SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
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: 000-13333
ENSTAR INCOME PROGRAM 1984-1, L.P.
(Exact name of registrant as specified in its charter)
12405 Powerscourt Drive
St. Louis, Missouri 63131
(Address of principal executive offices including zip code)
(314) 965-0555
(Registrant's telephone number, including area code)
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 such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Enstar Income Program 1984-1, L.P.
Quarterly Report on Form 10-Q for the Period ended June 30, 2003
Table of Contents
| PART I. FINANCIAL INFORMATION | Page No. |
| Item 1. Financial Statements - Enstar Income Program 1984-1, L.P. | |
| Condensed Balance Sheets as of June 30, 2003 and December 31, 2002 | |
| Condensed Statements of Operations for the three and six months ended June 30, 2003 and 2002 | |
| Condensed Statements of Cash Flows for the six months ended June 30, 2003 and 2002 | |
| Notes to Condensed Financial Statements | |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 4. Controls and Procedures | |
| PART II. OTHER INFORMATION | |
| Item 6. Exhibits and Reports on Form 8-K | |
| SIGNATURES | |
| EXHIBIT INDEX |
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
ENSTAR INCOME PROGRAM 1984-1, L.P.
CONDENSED BALANCE SHEETS
June 30, December 31,
2003 2002
------------ ------------
(Unaudited)
ASSETS
ASSETS:
Cash and cash equivalents........................................ $ 388,700 $ 1,185,600
Accounts receivable, less allowance for doubtful accounts
of $14,600 and $11,700, respectively........................... 72,300 78,900
Prepaid expenses and other assets................................ 18,600 39,800
Property, plant and equipment, net of accumulated depreciation
of $12,437,200 and $11,933,400, respectively................... 2,856,600 3,403,700
Franchise cost, net of accumulated amortization of $48,000
and $43,900, respectively...................................... 32,700 36,800
------------ ------------
Total assets............................................... $ 3,368,900 $ 4,744,800
============ ============
LIABILITIES AND PARTNERSHIP CAPITAL
LIABILITIES:
Accounts payable................................................. $ 41,300 $ 120,800
Accrued liabilities.............................................. 475,800 701,500
Due to affiliates................................................ 902,900 1,429,200
------------ ------------
Total liabilities......................................... 1,420,000 2,251,500
------------ ------------
PARTNERSHIP CAPITAL (DEFICIT):
General Partner.................................................. (53,300) (47,900)
Limited Partners................................................. 2,002,200 2,541,200
------------ ------------
Total Partnership capital................................. 1,948,900 2,493,300
------------ ------------
Total liabilities and Partnership capital................. $ 3,368,900 $ 4,744,800
============ ============
See accompanying notes to condensed financial statements.
ENSTAR INCOME PROGRAM 1984-1, L.P.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUES........................................................... $ 712,400 $ 846,600 $ 1,416,900 $ 1,754,500
OPERATING EXPENSES:
Service costs................................................... 424,700 382,500 830,200 736,900
General and administrative expenses............................. 178,400 207,200 364,100 389,800
General partner management fees and reimbursed expenses......... 67,800 101,800 140,400 206,700
Depreciation and amortization................................... 250,200 257,900 507,900 502,400
Asset impairment charge......................................... 100,000 -- 100,000 --
------------ ------------ ------------ ------------
1,021,100 949,400 1,942,600 1,835,800
------------ ------------ ------------ ------------
Operating loss............................................. (308,700) (102,800) (525,700) (81,300)
------------ ------------ ------------ ------------
OTHER INCOME:
Interest income................................................. 1,800 5,300 4,300 10,000
Other income (expense).......................................... (11,100) 100 (23,000) 2,200
------------ ------------ ------------ ------------
(9,300) 5,400 (18,700) 12,200
------------ ------------ ------------ ------------
NET LOSS .......................................................... $ (318,000) $ (97,400) $ (544,400) $ (69,100)
============ ============ ============ ============
NET LOSS ALLOCATED TO GENERAL PARTNER.............................. $ (3,200) $ (1,000) $ (5,400) $ (700)
============ ============ ============ ============
NET LOSS ALLOCATED TO LIMITED PARTNERS............................. $ (314,800) $ (96,400) $ (539,000) $ (68,400)
============ ============ ============ ============
NET LOSS PER UNIT OF LIMITED PARTNERSHIP INTEREST.................. $ (10.51) $ (3.22) $ (18.00) $ (2.28)
============ ============ ============ ============
LIMITED PARTNERSHIP UNITS OUTSTANDING
DURING PERIOD...................................................... 29,940 29,940 29,940 29,940
============ ============ ============ ============
See accompanying notes to condensed financial statements.
ENSTAR INCOME PROGRAM 1984-1, L.P.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................ $ (544,400) $ (69,100)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization................................................ 507,900 502,400
Asset impairment charge...................................................... 100,000 --
Changes in:
Accounts receivable, prepaid expenses and other assets....................... 27,800 55,300
Accounts payable, accrued liabilities and due to affiliates.................. (831,500) (162,300)
----------- -----------
Net cash from operating activities....................................... (740,200) 326,300
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................ (56,700) (650,600)
----------- -----------
Net cash from investing activities....................................... (56,700) (650,600)
----------- -----------
Net decrease in cash .................................................... (796,900) (324,300)
CASH, beginning of period.......................................................... 1,185,600 2,222,100
----------- -----------
CASH, end of period................................................................ $ 388,700 $ 1,897,800
=========== ===========
See accompanying notes to condensed financial statements.
ENSTAR INCOME PROGRAM 1984-1, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
The accompanying condensed interim financial statements for Enstar Income Program 1984-1, L.P. (the Partnership) as of June 30, 2003, and for the three and six months ended June 30, 2003 and 2002, are unaudited. These condensed interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2002. In the opinion of management, the condensed interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of such periods. The results of operations for the three and six months ended June 30, 2003 are not necessarily indicative of results for the entire year. As discussed in Note 3 below, current franchise disputes and overbuild issues could have a material adverse effect on the Partnership's operations.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. These estimates include useful lives of property, plant and equipment, valuation of long-lived assets and allocated operating costs. Actual results could differ from those estimates.
Certain reclassifications have been made to conform to current period presentation.
2. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES
The Partnership has a management and service agreement (the Management Agreement) with Enstar Cable Corporation ("Enstar Cable"), a wholly owned subsidiary of Enstar Communications Corporation, the Corporate General Partner, for a monthly management fee of 5% of gross revenues. Management fee expense approximated $35,600 and $42,300 for the three months ended June 30, 2003 and 2002, respectively, and $70,800 and $87,700 for the six months ended June 30, 2003 and 2002, respectively. Management fees are non- interest bearing.
In addition to the monthly management fee, the Partnership reimburses Enstar Cable for direct expenses incurred on behalf of the Partnership, and for the Partnership's allocable share of operational costs associated with services provided by Enstar Cable. Additionally, Charter Communications Holding Company, LLC and its affiliates (collectively, Charter) provide other management and operational services for the Partnership. These expenses are charged to the properties served based primarily on the Partnership's allocable share of operational costs associated with the services provided. The total amount charged to the Partnership for these services and direct expenses was $32,200 and $59,500 for the three months ended June 30, 2003 and 2002, respectively, and $69,600 and $119,000 for the six months ended June 30, 2003 and 2002, respectively.
Substantially all programming services are purchased through Charter. Charter charges the Partnership for these costs based on its costs. The Partnership recorded programming fee expense of $201,600 and $206,500 for the three months ended June 30, 2003 and 2002, respectively, and $400,300 and $417,900 for the six months ended June 30, 2003 and 2002, respectively. Programming fees are included in service costs in the accompanying condensed statements of operations.
3. CERTAIN TRENDS AND UNCERTAINTIES
The Partnership's franchise agreement with the City of Covington, Tennessee ("the City") expired in 1994. By agreement with the City, the Partnership has continued to operate the cable system in Covington and pay franchise fees to the City on a month-to-month basis until a new franchise agreement is reached. In March 2000, the Corporate General Partner submitted a renewal proposal to the City on behalf of the Partnership. In November 2000, the City sold municipal bonds to finance construction of a municipally-owned cable system. The City completed the construction project in the first quarter of 2002 and is actively competing with the Partnership.
In July 2002, the Partnership received a letter from the City Attorney advising the Partnership that it may not operate within the city limits and demanding the Partnership discontinue service within thirty days. On August 7, 2002, the Corporate General Partner filed a lawsuit on behalf of the Partnership in the United States District Court for the Western District of Tennessee ("the Court") against the City, the Covington Electric System Board of Public Utilities and Covington Cable. The Partnership alleges that the City and other defendants are unlawfully attempting to shut down the Partnership's cable television system in Covington, in order to eliminate competition to the new City-owned cable system. The Partnership also alleges that the City failed to follow the federal statutory procedures governing the renewal of a cable television franchise and is now attempting to shut down the Partnership's cable system, without having complied with those procedures or even formally having denied the numerous renewal proposals, in contravention of federal law. The Partnership seeks a declaration from the Court that the City's actions are unlawful and violate the 1992 Cable Act, franchise provisions, federal antitrust laws, state common law, the Tennessee Consumer Protection Act and both the United States and Tennessee Constitutions. The Partnership is also seeking a preliminary injunction against all three defendants. The defendants have agreed to take no action against the Partnership's provision of services in Covington until the Court has ruled on the motion for preliminary injunction. The lawsuit is on hold pending the sale of our cable system, as discussed in Note 6 below.
If the Partnership is unsuccessful in the lawsuit, the Partnership may have to terminate its operations in the City. The loss of the Partnership's franchise and the related loss of customers would have a significant adverse impact on the Partnership's financial condition and operating results. As of June 30, 2003, the Partnership had approximately 500 basic customers in the city of Covington.
In January 2000, the franchise authority in Bolivar, Tennessee authorized its municipal utility to construct and operate a competing cable system in that franchise area. The Partnership has continued to operate the cable system in Bolivar and pay franchise fees to the franchise authority. Although the municipal utility has not obtained funds to build a cable system, the Partnership believes that if a competing system were built, the loss of customers would have an adverse impact on the financial condition and results of operations of the Partnership. As of June 30, 2003, the Partnership had approximately 900 basic customers in the city of Bolivar.
The Brownsville system's property, plant and equipment, which includes all properties served by the Brownsville headend, namely Covington, Bolivar and Brownsville, collectively had a carrying value, after the impairment charge, of $2,232,200 at June 30, 2003. This is approximately 78.1% of the total property, plant and equipment of the Partnership.
As disclosed in Charter's Quarterly Report on Form 10-Q, the parent of the Corporate General Partner and the Manager is the defendant in twenty-two class action and shareholder lawsuits and is the subject of a grand jury investigation being conducted by the United States Attorney's Office for the Eastern District of Missouri and an SEC investigation. The United States Attorney's office has publicly stated that Charter is not currently a target of the investigation. Charter has also been advised by the United States Attorney's office that no member of its board of directors, including its Chief Executive Officer, is a target of the investigation. On July 24, 2003, a federal grand jury charged four former officers of Charter with conspiracy and mail and wire fraud, alleging improper accounting and reporting practices focusing on revenue from digital set-top terminal suppliers and inflated subscriber account numbers. On July 25, 2003, one of the former officers who was indicted entered a guilty plea. Charter has informed the Corporate General partner that they are fully cooperating with the investigation.
Charter is unable to predict the outcome of the class action lawsuits and government investigations at this time. An unfavorable outcome of these matters could have a material adverse effect on Charter's results of operations and financial condition which could in turn have a material adverse effect on the Partnership.
4. ASSET IMPAIRMENT CHARGE
The asset impairment charge of $100,000 for the three and six months ended June 30, 2003 represents a write down of property plant and equipment related to our Brownsville, Tennessee cable system to its estimated fair value. It became apparent during the second quarter of 2003 that based on subscriber losses during the three months ended June 30, 2003, the book value of the systems would not be realized. As a result, an asset impairment charge of $100,000 related to our Brownsville, Tennessee cable system was recorded in the second quarter of 2003.
5. NET LOSS PER UNIT OF LIMITED PARTNERSHIP INTEREST
The amended Partnership Agreement generally provides that all partnership profits, gains, losses, credits, and cash distributions (all as defined) from operations or liquidation be allocated 1% to the Corporate General Partner and 99% to the Limited Partners until the Limited Partners have received distributions of cash flow from operations and/or cash flow from sales, refinancing, or liquidation of systems equal to their initial investment. After the Limited Partners have received cash flow equal to their initial investment, the Corporate General Partner will only receive a 1% allocation of cash flow from liquidating a system until the Limited Partners have received an annual simple interest return of at least 18% of their initial investment less any distributions from previous system liquidations. Thereafter, allocations will be made 15% to the Corporate General Partner and 85% to the Limited Partners. All allocations to individual Limited Partners will be based on their respective capital accounts. The Partnership Agreement limits the amount of debt the Partnership may incur.
Upon the disposition of substantially all of the Partnership's assets, gains shall be allocated first to the Limited Partners having negative capital account balances until their capital accounts are increased to zero, next equally among the Corporate General Partner until their capital accounts are increased to zero, and thereafter as outlined in the preceding paragraph. Upon dissolution of the Partnership, any negative capital account balances remaining after all allocations and distributions are made must be funded by the respective partners.
6. PROPOSED SALES TRANSACTIONS
On November 8, 2002 the Partnership entered into an asset purchase agreement providing for the sale of all of its cable systems to Telecommunications Management, LLC (Telecommunications Management) for a total sale price of approximately $3,916,300 (an average of approximately $643 per customer acquired). This sale is a part of a larger transaction in which the Partnership and nine other affiliated partnerships (which, together with the Partnership are collectively referred to as the "Selling Partnerships") would sell all of their remaining assets used in the operation of their respective cable systems to Telecommunications Management for a total cash sale price of approximately $15,341,600 (the Telecommunications Management Sale). The Telecommunications Management Sale is subject to the approval of a majority of the holders of the Partnership's units and approval of the holders of the other Selling Partnerships. In addition, the transaction is subject to certain closing conditions, including regulatory and franchise approvals. If approved, it is expected that this sale will close in the second half of 2003, although no assurance can be given regarding this matter.
On February 6, 2003, the Partnership entered into a side letter amending the asset purchase agreement providing for the sale of all of its cable systems to Telecommunications Management. The February 6, 2003 side letter amends the asset purchase agreement and Deposit Escrow Agreement to extend the date of the second installment of the deposit and the Outside Closing Date each by 60 days. On April 7, 2003, the second installment of the escrow deposit was due and was not made.
On April 24, 2003, the Partnership entered into another side letter amending the asset purchase agreement providing for the sale of all of its cable systems to Telecommunications Management. The April 24, 2003 side letter amends the asset purchase agreement and Deposit Escrow Agreement to extend the date of the second installment of the deposit to May 15, 2003 and the Outside Closing Date to September 30, 2003.
On June 6, 2003, the Partnership entered into a third side letter amending the asset purchase agreement providing for the sale of all of its cable systems to Telecommunications Management. The June 6, 2003 side letter amends the asset purchase agreement to reduce the purchase price of the remaining cable systems in the Selling Partnerships to approximately $14,487,200, subject to closing sale price adjustments, of which approximately $3,505,500 relates to the cable systems in the Partnership. In addition, $250,000 was deposited in the Deposit Escrow Account concurrent with the execution of the side letter.
Upon approval of the Limited Partners and the sale of all of its cable systems to Telecommunications Management as discussed previously, the Partnership will be liquidated and all remaining assets distributed to the Limited Partners and the Corporate General Partner. The Partnership has not reflected the pending sale of these systems as discontinued operations since the Limited Partners have not yet approved the sale.
The Corporate General Partner's intention is to settle the outstanding obligations of the Partnership and terminate the Partnership as expeditiously as possible. Final dissolution of the Partnership and related cash distributions to the partners will occur upon obtaining final resolution of all liquidation issues.
7.RECENTLY ISSUED ACCOUNTING STANDARDS
In April of 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 will not have an impact on the Partnership's financial condition or results of operations.
In May of 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 will not have an impact on the Partnership's financial condition or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This report includes certain forward-looking statements regarding, among other things, our future results of operations, regulatory requirements, competition, capital needs and general business conditions applicable to us. Such forward-looking statements involve risks and uncertainties including, without limitation, the uncertainty of legislative and regulatory changes and the rapid developments in the competitive environment facing cable television operators such as us. In addition to the information provided herein, reference is made to our Annual Report on Form 10-K for the year ended December 31, 2002 for additional information regarding such matters and the effect thereof on our business.
RESULTS OF OPERATIONS
Revenues decreased $134,200 from $846,600 to $712,400, or 15.9%, and $337,600 from $1,754,500 to $1,416,900, or 19.2%, for the three and six months ended June 30, 2003, respectively, compared to the corresponding periods in 2002. The decrease was primarily due to a decline in basic and premium service customers. As of June 30, 2003 and 2002, we had approximately 5,300 and 6,500 basic service customers, respectively, and 2,400 and 2,800 premium service customers, respectively. The decline in customers is primarily due to competition from satellite providers and Covington Cable.
Service costs increased $42,200 from $382,500 to $424,700, or 11.0%, and $93,300 from $736,900 to $830,200, or 12.7%, for the three and six months ended June 30, 2003, respectively, compared to the corresponding periods in 2002. Service costs represent programming costs and other costs directly attributable to providing cable services to customers. The increase was primarily due to a reduced amount of personnel costs associated with the capitalizable activities of rebuild and installation.
General and administrative expenses decreased $28,800 from $207,200 to $178,400, or 13.9%, and $25,700 from $389,800 to $364,100, or 6.6%, for the three and six months ended June 30, 2003, respectively, compared to the corresponding periods in 2002. The decrease was due primarily to a decrease in bad debt expense.
General partner management fees and reimbursed expenses decreased $34,000 from $101,800 to $67,800, or 33.4%, and decreased $66,300 from $206,700 to $140,400, or 32.1%, for the three and six months ended June 30, 2003, respectively, compared to the corresponding periods in 2002. These costs represent administrative costs reimbursed to Charter by us based on Charter's actual costs incurred. The decrease was due to a decrease in management fees as a result of the decrease in revenues and a decrease in the amount of reimbursable expenses incurred by Charter.
Depreciation and amortization expense decreased $7,700 from $257,900 to $250,200, or 3.0%, and increased $5,500 from $502,400 to $507,900, or 1.1%, for the three and six months ended June 30, 2003, respectively, compared to the corresponding periods in 2002. The decrease for the three months ended June 30, 2003 was a result of certain assets becoming fully depreciated in the first quarter of 2003. The increase for the six months ended June 30, 2003 was due primarily to capital expenditures in 2002 relating to cable systems upgrades offset in part by fully depreciated assets.
The asset impairment charge of $100,000 for the three and six months ended June 30, 2003 represents a write down of property plant and equipment related to our Brownsville, Tennessee cable system to its estimated fair value. It became apparent during the second quarter of 2003 that based on subscriber losses during the three months ended June 30, 2003, the book value of the systems would not be realized. As a result, an asset impairment charge of $100,000 related to our Brownsville, Tennessee cable system was recorded in the second quarter of 2003.
Due to the factors described above, operating loss increased $205,900 from $102,800 to $308,700 and $444,400 from $81,300 to $525,700, for the three and six months ended June 30, 2003, respectively, compared to the corresponding periods in 2002.
Interest income decreased $3,500 from $5,300 to $1,800, or 66.0%, and $5,700 from $10,000 to $4,300, or 57.0%, for the three and six months ended June 30, 2003, respectively, compared to the corresponding periods in 2002. The decrease was primarily due to lower average cash balances available for investment coupled with lower interest rates during the three and six months ended June 30, 2003 compared to the corresponding periods in 2002.
Other expense of $11,100 and $23,000 for the three and six months ended June 30, 2003, respectively, represents a loss on the sale of fixed assets combined with costs incurred in connection with the proposed sales transactions. Other income of $100 and $2,200 for the three and six months ended June 30, 2002, respectively, represents a gain on sale of fixed assets.
Due to the factors described above, our net loss increased $220,600 from $97,400 to $318,000 and $475,300 from $69,100 to $544,400 for the three and six months ended June 30, 2003, respectively, compared to the corresponding periods in 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our primary objective, having invested net offering proceeds in cable television systems, is to distribute to our partners all available cash from the sale of cable systems and all cash flow, if any, from operations after providing for expenses and any planned capital requirements. In general, these capital requirements involve expansion, improvement and upgrade of our existing cable systems necessary to maintain compliance with franchise agreements and to effectively compete.
Cash and cash equivalents decreased $796,900 from $1,185,600 at December 31, 2002 to $388,700 at June 30, 2003 primarily due to repayments of $600,000 on the amounts due to affiliates. Cash and cash equivalents decreased $324,300 from $2,222,100 at December 31, 2001 to $1,897,800 at June 30, 2002 as a result of capital expenditures of $650,600 offset by $326,300 of cash used by operating activities. Capital expenditures in the six months ended June 30, 2003 were $56,700.
Cash generated by our operations, together with available cash balances will be used to fund capital expenditures as required by franchise authorities. However, our cash reserves will be insufficient to fund a comprehensive upgrade program. If our pending sales transactions are not closed, we will need to rely on increased cash flow from operations or new sources of financing in order to meet our future liquidity requirements. There can be no assurance that such cash flow increases can be attained, or that additional future financing will be available on terms acceptable to us. If we are not able to attain such cash flow increases, or obtain new sources of borrowings, we will not be able to upgrade our cable systems. As a result, the value of our systems would be lower than that of systems built to a higher technical standard.
Significant capital would be required for a comprehensive plant and headend upgrade particularly in light of the high cost of electronics to enable two-way service, to offer high speed cable modem Internet service and other interactive services, as well as to increase channel capacity and allow a greater variety of video services. The estimated cost of all of these comprehensive upgrades would be approximately $12.2 million (for an upgrade to 550 megahertz capacity) and $14.6 million (for an upgrade to 870 megahertz capacity). Given the potential and existing overbuilds that exist in Tennessee, the high cost of this comprehensive upgrade plan, the limited funds available, pending sale transactions, and the belief that such a plan is not economically prudent, Enstar Communications Corporation (the Corporate General Partner) does not presently anticipate that it will proceed with a comprehensive upgrade plan. The Corporate General Partner will, however, continue to make upgrades required by franchise agreements.
We believe it is critical to conserve cash to fund our future liquidity requirements and any anticipated capital expenditures as required by franchise authorities. Accordingly, we do not anticipate distributions to partners at this time, other than those resulting from the pending sales transactions.
PROPOSED SALES TRANSACTIONS
On November 8, 2002 the Partnership entered into an asset purchase agreement providing for the sale of all of its cable systems to Telecommunications Management, LLC (Telecommunications Management) for a total sale price of approximately $3,916,300 (an average of approximately $643 per customer acquired). This sale is a part of a larger transaction in which the Partnership and nine other affiliated partnerships (which, together with the Partnership are collectively referred to as the "Selling Partnerships") would sell all of their remaining assets used in the operation of their respective cable systems to Telecommunications Management for a total cash sale price of approximately $15,341,600 (the Telecommunications Management Sale). The Telecommunications Management Sale is subject to the approval of a majority of the holders of the Partnership's units and approval of the holders of the other Selling Partnerships. In addition, the transaction is subject to certain closing conditions, including regulatory and franchise approvals. If approved, it is expected that this sale will close in the second half of 2003, although no assurance can be given regarding this matter.
On February 6, 2003, the Partnership entered into a side letter amending the asset purchase agreement providing for the sale of all of its cable systems to Telecommunications Management. The February 6, 2003 side letter amends the asset purchase agreement and Deposit Escrow Agreement to extend the date of the second installment of the deposit and the Outside Closing Date each by 60 days. On April 7, 2003, the second installment of the escrow deposit was due and was not made.
On April 24, 2003, the Partnership entered into another side letter amending the asset purchase agreement providing for the sale of all of its cable systems to Telecommunications Management. The April 24, 2003 side letter amends the asset purchase agreement and Deposit Escrow Agreement to extend the date of the second installment of the deposit to May 15, 2003 and the Outside Closing Date to September 30, 2003.
On June 6, 2003, the Partnership entered into a third side letter amending the asset purchase agreement providing for the sale of all of its cable systems to Telecommunications Management. The June 6, 2003 side letter amends the asset purchase agreement to reduce the purchase price of the remaining cable systems in the Selling Partnerships to approximately $14,487,200, subject to closing sale price adjustments, of which approximately $3,505,500 relates to the remaining cable systems in the Partnership. In addition, $250,000 was deposited in the Deposit Escrow Account concurrent with the execution of the side letter.
Upon approval of the Limited Partners and the sale of all of the remaining cable systems to Telecommunications Management as discussed previously, the Partnership will be liquidated and all remaining assets distributed to the Limited Partners and the Corporate General Partner. The Partnership has not reflected the pending sale of these systems as discontinued operations since the Limited Partners have not yet approved the sale.
The Corporate General Partner's intention is to settle the outstanding obligations of the Partnership and terminate the Partnership as expeditiously as possible. Final dissolution of the Partnership and related cash distributions to the partners will occur upon obtaining final resolution of all liquidation issues.
CERTAIN TRENDS AND UNCERTAINTIES
Our franchise agreement with the City of Covington, Tennessee ("the City") expired in 1994. By agreement with the City, we have continued to operate the cable system in Covington and pay franchise fees to the City on a month-to-month basis until a new franchise agreement is reached. In March 2000, the Corporate General Partner submitted a renewal proposal to the City on our behalf. In November 2000, the City sold municipal bonds to finance construction of a municipally-owned cable system. The City completed the construction project in the first quarter of 2002 and is actively competing with us.
In July 2002, we received a letter from the City Attorney advising us that we may not operate within the city limits and demanding we discontinue service within thirty days. On August 7, 2002, the Corporate General Partner filed a lawsuit on behalf of us in the United States District Court for the Western District of Tennessee against the City, the Covington Electric System Board of Public Utilities and Covington Cable. We allege that the City and other defendants are unlawfully attempting to shut down our cable television system in Covington, in order to eliminate competition to the new City-owned cable system. We also allege that the City failed to follow the federal statutory procedures governing the renewal of a cable television franchise and is now attempting to shut down our cable system, without having complied with those procedures or even formally having denied the numerous renewal proposals, in contravention of federal law. We seek a declaration from the Court that the City's actions are unlawful and violate the 1992 Cable Act, franchise provisions, federal antitrust laws, state common law, the Tennessee Consumer Protection Act and both the United States and Tennessee Constitutions. We are also seeking a preliminary injunction against all three defendants. The defendants have agreed to take no action against our provision of services in Covington until the Court has ruled on the motion for preliminary injunction. The lawsuit is on hold pending the sale to Telecommunications Management. If we are ultimately unsuccessful in the lawsuit, we may have to terminate our operations in the City of Covington. The loss of our franchise and the related loss of customers would have a significant adverse impact on our financial condition and operating results. As of June 30, 2003, we had approximately 500 basic customers in the city of Covington.
In January 2000, the franchise authority in Bolivar, Tennessee authorized its municipal utility to construct and operate a competing cable system in that franchise area. We have continued to operate the cable system in Bolivar and pay franchise fees to the franchise authority. Although the municipal utility has not obtained funds to build a cable system, we believe that if a competing system were built, the loss of customers would have an adverse impact on our financial condition and results of operations. As of June 30, 2003, we had approximately 900 basic customers in the city of Bolivar.
An impairment charge of $100,000 was recorded in the second quarter of 2003 on Brownsville's property, plant and equipment and franchise costs, which includes all properties served by the Brownsville headend, namely Covington, Bolivar and Brownsville. Collectively, the properties had a carrying value, after the impairment charge, of $2,232,200 at June 30, 2003. The Brownsville headend constitutes approximately 78.1% of our total property, plant and equipment.
As disclosed in Charter's Quarterly Report on Form 10-Q, the parent of our Corporate General Partner and our Manager is the defendant in twenty-two class action and shareholder lawsuits and is the subject of a grand jury investigation being conducted by the United States Attorney's Office for the Eastern District of Missouri and an SEC investigation. The United States Attorney's office has publicly stated that Charter is not currently a target of the investigation. Charter has also been advised by the United States Attorney's office that no member of its board of directors, including its Chief Executive Officer, is a target of the investigation. On July 24, 2003, a federal grand jury charged four former officers of Charter with conspiracy and mail and wire fraud, alleging improper accounting and reporting practices focusing on revenue from digital set-top terminal suppliers and inflated subscriber account numbers. On July 25, 2003, one of the former officers who was indicted entered a guilty plea. Charter has informed the Corporate General partner that they are fully cooperating with the investigation.
Charter is unable to predict the outcome of the class action lawsuits and government investigations at this time. An unfavorable outcome of these matters could have a material adverse effect on Charter's results of operations and financial condition which could in turn have a material adverse effect on us.
Insurance coverage is maintained for all of the cable television properties owned or managed by Charter to cover damage to cable distribution systems, customer connections and against business interruptions resulting from such damage. This coverage is subject to a significant annual deductible which applies to all of the cable television properties owned or managed by Charter, including our properties.
Approximately 75.5% of our customers are served by our system in Brownsville, Tennessee, including those served off of the Brownsville headend, and neighboring communities. Significant damage to the system due to seasonal weather conditions or other events could have a material adverse effect on our liquidity and cash flows. We continue to purchase insurance coverage in amounts our management views as appropriate for all other property, liability, automobile, workers' compensation and other insurable risks.
Charter and our Corporate General Partner have had communications and correspondence with representatives of certain limited partners, and others, concerning certain Enstar partnerships of which our Corporate General Partner is also the Corporate General Partner. While we are not aware of any formal litigation which has been filed relating to the communications and correspondence, or the subject matter referred to therein, it is impossible to predict what actions may be taken in the future or what loss contingencies may result therefrom.
It is difficult to assess the impact the general economic slowdown will have on future operations. This could result in reduced spending by customers and advertisers, which could reduce our revenues and operating cash flow, as well as the collectibility of accounts receivable.
INFLATION
Certain of our expenses, such as those for wages and benefits, equipment repair and replacement, and billing and marketing generally increase with inflation. However, we do not believe that our financial results have been, or will be, adversely affected by inflation in a material manner, provided that we are able to increase our service prices periodically, of which there can be no assurance.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April of 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 will not have an impact on our financial condition or results of operations.
In May of 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 will not have an impact on our financial condition or results of operations.
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, our Corporate General Partner, including our Chief Administrative Officer and Principal Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures with respect to the information generated for use in this Quarterly Report. The evaluation was based in part upon reports and affidavits provided by a number of executives. Based upon, and as of the date of that evaluation, our Chief Administrative Officer and Principal Financial Officer concluded that the disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms.
There was no change in our internal control over financial reporting during the quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the above evaluation, we believe that our controls do provide such reasonable assurances.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8- K.
- EXHIBITS
- REPORTS ON FORM 8-K
ExhibitNumber | Description of Document |
|
|
2.1a | Asset Purchase Agreement, dated November 8, 2002, by and among Telecommunications Management, LLC and Enstar Income Program II-2, L.P., Enstar Income Program IV-3, L.P., Enstar Income Program 1984-1, L.P., Enstar Income/Growth Program Six-A, L.P., Enstar VII, L.P., Enstar VIII, L.P., Enstar X, L.P., Enstar XI, L.P., Enstar IV/PBD Systems Venture and Enstar Cable of Cumberland Valley (Incorporated by reference to Exhibit 2.1 to the quarterly report of Form 10-Q of Enstar Income Program II-2, L.P. filed on November 12, 2002 (File No. 000-14505)). |
2.1b | Letter of Amendment, dated as of February 6, 2003, between Enstar Income Program II-2, L.P., Enstar Income Program IV-3, L.P., Enstar Income Program 1984-1, L.P., Enstar Income/Growth Program Six-A, L.P., Enstar VII, L.P., Enstar VIII. L.P., Enstar X, L.P., Enstar XI, L.P., Enstar IV/PBD Systems Venture and Enstar Cable of Cumberland Valley and Telecommunications Management, LLC (Incorporated by reference to Exhibit 2.1 to the current report on Form 8-K of Enstar Income/Growth Program Five-A, L.P. filed on February 14, 2003 (File No. 000-16779)). |
2.1c | Letter of Amendment, dated as of April 24, 2003, between Enstar Income Program II-2, L.P., Enstar Income Program IV-3, L.P., Enstar Income Program 1984-1, L.P., Enstar Income/Growth Program Six-A, L.P., Enstar VII, L.P., Enstar VIII. L.P., Enstar X, L.P., Enstar XI, L.P., Enstar IV/PBD Systems Venture and Enstar Cable of Cumberland Valley and Telecommunications Management, LLC (Incorporated by reference to Exhibit 2.1 to the current report on Form 8-K of Enstar Income/Growth Program Five-A, L.P. filed on April 25, 2003 (File No. 000-16779)). |
2.1d | Letter of Amendment, dated as of November 8, 2002, between Enstar Income Program II-2, L.P., Enstar Income Program IV-3, L.P., Enstar Income Program 1984-1, L.P., Enstar Income/Growth Program Six-A, L.P., Enstar VII, L.P., Enstar VIII. L.P., Enstar X, L.P., Enstar XI, L.P., Enstar IV/PBD Systems Venture and Enstar Cable of Cumberland Valley and Telecommunications Management, LLC (Incorporated by reference to Exhibit 2.1 to the current report on Form 8-K of Enstar Income/Growth Program Five-A, L.P. filed on June 9, 2003 (File No. 000-16779)). |
31.1 | Certificate of Chief Administrative Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934. * |
31.2 | Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934. * |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Administrative Officer). * |
32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Principal Financial Officer). * |
* filed herewith
On April 25, 2003 the registrant filed a current report on Form 8-K dated April 24, 2003 to announce it had entered into a side letter amending an asset purchase agreement.
On June 9, 2003 the registrant filed a current report on Form 8-K dated November 8, 2002 to announce it had entered into a side letter amending an asset purchase agreement.
.
Pursuant to the requirements 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.
ENSTAR INCOME PROGRAM 1984-1, L.P.
By:ENSTAR COMMUNICATIONS CORPORATION
Corporate General Partner
Date: August 12, 2003
By:/s/ Paul E. Martin
Name: Paul E. Martin
Title: Senior Vice President and Corporate
Controller (Principal Financial Officer and Principal Accounting Officer)
ExhibitNumber | Description of Document |
|
|
2.1a | Asset Purchase Agreement, dated November 8, 2002, by and among Telecommunications Management, LLC and Enstar Income Program II-2, L.P., Enstar Income Program IV-3, L.P., Enstar Income Program 1984-1, L.P., Enstar Income/Growth Program Six-A, L.P., Enstar VII, L.P., Enstar VIII, L.P., Enstar X, L.P., Enstar XI, L.P., Enstar IV/PBD Systems Venture and Enstar Cable of Cumberland Valley (Incorporated by reference to Exhibit 2.1 to the quarterly report of Form 10-Q of Enstar Income Program II-2, L.P. filed on November 12, 2002 (File No. 000-14505)). |
2.1b | Letter of Amendment, dated as of February 6, 2003, between Enstar Income Program II-2, L.P., Enstar Income Program IV-3, L.P., Enstar Income Program 1984-1, L.P., Enstar Income/Growth Program Six-A, L.P., Enstar VII, L.P., Enstar VIII. L.P., Enstar X, L.P., Enstar XI, L.P., Enstar IV/PBD Systems Venture and Enstar Cable of Cumberland Valley and Telecommunications Management, LLC (Incorporated by reference to Exhibit 2.1 to the current report on Form 8-K of Enstar Income/Growth Program Five-A, L.P. filed on February 14, 2003 (File No. 000-16779)). |
2.1c | Letter of Amendment, dated as of April 24, 2003, between Enstar Income Program II-2, L.P., Enstar Income Program IV-3, L.P., Enstar Income Program 1984-1, L.P., Enstar Income/Growth Program Six-A, L.P., Enstar VII, L.P., Enstar VIII. L.P., Enstar X, L.P., Enstar XI, L.P., Enstar IV/PBD Systems Venture and Enstar Cable of Cumberland Valley and Telecommunications Management, LLC (Incorporated by reference to Exhibit 2.1 to the current report on Form 8-K of Enstar Income/Growth Program Five-A, L.P. filed on April 25, 2003 (File No. 000-16779)). |
2.1d | Letter of Amendment, dated as of November 8, 2002, between Enstar Income Program II-2, L.P., Enstar Income Program IV-3, L.P., Enstar Income Program 1984-1, L.P., Enstar Income/Growth Program Six-A, L.P., Enstar VII, L.P., Enstar VIII. L.P., Enstar X, L.P., Enstar XI, L.P., Enstar IV/PBD Systems Venture and Enstar Cable of Cumberland Valley and Telecommunications Management, LLC (Incorporated by reference to Exhibit 2.1 to the current report on Form 8-K of Enstar Income/Growth Program Five-A, L.P. filed on June 9, 2003 (File No. 000-16779)). |
31.1 | Certificate of Chief Administrative Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934. * |
31.2 | Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934. * |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Administrative Officer). * |
32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Principal Financial Officer). * |
* filed herewith