1
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, 1998
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or
Transition Report Pursuant to Section 13 or 15(d) of
- ----- the Securities Exchange Act of 1934
For the transition period from to
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Commission file number: 0-16838
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JETSTREAM II, L.P.
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Exact name of registrant as specified in its charter
Delaware 84-1068932
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State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization
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) 526-3183
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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, 1998 (Portions of
Parts I, II, III & IV).
<PAGE>
2
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, 1998, 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, 1998, 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, 1998. 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, 1998
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, 1998 for an overview of the
aircraft leasing industry.
<PAGE>
3
<TABLE>
<CAPTION>
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)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
B-727-200 Boeing $ 5,451,231 $ 0 $ 905,800 10/31/99 Stage 3 46,500 69,460
1969 Capital
DC-9-30 Northwest $ 7,230,460 $ 627,994 $ 2,455,150 1/31/07 Stage 3 66,210 63,490
1968
DC-9-30 Northwest $ 7,230,460 $ 627,994 $ 2,455,150 1/31/07 Stage 2 62,180 66,670
1970
DC-9-30 Northwest $ 7,230,461 $ 627,994 $ 2,485,150 4/21/07 Stage 3 77,600 75,010
1970
B-737-200 ADV Delta $14,380,390 $ 1,252,760 $ 3,573,100 9/30/99 Stage 2 39,340 59,050
1979
MD-80 Series Continental $27,313,020 $ 4,803,065 $14,222,000 3/15/00 Stage 3 18,280 37,640
1986 ----------- ----------- -----------
TOTALS $68,836,022 $ 7,939,807 $26,096,350
=========== =========== ===========
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
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, 1998.
(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) Data as of February 5, 1999.
</FN>
</TABLE>
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.
<PAGE>
4
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.
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.
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.
Four of the aircraft owned by the Partnership are Stage 3, the remaining two are
Stage 2 aircraft. Northwest has hushkitted two of its three DC-9-30s and is
required to hushkit the third prior to December 1999. 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 Partnership is in
discussions with Delta Airlines to hushkit the 737-200 on lease to Delta prior
to year end in connection with a lease extension. By year-end 1999 we anticipate
that all of the Partnership's aircraft will be Stage 3.
<PAGE>
5
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 in EEC countries before
November 1, 1990. The Partnership does not currently have any aircraft on lease
to airlines outside the United States. EEC regulations currently proposed would
require aircraft hushkitted to comply with Stage 3 requirements to register
prior to April 1999.
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 6 to the Financial
Statements of the Partnership's Annual Report to Unitholders for the year ended
December 31, 1998, 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, 1998.
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 1998.
<PAGE>
6
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, 1998, the number of Unitholders was 6,816.
Per Unit cash distributions paid to the Limited Partners for the two years ended
December 31, 1998 are presented in the table below.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 $.263 $ .217 $.220 $.230 $ .930
1998 $.210 $ .219 $.221 $.222 $ .872
-------------------------------------------------------
</TABLE>
Future cash distributions will be determined on a quarterly basis after an
evaluation of the Partnership's current and expected financial position.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rental Revenues $ 4,920,000 $ 4,795,000 $ 4,770,000 $ 4,927,500 $ 5,417,086
Total Expenses 3,740,075 3,720,073 4,594,089 5,688,047 6,182,152
Net Income (Loss) 1,285,470 1,196,140 485,267 608,971 (575,105)
Net Income (Loss) per
Limited Partnership Unit(1) .26 .24 .10 .12 (0.12)
Total Assets 9,766,676 12,814,880 16,175,937 23,457,938 27,689,193
Partners' Capital 8,248,904 11,219,359 14,589,989 22,036,571 26,013,542
Net Cash Provided by
Operating Activities 4,255,925 4,444,031 5,293,635 4,560,125 6,612,975
Cash Distributions per Unit(1)(2) .87 .93 1.63 .94 1.00
- -------------------------------------------------------------------------------------------------------
<FN>
(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.
</FN>
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
As of December 31, 1998, 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.
The primary term of the lease for the Partnership's B-727-200 aircraft expires
on October 31, 1999. BCC subleases the aircraft to SportHawk International, Inc.
BCC pays the Partnership a monthly lease rate of $45,000. At the end of the
lease term, BCC has the option to purchase the aircraft for $1,000,000.
<PAGE>
7
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.
The lease with Continental for the Partnership's MD-80 Series aircraft was
originally scheduled to expire in March 1998. Continental extended its lease to
March 1999 and in October 1998, exercised its second option to renew this lease
through March 2000, with the remaining terms of the lease unchanged. Continental
makes monthly lease payments to the Partnership of $180,000.
At December 31, 1998, the Partnership had unrestricted cash and cash equivalents
of $1,781,869, compared to $1,810,843 at December 31, 1997. The slight decrease
is primarily attributable to a decrease in net cash provided by operating
activities, reflecting the reclassification of the restricted cash balance
during 1997. The restricted cash was required pursuant to the lease with
Continental for the Partnership's MD-80 Series aircraft, but is no longer
required due to the completion of all maintenance requirements permitted under
the lease agreement. The decrease in cash was also attributable to distributions
to the limited partners which slightly exceeded cash flow from operations during
1998.
Accounts payable and accrued expenses totaled $280,044 at December 31, 1998
compared with $328,819 at December 31, 1997. The decrease primarily reflects
differences in the timing of payment of postage and professional fees between
the two periods.
During the year ended December 31, 1998, the Partnership paid cash distributions
to the Unitholders for the period from October 1, 1997 to December 31, 1997 and
for the first three quarters of 1998, in the amounts of $1,102,236 and
$3,139,810, respectively, which represent approximately $.23 and approximately
$.65 per Unit, respectively. At December 31, 1998, the Partnership had a
distribution payable to Unitholders of $1,073,551, or approximately $.22 per
Unit. This amount reflects the 1998 fourth quarter cash distribution to
Unitholders which was funded primarily from cash flow from operations and was
subsequently paid on March 4, 1999. Future cash distributions will be determined
on a quarterly basis after an evaluation of the Partnership's current and
expected financial position.
Market Risk
Interest rate risk comprises the Partnership's principal market risk exposure.
The Partnership has no long-term debt and its aircraft are unencumbered by debt.
Accordingly, the Partnership's interest risk exposure is primarily limited to
interest earned on the Partnership's cash and cash equivalents, which are
invested at short-term rates. Such risk is not considered material to the
Partnership's operations.
Year 2000 Initiatives
The Year 2000 compliance issue concerns the ability of computerized information
systems to accurately calculate, store or use a date after 1999. This could
result in computer system failures or miscalculations causing disruptions of
operations. The Year 2000 issue affects almost all companies and organizations.
As the owner and lessor of commercial aircraft, the Partnership's most
significant Year 2000 issues relate to systems concerns with respect to the
airworthiness of the aircraft. It is the responsibility of the lessees to comply
with any Airworthiness Directives or other manufacturer recommended maintenance
necessary to meet Year 2000 requirements, and the costs of such maintenance, if
any, are to be borne by the lessee. Non-compliance by the lessee could impact
its ability to operate the aircraft, and could affect its ability to meet the
terms of its lease. The Partnership's lessees also face the potential risk of
non-compliance by the air traffic control systems in the areas in which the
aircraft operate. A disruption in any of the air traffic control systems could
cause disruption to the lessee's operations, which may adversely affect their
ability to generate revenue and meet the terms of their leases. The Partnership
is unable to assess the likelihood or the potential cost to the Partnership of
such disruption.
Other potential Year 2000 issues relate primarily to outside vendors which
provide the Partnership's administrative services including accounting, tax
preparation and transfer agent services. Such services are reliant on computer
systems, software products and equipment which may or may not be Year 2000
compliant. It is anticipated that the cost of vendor compliance with Year 2000
problems will be borne primarily by vendors. Although it is not possible at
present to give an estimate of the cost of this work to the Partnership, the
General Partner does not expect such costs to have a material adverse impact on
the Partnership's long term results of operations.
<PAGE>
8
Results of Operations
Substantially all of the Partnership's revenue during 1998 was generated from
the leasing of the Partnership's Aircraft to commercial air carriers under
triple net operating leases. The majority of the balance of the Partnership's
1998 revenue consisted of interest income.
1998 compared to 1997
- ---------------------
For the twelve months ended December 31, 1998, the Partnership reported net
income of $1,285,470 compared to $1,196,140 in 1997. The increase is primarily
attributable to an increase in rental income, offset partly by a slight increase
in management fees and general and administrative expenses.
Rental income totaled $4,920,000 for the year ended December 31, 1998 compared
with $4,795,000 in 1997. The increase is primarily a result of a higher lease
rate paid for the 727-200 non-advanced aircraft in comparison to 1997.
Interest income totaled $97,191 for the year ended December 31, 1998, compared
with $111,683 for the year ended December 31, 1997. The decrease is primarily
attributable to a decrease in the Partnership's average cash balances during
1998.
Management fees totaled $444,005 for the year ended December 31, 1998 compared
to $432,958 in 1997. The increase primarily reflects an increase in release fees
and lease revenues upon which management fees are based.
General and administrative expenses totaled $275,515 for the year ended December
31, 1998, compared with $267,887 for the year ended December 31, 1997. The
slight increase is primarily attributable to higher administrative expenses
during 1998, which were partly offset by reductions in postage, legal and other
professional fees.
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.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to Unitholders for
the year ended December 31, 1998.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
<PAGE>
9
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
Michael T. Marron Director, President and Chief Financial Officer
William T. McDermott 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, 40, 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.
Michael T. Marron, 35, 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.
William T. McDermott, 35, is a Vice President of Lehman Brothers and has been a
member of the Diversified Asset Group since 1998. Mr. McDermott joined Lehman
Brothers in 1993 and held various positions within the firm before joining the
Diversified Asset Group. Prior to joining Lehman Brothers, Mr. McDermott was a
financial analyst with Cantor Fitzgerald Inc. from 1991 - 1993 and was
associated with Arthur Andersen & Co. serving in both its audit and bankruptcy
consulting divisions from 1985 to 1991. Mr. McDermott received his B.B.A. degree
from the University of Notre Dame and is a Certified Public Accountant.
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.
<PAGE>
10
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, 53, is President of CIS Aircraft Partners, Inc. since
1991. Mr. Prinzing, a Certified Public Accountant, received a Bachelor of
Commerce degree from the University of Windsor.
Robin A. Konicek, 42, 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, 1998.
(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. During 1998 and 1997, certain administrative expenses incurred 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 6 of the Notes to the
Financial Statements in the Partnership's Annual Report to Unitholders for the
year ended December 31, 1998.
<PAGE>
11
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements:
Page
Number
------
Balance Sheets - December 31, 1998 and 1997........................(1)
Statements of Partners' Capital (Deficit) -
For the years ended December 31, 1998, 1997 and 1996...............(1)
Statements of Operations -
For the years ended December 31, 1998, 1997 and 1996...............(1)
Statements of Cash Flows -
For the years ended December 31, 1998, 1997 and 1996...............(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, 1998.
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,
1998.
(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.
<PAGE>
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Partnership 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 29, 1999 BY: /s/Michael T. Marron
--------------------
Name: Michael T. Marron
Title: Director, President and
Chief Financial Officer
BY: CIS Aircraft Partners, Inc.
Managing General Partner
Date: March 29, 1999 BY: /s/Thomas J. Prinzing
---------------------
Name: Thomas J. Prinzing
Title: Director and President
<PAGE>
13
SIGNATURES
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.
BY: CIS Aircraft Partners, Inc.
A General Partner
Date: March 29, 1999 BY: /s/Thomas J. Prinzing
---------------------
Name: Thomas J. Prinzing
Title: Director and President
Date: March 29, 1999 BY: /s/Robin A. Konicek
-------------------
Name: Robin A. Konicek
Title: Vice President
<PAGE>
14
SIGNATURES
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 29, 1999 BY: /s/Rocco F. Andriola
--------------------
Name: Rocco F. Andriola
Title: Director
Date: March 29, 1999 BY: /s/Michael T. Marron
--------------------
Name: Michael T. Marron
Title: Director, President and
Chief Financial Officer
Date: March 29, 1999 BY: /s/William T. McDermott
-----------------------
Name: William T. McDermott
Title: Vice President
EXHIBIT 13
JetStream II, L.P.
1998 Annual Report
<PAGE>
- --------------------------------------------------------------------------------
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 totaling approximately $17.81 per
$20.00 Unit. The following table provides the quarterly cash
distributions per Unit paid by the Partnership for the years ended
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Quarter Declared 1998 1997
--------------------------------------------
<S> <C> <C>
First Quarter $.210 $.263
Second Quarter .219 .217
Third Quarter .221 .220
Fourth Quarter .222 .230
----- -----
Total $.872 $.930
============================================
</TABLE>
Contents
1 Message to Investors
3 Financial Statements
6 Notes to the Financial Statements
11 Report of Independent Public Accountants
<PAGE>
1
- --------------------------------------------------------------------------------
MESSAGE TO INVESTORS
- --------------------------------------------------------------------------------
Presented for your review is the 1998 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, 1998.
Industry Overview
The United States airline industry continued to perform well in 1998 as the
economy continued its strong growth this past year. The number of passengers
traveling within the United States increased by approximately 5%, which in turn
led to an increase in revenues. This increase was tempered somewhat by recent
fare reductions, but overall, net income for most airlines increased in 1998.
Forecasts are for continued growth in this industry.
However, 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. An update on the status of hushkitting the Partnership's Stage
2 planes is discussed below.
Portfolio Update
Following is an update on the lease status of each aircraft:
MD-80 Series Aircraft - The lease agreement with Continental Airlines
("Continental") for the Partnership's MD-80 Series aircraft was scheduled to
expire in March 1999. In October 1998, Continental exercised its option to renew
this lease through March 2000 with the remaining lease terms unchanged. The
lease requires Continental to make monthly payments of $180,000. This is a Stage
3 aircraft which meets the noise compliance guidelines set by the Federal
Aviation Administration (the "FAA").
737-200 Advanced Aircraft - The lease with Delta Air Lines ("Delta") for the
Partnership's 737-200 advanced aircraft expires in September 1999. Pursuant to
the lease terms, Delta makes monthly payments of $80,000. We are currently
negotiating an extension of this lease with Delta which would also require Delta
to hushkit the plane.
727-200 Non-advanced Aircraft - As previously reported, the Partnership's Boeing
727 aircraft was re-leased to Boeing Capital Corporation ("BCC"), which
subleases the aircraft to SportHawk International, Inc. BCC pays the Partnership
$45,000 monthly. The primary term of the BCC lease expires on October 31, 1999.
This aircraft has been hushkitted by BCC and now meets the FAA's noise
compliance guidelines.
DC-9-30 Aircraft - The leases for the Partnership's three DC-9-30 aircraft with
Northwest Airlines ("Northwest") expire in January 2007 (two aircraft) and April
2007 (one aircraft). Northwest pays $35,000 monthly per aircraft. As part of the
1996 agreement to extend these leases, Northwest agreed to hushkit each aircraft
prior to year-end 1999. In exchange for funding the costs of the hushkits,
Northwest will be entitled to 50% of the proceeds from the eventual sale of the
aircraft. Two of the planes have been hushkitted by Northwest with the third
plane scheduled to be hushkitted prior to the end of this year.
<PAGE>
2
Financial Highlights
Provided below is a review of Partnership operations for the year ended
December 31,
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------
<S> <C> <C>
Rental Income $4,920,000 $4,795,000
Total Expenses 3,740,075 3,720,073
Net Income 1,285,470 1,196,140
Net Cash provided by Operating Activities 4,255,925 4,444,031
--------------------------------------------------------------------
</TABLE>
o Rental income increased primarily as a result of the higher lease rate
paid for the 727-200 non-advanced aircraft in comparison to 1997.
o Total expenses were relatively unchanged in 1998 from 1997.
o The increase in net income is attributable to the increase in rental
income.
o The decrease in net cash provided by operating activities is primarily
attributable to the reclassification of the Partnership's restricted cash
balance during 1997. The cash was originally classified as restricted
pursuant to the lease with Continental, but this is no longer required due
to the completion of all maintenance requirements under the lease.
General Information
As you are probably aware, several unaffiliated 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 have
recommended that Limited Partners reject these offers since we believe that they
do not reflect the underlying value of the Partnership's assets.
Summary
We will continue our efforts to effectively manage the Partnership's aircraft.
It should be noted, 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 impacted your
investment. We will update you on the status of the Partnership's operations in
future correspondence. In the interim, questions regarding the Partnership
should be directed to your Financial Consultant or Partnership Investor
Services. All requests for a change of address should be submitted in writing to
the Partnership's administrative agent at P.O. Box 7090, Troy, MI 48007-7090.
Partnership Investor Services can be reached at 617-342-4225, and the
Partnership's administrative agent can be reached at 248-637-7900.
Very truly yours,
Jet Aircraft Leasing Inc. CIS Aircraft Partners, Inc.
A General Partner A General Partner
Michael T. Marron Thomas J. Prinzing
President President
March 29, 1999
<PAGE>
3
JETSTREAM II, L.P.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
BALANCE SHEETS
At December 31, At December 31,
1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Aircraft, at cost $ 26,877,000 $ 26,877,000
Less accumulated depreciation (18,937,193) (15,917,963)
------------------------------
7,939,807 10,959,037
------------------------------
Cash and cash equivalents 1,781,869 1,810,843
Accounts receivable 45,000 45,000
- -------------------------------------------------------------------------------------
Total Assets $ 9,766,676 $ 12,814,880
=====================================================================================
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses (Note 6) $ 280,044 $ 328,819
Distribution payable 1,084,395 1,113,369
Deferred revenue 153,333 153,333
------------------------------
Total Liabilities 1,517,772 1,595,521
------------------------------
Partners' Capital (Deficit):
General Partners (868,684) (838,980)
Limited Partners (4,837,505 units outstanding) 9,117,588 12,058,339
------------------------------
Total Partners' Capital 8,248,904 11,219,359
- -------------------------------------------------------------------------------------
Total Liabilities and Partners' Capital $ 9,766,676 $ 12,814,880
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1998, 1997, and 1996
General Limited
Partners Partners Total
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
Net Income 12,855 1,272,615 1,285,470
Distributions (42,559) (4,213,366) (4,255,925)
- -------------------------------------------------------------------------------------
Balance at December 31, 1998 $(868,684) $ 9,117,588 $ 8,248,904
=====================================================================================
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
4
JETSTREAM II, L.P.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the years ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Rental $4,920,000 $4,795,000 $4,770,000
Interest 97,191 111,683 263,533
Other 8,354 9,530 45,823
------------------------------------------
Total Income 5,025,545 4,916,213 5,079,356
- -------------------------------------------------------------------------------------
Expenses
Depreciation 3,019,230 3,019,228 3,961,231
Management fees 444,005 432,958 447,465
General and administrative 275,515 267,887 184,047
Operating 1,325 -- 1,346
------------------------------------------
Total Expenses 3,740,075 3,720,073 4,594,089
- -------------------------------------------------------------------------------------
Net Income from Operations 1,285,470 1,196,140 485,267
- -------------------------------------------------------------------------------------
Net Income $1,285,470 $1,196,140 $ 485,267
=====================================================================================
Net Income Allocated:
To the General Partners $ 12,855 $ 11,961 $ 4,853
To the Limited Partners 1,272,615 1,184,179 480,414
- -------------------------------------------------------------------------------------
$1,285,470 $1,196,140 $ 485,267
=====================================================================================
Per limited partnership unit
(4,837,505 outstanding) $ 0.26 $ 0.24 $ 0.10
- -------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
5
JETSTREAM II, L.P.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
For the years ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income $ 1,285,470 $ 1,196,140 $ 485,267
Adjustments to reconcile net income
to net cash provided by operating
activities:
Restricted cash -- 297,475 750,000
Depreciation 3,019,230 3,019,228 3,961,231
Increase (decrease) in cash
arising from changes in operating
assets and liabilities:
Accounts receivable -- (45,000) --
Interest receivable -- 368 290
Accounts payable and accrued
expenses (48,775) (24,180) 96,847
----------- ----------- -----------
Net cash provided by operating
activities 4,255,925 4,444,031 5,293,635
- -------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Loan receivable -- 108,403 79,326
----------- ----------- -----------
Net cash provided by investing
activities -- 108,403 79,326
- -------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Cash distributions (4,284,899) (4,533,017) (7,864,115)
----------- ----------- -----------
Net cash used for financing activities (4,284,899) (4,533,017) (7,864,115)
- -------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (28,974) 19,417 (2,491,154)
Cash and cash equivalents,
beginning of period 1,810,843 1,791,426 4,282,580
- -------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 1,781,869 $ 1,810,843 $ 1,791,426
=====================================================================================
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
6
JETSTREAM II, L.P.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1997
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 lease 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.
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.
<PAGE>
7
JETSTREAM II, L.P.
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.
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, 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.
<PAGE>
8
JETSTREAM II, L.P.
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.
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. On June
7, 1994, the Partnership made its only advance to Continental in the amount of
$302,525. The notes were prepaid 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 has been 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. Continental extended its lease
to March 1999 and in October 1998, exercised its second option to renew this
lease through March 2000, 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 pays 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:
<TABLE>
<CAPTION>
Percent of Rental Revenues
--------------------------------------------------
Airline 1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
Northwest 25.6% 26.3% 26.4%
Delta 19.5 20.0 20.1
Continental 43.9 45.0 45.3
Boeing Capital 11.0 1.9 --
TWA -- 6.8 8.2
--------------------------------------------------
</TABLE>
<PAGE>
9
JETSTREAM II, L.P.
The following is a schedule, by year, of future minimum rental income under the
leases as of December 31, 1998.
<TABLE>
<CAPTION>
Year Amount
--------------------------------------------------
<S> <C>
1999 $ 4,590,000
2000 1,710,000
2001 1,260,000
2002 1,260,000
2003 1,260,000
Thereafter 3,979,500
--------------------------------------------------
Total $14,059,500
==================================================
</TABLE>
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. Distributions
Distributions declared aggregated $4,255,925 (approximately $0.87 per LP unit),
$4,566,770 (approximately $0.94 per LP unit) and $7,931,849 (approximately $1.63
per LP unit) for the years ended December 31, 1998, 1997 and 1996, respectively.
As of December 31, 1998, the Partnership had declared a distribution of
$1,084,395, of which $1,073,551 (approximately $.22 per LP unit) was paid to the
Limited Partners and $10,844 was paid to the General Partners on March 4, 1999.
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.
6. 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. 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, 1997 or 1998.
The following is a summary of amounts earned by the General Partners and their
affiliates during the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Unpaid at Earned
December 31, ------------------------------
1998 1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Base Management Fee $ 17,804 $ 71,217 $ 68,756 $ 69,046
Incentive Management Fee 49,388 200,588 197,952 211,470
Re-lease Fee 43,050 172,200 166,250 166,949
----------------------------------------------------------------------
$110,242 $444,005 $432,958 $447,465
=========================================
</TABLE>
<PAGE>
10
JETSTREAM II, L.P.
7. Reconciliation of Difference between Net Income in the Financial
Statements (Accrual Basis--Generally Accepted Accounting Principles) and
Net Income in the Partnership's Tax Return
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income, as reported $ 1,285,470 $ 1,196,140 $ 485,267
Adjustments--
Depreciation differential between the
Modified Accelerated Cost Recovery
System and depreciation for
financial reporting purposes 3,019,230 2,115,533 2,146,454
-------------------------------------------
Net income, per the Partnership's
tax return $ 4,304,700 $ 3,311,673 $ 2,631,721
- -------------------------------------------------------------------------------------
The net income determined on the income tax basis is allocated to the partners
as follows:
Limited partners (4,837,505 units) $ 4,261,653 $ 3,278,556 $ 2,605,404
General partners 43,047 33,117 26,317
-------------------------------------------
$ 4,304,700 $ 3,311,673 $ 2,631,721
Taxable income (loss) per
limited partner unit $ 0.88 $ 0.68 $ 0.54
- -------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1998, the tax basis of total assets and total liabilities was
$12,639,729 and $1,317,009, respectively.
<PAGE>
11
- -------------------------------------------------------------------------------
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, 1998 and 1997, and the related
statements of operations, partners' capital (deficit) and cash flows for each of
the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 1,781,869
<SECURITIES> 000
<RECEIVABLES> 45,000
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> 1,826,869
<PP&E> 26,877,000
<DEPRECIATION> 18,937,193
<TOTAL-ASSETS> 9,766,676
<CURRENT-LIABILITIES> 1,517,772
<BONDS> 000
000
000
<COMMON> 000
<OTHER-SE> 8,248,904
<TOTAL-LIABILITY-AND-EQUITY> 9,766,676
<SALES> 000
<TOTAL-REVENUES> 5,025,545
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 3,740,075
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> 1,285,470
<INCOME-TAX> 000
<INCOME-CONTINUING> 1,285,470
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 1,285,470
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
