================================================================================
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 March 31, 2002.
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: 000-14508
ENSTAR INCOME PROGRAM II-1, L.P.
--------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1628877
------- ----------
(State or other jurisdiction of incorporation of organization) (I.R.S. Employer Identification Number)
12405 Powerscourt Drive
St. Louis, Missouri 63131
------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 965-0555
--------------
Former name, former address and former fiscal year,
if changed since last report.
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 such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
================================================================================
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENSTAR INCOME PROGRAM II-1, L.P.
CONDENSED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2002 2001 *
-------------- ------------
(UNAUDITED)
ASSETS
ASSETS:
Cash $ 850,500 $1,083,500
Accounts receivable 78,800 82,800
Due from affiliates 411,700 241,500
Prepaid expenses and other assets 19,200 11,300
Property, plant and equipment, net of accumulated
depreciation of $4,956,600 and $4,721,900, respectively 6,515,600 6,434,000
Franchise cost, net of accumulated
amortization of $74,100 and $72,500, respectively 48,400 50,000
---------- ----------
Total assets $7,924,200 $7,903,100
========== ==========
LIABILITIES AND PARTNERSHIP CAPITAL
LIABILITIES:
Accounts payable $ 51,700 $ 90,600
Accrued liabilities 457,000 367,900
---------- ----------
Total liabilities 508,700 458,500
---------- ----------
PARTNERSHIP CAPITAL:
General Partners 300 500
Limited Partners 7,415,200 7,444,100
---------- ----------
Total partnership capital 7,415,500 7,444,600
---------- ----------
Total liabilities and partnership capital $7,924,200 $7,903,100
========== ==========
* Agrees with the audited balance sheet included in the Partnership's Annual
Report on Form 10-K for the year ended December 31, 2001.
See accompanying notes to condensed financial statements.
2
ENSTAR INCOME PROGRAM II-1, L.P.
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
-------------------------
2002 2001
--------- ---------
(UNAUDITED)
REVENUES $ 808,000 $ 803,900
--------- ---------
OPERATING EXPENSES:
Service costs 266,100 230,300
General and administrative expenses 50,200 68,900
General partner management fees and reimbursed expenses 136,900 121,600
Depreciation and amortization 236,900 189,200
--------- ---------
690,100 610,000
--------- ---------
OPERATING INCOME 117,900 193,900
--------- ---------
OTHER INCOME (EXPENSE):
Interest income 1,900 10,900
Other (54,400) 1,000
--------- ---------
(52,500) 11,900
--------- ---------
NET INCOME $ 65,400 $ 205,800
========= =========
Net income allocated to General Partners $ 700 $ 2,100
========= =========
Net income allocated to Limited Partners $ 64,700 $ 203,700
========= =========
NET INCOME PER UNIT OF LIMITED PARTNERSHIP
INTEREST $ 2.16 $ 6.80
========= =========
AVERAGE LIMITED PARTNERSHIP UNITS
OUTSTANDING DURING PERIOD 29,936 29,936
========= =========
See accompanying notes to condensed financial statements.
3
ENSTAR INCOME PROGRAM II-1, L.P.
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2002 2001
----------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 65,400 $ 205,800
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 236,900 189,200
Changes in:
Accounts receivable, prepaid expenses, other assets,
and due from affiliates (174,700) 31,700
Accounts payable and accrued liabilities 50,200 (818,200)
----------- -----------
Net cash from operating activities 177,800 (391,500)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (316,300) (44,100)
----------- -----------
Net cash from investing activities (316,300) (44,100)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (94,500) (94,200)
----------- -----------
Net cash from financing activities (94,500) (94,200)
----------- -----------
NET DECREASE IN CASH (233,000) (529,800)
CASH AT BEGINNING OF PERIOD 1,083,500 1,861,600
----------- -----------
CASH AT END OF PERIOD $ 850,500 $ 1,331,800
=========== ===========
See accompanying notes to condensed financial statements.
4
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
The accompanying condensed interim financial statements for Enstar Income
Program II-1, L.P. (the Partnership) as of March 31, 2002, and for the three
months ended March 31, 2002 and 2001, are unaudited. These condensed interim
financial statements should be read in conjunction with the audited financial
statements and notes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2001. 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 months ended March 31, 2002 are
not necessarily indicative of results for the entire year.
2. TRANSACTIONS WITH THE GENERAL PARTNERS 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 (ECC), the Corporate General
Partner, for a monthly management fee of 5% of gross revenues, as defined, from
operations of the Partnership, excluding revenues from the sale of cable
television systems or franchises. Management fee expense approximated $40,400
and $38,700 for the three months ended March 31, 2002 and 2001, respectively.
Management fees are non-interest bearing.
The Management Agreement also provides that the Partnership reimburse
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 was $96,500 and $82,900 for the
three months ended March 31, 2002 and 2001, respectively.
All programming services have been purchased through Charter. Charter
charges the Partnership for these costs based on its costs. The Partnership
recorded programming fee expense of $179,600 and $173,100 for the three months
ended March 31, 2002 and 2001, respectively. Programming fees are included in
service costs in the accompanying condensed statements of operations.
The Partnership provides cable television signals to certain cable systems
in neighboring communities that are owned by other partnerships managed by ECC.
Such services are provided without fee.
3. NET INCOME PER UNIT OF LIMITED PARTNERSHIP INTEREST
Net income per unit of limited partnership interest is based on the average
number of units outstanding during the periods presented. For this purpose, net
income has been allocated 99% to the Limited Partners and 1% to the General
Partners. The General Partners do not own units of partnership interest in the
Partnership, but rather hold a participation interest in the income, losses and
distributions of the Partnership.
4. PROPOSED SALE OF ASSETS
On April 10, 2002, the Partnership entered into an asset purchase agreement
providing for the sale of all of the Partnership's Illinois cable television
systems to Charter Communications Entertainment I, LLC, an affiliate of the
Corporate General Partner and an indirect subsidiary of Charter, for a total
sale price of approximately $14,706,800 (the Charter Sale). Closing of the
Charter Sale is subject to closing sale price adjustments, regulatory approvals,
customary closing conditions and approval by the Limited Partners of the sale
transaction. In addition, the Limited Partners must also approve an amendment to
the partnership agreement to allow the sale of assets to an affiliate of the
Corporate General Partner. If approved, it is expected that this sale will
close in the third quarter of 2002, although no assurance can be given
regarding this matter. Proceeds from the sale will be used primarily for
distributions to partners, transaction costs and dissolution expenses.
5
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Prior to entering into the Charter Sale agreement, the Partnership was a
party to a multi-party asset sale agreement whereby the Partnership and five
other affiliated partnerships (which, together with the Partnership are
collectively referred to as the Selling Partnerships) would sell all of their
assets used in the operation of their respective Illinois cable television
systems (the Multi-Party Sale) to three affiliates of the Corporate General
Partner (referred to as the Purchasers). The Multi-Party Sale provided for a
total cash sale price of $63,000,000, with the total sale price being allocated
among the Selling Partnerships based on the number of customers served by each
of the Selling Partnerships' respective Illinois cable systems as of June 30,
2001 and each Selling Partnership receiving the same value per customer. The
Partnership's share of the purchase price was to be approximately $14,706,800,
consistent with the new Charter Sale agreement purchase price. Closing of the
Multi-Party Sale was subject to closing sale price adjustments, regulatory
approvals, customary closing conditions and the approval by the Limited
Partners of the Selling Partnerships of the sale of their respective Illinois
cable systems. On April 10, 2002, the Purchasers and the Partnership agreed to
terminate the Partnership as a party to the Multi-Party Sale, and the other
Selling Partnerships and the Purchasers closed the transaction as to the
remaining assets covered by the Multi-Party Sale agreement, at which time the
Partnership entered into the previously mentioned Charter Sale agreement.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 provides for the rescission of several previously
issued accounting standards, new accounting guidance for the accounting for
certain lease modifications and various technical corrections that are not
substantive in nature to existing pronouncements. SFAS No. 145 will be adopted
by the Partnership beginning January 1, 2003, except for the provisions relating
to the amendment of SFAS No. 13, which will be adopted for transactions
occurring subsequent to May 15, 2002. Adoption of SFAS No. 145 will not have a
material impact on the condensed financial statements of the Partnership.
6
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, 2001
for additional information regarding such matters and the effect thereof on our
business.
RESULTS OF OPERATIONS
Revenues increased $4,100 from $803,900 to $808,000, or less than 1%,
for the three months ended March 31, 2002 compared to the corresponding
period in 2001. As of March 31, 2002 and 2001, we had approximately 6,300 and
6,400 basic service customers, respectively, and 1,300 and 1,300 premium
service customers, respectively.
Service costs increased $35,800 from $230,300 to $266,100, or 15.5%, for
the three months ended March 31, 2002 compared to the corresponding period in
2001. Service costs represent programming costs and other costs directly
attributable to providing cable services to customers. The increase for the
three months ended March 31, 2002 is primarily due to an increase in
programming costs compared to the corresponding period in 2001.
General and administrative expenses decreased $18,700 from $68,900 to
$50,200, or 27.1%, for the three months ended March 31, 2002 compared to the
corresponding period in 2001. The decrease was primarily due to a decrease in
the number of employees coupled with a decrease in bad debt expense compared to
the corresponding period in 2001.
General partner management fees and reimbursed expenses increased $15,300
from $121,600 to $136,900, or 12.6%, for the three months ended March 31, 2002
compared to the corresponding period in 2001. The increase was primarily due to
an increase in the level of such services being provided and billed to us by
Charter Communications Holding Company, LLC and its affiliates.
Depreciation and amortization expense increased $47,700 from $189,200 to
$236,900, or 25.2%, for the three months ended March 31, 2002 compared to the
corresponding period in 2001. The increase was due primarily to capital
expenditures for cable system upgrades during the last three quarters of 2001
and first quarter of 2002.
Due to the factors described above, operating income decreased $76,000 from
$193,900 to $117,900, or 39.2%, for the three months ended March 31, 2002
compared to the corresponding period in 2001.
Interest income decreased $9,000 from $10,900 to $1,900, or 82.6%, for the
three months ended March 31, 2002 compared to the corresponding period in 2001.
The decrease is primarily due to lower average cash balances available for
investment during the three months ended March 31, 2002.
Other expense of $54,400 for the three months ended March 31, 2002
represents expenses associated with the sale of assets. Other income of $1,000
for the three months ended March 31, 2001 represents gains on the sale of fixed
assets.
Due to the factors described above, net income decreased $140,400 from
$205,800 to $65,400, or 68.2%, for the three months ended March 31, 2002
compared to the corresponding period in 2001.
Based on our experience in the cable television industry, we believe that
income before interest, income taxes, depreciation and amortization, or EBITDA,
and related measures of cash flow serve as important financial
7
analysis tools for measuring and comparing cable television companies in several
areas, such as liquidity, operating performance and leverage. EBITDA is not a
measurement determined under generally accepted accounting principles (GAAP) and
does not represent cash generated from operating activities in accordance with
GAAP. EBITDA should not be considered by the reader as an alternative to net
income as an indicator of financial performance or as an alternative to cash
flows as a measure of liquidity. In addition, the definition of EBITDA may not
be identical to similarly titled measures used by other companies. EBITDA
increased $83,700 from $384,100 to $300,400, or 21.8%, for the three months
ended March 31, 2002, as compared to the corresponding period in 2001. EBITDA
as a percentage of revenues decreased 10.6% from 47.8% to 37.2%, during the
three months ended March 31, 2002 compared to the corresponding period in 2001.
The fluctuations were related to the changes in revenues and expenses as
described above.
Operating activities provided $177,800 and used $391,500 in the three
months ended March 31, 2002 and 2001, respectively. Changes in receivables,
prepaid expenses, other assets and due from affiliates used $174,700 cash and
provided $31,700 cash during the three months ended March 31, 2002 and 2001,
respectively, primarily due to fluctuations in the amount owed from affiliates.
We provided $50,200 and used $818,200 cash to pay liabilities owed to affiliates
and third party creditors during the three months ended March 31, 2002 and 2001,
respectively.
Investing activities used $316,300 and $44,100 during the three months
ended March 31, 2002 and 2001, respectively, on capital expenditures for systems
upgrades.
Financing activities used $94,500 and $94,200 during the three months ended
March 31, 2002 and 2001, respectively, due to distributions to partners.
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 flow
from operations and proceeds from the sale of cable systems, if any, after
providing for expenses and any planned capital requirements relating to the
expansion, improvement and upgrade of our cable systems. Effective during the
second quarter of 2002, quarterly distributions will be suspended in light of
the proposed sale of assets.
We believe that cash generated by operations, will be adequate to fund
capital expenditures and other liquidity requirements in 2002 and beyond. See
"Results of Operations" for discussion regarding cash from operating, investing
and financing activities.
INVESTING ACTIVITIES
Significant additional capital would be required to complete a
comprehensive plant and headend upgrade. The estimated cost of making additional
upgrades to the Taylorville and Litchfield headends, including the electronics
to activate two-way capability in order to be able to offer high-speed Internet
service from both headends, as well as to increase channel capacity and allow
additional video, would be an aggregate of approximately $2.7 million (for an
upgrade to 550 megahertz (MHz) capacity) to $3.1 million (for an upgrade to 870
MHz capacity). However, given the proposed sale of all of our systems and for
the reasons stated in the section entitled "Proposed Sale of Assets," Enstar
Communications Corporation (the Corporate General Partner) does not plan to
proceed with these additional upgrades. Provided there are available funds, the
Corporate General Partner will, however, continue to make upgrades required by
franchise agreements and will continue to evaluate alternative, cost-effective
solutions to increase channel capacity, pay-per-view services and digital
services which would enhance the value of our systems and be economically
prudent.
FINANCING ACTIVITIES
At March 31, 2002, we had no debt outstanding. We rely upon cash flow from
operations to meet liquidity requirements and fund necessary capital
expenditures. Although we currently maintain a cash balance, there can be no
assurance that our future cash flows, combined with available cash balances,
will be adequate to meet our future liquidity requirements or to fund future
capital expenditures.
We paid distributions to partners totaling $94,500 and $94,200 during the
three months ended March 31,
8
2002 and 2001, respectively. However, there can be no assurances regarding the
level, timing or continuation of future distributions.
PROPOSED SALE OF ASSETS
On April 10, 2002, we entered into an asset purchase agreement providing
for the sale of all of our Illinois cable television systems to Charter
Communications Entertainment I, LLC, an affiliate of the Corporate General
Partner and an indirect subsidiary of Charter Communications Holdings Company,
LLC, for a total sale price of approximately $14,706,800 (the Charter Sale).
Closing of the Charter Sale is subject to closing sale price adjustments,
regulatory approvals, customary closing conditions and approval by the Limited
Partners of the sale transaction. In addition, the Limited Partners must also
approve an amendment to our agreement to allow the sale of assets to an
affiliate of the Corporate General Partner. It is expected that this sale will
close in the third quarter of 2002, although no assurance can be given regarding
this matter. Proceeds from the sale will be used primarily for distributions to
partners, transaction costs and dissolution expenses.
Prior to entering into the Charter Sale agreement, we were party to a
multi-party asset sale agreement whereby we and five other affiliated
partnerships (which, together with us are collectively referred to as the
Selling Partnerships) would sell all assets used in the operation of their
respective Illinois cable television systems (the Multi-Party Sale) to three
affiliates of the Corporate General Partner (referred to as the Purchasers). The
Multi-Party Sale provided for a total cash sale price of $63,000,000, with the
total sale price being allocated among the Selling Partnerships based on the
number of customers served by each of the Selling Partnerships' respective
Illinois cable systems as of June 30, 2001 and each Selling Partnership
receiving the same value per customer. Our share of the purchase price was to be
approximately $14,706,800. Closing of the Multi-Party Sale was subject to
closing sale price adjustments, regulatory approvals, customary closing
conditions and the approval by the Limited Partners of the Selling Partnerships
of the sale of their respective Illinois cable systems. On April 10, 2002, the
Purchasers and us agreed to terminate us as a party to the Multi-Party Sale, and
the other Selling Partnerships and the Purchasers closed the transaction as to
the remaining assets covered by the Multi-Party Sale agreement.
CERTAIN TRENDS AND UNCERTAINTIES
Insurance coverage is maintained for all of the cable television properties
owned or managed by Charter to cover damage to cable distribution system,
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.
All of our customers are served by our system in Taylorville and
Litchfield, Illinois, 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.
Although we do not believe that the terrorist attacks on September 11, 2001
and the related events have resulted in any material changes to our business and
operations to date, it is difficult to assess the impact that these events,
combined with the general economic slowdown, will have on future operations.
These events 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 provides for the rescission of several previously
issued accounting standards, new accounting guidance for the accounting for
certain lease modifications and various technical corrections that are not
substantive in nature to existing pronouncements. SFAS No. 145 will be adopted
by us beginning January 1, 2003, except for the provisions relating to the
amendment of SFAS No. 13, which will be adopted for transactions
9
occurring subsequent to May 15, 2002. Adoption of SFAS No. 145 will not have a
material impact on the condensed financial statements.
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.
10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
2.1 Letter of Amendment, dated April 10, 2002, by and between Charter
Communications Entertainment I, LLC, Interlink Communications
Partners, LLC, and Rifkin Acquisitions Partners, LLC and Enstar
Income Program II-1, L.P., Enstar Income Program II-2, L.P.,
Enstar Income Program IV-3, L.P., Enstar Income/Growth Program
Six-A, L.P., Enstar IV/PBD Systems Venture, and Enstar Cable of
Macoupin County. (Incorporated by reference to Exhibit 2.1 to the
current report on Form 8-K filed by Enstar Income Program II-1,
L.P. on April 26, 2002 (File No. 000-14508)).
2.2 Asset Purchase Agreement, dated April 10, 2002, by and between
Charter Communications Entertainment I, LLC, and Enstar Income
Program II-1, L.P. (Incorporated by reference to Exhibit 2.1 to
the current report on Form 8-K filed by Enstar Income Program
II-1, L.P. on April 26, 2002 (File No. 000-14508)).
(B) REPORTS ON FORM 8-K
On April 26, 2002, the registrant filed a current report on Form 8-K
to announce its entering into an asset purchase agreement with certain
indirect subsidiaries of Charter Communications, Inc.
11
SIGNATURES
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 II-1, L.P.
By: ENSTAR COMMUNICATIONS CORPORATION
---------------------------------
Corporate General Partner
Date: May 15, 2002 By: /s/ Paul E. Martin
-------------------
Paul E. Martin
Senior Vice President, Corporate
Controller
(Principal Accounting Officer)
12