SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2002
------------------------------------------------
Commission Registrant; State of Organization; IRS Employer
File No. Address and Telephone Number Identification No.
- ---------- ---------------------------------- -----------------
1-14507 Henley Limited Partnership 04-3416346
(a Delaware limited partnership)
151 Merrimac Street, Boston, Massachusetts 02114
(617) 523-6050
1-9324 Henley Limited Partnership II 04-2936516
(a Delaware limited partnership)
151 Merrimac Street, Boston, Massachusetts 02114
(617) 523-6050
Indicate by checkmark 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 and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
As of December 31, 2002, there were 2,703,664 units representing limited
partnership interests outstanding of Henley Limited Partnership, and
2,703,664 units representing limited partnership interests outstanding of
Henley Limited Partnership II.
Part I - Financial Information
Item I - Financial Statements
HENLEY LIMITED PARTNERSHIP
and Subsidiaries
Condensed Consolidated Balance Sheets
December 31, June 30,
2002 2002
------------ ----------
(Unaudited)
<s> <c> <c>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $160,882,176 $ 3,499,387
Other short-term investments 28,700,000 28,400,000
Prepaid expenses and other current assets 696,513 28,467
----------------------------
TOTAL CURRENT ASSETS 190,278,689 31,927,854
PROPERTY AND EQUIPMENT, net 31,600 6,696
OTHER ASSETS 174,455 252,071
----------------------------
$190,484,744 $ 32,186,621
============================
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
CURRENT LIABILITIES
Accounts payable and other current liabilities $ 398,570 $ 125,445
Accrued compensation 8,000,000
Accrued interest 1,622,198
Federal and state income taxes 49,873,155 1,162,280
Subordinated debentures (principal
amount $54,073,280) 34,851,251
Notes payable to bank - current portion 10,000,000
Equity in net liabilities of
discontinued operations 545,780 22,853,519
----------------------------
TOTAL CURRENT LIABILITIES 95,290,954 34,141,244
DEFERRED FEDERAL AND STATE INCOME TAXES 9,710,875
SUBORDINATED DEBENTURES (principal
amount $54,073,280) 34,636,305
PARTNERS' CAPITAL (DEFICIT)
Henley Limited Partnership -
General Partner 1,559,429 165,699
Limited Partners 91,425,241 (46,553,948)
----------------------------
92,984,670 (46,388,249)
Henley Limited Partnership II - General Partner 1,653,177 (246,426)
Henley Limited Partnership IV - General Partner 555,943 332,872
----------------------------
TOTAL PARTNERS' CAPITAL (DEFICIT) 95,193,790 (46,301,803)
----------------------------
$190,484,744 $ 32,186,621
============================
See notes to condensed consolidated financial statements.
1
HENLEY LIMITED PARTNERSHIP
and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
Six Months Ended Three Months Ended
----------------------------- -----------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
----------------------------- -----------------------------
<s> <c> <c> <c> <c>
Costs and expenses:
General and administrative $ 10,114,324 $ 1,784,533 $ 9,398,004 $ 1,174,039
Depreciation and amortization 79,395 40,922 890 20,711
----------------------------- -----------------------------
10,193,719 1,825,455 9,398,894 1,194,750
Interest expense (1,919,328) (2,210,168) (918,738) (1,104,082)
Interest income 299,287 553,399 146,236 233,636
----------------------------- -----------------------------
Loss from continuing operations before
income taxes (11,813,760) (3,482,224) (10,171,396) (2,065,196)
Benefit from income taxes 4,725,504 4,725,504
----------------------------- -----------------------------
Loss from continuing operations (7,088,256) (3,482,224) (5,445,892) (2,065,196)
Discontinued operations:
Equity in income from operations of
discontinued business 1,792,270 1,987,944 3,162,695 3,436,746
Equity in gain on disposal of
discontinued business 192,234,254 192,234,254
Provision for income taxes (43,725,504) (43,725,504)
----------------------------- -----------------------------
Income from discontinued operations 150,301,020 1,987,944 151,671,445 3,436,746
----------------------------- -----------------------------
Net income (loss) 143,212,764 (1,494,280) 146,225,553 1,371,550
Net income (loss) applicable to interests of
General Partners 5,233,575 (125) 5,302,272 69,416
Net income (loss) applicable to interests of
Limited Partners $ 137,979,189 $ (1,494,155) $140,923,281 $ 1,302,134
================================================================
Net income (loss) per unit:
Continuing operations $ (2.59) $ (1.27) $ (1.99) $ (0.75)
Discontinued operations 53.62 0.72 54.11 1.23
$ 51.03 $ (0.55) $ 52.12 $ 0.48
----------------------------- -----------------------------
Weighted average units outstanding 2,703,664 2,703,664 2,703,664 2,703,664
See notes to condensed consolidated financial statements.
2
HENLEY LIMITED PARTNERSHIP
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
Six Months Ended
--------------------------------
December 31, December 31,
2002 2001
------------ ------------
<s> <c> <c>
CASH FLOWS USED IN OPERATING ACTIVITIES
General and administrative expenses $ (2,486,369) $ (2,083,619)
Interest expense (105,496) (373,625)
Interest income 299,723 610,843
-------------------------------
NET CASH FLOWS USED IN OPERATING ACTIVITIES (2,292,142) (1,846,401)
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Purchases of short-term investments (223,200,000) (193,700,000)
Proceeds from sales of short-term investments 222,900,000 195,600,000
Other receipts (expenditures) (26,683) 5,342
-------------------------------
NET CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES (326,683) 1,905,342
CASH FLOWS USED IN FINANCING ACTIVITIES
Repayment of notes payable to bank (10,000,000)
Cash distribution by Henley Limited Partnership IV
to Henley Corporation (General Partner's share) (1,717,171) (48,211)
-------------------------------
NET CASH FLOWS USED IN FINANCING ACTIVITIES (11,717,171) (48,211)
-------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS (14,335,996) 10,730
NET INCREASE IN CASH AND CASH EQUIVALENTS
FROM DISCONTINUED OPERATIONS - CASH
DISTRIBUTION FROM HENLEY HOLDINGS, L.P. 171,718,785 4,831,184
-------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 157,382,789 4,841,914
Cash and cash equivalents at beginning of period 3,499,387 3,062,645
-------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 160,882,176 $ 7,904,559
===============================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Amortization of original issue discount on
Subordinated Debentures $ 214,946 $ 212,303
See notes to condensed consolidated financial statements.
3
HENLEY LIMITED PARTNERSHIP
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 1 - The condensed consolidated financial statements include the
accounts of Henley Limited Partnership (formerly Boston Celtics Limited
Partnership) ("Henley," the "Partnership") and its majority-owned and
controlled subsidiaries and partnerships.
Henley is a Delaware limited partnership that was formed on April 13, 1998
in connection with a reorganization of Henley Limited Partnership II
(formerly Boston Celtics Limited Partnership II) ("Henley II"). Pursuant
to the reorganization of Henley II (the "Reorganization"), which was
completed on June 30, 1998, Henley owns a 99% limited partnership interest
in Henley II. In addition, Henley, through its subsidiaries, holds certain
investments, including a 48.3123% limited partnership investment in Henley
Holdings, L.P. (formerly Celtics Basketball Holdings, L.P.) ("Henley
Holdings"), which, through Henley Limited Partnership III (formerly Celtics
Basketball, L.P.) ("Henley III"), its 99.999% subsidiary partnership, owned
and operated the Boston Celtics professional basketball team (the "Boston
Celtics") of the National Basketball Association (the "NBA") prior to the
sale of the Boston Celtics basketball team on December 31, 2002. Henley's
investment in Henley Holdings is accounted for on the equity method and,
accordingly, the investment is carried at cost, increased by equity in the
earnings of Henley Holdings and reduced by distributions received. See
Note 5 related to the sale of the Boston Celtics basketball team.
Note 2 - The unaudited interim condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial statements and with instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation have been included therein. Operating
results for interim periods are not indicative of the results that may be
expected for the full year (see Note 5). Such financial statements should
be read in conjunction with the consolidated financial statements and
footnotes thereto of Henley and its subsidiaries included in the annual
report on Form 10-K for the year ended June 30, 2002 and the quarterly
report on Form 10-Q for the three months ended September 30, 2002.
Note 3 - The components of comprehensive income (loss) are as follows:
Six Months Ended Three Months Ended
----------------------------- ----------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
<s> <c> <c> <c> <c>
Net income (loss) $143,212,764 $(1,494,280) $146,225,553 $1,371,550
Unrealized gain on interest
rate cap agreement 40,044 65,572
------------------------------------------------------------
Total comprehensive income (loss) $143,212,764 $(1,454,236) $146,225,553 $1,437,122
============================================================
Note 4 - Henley, through its subsidiary partnerships and corporations, owns
a 48.3123% limited partnership interest in Henley Holdings. Henley
Holdings, through Henley III, owned and operated the Boston Celtics prior
to the sale of the net assets of the Boston Celtics on December 31, 2002.
Henley's investment in Henley Holdings is accounted for on the equity
method. Summary statement of operations data for Henley Holdings for the
six and three months ended December 31, 2002 and 2001 is as follows:
Six Months Ended Three Months Ended
----------------------------- ----------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
<s> <c> <c> <c> <c>
Total revenues $ 34,419,000 $30,981,000 $ 34,419,000 $30,981,000
Total costs and expenses (29,464,266) (25,288,851) (27,137,239) (23,082,529)
Gain on sale of assets 397,903,035 397,903,035
Interest income (expense), net (1,475,016) (1,577,331) (735,342) (784,800)
Other income (expense), net 230,078
------------------------------------------------------------
Net income $401,612,831 $ 4,114,818 $404,449,454 $ 7,113,671
============================================================
4
HENLEY LIMITED PARTNERSHIP
and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
Note 5 - On December 31, 2002, Henley III sold the Boston Celtics
basketball team, which was Henley III's sole operating asset. The
purchaser, Boston Championship Basketball, LLC, paid Henley III an
aggregate amount of $360,000,000 in cash consideration for team assets (of
which $50,000,000 was used to pay outstanding bank borrowings of Henley
III) and assumed all other liabilities relating to the team. The total
gain recognized by Henley III on the sale of the team amounted to
$397,903,000, which is calculated as follows:
<s> <c>
Cash consideration received $360,000,000
Plus net book value of assets sold and liabilities
assumed by purchaser 40,040,000
Less direct costs related to the sale (2,137,000)
------------
Gain on sale of team $397,903,000
============
The liabilities assumed by purchaser are comprised primarily of deferred
game revenues relating to ticket sales, broadcast and sponsorship revenues
for games not yet played ($23,240,000) and deferred revenue relating to the
initial fee paid to Henley III by Sportschannel New England ($29,429,000),
described in more detail in Henley's Form 10-K for the year ended June 30,
2002, in Items 1 and 2, under the caption "Basketball Operations -
Television, Cable and Radio Broadcasting."
Henley recognized its proportionate share of the gain, amounting to
$192,234,000, as an element of its equity in income of Henley III. Henley
III distributed to its partners substantially all of the net cash proceeds
resulting from the sale of the team. Henley's proportionate share of these
cash distributions amounted to $149,163,000. The principal differences
between the gain of $192,234,000 recognized by Henley and the cash
distributions of $149,163,000 received from Henley III are Henley's
proportionate share of (a) the use of proceeds from the sale of the team to
repay $50,000,000 of outstanding bank borrowings of Henley III, and (b) the
noncash portion of the consideration represented by the purchaser's
assumption of the team's net liabilities of $40,040,000. On a cash flow
per unit basis, these differences reduce the gain recognized by Henley by
approximately $16.00 per unit.
Subsequent to the sale of the basketball team, Henley III no longer
operates or has a continuing involvement with basketball operations.
Therefore, in accordance with the provisions of SFAS No. 144, Henley III
has classified the disposal of the basketball team as a discontinued
operation in its financial statements. Similarly, Henley's equity
investment in Henley Holdings has been classified as a discontinued
operation in Henley's financial statements. Accordingly, Henley's equity
in the net income of Henley Holdings has been segregated from continuing
operations and classified as discontinued operations for all periods
presented.
Note 6 - On January 9, 2003, Henley II provided notice that all of Henley
II's outstanding 6% Subordinated Debentures due 2038 (the "Debentures")
would be redeemed effective on February 15, 2003. Approximately
$54,073,000 principal amount of the Debentures is outstanding. The
redemption price is expected to be $56,096,000, which equals 100% of the
principal amount of Debentures plus interest that is accrued and unpaid up
to, but not including, the February 15, 2003 redemption date. As of
December 31, 2002, Henley II's carrying value of the Debentures amounted to
$34,851,000. The $19,222,000 difference between principal amount and
carrying value represents the remaining portion of the original issue
discount, which amount was to be amortized through 2038. Due to Henley
II's decision to redeem the Debentures on February 15, 2003, the
unamortized original issue discount of $19,222,000 will be recognized in
expense at the time of payment as a loss on early extinguishment of debt in
accordance with Staff Accounting Bulletin No. 94. During the six months
ending June 30, 2003, a tax benefit of approximately $7,700,000 will be
recognized in connection with the loss on extinguishment.
Note 7 - Accrued compensation of $8,000,000 at December 31, 2002 represents
anticipated compensation to be paid to Paul Gaston pursuant to an incentive
plan adopted in August 1993 ("1993 Incentive Plan"), which provides for the
payment to Mr. Gaston of annual incentive payments equal to 5% of the
amount by which Consolidated Net Income before taxes of Henley for the
related fiscal year exceeds $8,000,000. See Item 11 of Henley's Form 10-K
for the year ended June 30, 2002 for more information regarding the 1993
Incentive Plan.
5
HENLEY LIMITED PARTNERSHIP
and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
Note 8 - Henley is a partnership that is taxed as a corporation. During
the three and six months ended December 31, 2002, Henley recorded a
combined income tax provision from continuing and discontinued operations
of $39,000,000, principally due to taxable income generated by the equity
in gain of $192,234,000 on the sale of team assets. The principal
differences between the tax at the statutory rate and the tax provision are
the reversal of valuation allowances on (1) net operating loss
carryforwards that were not previously benefited, the tax effect of which
amounted to $11,603,000 and (2) differences between tax and financial
statement bases of the assets and liabilities of Henley and its
subsidiaries, the tax effect of which amounted to $22,400,000. At December
31, 2002, Henley has estimated federal and state income taxes payable in
the amount of $49,873,000.
Note 9 - In July and August 1998, four separate class action complaints
(the "1998 Complaints") were filed by Unitholders in the Court of Chancery
of the State of Delaware in and for New Castle County against Henley II,
Henley II, Inc. (formerly Celtics, Inc.), Paul E. Gaston, Don F. Gaston,
Paula B. Gaston, John H.M. Leithead and John B. Marsh III, each a director
or former director of Henley II, Inc. The named plaintiffs, each of whom
purported to bring their individual actions on behalf of themselves and
others similarly situated, are Kenneth L. Rilander, Harbor Finance
Partners, Maryann Kelly and Kathleen Kruse Perry. Each of the 1998
Complaints alleges, among other things, that the Reorganization was unfair
to former Henley II Unitholders, and seeks to recover an unspecified amount
of damages, including attorneys' and experts' fees and expenses. Henley II
filed a Motion to Dismiss the complaint filed by Mr. Rilander on July 29,
1998, and discovery in that case has been stayed by agreement of the
parties. The 1998 Complaints have been consolidated. On August 6, 1999,
the Court of Chancery issued an opinion granting in part, and denying in
part, Henley II's Motion to Dismiss, and on September 3, 1999, the
plaintiffs filed an amended consolidated 1998 Complaint. On October 1,
1999, Henley II filed an answer to the 1998 Complaint.
On October 2, 2002, a class action complaint (the "2002 Complaint") was
filed by Unitholders in the Court of Chancery of the State of Delaware in
and for New Castle County against Henley, BCLP GP, Inc., Paul E. Gaston,
Richard G. Pond, Don F. Gaston, Paula B. Gaston, John B. Marsh III, Tedmund
W. Pryor and David A. Splaine, each a director or officer of BCLP GP, Inc.
The named plaintiff, who purported to bring its individual action on behalf
of itself and others similarly situated, is Breakwater Partners, LP. The
2002 Complaint alleges, among other things, that the sale of assets and
liabilities of the Boston Celtics as described in Note 5 above is
structured in a manner that is unfair to Henley Unitholders, and seeks to
recover an unspecified amount of damages, including attorneys' and experts'
fees and expenses, and to obtain appropriate injunctive or rescissionary
relief.
Although the ultimate outcome of the 1998 Complaint and the 2002 Complaint
cannot be determined at this time, management of the Partnership does not
believe that the outcome of these proceedings will have a material adverse
effect on the Partnership's financial position or results of operations.
Accordingly, no amounts have been provided for in continuing or
discontinued operations in the event of an unfavorable outcome.
6
HENLEY LIMITED PARTNERSHIP II
and Subsidiaries
Condensed Consolidated Balance Sheets
December 31, June 30,
2002 2002
------------ --------
(Unaudited)
<s> <c> <c>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $157,829,062 $ 1,188,529
Prepaid expenses and other current assets 117,999 12,000
----------------------------
TOTAL CURRENT ASSETS 157,947,061 1,200,529
PROPERTY AND EQUIPMENT, net 917 1,696
OTHER ASSETS 56,104
----------------------------
$157,947,978 $ 1,258,329
============================
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
CURRENT LIABILITIES
Accounts payable and other current liabilities $ 10,912 $ 34,225
Accrued interest 1,622,198
Federal and state income taxes 7,325,306 513,201
Subordinated debentures (principal
amount $54,073,280) 34,851,251
Notes payable to bank - current portion 10,000,000
Equity in net liabilities of
discontinued operations 545,780 22,853,519
----------------------------
TOTAL CURRENT LIABILITIES 44,355,447 33,400,945
DEFERRED FEDERAL AND STATE INCOME TAXES 6,812,105
NOTE PAYABLE TO RELATED PARTY 3,000,000
DUE TO RELATED PARTY 4,800,000 4,800,000
SUBORDINATED DEBENTURES (principal
amount $54,073,280) 34,636,305
PARTNERS' CAPITAL (DEFICIT)
Henley Limited Partnership II -
General Partner 1,653,177 (246,426)
Limited Partners 106,582,118 (81,478,542)
----------------------------
108,235,295 (81,724,968)
Henley Limited Partnership IV - General Partner 555,943 332,872
Henley Pride GP - General Partner 1,293 1,070
----------------------------
TOTAL PARTNERS' CAPITAL (DEFICIT) 108,792,531 (81,391,026)
----------------------------
$157,947,978 $ 1,258,329
============================
See notes to condensed consolidated financial statements.
7
HENLEY LIMITED PARTNERSHIP II
and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
Six Months Ended Three Months Ended
---------------------------- ----------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
<s> <c> <c> <c> <c>
Costs and expenses:
General and administrative $ 118,839 $ 109,047 $ 59,825 $ 45,614
Amortization 68,104 34,052 17,026
-----------------------------------------------------------
186,943 143,099 59,825 62,640
Interest expense (1,969,670) (2,341,418) (918,738) (1,169,707)
Interest income 32,534 26,761 23,271 21,084
-----------------------------------------------------------
Loss from continuing operations (2,124,079) (2,457,756) (955,292) (1,211,263)
Discontinued operations:
Equity in income from operations of
discontinued business 1,792,270 1,987,944 3,162,695 3,436,746
Equity in gain on disposal of
discontinued business 192,234,254 192,234,254
-----------------------------------------------------------
Income from discontinued operations 194,026,524 1,987,944 195,396,949 3,436,746
-----------------------------------------------------------
Net income (loss) 191,902,445 (469,812) 194,441,657 2,225,483
Net income applicable to interests of
General Partners 3,841,785 14,986 3,880,758 56,297
-----------------------------------------------------------
Net income (loss) applicable to interests of
Limited Partners $188,060,660 $ (484,798) $190,560,899 $ 2,169,186
===========================================================
See notes to condensed consolidated financial statements.
8
HENLEY LIMITED PARTNERSHIP II
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
Six Months Ended
--------------------------------
December 31, December 31,
2002 2001
------------ ------------
<s> <c> <c>
CASH FLOWS USED IN OPERATING ACTIVITIES
General and administrative expenses $ (236,059) $ (227,768)
Interest expense (155,838) (373,625)
Interest income 32,533 26,761
------------------------------
NET CASH FLOWS USED IN OPERATING ACTIVITIES (359,364) (574,632)
CASH FLOWS USED IN FINANCING ACTIVITIES
Repayment of notes payable to bank (10,000,000)
Repayment of note payable to related party (3,000,000)
Cash distribution by Henley Limited Partnership IV
to Henley Corporation (General Partner's share) (1,717,171) (48,211)
Cash distribution by Henley Pride GP to Henley
Capital Corporation (General Partner's share) (1,717) (48)
------------------------------
NET CASH FLOWS USED IN FINANCING ACTIVITIES (14,718,888) (48,259)
------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS
FROM CONTINUING OPERATIONS (15,078,252) (622,891)
NET INCREASE IN CASH AND CASH EQUIVALENTS
FROM DISCONTINUED OPERATIONS - CASH
DISTRIBUTION FROM HENLEY HOLDINGS, L.P. 171,718,785 4,831,184
------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 156,640,533 4,208,293
Cash and cash equivalents at beginning of period 1,188,529 839,962
------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $157,829,062 $5,048,255
==============================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Amortization of original issue discount on
Subordinated Debentures $ 214,946 $ 212,303
See notes to condensed consolidated financial statements.
9
HENLEY LIMITED PARTNERSHIP II
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 1 - The condensed consolidated financial statements include the
accounts of Henley Limited Partnership II (formerly Boston Celtics Limited
Partnership II) ("Henley II," the "Partnership") and its majority-owned and
controlled subsidiaries and partnerships. All intercompany transactions
are eliminated in consolidation.
Pursuant to a reorganization of its partnership structure that was
completed on June 30, 1998 (the "Reorganization"), the Partnership's name
was changed to Henley Limited Partnership II. As a result of the
Reorganization, the Partnership's 99% limited partnership interest is owned
by Henley Limited Partnership (formerly Boston Celtics Limited Partnership)
(a Delaware limited partnership) ("Henley"). Prior to the Reorganization,
Henley II, through its subsidiaries, owned and operated the Boston Celtics
professional basketball team (the "Boston Celtics") of the National
Basketball Association (the "NBA") and held investments.
Upon completion of the Reorganization, the Boston Celtics were owned and
operated by Henley Limited Partnership III (formerly Celtics Basketball,
L.P. ("Henley III"), a 99.999% subsidiary of Henley Holdings, L.P.
(formerly Celtics Basketball Holdings, L.P.) ("Henley Holdings"). Henley
II, through its subsidiaries, holds certain investments, including a
48.3123% limited partnership investment in Henley Holdings. Henley II's
interest in the accounts and operations of the Boston Celtics are reflected
in its investment in Henley Holdings, which is accounted for on the equity
method. Accordingly, the investment is carried at cost, increased by
equity in the earnings of Henley Holdings and reduced by distributions
received. See Note 5 related to the sale of the Boston Celtics basketball
team.
Note 2 - The unaudited interim condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial statements and with instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation have been included therein. Operating
results for interim periods are not indicative of the results that may be
expected for the full year (see Note 5). Such financial statements should
be read in conjunction with the consolidated financial statements and
footnotes thereto of Henley II and Subsidiaries included in the annual
report on Form 10-K for the year ended June 30, 2002 and the quarterly
report on Form 10-Q for the three months ended September 30, 2002.
Note 3 - The components of comprehensive income (loss) are as follows:
Six Months Ended Three Months Ended
----------------------------- ----------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
<s> <c> <c> <c> <c>
Net income (loss) $191,902,445 $(469,812) $194,441,657 $2,225,483
Unrealized gain on interest
rate cap agreement 40,044 65,572
------------------------------------------------------------
Total comprehensive income (loss) $191,902,445 $(429,768) $194,441,657 $2,291,055
============================================================
Note 4 - Henley II, through its subsidiary partnerships and corporations,
owns a 48.3123% limited partnership interest in Henley Holdings. Henley
Holdings, through Henley III, owned and operated the Boston Celtics prior
to the sale of the net assets of the Boston Celtics on December 31, 2002.
Henley II's investment in Henley Holdings is accounted for on the equity
method. Summary statement of operations data for Henley Holdings for the
six and three months ended December 31, 2002 and 2001 is as follows:
Six Months Ended Three Months Ended
----------------------------- ----------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
<s> <c> <c> <c> <c>
Total revenues $ 34,419,000 $30,981,000 $ 34,419,000 $30,981,000
Total costs and expenses (29,464,266) (25,288,851) (27,137,239) (23,082,529)
Gain on sale of assets 397,903,035 397,903,035
Interest income (expense), net (1,475,016) (1,577,331) (735,342) (784,800)
Other income (expense), net 230,078
-----------------------------------------------------------
Net income $401,612,831 $ 4,114,818 $404,449,454 $ 7,113,671
===========================================================
10
HENLEY LIMITED PARTNERSHIP II
and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
Note 5 - On December 31, 2002, Henley III sold the Boston Celtics
basketball team, which was Henley III's sole operating asset. The
purchaser, Boston Championship Basketball, LLC, paid Henley III an
aggregate amount of $360,000,000 in cash consideration for team assets (of
which $50,000,000 was used to pay outstanding bank borrowings of Henley
III) and assumed all other liabilities relating to the team. The total
gain recognized by Henley III on the sale of the team was $397,903,000,
which is calculated as follows:
<s> <c>
Cash consideration received $360,000,000
Plus net book value of assets sold and liabilities
assumed by purchaser 40,040,000
Less direct costs related to the sale (2,137,000)
-------------
Gain on sale of team $397,903,000
============
The liabilities assumed by purchaser are comprised primarily of deferred
game revenues relating to ticket sales, broadcast and sponsorship revenues
for games not yet played ($23,240,000) and deferred revenue relating to the
initial fee paid to Henley III by Sportschannel New England ($29,429,000),
described in more detail in Henley II's Form 10-K for the year ended June
30, 2002, in Items 1 and 2, under the caption "Basketball Operations -
Television, Cable and Radio Broadcasting."
Henley II recognized its proportionate share of the gain, amounting to
$192,234,000, as an element of its equity in income of Henley III.
Subsequent to the sale of the basketball team, Henley III no longer
operates or has a continuing involvement with basketball operations.
Therefore, in accordance with the provisions of SFAS No. 144, Henley III
has classified the disposal of the basketball team as a discontinued
operation in its financial statements. Similarly, Henley II's equity
investment in Henley Holdings has been classified as a discontinued
operation in Henley II's financial statements. Accordingly, Henley II's
equity in the net income of Henley Holdings has been segregated from
continuing operations and classified as discontinued operations for all
periods presented.
Note 6 - On January 9, 2003, Henley II provided notice that all of Henley
II's outstanding 6% Subordinated Debentures due 2038 (the "Debentures")
would be redeemed effective on February 15, 2003. Approximately
$54,073,000 principal amount of the Debentures is outstanding. The
redemption price is expected to be $56,096,000, which equals 100% of the
principal amount of Debentures plus interest that is accrued and unpaid up
to, but not including, the February 15, 2003 redemption date. As of
December 31, 2002, Henley II's carrying value of the Debentures amounted to
$34,851,000. The $19,222,000 difference between principal amount and
carrying value represents the remaining portion of the original issue
discount, which amount was to be amortized through 2038. Due to Henley
II's decision to redeem the Debentures on February 15, 2003, the
unamortized original issue discount of $19,222,000 will be recognized in
expense at the time of payment as a loss on early extinguishment of debt in
accordance with Staff Accounting Bulletin No. 94.
Note 7 - Henley II does not record a provision for income taxes as its
income and expenses are taxable to or deductible by its partners.
Therefore, Henley II has not recorded any tax provision related to its
equity in income of Henley Holdings, including its equity in the gain on
sale of the team.
Note 8 - In July and August 1998, four separate class action complaints
(the "1998 Complaints") were filed by Unitholders in the Court of Chancery
of the State of Delaware in and for New Castle County against Henley II,
Henley II, Inc. (formerly Celtics, Inc.), Paul E. Gaston, Don F. Gaston,
Paula B. Gaston, John H.M. Leithead and John B. Marsh III, each a director
or former director of Henley II, Inc. The named plaintiffs, each of whom
purported to bring their individual actions on behalf of themselves and
others similarly situated, are Kenneth L. Rilander, Harbor Finance
Partners, Maryann Kelly and Kathleen Kruse Perry. Each of the 1998
Complaints alleges, among other things, that the Reorganization was unfair
to former Henley II Unitholders, and seeks to recover an unspecified amount
of damages, including attorneys' and experts' fees and expenses. Henley II
filed a Motion to Dismiss the complaint filed by Mr. Rilander on July 29,
1998, and discovery in that case has been stayed by agreement of the
parties. The 1998 Complaints have been consolidated. On August 6, 1999,
the Court of Chancery
11
HENLEY LIMITED PARTNERSHIP II (continued)
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
issued an opinion granting in part, and denying in part, Henley II's Motion
to Dismiss, and on September 3, 1999, the plaintiffs filed an amended
consolidated 1998 Complaint. On October 1, 1999, Henley II filed an answer
to the 1998 Complaint.
On October 2, 2002, a class action complaint (the "2002 Complaint") was
filed by Unitholders in the Court of Chancery of the State of Delaware in
and for New Castle County against Henley, BCLP GP, Inc., Paul E. Gaston,
Richard G. Pond, Don F. Gaston, Paula B. Gaston, John B. Marsh III, Tedmund
W. Pryor and David A. Splaine, each a director or officer of BCLP GP, Inc.
The named plaintiff, who purported to bring its individual action on behalf
of itself and others similarly situated, is Breakwater Partners, LP. The
2002 Complaint alleges, among other things, that the sale of assets and
liabilities of the Boston Celtics as described in Note 5 above is
structured in a manner that is unfair to Henley Unitholders, and seeks to
recover an unspecified amount of damages, including attorneys' and experts'
fees and expenses, and to obtain appropriate injunctive or rescissionary
relief.
Although the ultimate outcome of the 1998 Complaint and the 2002 Complaint
cannot be determined at this time, management of the Partnership does not
believe that the outcome of these proceedings will have a material adverse
effect on the Partnership's financial position or results of operations.
Accordingly, no amounts have been provided for in continuing or
discontinued operations in the event of an unfavorable outcome.
12
HENLEY LIMITED PARTNERSHIP
HENLEY LIMITED PARTNERSHIP II
and Subsidiaries
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward Looking Statements
Certain statements and information included herein are "forward-looking
statements" within the meaning of the federal Private Securities Litigation
Reform Act of 1995. These forward-looking statements reflect management's
views and assumptions as of the date of this report regarding future
events. Statements that are not of historical fact are forward-looking
statements and are contained throughout this Quarterly Report on Form 10-Q
and include statements relating to Henley's and Henley II's financial
condition, results of operations, liquidity and capital resources, and
statements relating to any transaction undertaken by Henley intended to
result in the distribution of cash or other assets to Henley unitholders,
the amount or timing of any anticipated payment to Henley unitholders,
Henley's strategies or plans for the future, anticipated tax obligations,
cash available for accounts payable, liabilities, expenses, claims and
contingencies, and expected losses (and the associated tax benefit)
relating to redemption of Henley II's subordinated debentures. Some of the
forward-looking statements in this report can be identified by the use of
forward-looking terms such as "believes," "intends," "expects," "may,"
"will," "estimates," "should," "could," "anticipates," "plans" or other
comparable terms.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of Henley or Henley II to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Factors that could cause
actual results to differ materially from those indicated in such forward-
looking statements include, among others, the ultimate amount of taxes and
expenses relating to the sale of the Boston Celtics basketball team and any
proposed transaction intended to result in the distribution of cash or
other assets to unitholders; the costs and expenses of redeeming the
subordinated debentures and the amount of associated losses and tax
benefit; the nature and amount of accounts payable, liabilities, expenses,
claims and contingencies of Henley and its subsidiaries; actual earnings
and expenses of Henley and its subsidiaries; general economic conditions
and interest rate levels; the timing and nature of any requisite regulatory
approvals relating to any proposed transaction; and changed expectations,
intentions and strategies regarding the future. All forward-looking
statements in this report are qualified by these cautionary statements and
are made only as of the date of this report. Neither Henley nor Henley II
undertakes any obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or
otherwise.
Recent Developments
On December 31, 2002, Henley Limited Partnership III (formerly Celtics
Basketball L.P.) ("Henley III"), Henley's 48.3% owned, indirect subsidiary,
sold the Boston Celtics basketball team, which was Henley III's sole
operating asset. The purchaser, Boston Championship Basketball, LLC, paid
Henley III an aggregate amount of $360,000,000 in cash consideration for
team assets (of which $50,000,000 was used to pay outstanding bank
borrowings of Henley III) and assumed all other liabilities relating to the
team.
After accounting for liabilities assumed by the purchaser of the Boston
Celtics basketball team and the book value of the assets sold, both Henley
and Henley II have recognized their proportionate share of the gain,
amounting to $192,234,000, as an element of their equity in income of
Henley III. See Note 5 to Henley's and Henley II's Condensed Consolidated
Financial Statements for an explanation of the calculation of the gain on
sale of the basketball team.
Subsequent to the sale of the basketball team, Henley III no longer
operates or has a continuing involvement with basketball operations.
Therefore, in accordance with the provisions of SFAS No. 144, Henley III
has classified the disposal of the basketball team as a discontinued
operation in its financial statements. Similarly, the equity investment in
Henley Holdings has been classified as a discontinued operation in the
financial statements of Henley and Henley II.
13
As more fully described in "Liquidity and Capital Resources" below and in
Henley's Schedule 13E-3, filed with the SEC in February 2003 (the "Schedule
13E-3"), Henley has proposed a merger transaction that would result in the
cash payment of $27.00 per unit plus potential future payments consisting
of net assets that remain, if any, after paying or providing for taxes, the
repayment of debentures, other expenses and liabilities, claims and
contingent liabilities. The Schedule 13E-3 contains further information
about the proposed merger transaction, and about Henley's alternatives
should the proposed merger transaction not be consummated. Henley
anticipates that its units will cease to trade on the New York Stock
Exchange ("NYSE") and Boston Stock Exchange ("BSE") at the time of the
proposed merger. Because the NYSE and BSE generally do not maintain
listings for companies, like Henley, that do not have on-going business
operations, Henley believes that its units are likely to be delisted if the
merger is not consummated. In addition, on January 9, 2003, Henley II
announced that all of Henley II's outstanding 6% Subordinated Debentures
due 2038 would be redeemed effective on February 15, 2003 at their full
principal amount of $54,073,000, plus accrued but unpaid interest.
General
Henley, through its subsidiaries, owns an indirect investment in Henley
III, which owned and operated the Boston Celtics prior to the sale of the
team on December 31, 2002. Henley did not directly own or control the
Boston Celtics and therefore an investment in Henley was not a direct
investment in the Boston Celtics. However, a significant portion of
Henley's earnings and cash flows were derived from its indirect investment
in the Boston Celtics. Therefore, many disclosures in this document
regarding historical operating activities principally relate to the
operations of the Boston Celtics.
Henley has historically accounted for its indirect investment in the
accounts and operations of the Boston Celtics using the equity method and,
accordingly, its equity in the net income (loss) of the Boston Celtics was
reported on a single caption in its Condensed Consolidated Statements of
Operations. Due to the sale of the team, Henley's equity in the net income
of the Boston Celtics has been segregated from continuing operations and
classified as discontinued operations within the Condensed Consolidated
Statements of Operations for all periods presented. Following is a general
description of certain matters related to the historical operations of the
Boston Celtics.
The Boston Celtics derive revenues principally from the sale of tickets to
home games and the licensing of television, cable network and radio rights.
The most significant expenses of the Boston Celtics are player and coaching
salaries. A large portion of the Boston Celtics' annual revenues and
operating expenses is determinable at the commencement of each basketball
season based on season ticket sales and the Boston Celtics' multi-year
contracts with its players, coaches and broadcast organizations.
The operations and financial results of the Boston Celtics are seasonal.
On a cash flow basis, the Boston Celtics receive a substantial portion of
their receipts from the advance sale of season tickets during the months of
June through October, prior to the commencement of the NBA regular season,
and broadcast rights fees prior to and during the season. Cash receipts
from playoff ticket sales are received in March of any year for which the
team qualifies for league playoffs. Most of the Boston Celtics' operating
expenses are incurred and paid during the regular season, which normally
extends from late October or early November through late April.
For financial reporting purposes the Boston Celtics recognize revenues and
expenses on a game-by-game basis. Because the NBA regular season normally
begins in late October or early November, the first fiscal quarter, which
ends on September 30, generally includes limited or no revenue and reflects
a net loss attributable to general and administrative expenses and selling
and promotional expenses incurred in the quarter. Based on the standard
NBA game schedule, the Boston Celtics historically recognize approximately
one-third of its annual regular season revenue in the second fiscal
quarter, approximately one-half of such revenue in the third fiscal quarter
and the remainder in the fourth fiscal quarter, and recognize its playoff
revenue, if any, in the fourth fiscal quarter. Accordingly, Henley's and
Henley II's equity in the net income (loss) of Henley Holdings, which
indirectly owns and operates the Boston Celtics, will generally result in a
loss in its first fiscal quarter, income in its second and third fiscal
quarters and a loss in its fourth fiscal quarter unless there is
significant income from playoff revenues. Henley Holdings continued to
account for the normal operations of the Boston Celtics through December
31, 2002. Due to the sale of the team on December 31, 2002, the results of
operations of the Boston Celtics subsequent to that date will not have any
impact on the results of operations of Henley or its subsidiaries.
Critical Accounting Policies
14
The discussion and analysis of our financial condition and results of
operations is based upon the consolidated financial statements presented
herein, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these
financial statements requires the use of estimates and judgments that
affect the reported assets and liabilities, revenues and expenses, and
other financial information. Actual results may differ significantly from
these estimates under different assumptions and conditions.
The Partnership's significant accounting policies are described in the
notes to consolidated financial statements included in its annual report on
Form 10-K for the year ended June 30, 2002. Not all of these significant
accounting policies, however, require management to make difficult, complex
or subjective judgments or estimates. Management believes that the
Partnership's accounting policy related to its interest in Henley Holdings
and the Partnership's accounting for income taxes as described below meet
the definition of "critical accounting policies."
The Partnership accounts for its 48.3% interest in Henley Holdings using
the equity method. Accordingly, the investment is carried at cost,
increased by equity in earnings of Henley Holdings and reduced by
distributions received. The Partnership uses the equity method of
accounting because it holds less than a controlling financial interest
(50%) in Henley Holdings, but its interest of 48.3% presumes the ability to
exercise significant influence over operating and financial policies of
Henley Holdings. For all periods presented in the accompanying condensed
consolidated interim financial statements, the Partnership's equity in
earnings of Henley Holdings is classified as a discontinued operation in
accordance with SFAS No. 144 due to the sale of the Boston Celtics on
December 31, 2002.
Henley is a partnership that is taxed as a corporation. Henley accounts
for income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using tax rates and laws that
will be in effect when the differences are expected to reverse. Since its
inception in 1998, Henley has not recorded a provision for income taxes due
to the generation and utilization of net operating loss carryforwards.
During the six months ended December 31, 2002, Henley recorded a tax
provision in the amount of $39,000,000, which, together with previously
recorded tax accruals, represents management's estimate of the tax
obligation as of December 31, 2002 associated with, among other things,
Henley's interest in the gain on sale of the Boston Celtics. This tax
provision was reduced by the effect of the full utilization of available
net operating loss carryforwards in the amount of $11,603,000 and the
realization of permanent differences between financial reporting and tax
bases of assets and liabilities related to the Boston Celtics in the amount
of $22,400,000. Management's estimate of the tax obligation resulting from
these transactions requires significant judgment, and the actual tax
obligation could differ materially from the amount provided.
Results of Operations
The following discussion compares the operating results of Henley and its
subsidiaries for the six and three months ended December 31, 2002 with the
six and three months ended December 31, 2001.
Henley's general and administrative expenses of $10,114,000 in the six
months ended December 31, 2002 increased by $8,329,000 compared to
$1,785,000 in the six months ended December 31, 2001, and general and
administrative expenses of $9,398,000 in the three months ended December
31, 2002 increased by $8,224,000 compared to $1,174,000 in the three months
ended December 31, 2001. The increases in 2002 were primarily attributable
to increased compensation expense. Approximately $8,000,000 of the
increased compensation expense relates to anticipated compensation to be
paid to Paul Gaston pursuant to an incentive plan adopted in August 1993
("1993 Incentive Plan"), which provides for the payment to Mr. Gaston of
annual incentive payments equal to 5% of the amount by which Consolidated
Net Income before taxes of Henley for the related fiscal year exceeds
$8,000,000. See Item 11 of Henley's Form 10-K for the year ended June 30,
2002 for more information regarding the 1993 Incentive Plan.
Depreciation and amortization expense of $79,000 in the six months ended
December 31, 2002 increased by $38,000 compared to $41,000 in the three
months ended December 31, 2001. The increase in 2002 was primarily
attributable to the write-off of deferred financing costs related to the
Partnership's revolving credit agreement with its commercial bank. As
described in "Liquidity and Capital Resources" below, Henley II repaid all
amounts advanced under this agreement in September 2002 and canceled the
agreement.
Interest expense of $1,919,000 in the six months ended December 31, 2002
decreased by $291,000 compared to $2,210,000 in the six months ended
December 31, 2001. The decrease is primarily attributable to a decrease in
15
borrowings under Henley's revolving credit agreement with its commercial
bank, as Henley II repaid the entire $10,000,000 advanced under the
agreement in September 2002.
Henley's interest income of $299,000 in the six months ended December 31,
2002 decreased by $254,000 compared to $553,000 in the six months ended
December 31, 2001. The decrease is primarily the result of lower
interest rates earned on investments.
Discontinued operations represents Henley's 48.3% interest in the net
income of Henley Holdings, the entity that indirectly owned and operated
the Boston Celtics through December 31, 2002. Income from discontinued
operations is composed of two components: (1) Henley's equity in the
income from the normal operations of Henley Holdings and (2) Henley's
equity in the gain on sale of the team, which amounted to $192,234,000.
Henley's equity in the income from operations of Henley Holdings, excluding
the gain on the sale of the team, amounted to $1,792,000 in the six months
ended December 31, 2002, a decrease of $196,000 compared to $1,988,000 in
the six months ended December 31, 2001. The decrease is a result of
increased general and administrative expenses, principally management fees
($1,556,000), partially offset by increased profitability from basketball
related operations ($1,311,000). The Boston Celtics recognize revenues and
expenses on a game-by-game basis, and the NBA regular season normally
begins in late October or early November. As a result, Henley Holdings'
first fiscal quarter, which ends on September 30, generally includes
limited or no revenue and reflects a net loss attributable to general and
administrative expenses and selling and promotional expenses incurred in
the quarter. In the six months ended December 31, 2002, the Boston Celtics
played two more games than they played in the six months ended December 31,
2001.
During the three and six months ended December 31, 2002, Henley recorded a
combined income tax provision from continuing and discontinued operations
of $39,000,000, principally due to taxable income generated by Henley's
interest in the gain of $192,234,000 on the sale of Boston Celtics net
assets. Henley recorded a provision for income taxes of $43,726,000 from
discontinued operations, which represents an effective tax rate of 23%.
The principal differences between the tax at the statutory rate and the tax
provision from discontinued operations are the reversal of valuation
allowances on (1) net operating loss carryforwards that were not previously
benefited, the tax effect of which amounted to $11,603,000 and (2)
differences between tax and financial statement bases of the assets and
liabilities of Henley and its subsidiaries, the tax effect of which
amounted to $22,400,000. The provision for income taxes from discontinued
operations was partially offset by a tax benefit from continuing operations
in the amount of $4,726,000, which represents an effective tax rate of 40%.
Liquidity and Capital Resources
Henley used approximately $2,292,000 in cash flows from operating
activities in the six months ended December 31, 2002. At December 31,
2002, Henley and Henley II had approximately $160,882,000 of available cash
and $28,700,000 of short-term investments. These balances were primarily
attributable to distributions from Henley Holdings, which made aggregate
distributions to Henley and Henley II of $171,719,000 in the six months
ended December 31, 2002. These distributions consisted of cash available
from the operations of Henley III ($22,556,000) as well as proceeds from
the sale of the assets of the Boston Celtics basketball team
($149,163,000).
On December 31, 2002 Henley III sold the net assets of the Boston Celtics
basketball team, which was Henley III's sole operating asset. The
purchaser, Boston Championship Basketball, LLC, paid Henley III an
aggregate amount of $360,000,000 in cash consideration for team assets (of
which $50,000,000 was used to pay outstanding bank borrowings of Henley
III) and assumed all other liabilities relating to the team. After the
repayment of outstanding bank borrowings of Henley III, Henley's share of
the net proceeds from this sale amounted to approximately $149,163,000.
In addition to net proceeds from the sale of the team, in the six months
ended December 31, 2002, Henley received distributions from Henley Holdings
aggregating $22,556,000 representing cash available from operations of the
Boston Celtics basketball team, a substantial portion of which related to
initial payments under a broadcast contract. Future distributions from
Henley Holdings are unlikely because its sole operating asset was its
indirect interest in the Boston Celtics, which was sold on December 31,
2002. All proceeds from the sale and available cash were distributed by
Henley Holdings on December 31, 2002.
After receipt of distributions from Henley Holdings, Henley and Henley II
had cash and investments of $189,582,000 at December 31, 2002. Henley has
proposed a merger transaction whereby unaffiliated unitholders would
receive merger
16
consideration comprised of each unitholder's proportionate share of the net
assets of Henley (after payment of, or provision for, all taxes, expenses,
liabilities, claims and contingencies), based on each unitholder's pre-
merger equity ownership of Henley. At the time of the proposed merger,
each unit held by unaffiliated unitholders will be converted into a
nontransferable right to receive (i) an initial cash payment of $27.00 per
unit, and (ii) potential future payments consisting of net assets that
remain, if any, after payment of, or provision for, taxes, expenses,
liabilities, claims and contingencies. A more complete description of the
proposed transaction is contained in Henley's Schedule 13E-3.
Amounts remaining after payment of $27.00 per unit to unaffiliated public
unitholders will be held, along with earnings thereon, for payment of
taxes, expenses, liabilities, claims and contingencies. as described in the
Schedule 13E-3. After satisfaction of, or provision for, taxes, expenses,
liabilities, claims and contingencies, remaining amounts, if any, will be
paid to unaffiliated unitholders as described in the Schedule 13E-3, in
proportion to each unitholder's pre-merger equity ownership of Henley.
The following is a schedule of available cash at December 31, 2002:
<s> <c>
Cash and investments at December 31, 2002 $189,582,000
Less cash obligations to be paid subsequent to
December 31, 2002:
Payment of outstanding accounts payable, other
current liabilities and accrued compensation as
of December 31, 2002 (8,399,000)
Provision for payment of anticipated tax obligations (49,873,000)
Repayment of Subordinated Debentures, including
accrued but unpaid interest (56,096,000)
Tax benefit associated with repayment of
Subordinated Debentures and other
operating expenses 9,000,000
------------
Net cash and investments available for distribution 84,214,000
Assumed distribution at $27.00 per unit outstanding 72,999,000
------------
Cash available for post-December 31, 2002 accounts
payable, liabilities, expenses, claims and contingencies $ 11,215,000
============
Management currently believes that if certain tax efficiencies are
recognized in connection with the proposed transaction, actual taxes paid
may be up to $9,000,000 less than the $49,873,000 above and therefore
additional cash may be available.. Due to uncertainties relating to the
final amount of Henley's consolidated tax obligations, and as to Henley's
post-December 31, 2002 expenses, liabilities, claims and contingencies, no
assurances can be given as to the amount of cash that potentially could be
available in the future.
On January 9, 2003, Henley II announced that all of Henley II's outstanding
6% Subordinated Debentures due 2038 (the "Debentures") would be redeemed
effective on February 15, 2003. Approximately $54,073,000 principal amount
of the Debentures is outstanding. The redemption price is expected to be
$56,096,000, which equals 100% of the principal amount of Debentures plus
interest that is accrued and unpaid up to, but not including, the February
15, 2003 redemption date. As of December 31, 2002, Henley II's carrying
value of the Debentures amounted to $34,851,000. The $19,222,000
difference between principal amount and carrying value represents the
remaining portion of the original issue discount, which amount was to be
amortized through 2038. Due to Henley II's decision to redeem the
Debentures on February 15, 2003, the unamortized original issue discount of
$19,222,000 will be recognized in expense at the time of payment as a loss
on early extinguishment of debt, for which a tax benefit of approximately
$7,700,000 will be realized.
Henley II had a $10,000,000 revolving credit agreement with its commercial
bank, all of which was outstanding on June 30, 2002. The agreement was
scheduled to mature on June 30, 2003, but Henley II repaid all amounts
advanced under the revolving credit agreement and canceled the agreement in
September 2002.
No cash distributions to unitholders of Henley were declared or paid during
the six months ended December 31, 2002 and 2001. Future distributions will
be determined by BCLP GP, Inc., the general partner of Henley, in its sole
discretion based, among other things, on available resources, the needs of
Henley and the funds available after payments related to taxes, debentures,
other expenses and liabilities, claims and contingent liabilities.
17
Management believes that Henley's cash, cash equivalents and short-term
investments together with cash from operating activities will provide
adequate cash for Henley and its subsidiaries to meet their cash
requirements through December 31, 2003.
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
At December 31, 2002, Henley had invested approximately $28,700,000 in loan
participations issued by a commercial bank with maturities of less than
ninety days, and approximately $157,200,000 in repurchase agreements issued
by a commercial bank with maturities of less than ninety days. Due to
their short maturities and applicable transfer restrictions, management
believes that the loan participations and repurchase agreements are not
exposed to market risk. Management further believes that the Partnership
has no other assets that are subject to market risk.
At December 31, 2002, Henley II's debt portfolio included 6% Subordinated
Debentures with a carrying value of $34,851,000. The Subordinated
Debentures bear interest at a fixed rate of 6% per annum and, as a result,
fluctuations in market interest rates will have no effect on interest
expense, or on the earnings or cash flows of Henley II. On January 9,
2003, Henley II announced that the Subordinated Debentures will be redeemed
effective on February 15, 2003. The redemption price is expected to be
$56,096,000, which equals 100% of the principal amount of the Debentures
plus interest that is accrued and unpaid up to, but not including, the
February 15, 2003 redemption date. At February 11, 2003, the market value
of the Subordinated Debentures was approximately $53,835,000 based on their
trading value.
Neither Henley nor its subsidiaries are exposed to foreign currency risk.
Currently, Henley does not use interest rate derivative instruments to
manage its exposure to interest rate changes, and management does not
intend to utilize derivative instruments in the future.
ITEM 4 - Controls and Procedures
Within the 90 days before the date of this report, Henley and Henley II
carried out an evaluation, under the supervision and with the participation
of management, including the Chief Executive Officer and the Chief
Financial Officer and the Chief Operating Officer, of the effectiveness of
the design and operation of disclosure controls and procedures pursuant to
Rule 13a-14 of the Exchange Act. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer and Chief Operating Officer
concluded that the disclosure controls and procedures are effective in
timely alerting them to material information relating to Henley and Henley
II required to be included in periodic filings with the Securities Exchange
Commission.
There have been no significant changes in internal controls or in other
factors that could significantly affect those controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
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Part II - Other Information
ITEM 5 - Other Information
On February 14, 2003, Henley and certain of its affiliates filed a
transaction statement on Schedule 13E-3 with the SEC. The Schedule 13E-3
describes a proposed merger transaction that would result in the cash
payment to unaffiliated Henley unitholders of $27.00 per unit, plus
potential future payments consisting of net assets that remain, if any,
after paying or providing for taxes, the redemption of the Debentures,
other expenses and liabilities, claims and contingent liabilities.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits -
2.1 Asset Purchase and Sale Agreement, dated as of September 27, 2002,
by and between Celtics Basketball, L.P. and Lake Carnegie, LLC
(incorporated by reference to Exhibit 2.1 to our Current
Report on
Form 8-K filed on October 7, 2002).
(b) Reports on Form 8-K -
Form 8-K, dated October 7, 2002, regarding the Asset Purchase and
Sale Agreement between Celtics Basketball, L.P. and Lake Carnegie, LLC.
Form 8-K, dated January 8, 2003, regarding the completion of the sale of
the Boston Celtics basketball team and the change of name and trading symbol.
Form 8-K, dated January 10, 2003, regarding redemption of Subordinated
Debentures.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrants have duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HENLEY LIMITED PARTNERSHIP
---------------------------------
(Registrant)
By: BCLP GP, Inc., its General Partner
Dated: February 14, 2003 By: /s/ Richard G. Pond
-----------------------------
Richard G. Pond
Executive Vice President
Chief Financial Officer
and Chief Operating Officer
Dated: February 14, 2003 HENLEY LIMITED PARTNERSHIP II
---------------------------------
(Registrant)
By: BCLP II GP, Inc., its General
Partner
By: /s/ Richard G. Pond
-----------------------------
Richard G. Pond
Executive Vice President
Chief Financial Officer
and Chief Operating Officer
CERTIFICATIONS
Each of the undersigned, in his capacity as the Chief Executive
Officer and Chief Financial Officer, respectively, of the general partners
of Henley Limited Partnership and Henley Limited Partnership II
(collectively, the "Registrants"), for purposes of 18 U.S.C. Section 1350
provides the following certification required by 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, and 17
C.F.R.ss.240.13a-14.
Certification of Chief Executive Officer:
I, Paul E. Gaston, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrants;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
20
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrants as of, and for, the periods presented in this
quarterly report;
4. The Registrants' other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrants and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrants, including their
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrants' disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrants' other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrants' auditors and the respective
audit committees of the Registrants' board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrants' ability to
record, process, summarize and report financial data and have
identified for the Registrants' auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrants'
internal controls; and
6. The Registrants' other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003
-----------------
/s/ Paul E. Gaston
-----------------------------
Paul E. Gaston
Chief Executive Officer
Certification of Chief Financial Officer:
I, Richard G. Pond, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrants;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrants as of, and for, the periods presented in this
quarterly report;
4. The Registrants' other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrants and we have:
21
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrants, including their
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrants' disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrants' other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrants' auditors and the respective
audit committees of the Registrants' board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrants' ability to
record, process, summarize and report financial data and have
identified for the Registrants' auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrants'
internal controls; and
6. The Registrants' other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003
-----------------
/s/ Richard G. Pond
-----------------------------
Richard G. Pond
Chief Financial Officer
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