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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-14508
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Enstar Income Program II-1, L.P.
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(Exact name of Registrant as specified in its charter)
Georgia 58-1628877
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12405 Powerscourt Drive
St. Louis, Missouri 63131
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (314) 965-0555
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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
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PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
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ENSTAR INCOME PROGRAM II-1, L.P.
CONDENSED BALANCE SHEETS
================================================================================
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000 *
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(UNAUDITED)
ASSETS
ASSETS:
Cash $ 1,319,700 $ 1,861,600
Accounts receivable, net of allowance for doubtful
accounts of $4,700 and $6,100, respectively 66,200 119,300
Prepaid expenses and other assets 38,300 37,000
Due from affiliates 284,900 41,400
Property, plant and equipment, net of accumulated
depreciation of $4,307,100 and $3,933,900, respectively 5,805,400 6,046,300
Franchise cost, net of accumulated
amortization of $66,000 and $59,700, respectively 49,800 56,100
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$ 7,564,300 $ 8,161,700
=========== =============
LIABILITIES AND PARTNERSHIP CAPITAL
LIABILITIES:
Accounts payable $ 50,600 $ 633,100
Accrued liabilities 206,500 404,700
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257,100 1,037,800
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PARTNERSHIP CAPITAL (DEFICIT):
General Partners (900) (2,700)
Limited Partners 7,308,100 7,126,600
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TOTAL PARTNERSHIP CAPITAL 7,307,200 7,123,900
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$ 7,564,300 $ 8,161,700
=========== =============
</Table>
* Agrees with audited balance sheet included in the Partnership's Annual
Report on Form 10-K.
The accompanying notes are an integral part of these condensed
financial statements.
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ENSTAR INCOME PROGRAM II-1, L.P.
CONDENSED STATEMENTS OF OPERATIONS
================================================================================
<Table>
<Caption>
UNAUDITED
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THREE MONTHS ENDED
JUNE 30,
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2001 2000
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REVENUES $ 792,700 $ 815,200
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OPERATING EXPENSES:
Service costs 213,100 202,700
General and administrative expenses 81,000 82,500
General partner management fees and reimbursed expenses 125,500 126,500
Depreciation and amortization 190,300 143,200
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609,900 554,900
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OPERATING INCOME 182,800 260,300
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OTHER INCOME (EXPENSE):
Interest income 15,200 34,500
Interest expense -- (2,600)
Other expense (32,000) --
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(16,800) 31,900
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NET INCOME $ 166,000 $ 292,200
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Net income allocated to General Partners $ 1,600 $ 2,900
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Net income allocated to Limited Partners $ 164,400 $ 289,300
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NET INCOME PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ 5.49 $ 9.66
========== ==========
AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING PERIOD 29,936 29,936
========== ==========
</Table>
The accompanying notes are an integral part of these condensed
financial statements.
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ENSTAR INCOME PROGRAM II-1, L.P.
CONDENSED STATEMENTS OF OPERATIONS
================================================================================
<Table>
<Caption>
UNAUDITED
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SIX MONTHS ENDED
JUNE 30,
--------------------------
2001 2000
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REVENUES $ 1,596,600 $ 1,617,200
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OPERATING EXPENSES:
Service costs 443,400 416,800
General and administrative expenses 149,900 140,600
General partner management fees and reimbursed expenses 247,100 243,900
Depreciation and amortization 379,500 283,200
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1,219,900 1,084,500
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OPERATING INCOME 376,700 532,700
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OTHER INCOME (EXPENSE):
Interest income 26,100 63,100
Interest expense -- (5,300)
Other expense (31,000) --
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(4,900) 57,800
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NET INCOME $ 371,800 $ 590,500
=========== ===========
Net income allocated to General Partners $ 3,700 $ 5,900
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Net income allocated to Limited Partners $ 368,100 $ 584,600
=========== ===========
NET INCOME PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ 12.30 $ 19.53
=========== ===========
AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING PERIOD 29,936 29,936
=========== ===========
</Table>
The accompanying notes are an integral part of these condensed
financial statements.
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ENSTAR INCOME PROGRAM II-1, L.P.
CONDENSED STATEMENTS OF CASH FLOWS
================================================================================
<Table>
<Caption>
UNAUDITED
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SIX MONTHS ENDED
JUNE 30,
--------------------------
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 371,800 $ 590,500
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 379,500 283,200
Changes in:
Accounts receivable, due from affiliates, and prepaid
expenses and other assets (191,700) (71,900)
Accounts payable and accrued liabilities (780,700) (345,600)
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Net cash from operating activities (221,100) 456,200
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (132,300) (150,200)
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Net cash from investing activities (132,300) (150,200)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (188,500) (188,500)
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Net cash from financing activities (188,500) (188,500)
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INCREASE (DECREASE) IN CASH (541,900) 117,500
CASH AT BEGINNING OF PERIOD 1,861,600 2,309,000
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CASH AT END OF PERIOD $ 1,319,700 $ 2,426,500
=========== ===========
</Table>
The accompanying notes are an integral part of these condensed
financial statements.
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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 June 30, 2001, and for the three
and six months ended June 30, 2001 and 2000, 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, 2000. In the opinion of management, the
condensed interim financial statements reflect all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
results of such periods. The results of operations for the three and six months
ended June 30, 2001, 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 (the "Manager"), a wholly owned
subsidiary of Enstar Communications Corporation (ECC), the corporate general
partner, for a monthly management fee of 5% of revenues to the Manager,
excluding revenues from the sale of cable television systems or franchises.
Management fee expense approximated $39,600 and $79,800 for the three and six
months ended June 30, 2001, respectively. For the three and six months ended
June 30, 2000, management fee expense approximated $40,800 and $80,900,
respectively. Management fees are non-interest bearing.
In addition to the monthly management fee, the Management Agreement also
provides that the Partnership reimburse the Manager for direct expenses incurred
on behalf of the Partnership and for the Partnership's allocable share of
operational costs associated with services provided by the Manager.
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 $85,900 and $167,300 for the three and six months ended June
30, 2001, respectively. For the three and six months ended June 30, 2000, the
total amount charged to the Partnership for these services was $85,700 and
$163,000, respectively.
Substantially all programming services have been purchased through Charter.
Charter charges the Partnership for these costs based on its actual costs. The
Partnership recorded programming fee expense of $168,700 and $341,800 for the
three and six months ended June 30, 2001, respectively. For the three and six
months ended June 30, 2000, programming fee expense was $149,000 and $314,800,
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. COMMITMENTS
The Partnership, together with certain affiliates (collectively, the
"Selling Partnerships"), entered into a purchase and sale agreement, dated as of
August 8, 2000, as amended as of September 29, 2000 (the "Agreement"), with
Multimedia Acquisition Corp., an affiliate of Gans Multimedia Partnership
("Gans"). The Agreement provided for Gans to acquire the assets comprising the
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Partnership's Taylorville, Illinois cable system, as well as certain assets of
the other Selling Partnerships.
Following a series of discussions and meetings, the Partnership and Gans
determined that they will not be able to agree on certain further amendments to
the Agreement that are required in order to satisfy conditions precedent to
close the transaction. In light of this, present economic and financial market
conditions, and their impact on Gans' inability to arrange financing in order to
close the acquisition, on April 18, 2001 the parties agreed to terminate the
Agreement.
The Partnership's corporate general partner will continue to operate the
Partnership's cable television systems and will continue to investigate
potential divestiture transactions for the benefit of its unitholders.
5. NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board adopted
Statements of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting. SFAS No. 141 is required to be
implemented for all acquisitions initiated after June 30, 2001 and all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. Adoption of SFAS No. 141 will not impact
the condensed financial statements of the Partnership.
Under SFAS No. 142, goodwill is no longer subject to amortization over its
useful life, rather, it is subject to at least annual assessments of impairment.
Also, under SFAS No. 142, an intangible asset should be recognized if the
benefit of the intangible is obtained through contractual or other legal rights
or if the intangible asset can be sold, transferred, licensed, rented or
exchanged. Such intangibles will be amortized over their useful lives. Certain
intangibles have indefinite useful lives and will not be amortized. SFAS No. 142
will be implemented by the Partnership on January 1, 2002. All goodwill and
intangible assets acquired after June 30, 2001 will be immediately subject to
the provisions of SFAS No. 142. The Partnership is currently in process of
assessing the future impact of adoption of SFAS No. 142.
6. SUBSEQUENT EVENT
In August 2001, as a result of an auction process with sealed bids, the
corporate general partner received a non-binding letter of intent from Charter,
a related party, to acquire the Illinois cable systems of the Partnership and
certain of its affiliates, including the Partnership's Taylorville, Illinois
cable systems. The bid from Charter exceeded those of all other bidders. The
sale of the cable systems is subject to approval by a majority of the
Partnership's limited partners and certain closing conditions, including
regulatory approvals. There can be no assurance that this proposed sale will be
consummated.
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 the
Partnership. 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 the Partnership. In addition to the information
provided herein, reference is made to our Annual Report on Form 10-K for the
year ended December 31, 2000, for additional information regarding such matters
and the effect thereof on the Partnership's business.
RESULTS OF OPERATIONS
Revenues decreased from $815,200 to $792,700, or 2.8%, and from $1,617,200
to $1,596,600, or 1.3%, for the three and six months ended June 30, 2001,
respectively, as compared to the corresponding periods in 2000. The decreases in
revenues were due to a decline in the number of basic service customers,
partially offset by an increase in the number of premium service customers. As
of June 30, 2001 and 2000, we had approximately 6,400 and 6,700 basic service
customers, respectively, and 1,100 and 1,000 premium service customers,
respectively.
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Service costs increased from $202,700 to $213,100, or 5.1%, and from
$416,800 to $443,400, or 6.4%, for the three and six months ended June 30, 2001,
respectively, as compared to the corresponding periods in 2000. Service costs
represent programming costs and other costs directly attributable to providing
cable services to customers. The increases were primarily due to an increase in
programming fees.
Gross margin decreased from $612,500 to $579,600, or 5.4%, and from
$1,200,400 to $1,153,200, or 3.9%, for the three and six months ended June 30,
2001, respectively, as compared to the corresponding periods in 2000. As a
percentage of revenues, gross margin decreased from 75.1% to 73.1%, and from
74.2% to 72.2%, for the three and six months ended June 30, 2001, respectively,
as compared to the corresponding periods in 2000. The decreases in gross margin
dollars and gross margin dollars as a percentage of revenues were primarily due
to the decrease in revenues coupled with the increase in service costs, as
compared to the corresponding periods in 2000.
General and administrative expenses decreased from $82,500 to $81,000, or
1.8%, and increased from $140,600 to $149,900, or 6.6%, for the three and six
months ended June 30, 2001, respectively, as compared to the corresponding
periods in 2000. The decrease for the three months ended June 30, 2001 was
primarily due to decreases in marketing expenses, partially offset by an
increase in professional fees, as compared to the corresponding period in 2000.
The increase for the six months ended June 30, 2001 was primarily due to an
increase in professional fees, as compared to the corresponding period in 2000.
General partner management fees and reimbursed expenses decreased from
$126,500 to $125,500, or 0.8%, and increased from $243,900 to $247,100, or 1.3%,
for the three and six months ended June 30, 2001, respectively, as compared to
the corresponding periods in 2000.
Depreciation and amortization expense increased from $143,200 to $190,300,
or 32.9%, and from $283,200 to $379,500, or 34.0%, for the three and six months
ended June 30, 2001, respectively, as compared to the corresponding periods in
2000. The increases were due to asset additions for cable system upgrades in
2001 and throughout 2000.
Due to the factors described above, operating income decreased from $260,300
to $182,800, or 29.8%, and from $532,700 to $376,700, or 29.3%, for the three
and six months ended June 30, 2001, respectively, as compared to the
corresponding periods in 2000.
Interest income, net of interest expense, decreased from $31,900 to $15,200,
or 52.4%, and from $57,800 to $26,100, or 54.8%, for the three and six months
ended June 30, 2001, respectively, as compared to the corresponding periods in
2000. The decreases are primarily due to lower average cash balances available
for investment during the three and six months ended June 30, 2001.
Other expense of $32,000 for the three months ended June 30, 2001 represents
expenses associated with the termination of the Agreement with Gans.
Due to the factors described above, net income decreased from $292,200 to
$166,000 or 43.2%, and from $590,500 to $371,800, or 37.0%, for the three and
six months ended June 30, 2001, respectively, as compared to the corresponding
periods in 2000.
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 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 decreased from
$815,900 to $725,200, or 11.1%, for the six months ended June 30, 2001, as
compared to the corresponding period in 2000. EBITDA as a percentage of revenues
decreased from 50.5% to 45.4%, during the six months ended June 30, 2001, as
compared to the corresponding period in 2000. The decrease was related to the
changes in revenues and expenses as described above.
Operating activities used $221,100 cash in the six months ended June 30,
2001. Changes in receivables, due from affiliates, and prepaid expenses and
other assets used $191,700 cash during the six months ended June 30, 2001, due
to an increase in the amount owed from affiliates offset by higher receivable
collections. We used $780,700 cash to pay liabilities owed to affiliates and
third party creditors during the six months ended June 30, 2001. We used
$132,300 cash in investing activities during the six months ended June 30, 2001
on capital expenditures for systems upgrades. Cash used in financing activities
of $188,500 represent distributions to partners during the six months ended June
30, 2001.
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LIQUIDITY AND CAPITAL RESOURCES
Our primary objective 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 capital requirements relating to the expansion,
improvement and upgrade of such cable systems.
The Partnership, together with certain affiliates (collectively, the
"Selling Partnerships"), entered into a purchase and sale agreement, dated as of
August 8, 2000, as amended as of September 29, 2000 (the "Agreement"), with
Multimedia Acquisition Corp., an affiliate of Gans Multimedia Partnership
("Gans"). The Agreement provided for Gans to acquire the assets comprising the
Partnership's Taylorville, Illinois cable system, as well as certain assets of
the other Selling Partnerships.
Following a series of discussions and meetings, the Partnership and Gans
determined that they will not be able to agree on certain further amendments to
the Agreement that are required in order to satisfy conditions precedent to
close the transaction. In light of this, present economic and financial market
conditions, and their impact on Gans' inability to arrange financing in order
to close the acquisition, on April 18, 2001 the parties agreed to terminate the
Agreement.
The Partnership's corporate general partner will continue to operate the
Partnership's cable television systems and will continue to investigate
potential divestiture transactions for the benefit of its unitholders.
In August 2001, as a result of an auction process with sealed bids, the
corporate general partner received a non-binding letter of intent from Charter,
a related party, to acquire the Illinois cable systems of the Partnership and
certain of its affiliates, including the Partnership's Taylorville, Illinois
cable systems. The bid from Charter exceeded those of all other bidders. The
sale of the cable systems is subject to approval by a majority of the
Partnership's limited partners and certain closing conditions, including
regulatory approvals. There can be no assurance that this proposed sale will be
consummated.
At June 30, 2001, the Partnership had no debt outstanding. The Partnership
relies upon cash flow from operations to meet liquidity requirements and fund
necessary capital expenditures. Although the Partnership currently maintains a
cash balance, there can be no assurance that the Partnership's future cash
flows combined with available cash balances will be adequate to meet its
future liquidity requirements or to fund future capital expenditures. The
Partnership has upgraded its cable system in Litchfield, Illinois under a
provision of the franchise agreement. Total capital expenditures during 2000
and the six months ended June 30, 2001 approximated $1.6 million.
We paid distributions to partners totaling $188,500 during the six months
ended June 30, 2001, and expect to continue to pay distributions at
approximately this level during 2001. There can, however, be no assurances
regarding the level, timing or continuation of future distributions.
The Partnership maintains insurance coverage for all of the cable television
properties owned or managed by it to cover damage to cable distribution plant
and 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 those of the Partnership.
All of our customers are served by our system in Taylorville, 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.
Operating activities used $221,100 cash in the six months ended June 30,
2001. Changes in receivables, due from affiliates, and prepaid expenses and
other assets used $191,700 cash during the six months ended June 30, 2001, due
to an increase in the amount owed from affiliates offset by higher receivable
collections. We used $780,700 cash to pay liabilities owed to affiliates and
third party creditors during the six months ended June 30, 2001. We used
$132,300 cash in investing activities during the six months ended June 30, 2001
on capital expenditures for systems upgrades. Cash used in financing activities
of $188,500 represent distributions to partners during the six months ended June
30, 2001.
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NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board adopted
Statements of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting. SFAS No. 141 is required to be
implemented for all acquisitions initiated after June 30, 2001 and all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. Adoption of SFAS No. 141 will not impact
the condensed financial statements of the Partnership.
Under SFAS No. 142, goodwill is no longer subject to amortization over its
useful life, rather, it is subject to at least annual assessments of impairment.
Also, under SFAS No. 142, an intangible asset should be recognized if the
benefit of the intangible is obtained through contractual or other legal rights
or if the intangible asset can be sold, transferred, licensed, rented or
exchanged. Such intangibles will be amortized over their useful lives. Certain
intangibles have indefinite useful lives and will not be amortized. SFAS No. 142
will be implemented by the Partnership on January 1, 2002. All goodwill and
intangible assets acquired after June 30, 2001 will be immediately subject to
the provisions of SFAS No. 142. The Partnership is currently in process of
assessing the future impact of adoption of SFAS No. 142.
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 way, provided that we are
able to increase our service rates periodically, of which there can be no
assurance.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
None.
(B) REPORTS ON FORM 8-K
On May 1, 2001, the Registrant filed a current report
on Form 8-K to announce the termination of its sale
agreement with Multimedia Acquisition Corp.
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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.
a GEORGIA LIMITED PARTNERSHIP
-----------------------------------------------
(Registrant)
By: ENSTAR COMMUNICATIONS
CORPORATION
General Partner
Date: August 14, 2001 By: /s/ Paul E. Martin
----------------------------------------
Paul E. Martin, Vice President and
Corporate Controller (Principal
Financial Officer and Principal
Accounting Officer)
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