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, 1997
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 of
incorporation or organization I.R.S. Employer 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, 1997
(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, 1997, 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, 1997, 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 tables describe the Partnership's portfolio of Aircraft
as of December 31, 1997. These tables provide 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, 1997 for additional information on the
lease terms for each Aircraft. Reference is also made to the Message
to Investors section of the Partnership's Annual Report to Unitholders
for the year ended December 31, 1997 for an overview of the aircraft
leasing industry.
Estimated
Aircraft Model Acquisition Net Book Market
Year Delivered Lessee Cost (1) Value (2) Value (3)
B-727-200 Boeing $5,451,231 $0 $1,280,200
1969 Capital
DC-9-30 Northwest $7,230,460 $693,993 $3,174,000
1968
DC-9-30 Northwest $7,230,460 $693,993 $3,174,000
1970
DC-9-30 Northwest $7,230,461 $693,993 $3,296,000
1970
B-737-200 ADV Delta $14,380,390 $2,002,208 $4,284,600
1979
MD-80 Series Continental $27,313,020 $6,874,858 $15,925,700
1986
TOTALS $68,836,022 $10,959,038 $31,134,300
Cumulative Cumulative
Aircraft Model Lease Noise Flight Flight
Year Delivered Expiration (4) Compliance Cycles (5) Cycles (5)
B-727-200 10/31/99 Stage 2 46,270 69,140
1969
DC-9-30 1/31/07 Stage 2 60,830 64,400
1968
DC-9-30 1/31/07 Stage 2 73,370 76,600
1970
DC-9-30 4/21/07 Stage 2 64,700 61,600
1970
B-737-200 ADV 9/30/99 Stage 2 37,650 56,980
1979
MD-80 Series 3/15/99 Stage 3 16,870 31,520
1986
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, 1997.
(3)Estimated market values for the Aircraft are based upon annual independent
appraisals which 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)Northwest data as of February 2, 1998; Boeing Capital data as of
March 6, 1998; Continental data as of March 9, 1998; and Delta data as
of March 12, 1998.
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 hour and
chronological age thresholds.
The Partnership's B-727-200 non-advanced aircraft, which is currently on-lease
to Boeing Capital Corp., 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, which, 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 the 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, 1997, 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, 1997.
Item 3. Legal Proceedings
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 1997.
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, 1997, the number of Unitholders was 6,652.
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 and Note 6 of the Notes to Financial Statements of the
Partnership's Annual Report to Unitholders for the year ended December 31,
1997.
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, 1997.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
As of December 31, 1997, 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 Boeing Capital Corporation ("BCC"), one aircraft
on-lease to Delta Air Lines, Inc. ("Delta"), and one aircraft on-lease to
Continental Airlines, Inc. ("Continental").
The leases for the Partnership's three DC-9-30 aircraft expire in January 2007
(two aircraft) and April 2007 (one aircraft). Northwest pays the Partnership a
monthly lease rate of $35,000 per aircraft. As part of the August 1996
agreement to extend these leases, Northwest agreed to hushkit each aircraft
prior to December 31, 1999. In exchange for funding the cost of the hushkits,
Northwest will be entitled to 50% of the proceeds from the 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
for the aircraft in the future.
On October 30, 1997, the lease for the Partnership's B-727-200 with TWA was
terminated. TWA had been leasing the aircraft on a month-to-month basis at a
monthly lease rate of $32,500. Commencing November 1, 1997, the aircraft was
re-leased to BCC, which subleases the aircraft to SportHawk International, Inc.
BCC pays the Partnership a monthly lease rate of $45,000. The primary term of
the BCC lease expires on October 31, 1999.
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 was 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. During the third quarter of 1997, Continental paid off the remaining
balance of the loan, which had totaled $108,403 as of December 31, 1996.
Payments made on this loan during 1997 are the reason for the decrease in the
Partnership's loan receivable balance to $0 at December 31, 1997.
Continental makes monthly lease payments to the Partnership of $180,000.
The lease with Continental was scheduled to expire in March 1998. However, in
September 1997, the Partnership reached an agreement with Continental to extend
the lease through March 1999, with the remaining terms of the lease unchanged.
At December 31, 1997, the Partnership had unrestricted cash and cash
equivalents of $1,810,843, compared to $1,791,426 at December 31,1996. The
increase is primarily attributable to the reclassification of the restricted
cash balance , which is no longer required due to the completion of all
maintenance requirements permitted under the lease agreement. The increase in
cash was partially offset by distribution to the limited partners which
exceeded cash flow from operations during 1997. The Partnership had a
restricted cash balance of $0 at December 31, 1997, as compared with $297,475
at December 31, 1996.
Accounts receivable totaled $45,000 at December 31, 1997 compared with $0 at
December 31, 1996. The increase represents amounts due for December 1997 under
the terms of the lease with BCC for the Partnership's B-727-200 aircraft.
During the year ended December 31, 1997, the Partnership paid cash
distributions to the Unitholders for the period from October 1, 1996 to
December 31, 1996 and for the first three quarters of 1997, in the amounts of
$1,068,820 and $3,418,867, respectively, which represents approximately $.22
and approximately $.70 per Unit, respectively. At December 31, 1997, the
Partnership had a distribution payable to Unitholders of $1,102,235, or
approximately $.23 per Unit. This amount reflects the 1997 fourth quarter cash
distribution to Unitholders which was funded from cash flow from operations and
was subsequently paid on February 2, 1998. Future cash distributions will be
determined on a quarterly basis after an evaluation of the Partnership's
current and expected financial position.
Results of Operations
Substantially all of the Partnership's revenue during 1997 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 1997
revenue consisted of interest income.
1997 compared to 1996
For the twelve months ended December 31, 1997, the Partnership reported net
income of $1,196,140, compared to $485,267 for the corresponding period in
1996. The increase is primarily attributable to a decrease in depreciation
expense recorded by the Partnership as a result of the extended depreciable
life of the three DC-9-30 aircraft on-lease to Northwest.
Rental income totaled $4,795,000 for the year ended December 31, 1997 compared
with $4,770,000 in 1996. The slight increase is attributable to the increase
in lease rate on the Partnership's B-727-200 aircraft under the new lease with
BCC which commenced November 1, 1997.
The decrease in depreciation expense recorded by the Partnership is the result
of the lease agreement with Northwest, which extended the depreciable life of
the three DC-9-30 aircraft on-lease to Northwest for a period of ten years.
Interest income totaled $111,683 for the year ended December 31, 1997 compared
with $263,533 in 1996. The decrease is attributable to a decrease in the
Partnership's invested cash balance during 1997.
General and administrative expenses totaled $267,887 for the year ended
December 31, 1997, compared with $184,047 for the year ended December 31, 1996.
During the 1997 period, certain expenses incurred by an unaffiliated third
party service provider in servicing the Partnership, which were voluntarily
absorbed by affiliates of Jet Aircraft Leasing Inc. in prior periods, were
reimbursable to Jet Aircraft Leasing Inc. and its affiliates. The increase was
also due to legal and consulting fees related to the aircraft currently on
lease to Northwest and BCC.
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.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to Unitholders for
the year ended December 31, 1997.
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
Rocco F. Andriola Director
Jeffrey C. Carter Director, President and Chief Financial Officer
Michael T. Marron Vice President
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.
Rocco F. Andriola, 39, is a Managing Director of Lehman Brothers in its
Diversified Asset Group and has held such position since October 1996. Since
joining Lehman in 1986, Mr. Andriola has been involved in a wide range of
restructuring and asset management activities involving real estate and other
direct investment transactions. From June 1991 through September 1996,
Mr. Andriola held the position of Senior Vice President in Lehman's Diversified
Asset Group. From June 1989 through May 1991, Mr. Andriola held the position
of First Vice President in Lehman's Capital Preservation and Restructuring
Group. From 1986 to 1989, Mr. Andriola served as a Vice President in the
Corporate Transactions Group of Shearson Lehman Brothers' office of the general
counsel. Prior to joining Lehman, Mr. Andriola practiced corporate and
securities law at Donovan Leisure Newton & Irvine in New York. Mr. Andriola
received a B.A. from Fordham University, a J.D. from New York University School
of Law, and an LL.M in Corporate Law from New York University's Graduate School
of Law.
Jeffrey C. Carter, 52, is a Senior Vice President of Lehman Brothers in the
Diversified Asset Group. Mr. Carter joined Lehman Brothers in September 1988.
From 1972 to 1988, Mr. Carter held various positions with Helmsley-Spear
Hospitality Services, Inc. and Stephen W. Brener Associates, Inc. including
Director of Consulting Services at both firms. From 1982 through 1987,
Mr. Carter was President of Keystone Hospitality Services, an independent hotel
consulting and brokerage company. Mr. Carter received his B.S. degree in Hotel
Administration from Cornell University and an M.B.A. degree from Columbia
University.
Michael T. Marron, 34, is a Vice President of Lehman Brothers and has been a
member of the Diversified Asset Group since 1990 where he has actively managed
and restructured a diverse portfolio of syndicated limited partnerships. Prior
to joining Lehman Brothers, Mr. Marron was associated with Peat Marwick
Mitchell & Co. serving in both its audit and tax divisions from 1985 to 1989.
Mr. Marron received his B.S. degree from the State University of New York at
Albany and an MBA from Columbia University.
CIS Aircraft Partners, Inc.
Name Office
Thomas J. Prinzing Director and President
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, 52, 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.
Robin A. Konicek, 41, 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, 1997.
(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. During the 1997 periods, certain expenses incurred by
First Data Investor Services Group, Inc. in servicing the Partnership, which
were voluntarily absorbed by affiliates of Jet Aircraft Leasing Inc. in prior
periods, were reimbursable to Jet Aircraft Leasing Inc. and its affiliates.
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, 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements:
Page
Number
Balance Sheets - December 31, 1997 and 1996 (1)
Statements of Partners' Capital (Deficit) - For the years
ended December 31, 1997, 1996 and 1995 (1)
Statements of Operations - For the years ended
December 31, 1997, 1996 and 1995 (1)
Statements of Cash Flows - For the years ended
December 31, 1997, 1996 and 1995 (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, 1997.
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, 1997.
(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 27, 1998
BY: /s/Jeffrey C. Carter
Name: Jeffrey C. Carter
Title: Director, President and Chief Financial Officer
BY: CIS Aircraft Partners, Inc.
Managing General Partner
Date: March 27, 1998
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 27, 1998 BY: /s/ Thomas J. Prinzing
Thomas J. Prinzing
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.
JET AIRCRAFT LEASING INC.
A General Partner
Date: March 27, 1998 BY: /s/Rocco F. Andriola
Rocco Andriola
Director
Date: March 27, 1998 BY: /s/Jeffrey C. Carter
Jeffrey C. Carter
Director, President and Chief Financial Officer
Date: March 27, 1998 BY: /s/Michael T. Marron
Michael T. Marron
Vice President
EXHIBIT 13
JetStream II, L.P.
1997 Annual Report
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
$16.94 per $20.00 Unit. The following table provides
the quarterly cash distributions per Unit paid by the
Partnership for the years ended December 31, 1997 and
1996.
Quarter Declared 1997 1996
First Quarter $ .263 $ .232
Second Quarter .217 .240
Third Quarter .220 .230
Fourth Quarter .230 .221
Special Distribution* _ .703
Total $ .93 $1.626
*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
3 Portfolio and Financial Highlights
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 1997 Annual Report for JetStream II,L.P.
(the "Partnership"). This message includes 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.
Also provided are the Partnership's audited financial statements for the year
ended December 31, 1997.
Overview
The U.S. airline industry continued to improve during 1997, with a strong
economy contributing to increased passenger traffic and increased net profits
for the industry. The approximate 5.7% growth in passenger traffic combined
with reduced fuel costs and strict cost containment initiatives led to
significant improvement in operating profitability and net earnings for the
industry in 1997. These conditions have had a favorable effect on the level
of aircraft leasing activity, and have brought about a sustained reduction in
the number of serviceable aircraft available for lease. The reduced inventory
of available planes has, in turn, favorably affected lease rates.
This strong operating environment provided us with an opportunity to quickly
re-lease one of our oldest aircraft, the B-227-200, formerly leased to TWA,
and to extend the lease on the MD-80 Series aircraft through March 1999, as
discussed below. It should be noted, however, that future opportunities for
leasing Stage 2 aircraft, such as the Partnership's, are likely to be
restricted due to the implementation of noise compliance regulations developed
in accordance with the Airport Noise and Capacity Act of 1990, requiring
airlines to reduce the number of older aircraft in their fleets. These
regulations specify, among other things, phase-out and non-addition rules under
which the number of Stage 2 aircraft operated by domestic carriers are limited
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
On October 30, 1997, the lease for the Partnership's B-727-200 with TWA was
terminated. TWA had been leasing the aircraft on a month-to-month basis at a
monthly lease rate of $32,500. Commencing November 1, 1997, the aircraft was
re-leased to Boeing Capital Corporation ("BCC"), which subleases the aircraft
to SportHawk International, Inc. BCC pays the Partnership a monthly lease rate
of $45,000, an increase over the former lease rate with TWA. The primary term
of the BCC lease expires on October 31, 1999.
The lease agreement with Continental Airlines ("Continental") for the
Partnership's MD-80 Series aircraft was previously scheduled to expire in
March 1998. In September 1997, the Partnership reached an agreement with
Continental to extend the lease through March 1999, with the remaining terms of
the lease unchanged. The lease agreement requires Continental to make monthly
lease payments to the Partnership of $180,000.
As reported in prior correspondence, the lease agreement with Northwest for the
Partnership's three DC-9-30 aircraft was extended in August 1996. 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. 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.
General Information
As you are probably aware, several third parties have commenced tender offers
to purchase Units of the Partnership at prices which are below the
Partnership's estimate of net asset value per Unit. In response, we
recommended that limited partners reject these offers because we believe that
they do not reflect the underlying value of the Partnership's assets.
According to published industry sources, most of the investors who hold units
of limited partnerships similar to the Partnership have rejected these types of
tender offers due to their inadequacy.
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 aircrafts'
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 for 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/Jeffrey C. Carter /s/Thomas J. Prinzing
Jeffrey C. Carter Thomas J. Prinzing
President President
March 27, 1998
Portfolio and Financial Highlights
Aircraft Portfolio Highlights
Estimated Lease Monthly
Aircraft Model Acquisition Market Expiration Lease Noise
Year Delivered Lessee Cost (1) Value (2) (3) Rate Compliance
B-727-200 Boeing $ 5,451,231 $ 1,280,200 10/31/99 $ 45,000 Stage 2
1969 Capital
DC-9-30 Northwest $ 7,230,460 $ 3,174,000 1/31/07 $ 35,000 Stage 2
1968
DC-9-30 Northwest $ 7,230,460 $ 3,174,000 1/31/07 $ 35,000 Stage 2
1970
DC-9-30 Northwest $ 7,230,461 $ 3,296,000 4/21/07 $ 35,000 Stage 2
1970
B-737-200 ADV Delta $14,380,390 $ 4,284,600 9/30/99 $ 80,000 Stage 2
1979
MD-80 Series Continental $27,313,020 $15,925,700 3/15/99 $180,000 Stage 3
1986
(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 which 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.
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.
1997 1996 1995 1994 1993
Rental Revenues $4,795,000 $4,770,000 $4,927,500 $5,417,086 $5,112,882
Write-down of Aircraft _ _ _ _ 15,551,276
Total Expenses 3,720,073 4,594,089 5,688,047 6,182,152 22,198,497
Net Income (Loss) 1,196,140 485,267 608,971 (575,105)(14,797,472)
Net Income (Loss)
per Limited
Partnership Unit(1) .24 .10 .12 (0.12) (3.03)
Total Assets 12,814,880 16,175,937 23,457,938 27,689,193 33,618,546
Partners' Capital 11,219,359 14,589,989 22,036,571 26,013,542 31,450,948
Net Cash Provided by
Operating Activities 4,444,031 5,293,635 4,560,125 6,612,975 5,591,459
Cash Distributions
per Unit (1)(2) .94 1.63 .94 1.00 1.21
(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, 1997 increased slightly
from the year ended December 31, 1996 primarily due to the higher lease
rate being paid by the new lessee of the Partnership's B-727-200
aircraft.
* The decrease in total expenses from 1996 to 1997 is due primarily to a
decrease in depreciation expense as a result of the extended
depreciable life of the Partnership's three DC-9-30 aircraft in
connection with the Northwest lease extensions. The decrease in
depreciation expense is also the primary reason for the increase in net
income.
Balance Sheets At December 31, At December 31,
1997 1996
Assets
Aircraft, at cost $26,877,000 $26,877,000
Less accumulated depreciation (15,917,963) (12,898,735)
10,959,037 13,978,265
Cash and cash equivalents 1,810,843 1,791,426
Restricted cash _ 297,475
Accounts receivable 45,000 _
Loan receivable (Note 4) _ 108,403
Interest receivable _ 368
Total Assets $12,814,880 $16,175,937
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses (Note 6) $ 328,819 $ 352,999
Distribution payable 1,113,369 1,079,616
Deferred revenue 153,333 153,333
Total Liabilities 1,595,521 1,585,948
Partners' Capital (Deficit):
General Partners (838,980) (805,273)
Limited Partners (4,837,505 units outstanding) 12,058,339 15,395,262
Total Partners' Capital 11,219,359 14,589,989
Total Liabilities and Partners' Capital $12,814,880 $16,175,937
Statements of Partners' Capital (Deficit)
For the years ended December 31, 1997, 1996 and 1995
General Limited
Partners Partners Total
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
Net Income 11,961 1,184,179 1,196,140
Distributions (45,668) (4,521,102) (4,566,770)
Balance at December 31, 1997 $(838,980) $12,058,339 $11,219,359
Statements of Operations
For the years ended December 31, 1997 1996 1995
Income
Rental $4,795,000 $4,770,000 $4,927,500
Interest 111,683 263,533 282,782
Other 9,530 45,823 3,720
Total Income 4,916,213 5,079,356 5,214,002
Expenses
Depreciation 3,019,228 3,961,231 5,001,206
Management fees 432,958 447,465 457,670
General and administrative 267,887 184,047 156,043
Operating _ 1,346 73,128
Total Expenses 3,720,073 4,594,089 5,688,047
Net Income (Loss) from Operations 1,196,140 485,267 (474,045)
Other Income
Gain on sale of aircraft _ _ 1,083,016
Net Income $1,196,140 $ 485,267 $ 608,971
Net Income Allocated:
To the General Partners $ 11,961 $ 4,853 $ 6,090
To the Limited Partners 1,184,179 480,414 602,881
$1,196,140 $ 485,267 $ 608,971
Per limited partnership unit
(4,837,505 outstanding) $0.24 $0.10 $0.12
Statements of Cash Flows
For the years ended December 31, 1997 1996 1995
Cash Flows From Operating Activities
Net Income $1,196,140 $ 485,267 $ 608,971
Adjustments to reconcile net income to
net cash provided by operating
activities:
Restricted cash 297,475 750,000 _
Gain on sale of aircraft _ _ (1,083,016)
Depreciation 3,019,228 3,961,231 5,001,206
Increase (decrease) in cash arising
from changes in operating assets
and liabilities:
Accounts receivable (45,000) _ 9,941
Interest receivable 368 290 257
Accounts payable and accrued expenses (24,180) 96,847 30,266
Deferred revenue _ _ (7,500)
Net cash provided by operating activities 4,444,031 5,293,635 4,560,125
Cash Flows From Investing Activities
Loan receivable 108,403 79,326 73,246
Proceeds from sale of aircraft - net _ _ 1,533,570
Net cash provided by investing activities 108,403 79,326 1,606,816
Cash Flows From Financing Activities
Cash distributions (4,533,017) (7,864,115) (4,862,992)
Net cash used for financing activities (4,533,017) (7,864,115) (4,862,992)
Net increase (decrease) in cash
and cash equivalents 19,417 (2,491,154) 1,303,949
Cash and cash equivalents,
beginning of period 1,791,426 4,282,580 2,978,631
Cash and cash equivalents, end of period $1,810,843 $ 1,791,426 $4,282,580
Notes to the Financial Statements
December 31, 1997, 1996 and 1995
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.
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.
Effective January 1, 1997, depreciation of the unamortized balance at
December 31, 1996 for each Northwest aircraft will be depreciated on a
straight-line basis over a ten-year period, due to the lease agreement signed
in the third quarter of 1996 extending the current lease terms and the life of
each aircraft for a term of ten years. (See Note 4).
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 - The Partnership accounts for impairment losses 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.
Cash Equivalents - Cash equivalents consist of short-term highly liquid
investments with original 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 leases expired on October 31, 1994, December 19, 1994 (these two
aircraft were sold in 1995), and October 30, 1997 (this aircraft was leased to
Boeing Capital Corporation, as discussed below.)
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. These leases were subsequently extended twice at the
same monthly lease rate. Each extension was for one additional 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 provided for Continental to lease the plane for a
term of four years, and pay $180,000 per month in advance effective
March 15, 1994. 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
was 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 notes were paid in
full in September 1997. Having made all of the modifications permitted under
the Participation Agreements, Continental no longer can borrow any funds and
the Partnership is released from its obligation to lend.
The lease with Continental Airlines for the Partnership's MD-80 Series aircraft
was previously scheduled to expire in March 1998. However, in September 1997,
the Partnership reached an agreement with Continental to extend the lease
through March 1999, with the remaining terms of the lease unchanged.
Boeing Capital Corporation - On November 1, 1997, the Partnership entered into
an operating lease agreement with Boeing Capital Corporation ("BCC") to lease
one of the Partnership's Boeing 727-200 non-advanced aircraft formerly leased
to TWA. BCC subleases the aircraft to SportHawk International, Inc. BCC will
pay the Partnership a monthly lease rate of $45,000 through the primary term
of the lease, which expires on October 31, 1999. Revenues from each of the
airlines as a percentage of the Partnership's total rental revenues are
as follows:
Percent of Rental Revenues
Airline 1997 1996 1995
TWA 6.8% 8.2% 7.9%
Northwest 26.3 26.4 25.6
Delta 20.0 20.1 22.7
Continental 45.0 45.3 43.8
Boeing Capital 1.9 _ _
The following is a schedule, by year, of future minimum rental income under the
leases as of December 31, 1997.
Year Amount
1998 $ 4,920,000
1999 2,835,000
2000 1,260,000
2001 1,260,000
Thereafter 7,560,000
Total $17,835,000
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 $4,566,770 (approximately $0.93 per LP unit),
$7,931,849 (approximately $1.63 per LP unit) and $4,585,942 (approximately
$0.94 per LP unit) for the years ended December 31, 1997, 1996 and 1995,
respectively. As of December 31, 1997, the Partnership had declared a
distribution of $1,113,369, of which $1,102,235 (approximately $.23 per LP
unit) was paid to the Limited Partners and $11,134 was paid to the General
Partners on February 2, 1998. 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 LP 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,
and is included in the distribution of $7,931,849 discussed above.
7. Transactions with Affiliates
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 1997.
The following is a summary of amounts earned by the General Partners and their
affiliates during the years ended December 31, 1997, 1996 and 1995.
Unpaid at
December 31, Earned
1997 1997 1996 1995
Base Management Fee $ 17,623 $ 68,756 $ 69,046 $ 71,326
Incentive Management Fee 52,392 197,952 211,470 213,882
Re-lease Fee 42,613 166,250 166,949 172,462
Resale Fee 62,430 _ _ 47,430
$175,058 $432,958 $447,465 $ 505,100
8. Reconciliation of Difference between Net Income in the Financial Statements
(Accrual Basis - Generally Accepted Accounting Principles) and Net Income
(Loss)in the Partnership's Tax Return
1997 1996 1995
Net income, as reported $1,196,140 $ 485,267 $ 608,971
Adjustments-
Deferred revenue _ _ (7,500)
Loss on sale of asset _ _ (1,493,144)
Depreciation differential between
the Modified Accelerated Cost
Recovery System and depreciation
for financial reporting purposes 2,115,533 2,146,454 541,973
Total adjustments 2,115,533 2,146,454 (958,671)
Net income (loss), per the
Partnership's tax return $3,311,673 $2,631,721 $ (349,700)
The net income (loss) determined on the income tax basis is allocated to the
partners as follows:
Limited partners (4,837,505 units) $ 3,278,556 $ 2,605,404 $(346,203)
General partners 33,117 26,317 (3,497)
$3,311,673 $ 2,631,721 $(349,700)
Taxable income (loss) per limited
partner unit $0.68 $0.54 $(0.07)
As of December 31, 1997, the tax basis of total assets and total liabilities is
$12,668,703 and $1,394,757, 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, 1997 and 1996, and the
related statements of operations, partners' capital (deficit) and cash flows
for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 26, 1998
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 1,513,368
<SECURITIES> 0
<RECEIVABLES> 45,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,558,368
<PP&E> 26,877,000
<DEPRECIATION> 15,917,963
<TOTAL-ASSETS> 12,814,880
<CURRENT-LIABILITIES> 1,595,521
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 11,219,359
<TOTAL-LIABILITY-AND-EQUITY> 12,814,880
<SALES> 0
<TOTAL-REVENUES> 4,916,213
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,720,073
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,196,140
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,196,140
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,196,140
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
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