economic Community adopted a
non-addition rule which directed each member country to pass the necessary
legislation to prohibit airlines from adding Stage 2 aircraft to their fleets
after November 1, 1990. The rule has specific exceptions for leased aircraft
and does allow the continued use of Stage 2 aircraft which are in operation
before November 1, 1990, although adoption of rules requiring eventual
phase-out of Stage 2 aircraft in the member countries is anticipated. The
Partnership does not currently have any aircraft on lease to airlines outside
the United States. The effect of these regulations limits the market for these
aircraft unless they are hushkitted to comply with Stage 3 requirements.
Competition
The aircraft leasing industry is competitive and the success of any lessor is
largely dependent upon the nature of the aircraft within its portfolio. The
Partnership competes with aircraft manufacturers, distributors, airlines,
leasing companies, financial institutions and other parties engaged in leasing,
managing, and marketing aircraft. Such competitors may lease or sell aircraft
at lower rates or prices than the Partnership and provide benefits, such as
direct maintenance crews, and support services which the Partnership cannot
provide. Competition may include certain affiliates of the General Partners.
Since the Partnership's Aircraft are subject to operating leases, the
Partnership will be required to re-lease or sell such Aircraft after the
expiration of the current lease terms. The General Partners' ability to renew
leases or to sell the Aircraft owned by the Partnership is dependent upon
among other factors: (a) general economic conditions and economic conditions
affecting the airline industry in particular; (b) the current operating
profile of the aircraft, encompassing the age of the aircraft and the number
of hours and cycles flown and compliance with all issued AD's as well as the
general maintenance conditions of the aircraft; (c) the current fleet plans of
the major end-users of the aircraft type; (d) any costs required to refurbish
aircraft and to reconfigure aircraft to comply with all issued AD's and to
conform with similar aircraft within a potential lessee's fleet; (e) any cost
required to conform the aircraft to future Stage 3 noise restrictions; (f) the
availability to the lessee or potential lessee of other similar aircraft from
the Partnership's competition; and (g) the ability of the Managing General
Partner to effectively market the aircraft. It is possible that any future
lease renewals might be at lower lease rates than the Partnership currently
receives, adversely impacting revenue.
Employees
The Partnership has no employees. The officers, directors and employees of the
General Partners and their affiliates perform services on behalf of the
Partnership. The General Partners are entitled to certain fees and
reimbursement of certain out-of-pocket expenses incurred in connection with the
performance of these management services. Reference is made to Note 7 to the
Financial Statements of the Partnership's Annual Report to Unitholders for the
year ended December 31, 1996, for a discussion of the fees and reimbursable
expenses paid to the General Partners and their affiliates.
Item 2. Properties
Incorporated by reference to the Message to Investors and Note 4 to the
Financial Statements of the Partnership's Annual Report to Unitholders for the
year ended December 31, 1996.
Item 3. Legal Proceedings
The Partnership filed an administrative claim against Pan American World
Airways, Inc. ("Pan Am") in Bankruptcy Court as a result of Pan Am's return of
the Partnership's aircraft in November 1991. The aircraft was subsequently
sold in February 1992. The Partnership was seeking to recover certain rent and
maintenance costs associated with Pan Am's failure to comply with the return
provisions of its lease. The case was settled in the second quarter of 1996.
The Partnership received $41,508 as settlement of this claim in 1996.
There are no material pending legal proceedings to which the General Partners
or the Partnership is a party or to which its assets are subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the fourth quarter of 1996.
PART II
Item 5. Market for Partnership's Limited Partnership Interest and Related
Security Holder Matters
The Units represent the economic rights attributable to limited partnership
interests in the Partnership.
There is no established public trading market for the purchase and sale of
Units. As of December 31, 1996, the number of Unitholders was 6,936.
Information concerning the quarterly cash distributions paid per limited
partnership unit is incorporated herein by reference to the page prior to the
Message to Investors, the Message to Investors and Note 6 of the Notes to
Financial Statements of the Partnership's Annual Report to Unitholders for the
year ended December 31, 1996.
Item 6. Selected Financial Data
Incorporated by reference to the "Financial Highlights" section of the Message
to Investors of the Partnership's Annual Report to Unitholders for the year
ended December 31, 1996.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
As of December 31, 1996, all six of the Partnership's aircraft were on-lease.
There were three aircraft on-lease to Northwest Airlines, Inc. ("Northwest"),
one aircraft on-lease to Trans World Airlines, Inc. ("TWA"), one aircraft
on-lease to Delta Air Lines, Inc. ("Delta"), and one aircraft on-lease to
Continental Airlines, Inc. ("Continental").
In August 1996, the Partnership executed agreements with Northwest to extend
the leases for the Partnership's three DC-9-30 aircraft for a term of 10 years
from the scheduled lease expiration dates in January 1997 (two aircraft) and
April 1997 (one aircraft). Northwest continues to pay the Partnership a
monthly lease rate of $35,000 per aircraft. In accordance with the lease
extensions, each of the aircraft will be hushkitted, which entails upgrading
the current engines to comply with Stage 3 noise requirements. These upgrades
will enable the aircraft to continue to fly in the United States beyond
December 31, 1999 -- the phase-out date for all Stage 2 commercial aircraft.
Northwest has agreed to fund the cost of hushkitting and, in turn, will be
entitled to 50% of the proceeds from the sale of the aircraft at the end of the
leases. The General Partners believe that the lease extensions and hushkitting
of the engines will in all likelihood increase the value of the aircraft and wi
ll present the Partnership with more viable sales opportunities for the
aircraft in the future.
TWA continues to lease the Partnership's remaining 727-200 Stage 2 non-advanced
aircraft on a month-to-month basis and remains current on its monthly lease
payments of $32,500. To date, TWA has not given any indication to the
Partnership as to how long it will continue to lease the aircraft. Once the
aircraft is returned to the Partnership, the General Partners believe that it
will be very difficult to re-lease it to another airline.
The lease with Delta for the Partnership's 737-200 advanced aircraft expires in
September 1999. In accordance with the terms of the lease agreement, Delta
pays the Partnership a monthly lease rate of $80,000.
Pursuant to the terms of the lease agreement executed with Continental in
February 1994, the Partnership agreed to provide up to $600,000 of financing to
the airline to perform modification work on the Partnership's MD-80 Series
aircraft, including advanced avionics, interior furnishings and exterior paint.
On June 7, 1994, the Partnership made its first advance to Continental in the
amount of $302,525. The modification financing is repayable over the life of
the lease at an interest rate of 8% per annum for advances made before February
1, 1996, and, with respect to advances made after February 1, 1996, a rate per
annum equal to the yield to maturity of United States Treasury Notes having a
maturity closest to the remaining term of the lease, plus 4.25 percent. As of
December 31, 1996, Continental had made cumulative principal payments on the
loan totalling $194,122. Payments made on this loan are the reason for the
decrease in the Partnership's loan receivable balance, which tota lled $108,403
at December 31, 1996, compared to $187,729 at December 31, 1995. Continental
makes monthly lease payments to the Partnership of $180,000. The lease with
Continental expires in March 1998.
At December 31, 1996, the Partnership had unrestricted cash and cash
equivalents of $1,791,426, compared to $4,282,580 at December 31, 1995. The
decrease is primarily attributable to the payment of a special cash
distribution to Unitholders of $3,401,826, or approximately $.70 per Unit, on
October 22, 1996. This special distribution was funded from cash that was
previously held in reserve. The General Partners determined that a portion of
the Partnership's cash reserves could be distributed as a result of Northwest's
agreement to fund the costs associated with hushkitting the Partnership's three
DC-9-30 aircraft as part of the lease extensions executed in August 1996 as
discussed above. The Partnership's restricted cash balance decreased from
$1,047,475 at December 31, 1995 to $297,475 at December 31, 1996. The decrease
is attributable to the reclassification of $750,000 from restricted cash to
operating cash in connection with the lease extensions executed with Northwest
in Augus t 1996. Such amount had previously been included in the Partnership's
restricted cash to cover the cost of performing various airworthiness
directives on the Partnership's three DC-9-30 aircraft on-lease to Northwest.
Under the extended leases, Northwest is obligated to pay for all airworthiness
directives required during the terms of the leases, therefore, the Partnership
reclassified the $750,000 as operating cash. The Partnership's remaining
restricted cash balance of $297,475 represents the balance of modification work
financing committed to Continental in accordance with the 1994 lease agreement.
Accounts payable and accrued expenses at December 31, 1996 totalled $352,999,
compared to $256,152 at December 31, 1995. The increase is primarily
attributable to the accrual of management and re-leasing fees for the third and
fourth quarters of 1996. The 1995 balance reflects the accrual of management
fees for only the fourth quarter of 1995.
During the year ended December 31, 1996, the Partnership paid distributions to
the Unitholders for the period from October 1, 1995 to December 31, 1995 and
for the first three quarters of 1996, in the amounts of $1,001,763 and
$3,397,219, respectively, which represents approximately $.21 and approximately
$.70 per Unit, respectively. Additionally, as discussed above, the Partnership
paid a special cash distribution to Unitholders in the amount of $3,401,826, or
approximately $.70 per Unit, on October 22, 1996. This special distribution
was funded from cash that was previously held in reserve. At December 31,
1996, the Partnership had a distribution payable to Unitholders of $1,068,820,
or approximately $.22 per Unit. This amount reflects the 1996 fourth quarter
cash distribution to Unitholders which was funded from cash flow from
operations. This distribution was subsequently paid on February 11, 1997.
Future cash distributions will be determined on a quarterly basis after an
evaluation of the Partnership's current and expected financial position. The
level of cash available for future distribution will be reduced if TWA
terminates the lease for the Partnership's 727-200 non-advanced aircraft which
is currently being leased from the Partnership on a month-to-month basis.
On March 18, 1996, based upon, among other things, the advice of legal counsel,
Skadden, Arps, Slate, Meagher & Flom, the General Partners adopted a resolution
that states, among other things, if a Change of Control (as defined below)
occurs, the General Partners may distribute the Partnership's cash balances not
required for its ordinary course day-to-day operations. "Change of Control"
means any purchase or offer to purchase more than 10% of the Units that is not
approved in advance by the General Partners. In determining the amount of the
distribution, the General Partners may take into account all material factors.
In addition, the Partnership will not be obligated to make any distribution to
any partner and no partner will be entitled to receive any distribution until
the General Partners have declared the distribution and established a record
date and distribution date for the distribution. The Partnership filed a Form
8-K disclosing this resolution on March 21, 1996.
Results of Operations
Substantially all of the Partnership's revenue during 1996 was generated from
the leasing of the Partnership's Aircraft to commercial airlines under triple
net operating leases. The majority of the balance of the Partnership's revenue
consisted of interest income.
1996 compared to 1995
For the twelve months ended December 31, 1996, the Partnership reported net
income of $485,267, compared to $608,971 for the corresponding period in 1995.
The decrease is primarily attributable to gains on the sale of aircraft
totalling $1,083,016 recognized by the Partnership during 1995 as a result of
the June 1995 and September 1995 sales of two 727-200 non-advanced aircraft
formerly on-lease to TWA. No such gain was recognized by the Partnership
during 1996. Excluding the gains on sale of aircraft, the Partnership recorded
a loss from operations for the twelve months ended December 31, 1995 totalling
$474,045, compared to income from operations of $485,267 for 1996. The
increase in income from operations for the 1996 period is primarily
attributable to a decrease in depreciation expense and, to a lesser extent, a
decrease in operating expenses, partially offset by a slight decrease in rental
income.
Rental income for the twelve months ended December 31, 1996 totalled
$4,770,000, compared to $4,927,500 for the corresponding period in 1995. The
slight decrease is primarily attributable to the reduction in the monthly lease
rate paid by Delta in accordance with the lease extension for the Partnership's
737-200 advanced aircraft executed in November 1995.
Other income for the twelve months ended December 31, 1996 totalled $45,823,
compared to $3,720 for the corresponding period in 1995. The increase is
primarily attributable to a payment received by the Partnership in the amount
of $41,508 as settlement of an administrative claim by the Partnership against
Pan Am which was filed in Bankruptcy Court in 1992. The Partnership was
seeking to recover certain rent and maintenance costs associated with Pan Am's
failure to comply with the return provisions of its lease. The case was
settled during the second quarter of 1996.
Depreciation expense for the twelve months ended December 31, 1996 totalled
$3,961,231, compared to $5,001,206 for the corresponding period in 1995. The
decrease is primarily attributable to the sales of the two 727-200 non-advanced
aircraft in June 1995 and September 1995 formerly on lease to TWA and to one of
the Partnership's aircraft being fully depreciated in 1995.
General and administrative expenses totalled $184,047 for the twelve months
ended December 31, 1996, compared to $156,043 for the corresponding period in
1995. The increase is primarily due to an increase in printing and postage
costs and an increase in costs associated with the appraisal of the
Partnership's aircraft.
Operating expenses for the twelve months ended December 31, 1996 totalled
$1,346, compared to $73,128 for the corresponding period in 1995. The balance
in the 1995 period is primarily attributable to storage and maintenance costs
which were incurred as a result of the idle status of the two 727-200
non-advanced aircraft during 1995 which were returned to the Partnership by TWA
subsequent to their respective lease expirations in the fourth quarter of 1994.
These aircraft were subsequently sold in June 1995 and September 1995.
1995 compared to 1994
For the twelve months ended December 31, 1995, the Partnership reported net
income of $608,971 as compared to a net loss of $575,105 for the corresponding
period in 1994. The increase is primarily attributable to a $1,083,016 gain on
the sale of the two 727-200 non-advanced aircraft in June and September 1995,
respectively, which were formerly on-lease to TWA. This increase was partially
offset by a decrease in rental income.
Rental income for the twelve months ended December 31, 1995 totalled $4,927,500
as compared to $5,417,086 for the corresponding period in 1994. The decrease
is primarily due to the fourth quarter 1994 lease expirations and subsequent
sale of the two 727-200 non-advanced aircraft formerly on lease to TWA and, to
a lesser extent, the reduction of the monthly lease rate paid by Delta in
accordance with the lease extension for the Partnership's 737-200 advanced
aircraft effected in November 1995.
Interest income for the twelve months ended December 31, 1995 totalled $282,782
as compared to $134,581 for the corresponding period in 1994. The increase is
attributable to an increase in the Partnership's invested cash balance, higher
interest rates and interest income earned on the loan to Continental.
Other income totalled $3,720 for the twelve months ended December 31, 1995 as
compared to $55,380 for the year ended December 31, 1994. The higher balance
in 1994 primarily represents a settlement for damage done to the landing gear
of the Partnership's MD-80 Series aircraft while it was in storage prior to
being re-leased to Continental in February 1994.
Depreciation expense for the twelve months ended December 31, 1995 totalled
$5,001,206 as compared to $5,451,744 for the corresponding period in 1994. The
decrease is primarily attributable to the sales of the two 727-200 non-advanced
aircraft in June 1995 and September 1995.
General and administrative expenses for the twelve months ended December 31,
1995 were $156,043 as compared to $193,698 for the corresponding period in
1994. The decrease is primarily attributable to legal expenses which were
incurred in the first quarter of 1994 in connection with the lease agreement
with Continental.
Operating expenses for the twelve months ended December 31, 1995 totalled
$73,128 as compared to $56,937 for the corresponding period in 1994. The
increase is primarily attributable to storage and maintenance costs which were
incurred as a result of the idle status of the two 727-200 non-advanced
aircraft which were returned to the Partnership by TWA subsequent to the
respective lease expirations in the fourth quarter of 1994.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to Unitholders for
the year ended December 31, 1996.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Partnership
The Partnership has no officers or directors. The General Partners jointly
manage and control the affairs of the Partnership and have general
responsibility and authority in all matters affecting its business.
Information concerning the directors and executive officers of the General
Partners are as follows:
Jet Aircraft Leasing Inc.
Name Office
Moshe Braver Director and President
John Stanley Vice President and Chief Financial Officer
Certain officers and directors of Jet Aircraft Leasing, Inc. are now serving
(or in the past have served) as officers or directors of entities which act as
general partners of a number of limited partnerships which have sought
protection under the provisions of the Federal Bankruptcy Code. Those
partnerships sought the protection of the bankruptcy laws to protect the
partnerships' assets from loss through foreclosure.
Moshe Braver, 43, is currently a Managing Director of Lehman Brothers and has
held such position since October 1985. During this time, he has held positions
with the Business Analysis Group, International and Capital Markets
Administration and currently, with the Diversified Asset Group. Mr. Braver
joined Shearson Lehman Brothers in August 1983 as Senior Vice President. Prior
to joining Shearson, Mr. Braver was employed by the accounting firm of Coopers
& Lybrand from January 1975 through August 1983 as an Audit Manager. He
received a Bachelor of Business Administration degree from Bernard Baruch
College in January 1975 and is a Certified Public Accountant.
John D. Stanley, 34, Vice President, has worked with the Diversified Asset
Group since October 1988. Mr. Stanley received a B.A. in Economics from the
University of Wisconsin-Madison in 1984 and a Master of Management Degree from
Northwestern University in 1988. From 1984 to 1986, Mr. Stanley worked as a
Financial Analyst for Kidder, Peabody and Co.
CIS Aircraft Partners, Inc.
Name Office
Thomas J. Prinzing Director and President
Frank J. Corcoran Director, Vice President and Treasurer
Robin A. Konicek Vice President
As reported on the Partnership's Current Report on Form 8-K, dated February 28,
1989, on Friday, January 13, 1989, Continental Information Systems Corporation,
and certain of its subsidiaries, including CIS Corporation, filed voluntary
petitions for reorganization under Chapter 11 of the Federal Bankruptcy Code.
As described below, various directors and executive officers of CAP hold
similar positions for Continental Information Systems Corporation, CIS
Corporation and such subsidiaries.
On November 29, 1994, the Bankruptcy Court for the Southern District of New
York confirmed the Trustee's Proposed Joint Plan of Reorganization. The
approved Plan became effective on December 21, 1994. As a result of the
reorganization, the Directors and Officers of CAP resigned from and took on
various directorships for Continental Information Systems Corporation, CIS
Corporation and their subsidiaries.
Thomas J. Prinzing, 51, is President of CIS Aircraft Partners, Inc. and of
Continental Information Systems Corporation. From 1991 to December 1995, Mr.
Prinzing was President of CIS Aircraft Partners, Inc. Mr. Prinzing, a
Certified Public Accountant, received a Bachelor of Commerce degree from the
University of Windsor.
Frank J. Corcoran, 46, joined CIS Corporation in November 1994 as Senior Vice
President and Chief Financial Officer. From 1992 until joining CIS
Corporation, Mr. Corcoran was Vice President and General Manager of Unisys
Finance Corporation, an equipment leasing and finance subsidiary of Unisys
Corporation. Previously, he served as Chief Financial Officer and Controller
of Unisys Finance Corporation. Prior to that, Mr. Corcoran held positions of
Corporate Tax Manager at Unisys Corporation; Controller, U.S. Operations of
Lucas Industries, Inc.; Financial Analyst with Detroit Edison Company; and a
Senior Accountant with KPMG Peat Marwick. Mr. Corcoran holds a B.S. in
Business Administration from Wayne State University, an M.S. in Taxation from
Walsh College, and is a Certified Public Accountant.
Robin A. Konicek, 40, is a Vice President of CIS Aircraft Partners, Inc. and is
responsible for domestic and international aircraft marketing. She has been
active in the financing, trading and management of aircraft since 1982. Prior
to joining CIS in 1986, Ms. Konicek was a Vice President of Crocker Bank
Airlines and Aerospace Group, with major responsibility for developing the U.S.
market. She holds an A.B. from Stanford University and an M.B.A. from the
University of California, Los Angeles.
Item 11. Executive Compensation
No compensation was paid by the Partnership to the officers and directors of
the General Partners. See Item 13 below for a description of the compensation
and fees paid to the General Partners and their affiliates by the Partnership.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security ownership of certain beneficial owners As of the date hereof, no
person is known by the Partnership to be the beneficial owner of more than
five percent of the Units of the Partnership.
(b) Security ownership of management The Partnership has no directors or
officers, and neither of the General Partners of the Partnership owns any
Units. The Assignor Limited Partners for the Partnership, CIS Assignor
L.P.A., Inc. (an affiliate of CAP), owns 5 Units.
None of the directors or officers of the General Partners owned any Units
as of December 31, 1996.
(c) Changes in Control Other than as described herein, the Partnership knows
of no arrangements, the operation of the terms of which may at a subsequent
date result in a change in control of the Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partners and their affiliates received or will receive certain
types of compensation, fees, or other distributions in connection with the
operation of the Partnership. The fees and compensation were not determined
by, and may not necessarily reflect, arm's length negotiations. None of the
officers and directors of the General Partners received any compensation from
the Partnership. First Data Investor Services Group, an unaffiliated company,
provides partnership accounting and investor relations services for the
Partnership. Prior to May 1993, these services were provided by an affiliate
of a general partner. Transfer agent services and certain tax reporting
services are provided by Service Data Corporation, an unaffiliated company.
For additional information on fees paid to the General Partners and affiliates,
reference is made to Note 7 of the Notes to the Financial Statements in the
Partnership's Annual Report to Unitholders for the year ended December 31,
1996.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements:
Page
Number
Balance Sheets - December 31, 1996 and 1995 (1)
Statements of Partners' Capital (Deficit) - For the years
ended December 31, 1996, 1995 and 1994 (1)
Statements of Operations - For the years ended
December 31, 1996, 1995 and 1994 (1)
Statements of Cash Flows - For the years ended
December 31, 1996, 1995 and 1994 (1)
Notes to Financial Statements (1)
Report of Independent Public Accountants (1)
(1) Incorporated by reference to the Partnership's Annual Report to
Unitholders for the year ended December 31, 1996.
2. Financial Statement Schedules:
No schedules are presented because the information is not applicable or
is included in the Financial Statements or the notes thereto.
3. Exhibits:
(3) Articles of Incorporation and bylaws (Incorporated by reference to
the Partnership's Prospectus filed with the Commission on April 17,
1987.)
(4) Depositary Agreement (Incorporated by reference to Exhibit 4.5 to
the Partnership's Registration Statement on Form S-1 filed with the
Commission on April 17, 1987.)
(10) Escrow Agreement (Incorporated by reference to Exhibit 10.12 to the
Partnership's Registration Statement on Form S-1 filed with the
Commission on April 17, 1987.)
(13) Annual Report to Unitholders for the year ended December 31, 1996.
(27) Financial Data Schedule
(b) The Partnership filed no current reports on Form 8-K during the fourth
quarter of the period covered on this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
JETSTREAM II, L.P.
BY: Jet Aircraft Leasing Inc.
Administrative General Partner
Date: March 17, 1997
BY: /s/ Moshe Braver
Name: Moshe Braver
Title: Director and President
BY: CIS Aircraft Partners, Inc.
Managing General Partner
Date: March 17, 1997
BY: /s/ Thomas J. Prinzing
Name: Thomas J. Prinzing
Title: Director and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
CIS AIRCRAFT PARTNERS, INC.
A General Partner
Date: March 17, 1997
BY: /s/ Thomas J. Prinzing
Thomas J. Prinzing
Director and President
Date: March 17, 1997
BY: /s/ Frank J. Corcoran
Frank J. Corcoran
Director, Vice President
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
JET AIRCRAFT LEASING INC.
A General Partner
Date: March 17, 1997
BY: /s/ Moshe Braver
Moshe Braver
Director and President
Date: March 17, 1997
BY: /s/ John Stanley
John Stanley
Vice President and
Chief Financial Officer
JetStream II, L.P.
EXHIBIT 13
JetStream II, L.P.
1995 Annual Report
JETSTREAM II, L.P.
JetStream II, L.P. commenced operations in 1988, and was formed to acquire used
commercial aircraft subject to triple net operating leases with commercial
airlines. Since inception, limited partners have received cash distributions
totalling approximately $16.00 per $20.00 Unit. The following table provides
the quarterly cash distributions per Unit paid by the Partnership for the years
ended December 31, 1996 and 1995.
Quarter Declared 1996 1995
Special Distribution* $ .703 $ --
First Quarter .232 .228
Second Quarter .240 .237
Third Quarter .230 .267
Fourth Quarter .221 .207
Total $ 1.626 $ .939
* On October 22, 1996, the Partnership paid a special distribution in
the amount of approximately $.70 per Unit which was funded from cash
previously held in reserve.
Contents
1 Message to Investors
4 Financial Statements
7 Notes to the Financial Statements
12 Report of Independent Public Accountants
Administrative Inquiries Performance Inquiries/Form 10-Ks
Address Changes/Transfers First Data Investor Services Group
Service Data Corporation P.O. Box 1527
2424 South 130th Circle Boston, Massachusetts 02104-1527
Omaha, Nebraska 68144-2596 Attn: Financial Communications
800-223-3464 800-223-3464
MESSAGE TO INVESTORS
Presented for your review is the 1996 Annual Report for JetStream II, L.P. (the
"Partnership"). This message will provide an overview of conditions in the
airline and aircraft leasing industries, an update on the Partnership's
portfolio of aircraft, and highlights of the Partnership's financial results
for the past five years. Also included are the Partnership's audited financial
statements for the year ended December 31, 1996.
Industry Overview
The upturn in the U.S. airline industry continued in 1996 as evidenced by
overall net profits reaching a record $3.5 billion, an increase from
approximately $2 billion in 1995. Primary among the factors contributing to
the continued improvement were a strengthening economy, an increase in
passenger traffic, which was up by 7% from 1995, and cost-cutting initiatives,
all of which have resulted in improved cash flow and operating results for many
airlines. While strong operating results are expected to continue in 1997,
they could be tempered by high fuel costs and potential labor issues.
These improving conditions and the resulting increase in aircraft utilization
have had a positive impact on the level of aircraft leasing activity, as
evidenced by the significant reduction in the number of serviceable aircraft
available for lease during the past two years. Additionally, as reported in a
recent edition of Aviation Week & Space Technology, it is possible that the
number of surplus commercial aircraft available for sale or lease could
disappear altogether during 1997. However, it is important to note that,
despite this increase in leasing activity, future viable leasing opportunities
for Stage 2 aircraft, such as the Partnership's, will be limited as a result of
the implementation of noise compliance regulations developed in accordance with
the Airport Noise and Capacity Act of 1990, which requires airlines to reduce
the number of older aircraft in their fleets. These regulations provide, among
other things, phase-out and non-addition rules under which the number of Stage
2 aircraft operated by domestic carriers were limited to 75% of 1990 base
levels by the end of 1994, 50% of 1990 base levels by the end of 1996, with
further reductions to 25% of 1990 base levels by the end of 1998 and ultimately
to 0% by December 31, 1999. The scheduled phase-out of Stage 2 aircraft
combined with the prolonged difficulties in the airline industry during the
early 1990's has had a substantial impact on residual aircraft values of Stage
2 aircraft.
Portfolio Update
As discussed in prior correspondence, the Partnership executed an agreement
with Northwest in August 1996 to extend the leases for the Partnership's three
DC-9-30 aircraft for a term of 10 years from the previous scheduled expiration
dates in January 1997 (two aircraft) and April 1997 (one aircraft). Northwest
will continue to pay the Partnership a monthly lease rate of $35,000 per
aircraft. In accordance with the lease extensions, each of the aircraft will
be hushkitted, which entails upgrading the current engines to comply with Stage
3 noise requirements. These upgrades will enable the aircraft to continue to
fly in the United States beyond December 31, 1999, the phase-out date for all
Stage 2 commercial aircraft. Northwest has agreed to fund the cost of the
hushkitting and, in turn, will be entitled to 50% of the proceeds from the
eventual sale of the aircraft. The General Partners believe that the lease
extensions and hushkitting of the engines will in all likelihood increase the
value of the aircraft and will present the Partnership with more viable sales
opportunities in the future.
Of the Partnership's three remaining aircraft, one is on-lease to Continental
Airlines ("Continental"), one is on-lease to Delta Air Lines ("Delta") and one
is on-lease to Trans World Airlines ("TWA"). The following table highlights
the Partnership's portfolio of aircraft as of December 31, 1996 and includes
estimated market values as of that date.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Estimated
Aircraft Model Acquisition Market Lease Monthly Noise
Year Delivered Lessee Cost (1) Value (2) Expiration (3) Lease Rate Compliance
MD-80 Series Continental $27,313,020 $16,564,900 3-15-98 $180,000 Stage 3
1986
B-737-200 ADV Delta 14,380,390 5,060,800 9-30-99 $80,000 Stage 2
1979
DC-9-30 Northwest 7,230,460 3,296,000 4-21-07 $35,000 Stage 2
1968
DC-9-30 Northwest 7,230,460 3,296,000 1-31-07 $35,000 Stage 2
1970
DC-9-30 Northwest 7,230,461 3,296,000 1-31-07 $35,000 Stage 2
1970
B-727-200 TWA 5,451,231 818,500 N/A (4) $32,500 Stage 2
1969
</TABLE>
(1) Includes a 1.5% fee paid to the Managing General Partner at the acquisition
of the aircraft.
(2) Estimated market values for the aircraft are based upon annual independent
appraisals. These estimates are subject to a variety of assumptions.
Additionally, there can be no assurance that the Partnership would receive
an amount equal to the market value shown above upon the sale of any of the
aircraft.
(3) Lease expiration dates do not include renewal options.
(4) TWA currently leases the Partnership's 727-200 non-advanced aircraft on a
month-to-month basis.
Financial Highlights
The following table summarizes the Partnership's financial results for the last
five years. For additional financial information, please refer to the
financial statements and notes to the financial statements beginning on page 4
of this report.
1996 1995 1994 1993 1992
Rental Revenues $ 4,770,000 $ 4,927,500 $ 5,417,086 $ 5,112,882 $ 9,074,600
Write-down
of Aircraft -- -- -- 15,551,276 --
Total Expenses 4,594,089 5,688,047 6,182,152 22,198,497 6,883,907
Net Income (Loss) 485,267 608,971 (575,105) (14,797,472) 2,350,915
Net Income (Loss)
per Limited
Partnership Unit (1) .10 .12 (0.12) (3.03) .48
Total Assets 16,175,937 23,457,938 27,689,193 33,618,546 57,722,748
Partners'
Capital 14,589,989 22,036,571 26,013,542 31,450,948 52,136,949
Net Cash Provided
by Operating
Activities 5,293,635 4,560,125 6,612,975 5,591,459 7,848,774
Cash Distributions
per Unit (1)(2) 1.63 .94 1.00 1.21 1.85
(1) 4,837,505 units outstanding
(2) Distribution amounts are reflected in the year for which they are declared.
The Partnership's fourth quarter cash distribution is usually paid in late
January or early February of the following year.
* Rental revenues for the year ended December 31, 1996 decreased from 1995
primarily due to the reduction in the monthly lease rate paid by Delta in
accordance with the lease extension executed in November 1995.
* The decrease in total expenses from 1995 to 1996 is primarily attributable to
a decrease in depreciation expense recorded by the Partnership as a result of
the June 1995 and September 1995 sales of two aircraft formerly on-lease to
TWA and to one of the Partnership's aircraft being fully depreciated in 1995.
* The decrease in net income is primarily attributable to gains on the sale of
aircraft totalling $1,083,016 recognized by the Partnership during 1995 as a
result of the aforementioned sales. No such gain was recognized by the
Partnership during 1996. Excluding the gains on sale of aircraft, the
Partnership recorded a loss from operations for the year ended December 31,
1995 totalling $474,045, compared to income from operations of $485,267 for
the corresponding period in 1996. The increase in income from operations for
the 1996 period is primarily attributable to a decrease in depreciation
expense and, to a lesser extent, a decrease in operating expenses, partially
offset by the slight decrease in rental income.
* The increase in net cash provided by operating activities is primarily
attributable to the reclassification of $750,000 from restricted cash to
operating cash during the third quarter of 1996. Such amount had previously
been included in the Partnership's restricted cash to cover the cost of
performing various airworthiness directives on the Partnership's three
aircraft on-lease to Northwest. Under its extended leases executed in August
1996, Northwest is obligated to pay for all airworthiness directives required
during the term of the leases, therefore, the Partnership reclassified the
$750,000 as operating cash.
General Information
As you are aware, a third party issued a partial tender offer in October 1996
to purchase units of the Partnership at a grossly inadequate price which was
substantially below the Partnership's estimated net asset value. In response,
we recommended that limited partners reject this offer because it did not
reflect the underlying value of the Partnership's assets. Holders of over 99%
of the outstanding units agreed that this offer was inadequate, rejected the
offer and did not tender their units. Please be assured that if any additional
tender offers are made for your units, we will make every effort to provide you
with our position regarding such offer on a timely basis.
Summary
The General Partners will continue their efforts to keep the Partnership's
aircraft on-lease. It is important to note, however, that since the total
return from your investment in the Partnership is dependent upon the aircraft's
ultimate selling prices, declines in residual values over the past several
years have had an adverse impact on your investment. The future performance of
the Partnership will be dependent upon the General Partners' ability to keep
the remaining aircraft on-lease, which, in turn, is largely dependent on the
demand of aircraft by the airline industry. We will update you on the status
of the Partnership's operations in future correspondence.
Very truly yours,
Jet Aircraft Leasing Inc. CIS Aircraft Partners, Inc.
A General Partner A General Partner
/s/Moshe Braver /s/Thomas J. Prinzing
Moshe Braver Thomas J. Prinzing
President President
March 17, 1997
BALANCE SHEETS
At December 31, At December 31,
1996 1995
Assets
Aircraft, at cost $ 26,877,000 $ 26,877,000
Less accumulated depreciation (12,898,735) (8,937,504)
13,978,265 17,939,496
Cash and cash equivalents 1,791,426 4,282,580
Restricted cash 297,475 1,047,475
Loan receivable (Note 4) 108,403 187,729
Interest receivable 368 658
Total Assets $ 16,175,937 $ 23,457,938
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses (Note 7) $ 352,999 $ 256,152
Distribution payable 1,079,616 1,011,882
Deferred revenue 153,333 153,333
Total Liabilities 1,585,948 1,421,367
Partners' Capital (Deficit):
General Partners (805,273) (746,143)
Limited Partners (4,837,505 units outstanding) 15,395,262 22,782,714
Total Partners' Capital 14,589,989 22,036,571
Total Liabilities and Partners' Capital $ 16,175,937 $ 23,457,938
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1996, 1995 and 1994
General Limited
Partners Partners Total
Balance at December 31, 1993 $ (652,000) $ 32,102,948 $ 31,450,948
Net Loss (5,751) (569,354) (575,105)
Distributions (48,623) (4,813,678) (4,862,301)
Balance at December 31, 1994 $ (706,374) $ 26,719,916 $ 26,013,542
Net Income 6,090 602,881 608,971
Distributions (45,859) (4,540,083) (4,585,942)
Balance at December 31, 1995 $ (746,143) $ 22,782,714 $ 22,036,571
Net Income 4,853 480,414 485,267
Distributions (63,983) (7,867,866) (7,931,849)
Balance at December 31, 1996 $ (805,273) $ 15,395,262 $ 14,589,989
STATEMENTS OF OPERATIONS
For the years ended December 31, 1996 1995 1994
Income
Rental $ 4,770,000 $ 4,927,500 $ 5,417,086
Interest 263,533 282,782 134,581
Other 45,823 3,720 55,380
Total Income 5,079,356 5,214,002 5,607,047
Expenses
Depreciation 3,961,231 5,001,206 5,451,744
Management fees 447,465 457,670 479,773
General and administrative 184,047 156,043 193,698
Operating 1,346 73,128 56,937
Total Expenses 4,594,089 5,688,047 6,182,152
Net Income (Loss) from Operations 485,267 (474,045) (575,105)
Other Income
Gain on sale of aircraft (Note 5) -- 1,083,016 --
Net Income (Loss) $ 485,267 $ 608,971 $ (575,105)
Net Income (Loss) Allocated:
To the General Partners $ 4,853 $ 6,090 $ (5,751)
To the Limited Partners 480,414 602,881 (569,354)
$ 485,267 $ 608,971 $ (575,105)
Per limited partnership unit
(4,837,505 outstanding) $0.10 $0.12 $(0.12)
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996 1995 1994
Cash Flows From Operating Activities
Net Income (Loss) $ 485,267 $ 608,971 $ (575,105)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Restricted cash 750,000 -- 2,592,224
Gain on sale of aircraft -- (1,083,016) --
Depreciation 3,961,231 5,001,206 5,451,744
Increase (decrease) in cash arising
from changes in operating assets
and liabilities:
Accounts receivable -- 9,941 (9,941)
Interest receivable 290 257 8,854
Prepaid expenses -- -- 22,074
Accounts payable and accrued expenses 96,847 30,266 27,792
Maintenance payable -- -- (750,000)
Deferred revenue -- (7,500) (154,667)
Net cash provided by operating
activities 5,293,635 4,560,125 6,612,975
Cash Flows From Investing Activities
Loan receivable 79,326 73,246 (260,975)
Proceeds from sale of aircraft - net -- 1,533,570 --
Net cash provided by (used for)
investing activities 79,326 1,606,816 (260,975)
Cash Flows From Financing Activities
Cash distributions (7,864,115) (4,862,992) (4,477,373)
Net cash used for financing activities (7,864,115) (4,862,992) (4,477,373)
Net increase (decrease) in cash
and cash equivalents (2,491,154) 1,303,949 1,874,627
Cash and cash equivalents,
beginning of period 4,282,580 2,978,631 1,104,004
Cash and cash equivalents,
end of period $ 1,791,426 $ 4,282,580 $ 2,978,631
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
1. Organization
JetStream II, L.P. ("the Partnership"), a Delaware limited partnership, was
formed on October 15, 1987, for the purpose of acquiring and leasing used
commercial aircraft. The Managing General Partner of the Partnership is CIS
Aircraft Partners, Inc. ("CAP"), a third-tier, wholly owned subsidiary of
Continental Information Systems Corporation. The Administrative General
Partner is Jet Aircraft Leasing Inc. ("JAL"), formerly Hutton Aircraft Leasing,
Inc., an affiliate of Lehman Brothers Inc.
Upon formation of the Partnership, the General Partners each contributed $500,
and the initial Limited Partner contributed $100 for five limited partner
units. An additional 4,837,500 limited partnership depositary units were then
sold at a price of $20.00 per unit. The Partnership had an interim closing on
January 14, 1988 and a final closing on February 24, 1988, and received gross
offering proceeds of $96,750,000.
The Partnership is required to dissolve and distribute all of its assets no
later than December 31, 2027. The Partnership may reinvest the proceeds from
sales of aircraft occurring prior to February 24, 1999. Thereafter, the net
proceeds from any sales of aircraft will be distributed to the partners.
Title to the aircraft owned by the Partnership is held by nonaffiliated trusts
of which the Partnership is the beneficiary. The purpose of this method of
holding title is to satisfy certain registration requirements of the Federal
Aviation Administration.
On March 18, 1996, based upon, among other things, the advice of legal counsel,
Skadden, Arps, Slate, Meagher & Flom, the General Partners adopted a resolution
that states, among other things, if a Change of Control (as defined below)
occurs, the General Partners may distribute the Partnership's cash balances not
required for its ordinary course day-to-day operations. "Change of Control"
means any purchase or offer to purchase more than 10% of the Units that is not
approved in advance by the General Partners. In determining the amount of the
distribution, the General Partners may take into account all material factors.
In addition, the Partnership will not be obligated to make any distribution to
any partner and no partner will be entitled to receive any distribution until
the General Partners have declared the distribution and established a record
date and distribution date for the distribution. The Partnership filed a Form
8-K disclosing this resolution on March 21, 1996.
2. Significant Accounting Policies
Basis of Accounting -- The accompanying financial statements have been prepared
on the accrual basis of accounting in accordance with generally accepted
accounting principles. Revenues are recognized as earned and expenses are
recorded as obligations are incurred.
Aircraft and Depreciation -- The aircraft were recorded at cost, which includes
acquisition costs. Through December 31, 1993, depreciation to an estimated
salvage value of 10% was computed using the straight-line method over an
estimated average economic life of twelve years for all aircraft owned by the
Partnership. Beginning in 1994, depreciation was computed using the
straight-line method over an estimated remaining economic life of two to six
years for all aircraft owned by the Partnership.
Improvements to aircraft required to comply with regulatory requirements will
be capitalized when incurred and depreciated over the useful life of the
improvement.
Accounting for Impairment -- In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("FAS 121"), which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. FAS 121 also addresses the accounting
for long-lived assets that are expected to be disposed of. The Partnership
adopted FAS 121 in the fourth quarter of 1995.
Cash Equivalents -- Cash equivalents consist of short-term highly liquid
investments with maturities of three months or less from the date of issuance.
The carrying amount approximates fair value because of the short maturity of
these instruments.
Restricted Cash -- Restricted cash consists of funds the General Partners
believe will be expended by the Partnership to comply with regulatory and
maintenance requirements. During 1996, the Partnership reclassified $750,000
from restricted cash to operating cash. Such amount had previously been
included in restricted cash to cover the cost of performing various
airworthiness directives on the three aircraft on lease to Northwest Airlines.
However, under the extended leases (see Note 4), Northwest is obligated to pay
for all airworthiness directives required during the terms of the leases.
Concentration of Credit Risk -- Financial instruments which potentially subject
the Partnership to a concentration of credit risk principally consist of cash
in excess of the financial institutions' insurance limits. The Partnership
invests available cash with high credit quality financial institutions.
Operating Leases -- The aircraft leases are accounted for as operating leases.
Lease revenues are recognized over the terms of the related leases. Some of
the Partnership's operating leases require rental payments to be paid in
advance. Rental payments received in advance are deferred and then recognized
as income when earned.
Income Taxes -- No provision for income taxes has been made in the financial
statements since such taxes are the responsibility of the individual partners
rather than that of the Partnership (Note 8).
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. Partnership Allocations
The Limited Partnership Agreement ("Agreement") as originally executed on
November 10, 1987 substantially provides for the following:
Cash Distributions -- Cash flow from operations as defined in the Agreement, at
the discretion of the General Partners, will be distributed on a quarterly
basis, 99% to the Limited Partners and 1% to the General Partners.
Distributable proceeds from sales of aircraft in liquidation of the Partnership
will be distributed in accordance with the partners' capital accounts after all
allocations of income and losses.
Allocation of Income and Losses -- Generally, income and losses for any year
are allocated 99% to the Limited Partners and 1% to the General Partners.
Gains on sales of aircraft shall first be allocated to the General Partners
until they have been allocated an amount of gain equal to the lesser of their
respective deficit account balances or 1.01% of all capital contributions by
Limited Partners. Any additional gain recognized by the Partnership upon the
sale of aircraft shall be allocated 99% to the Limited Partners and 1% to the
General Partners.
Dissolution of Partnership -- If, upon dissolution of the Partnership, the
General Partners have a negative capital account, they shall contribute capital
equal to the lesser of their respective capital deficit account balances or
1.01% of all capital contributed by the Limited Partners.
4. Aircraft under Operating Leases
The Partnerships' aircraft leases are triple net operating leases, requiring
the lessees to pay substantially all expenses associated with the aircraft
during the term of the leases, except as described below:
Trans World Airlines, Inc. -- On January 15, 1988, the Partnership acquired
three Boeing 727-200 non-advanced aircraft for a total purchase price of
$16,353,693. These aircraft were subject to operating leases with Trans World
Airlines, Inc. ("TWA"), the terms of which are described below. In August
1993, the General Partners and TWA agreed to amend the original leases. As a
result, TWA paid the Partnership rent of $40,000 per month per aircraft, paid
quarterly in advance, commencing September 1, 1993 and continuing through
September 30, 1994, for two aircraft and October 31, 1994 for the third
aircraft.
On September 30, 1994, TWA agreed to extend the lease on one of the aircraft to
April 30, 1995. Thereafter, TWA has leased the aircraft on a month-to-month
basis at $32,500 per month paid in advance. The leases for the two remaining
aircraft were extended on a short-term basis and expired on October 31, 1994
and December 19, 1994. The remaining two aircraft were returned to the
Partnership in the fourth quarter of 1994 and sold in 1995. (See Note 5)
Northwest Airlines, Inc. -- During 1988 the Partnership acquired three
McDonnell Douglas DC-9-30 aircraft for a total purchase price of $21,691,381.
These aircraft are subject to operating leases with Northwest Airlines, Inc.
("Northwest"). Lease extensions were executed with Northwest in December 1993
for the Partnership's three DC-9-30 aircraft. Under the lease extensions,
which were scheduled to expire in January 1995 for two aircraft and April 1995
for the third, Northwest made monthly lease payments to the Partnership of
$35,000 per aircraft.
In October 1994, Northwest exercised its option to extend its current lease
agreements by one year. The new expiration dates were January 1996 for two
aircraft and April 1996 for the third aircraft. The monthly lease payments
remained at $35,000 per aircraft, paid in advance. In October 1995, Northwest
exercised its option to extend the current lease agreement for a term of one
year from the previous expiration dates, with the remaining terms of the lease
unchanged.
During the third quarter of 1996 the Partnership signed new lease agreements
with Northwest extending the current lease terms for the Partnership's three
DC-9-30 aircraft for a term of ten years from the previous scheduled expiration
dates in January 1997 (two aircraft) and April 1997 (one aircraft). Northwest
will continue to pay the Partnership a monthly lease rate of $35,000 per
aircraft. In accordance with the lease extensions, each of the aircraft will
be hushkitted, which entails upgrading the current engines to comply with Stage
3 noise requirements. This will enable the aircraft to continue to fly in the
United States beyond December 31, 1999, the phase-out date for all Stage 2
commercial aircraft. Northwest has agreed to fund the cost of the hushkitting
and, in turn, will be entitled to fifty percent (50%) of the proceeds from the
eventual sale of the aircraft.
Delta Air Lines, Inc. -- On February 25, 1988, the Partnership acquired a Boeing
737-200 advanced aircraft for a total purchase price of $14,380,390. This
aircraft is subject to an operating lease with Delta Air Lines, Inc. ("Delta").
In September 1992, the General Partners and Delta agreed to amend the original
lease. The amendment provided for rent of $95,000 per month through the
expiration date in December 1994. In May 1994, Delta exercised its option to
extend the lease for a term of two years from the previous expiration date.
The remaining terms of the lease were unchanged.
In November 1995 an agreement was reached with Delta to amend and extend the
current lease until September 1999 at a monthly lease rate of $80,000. While
this rate represents a decline from the prior lease rate of $95,000 per month,
it was in line with the then prevailing market rates.
Continental Airlines, Inc. -- On January 26, 1988, the Partnership acquired a
McDonnell Douglas MD-80 Series aircraft for a total purchase price of
$27,313,020. This aircraft was subject to an operating lease with Continental
Airlines, Inc. ("Continental"), the term of which expired on April 28, 1993.
Subsequent to the expiration date of April 28, 1993, Continental returned the
aircraft to the Partnership.
On February 9, 1994, the Partnership entered into a new lease agreement with
Continental. The agreement provides for Continental to lease the plane for a
term of four years, and pay $180,000 per month in advance effective March 15,
1994. In addition, the Partnership reserved $750,000 from its maintenance
reserve funds in March 1994 to perform various maintenance work on the plane.
Also, the Partnership agreed to provide up to $600,000 of financing to
Continental to perform modification work on the aircraft, including advanced
avionics, interior furnishings and exterior paint. The modification financing
is repayable over the life of the lease at an interest rate of 8% per annum for
advances made before February 1, 1996, and with respect to advances made after
February 1, 1996, a rate per annum equal to the yield to maturity of United
States Treasury Notes having a maturity closest to the remaining term of the
lease, plus 4.25 percent. On June 7, 1994, the Partnership made its first
advance to Continental in the amount of $302,525. The fair value of the loan
receivable from Continental as of December 31, 1996 is equal to the carrying
value of the asset.
Revenues from each of the airlines as a percentage of the Partnership's total
rental revenues are as follows:
Percent of Rental Revenues
Airline 1996 1995 1994
TWA 8.2% 7.9% 24.0%
Northwest 26.4 25.6 23.4
Delta 20.1 22.7 21.0
Continental 45.3 43.8 31.6
The following is a schedule, by year, of future minimum rental income under the
leases as of December 31, 1996.
Year Amount
1997 $ 4,380,000
1998 2,670,000
1999 1,980,000
2000 1,260,000
2001 1,260,000
Thereafter 6,405,000
Total $17,955,000
The above schedule of future minimum rental income is based on the existing
terms of the leases and does not include the rental income that may result from
the renewal of existing leases or the re-leasing of the aircraft, if any.
5. Sale of Aircraft
In June 1995, the General Partners sold aircraft N64321 formerly on lease with
TWA for net proceeds of $776,000. The aircraft had a carrying value of
$286,714 on the date of sale resulting in a gain on sale of $489,286. In
September 1995, the General Partners sold aircraft N74317 formerly on lease
with TWA for net proceeds of $757,570. The aircraft had a carrying value of
$163,840 on the date of sale resulting in a gain on sale of $593,730.
6. Distributions
Distributions declared aggregated $7,931,849 (approximately $1.63 per unit),
$4,585,942 (approximately $.94 per unit) and $4,862,301 (approximately $1.00
per unit) for the years ended December 31, 1996, 1995 and 1994, respectively.
As of December 31, 1996, the Partnership had declared a distribution of
$1,079,616, of which $1,068,820 (approximately $.22 per unit) was paid to the
Limited Partners and $10,796 was paid to the General Partners on February 11,
1997. In addition to the regular quarterly distributions paid by the
Partnership for the year ended December 31, 1996, the Partnership paid a
special cash distribution on October 22, 1996 in the amount of $3,420,697, of
which $3,401,826 (approximately $.70 per unit) was paid to the Limited Partners
and $18,871 was paid to the General Partners. This special distribution was
funded from cash that was previously held in reserve.
7. Transactions with Affiliates
Cash and Cash Equivalents -- Cash and cash equivalents reflected on the
Partnership's balance sheet at December 31, 1995 were on deposit with an
affiliate of Jet Aircraft Leasing Inc. As of December 31, 1996, no cash and
cash equivalents were on deposit with an affiliate of a general partner or the
Partnership.
Base Management Fee -- The General Partners receive a quarterly fee,
subordinated to the Limited Partners receiving their Preferred Return as
defined in the Agreement in an amount generally equal to 1.5% of gross aircraft
rentals. Of this amount, 1.0% is payable to CAP and .5% is payable to JAL.
Incentive Management Fee -- CAP receives a quarterly fee of 4.5% of quarterly
cash flow, subordinated to the Limited Partners receiving their Preferred
Return.
Re-lease Fee -- The General Partners receive a quarterly fee, subordinated to
the Limited Partners receiving their Preferred Return, for re-leasing aircraft
or renewing a lease in an amount equal to 3.5% of the gross rentals from such
re-lease or renewal for each quarter for which such payment is made. Of this
amount, 2.5% is payable to CAP, and 1.0% is payable to JAL.
Resale Fee -- CAP receives a subordinated fee with respect to each aircraft
sold by the Partnership in an amount equal to the lesser of (i) 3% of the
contract sales price of the aircraft or (ii) an amount that is competitive with
fees charged by nonaffiliates rendering comparable services. Such fee will be
reduced (but not below zero) for any resale fees or commissions payable to
third parties. During 1995, $47,430 was accrued based on 3% of the gross sale
proceeds totaling $1,581,000 from the sale of two Boeing 737-200s. The resale
fee is subordinate to the Limited Partners receiving a priority return equal to
their original capital contribution plus their preferred return. No resale
fees were earned during 1996 or 1994.
The following is a summary of amounts earned by the General Partners and their
affiliates during the years ended December 31, 1996, 1995 and 1994.
Unpaid at
December 31, Earned
1996 1996 1995 1994
Base Management Fee $ 34,523 $ 69,046 $ 71,326 $ 78,412
Incentive Management Fee 104,795 211,470 213,882 211,763
Re-lease Fee 83,475 166,949 172,462 189,598
Resale Fee 62,430 -- 47,430 --
$ 285,223 $ 447,465 $ 505,100 $ 479,773
8. Reconciliation of Difference between Net Income (Loss) in the Financial
Statements (Accrual Basis - Generally Accepted Accounting Principles) and
Net Loss in the Partnership's Tax Return
1996 1995 1994
Net income (loss), as reported $ 485,267 $ 608,971 $ (575,105)
Adjustments-
Deferred revenue -- (7,500) (154,667)
Prepaid Insurance -- -- 22,074
Maintenance reserve fund -- -- (750,000)
Loss on sale of asset -- (1,493,144) --
Depreciation differential between
the Modified Accelerated Cost
Recovery System and depreciation
for financial reporting purposes 2,146,454 541,973 (1,663,457)
Legal fees, net of amortization -- -- (5,297)
Total adjustments 2,146,454 (958,671) (2,551,347)
Net income (loss), per the
Partnership's tax return $ 2,631,721 $ (349,700) $(3,126,452)
The net income (loss) determined on the income tax basis is allocated to the
partners as follows:
Limited partners (4,837,505 units) $ 2,605,404 $ (346,203) $(3,095,187)
General partners 26,317 (3,497) (31,265)
$ 2,631,721 $ (349,700) $(3,126,452)
Taxable income (loss) per
limited partner unit $0.54 $(0.07) $(0.64)
As of December 31, 1996, the tax basis of total assets and total liabilities is
$13,914,228 and $1,385,185, respectively.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
JetStream II, L.P.:
We have audited the accompanying balance sheets of JetStream II, L.P. (a
Delaware limited partnership) as of December 31, 1996 and 1995, and the related
statements of operations, partners' capital (deficit) and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of JetStream II, L.P. as of
December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 21, 1997
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 1,791,426
<SECURITIES> 0
<RECEIVABLES> 108,771
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,791,794
<PP&E> 26,877,000
<DEPRECIATION> 12,898,735
<TOTAL-ASSETS> 16,175,937
<CURRENT-LIABILITIES> 1,585,948
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 14,589,989
<TOTAL-LIABILITY-AND-EQUITY> 16,175,937
<SALES> 0
<TOTAL-REVENUES> 5,079,356
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,594,089
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 485,267
<INCOME-TAX> 0
<INCOME-CONTINUING> 485,267
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 485,267
<EPS-PRIMARY> .10
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