1
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 September 30, 1997
---------------------------
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 0-14508
--------
Enstar Income Program II-1, L.P.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Georgia 58-1628877
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10900 Wilshire Boulevard - 15th Floor
Los Angeles, California 90024
- ---------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 824-9990
------------------
- --------------------------------------------------------------------------------
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
----- -----
Exhibit Index located at Page E-1
2
PART I - FINANCIAL INFORMATION
ENSTAR INCOME PROGRAM II-1, L.P.
CONDENSED BALANCE SHEETS
==============================================
December 31, September 30,
1996* 1997
----------- -----------
(Unaudited)
ASSETS:
Cash and cash equivalents $ 2,849,600 $ 2,104,400
Accounts receivable, less allowance of $4,700 and
$9,800 for possible losses 75,000 41,800
Prepaid expenses and other assets 29,200 338,800
Property, plant and equipment, less accumulated
depreciation and amortization of $4,145,800 and $4,334,100 1,891,100 3,283,100
Franchise cost, net of accumulated
amortization of $17,500 and $24,400 64,600 62,700
Deferred charges, net 8,900 7,800
----------- -----------
$ 4,918,400 $ 5,838,600
=========== ===========
LIABILITIES AND PARTNERSHIP CAPITAL
-----------------------------------
LIABILITIES:
Accounts payable $ 229,800 $ 410,100
Due to affiliates 173,900 210,400
----------- -----------
TOTAL LIABILITIES 403,700 620,500
----------- -----------
COMMITMENTS AND CONTINGENCIES
PARTNERSHIP CAPITAL (DEFICIT):
General partners (28,800) (21,700)
Limited partners 4,543,500 5,239,800
----------- -----------
TOTAL PARTNERSHIP CAPITAL 4,514,700 5,218,100
----------- -----------
$ 4,918,400 $ 5,838,600
=========== ===========
*As presented in the audited financial statements.
See accompanying notes to condensed financial statements.
-2-
3
ENSTAR INCOME PROGRAM II-1, L.P.
CONDENSED STATEMENTS OF OPERATIONS
==============================================
Unaudited
----------------------------
Three months ended
September 30,
----------------------------
1996 1997
----------- -----------
REVENUES $ 699,600 $ 754,000
----------- -----------
OPERATING EXPENSES:
Service costs 199,300 174,200
General and administrative expenses 66,700 61,000
General Partner management fees
and reimbursed expenses 100,600 116,900
Depreciation and amortization 59,500 86,600
----------- -----------
426,100 438,700
----------- -----------
OPERATING INCOME 273,500 315,300
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 31,000 31,500
Interest expense -- (4,700)
Gain on sale of cable assets 2,000 --
----------- -----------
33,000 26,800
----------- -----------
NET INCOME $ 306,500 $ 342,100
=========== ===========
Net income allocated to General Partners $ 3,100 $ 3,400
=========== ===========
Net income allocated to Limited Partners $ 303,400 $ 338,700
=========== ===========
NET INCOME PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ 10.14 $ 11.31
=========== ===========
AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING PERIOD 29,936 29,936
=========== ===========
See accompanying notes to condensed inancial statements.
-3-
4
ENSTAR INCOME PROGRAM II-1, L.P.
CONDENSED STATEMENTS OF OPERATIONS
==============================================
Unaudited
-----------------------------
Nine months ended
September 30,
-----------------------------
1996 1997
----------- -----------
REVENUES $ 2,015,800 $ 2,240,200
----------- -----------
OPERATING EXPENSES:
Service costs 589,600 606,900
General and administrative expenses 237,300 180,000
General Partner management fees
and reimbursed expenses 280,000 347,400
Depreciation and amortization 241,400 227,300
----------- -----------
1,348,300 1,361,600
----------- -----------
OPERATING INCOME 667,500 878,600
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 89,000 105,800
Interest expense (1,400) (10,700)
Gain on sale of cable assets 2,700 --
Other income -- 13,200
----------- -----------
90,300 108,300
----------- -----------
NET INCOME $ 757,800 $ 986,900
=========== ===========
Net income allocated to General Partners $ 7,600 $ 9,900
=========== ===========
Net income allocated to Limited Partners $ 750,200 $ 977,000
=========== ===========
NET INCOME PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ 25.06 $ 32.64
=========== ===========
AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING PERIOD 29,936 29,936
=========== ===========
See accompanying notes to condensed financial statements.
-4-
5
ENSTAR INCOME PROGRAM II-1, L.P.
STATEMENTS OF CASH FLOWS
==============================================
Unaudited
-----------------------------
Nine months ended
September 30,
-----------------------------
1996 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 757,800 $ 986,900
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 241,400 227,300
Gain on sale of cable assets (2,700) --
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses and other assets (33,800) (276,400)
Accounts payable and due to affiliates 228,200 216,800
----------- -----------
Net cash provided by operating activities 1,190,900 1,154,600
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (506,800) (1,605,800)
Increase in intangible assets (13,700) (10,500)
Proceeds from sale of property, plant and equipment 11,000 --
----------- -----------
Net cash used in investing activities (509,500) (1,616,300)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (283,500) (283,500)
----------- -----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 397,900 (745,200)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 2,657,300 2,849,600
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,055,200 $ 2,104,400
=========== ===========
See accompanying notes to condensed financial statements.
-5-
6
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
==============================================
1. INTERIM FINANCIAL STATEMENTS
The accompanying condensed interim financial statements for the three
and nine months ended September 30, 1997 and 1996 are unaudited. These condensed
interim financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Partnership's latest
Annual Report on Form 10-K. In the opinion of management, such 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 nine months ended September 30, 1997 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 with a wholly
owned subsidiary of the Corporate General Partner (the "Manager") for a monthly
management fee of 5% of revenues, excluding revenues from the sale of cable
television systems or franchises. Management fee expense approximated $37,700
and $112,000 for the three and nine months ended September 30, 1997.
In addition to the monthly management fee described above, the
Partnership reimburses 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. All cable television
properties managed by the Corporate General Partner and its subsidiary are
charged a proportionate share of these expenses. Corporate office allocations
and district office expenses are charged to the properties served based
primarily on the respective percentage of basic subscribers or homes passed
(dwelling units within a system) within the designated service areas. The total
amount charged to the Partnership for these services approximated $79,200 and
$235,400 for the three and nine months ended September 30, 1997. Management fees
and reimbursed expenses due the Corporate General Partner are non-interest
bearing.
Certain programming services have been purchased through an affiliate
of the Partnership. In turn, the affiliate charges the Partnership for these
costs based on an estimate of what the Corporate General Partner could negotiate
for such programming services for the 15 partnerships managed by the Corporate
General Partner as a group. The Partnership recorded programming fee expense of
$149,100 and $452,300 for the three and nine months ended September 30, 1997.
Programming fees are included in service costs in the statements of operations.
3. EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST
Earnings and losses per unit of limited partnership interest is based
on the average number of units outstanding during the periods presented. For
this purpose, earnings and losses have 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.
-6-
7
ENSTAR INCOME PROGRAM II-1, L.P.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act") required the Federal Communications Commission ("FCC")
to, among other things, implement extensive regulation of the rates charged by
cable television systems for basic and programming service tiers, installation,
and customer premises equipment leasing. Compliance with those rate regulations
has had a negative impact on the Partnership's revenues and cash flow. The
Telecommunications Act of 1996 (the "1996 Telecom Act") substantially changed
the competitive and regulatory environment for cable television and
telecommunications service providers. Among other changes, the 1996 Telecom Act
provides that the regulation of programming service tiers will be phased out
altogether in 1999. The regulatory environment will continue to change pending,
among other things, the outcome of legal challenges and FCC rulemaking and
enforcement activity in respect of the 1992 Cable Act and the 1996 Telecom Act.
There can be no assurance as to what, if any, further action may be taken by the
FCC, Congress or any other regulatory authority or court, or the effect thereof
on the Partnership's business. Accordingly, the Partnership's historical
financial results as described below are not necessarily indicative of future
performance.
This Report includes certain forward looking statements regarding,
among other things, 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 the Partnership's Annual Report on Form
10-K for the year ended December 31, 1996 for additional information regarding
such matters and the effect thereof on the Partnership's business.
RESULTS OF OPERATIONS
The Partnership's revenues increased from $699,600 to $754,000, or by
7.8%, and from $2,015,800 to $2,240,200, or by 11.1%, for the three and nine
months ended September 30, 1997 as compared to the corresponding periods in
1996. Of the $54,400 increase in revenues for the three months ended September
30, 1997 as compared to the corresponding period in 1996, $48,200 was due to
increases in regulated service rates that were implemented by the Partnership in
the fourth quarter of 1996 and the third quarter of 1997 and $9,100 was due to
an increase in the number of subscriptions, primarily for premium and basic
service. These increases were partially offset by a $2,900 decrease in other
revenue producing items. Of the $224,400 increase in revenues for the nine
months ended September 30, 1997 compared to the corresponding period in 1996,
$160,800 was due to increases in regulated service rates, $46,500 was due to the
restructuring of The Disney Channel from a premium channel to a tier channel
effective July 1, 1996, $13,400 was due to increases in other revenue producing
items and $3,700 was due to an increase in the number of subscriptions,
primarily for basic service. As of September 30, 1997, the Partnership had
approximately 7,000 homes subscribing to cable service and 1,700 premium service
units.
-7-
8
ENSTAR INCOME PROGRAM II-1, L.P.
RESULTS OF OPERATIONS (CONTINUED)
Service costs decreased from $199,300 to $174,200, or by 12.6%, and
increased from $589,600 to $606,900, or by 2.9%, for the three and nine months
ended September 30, 1997 as compared to the corresponding periods in 1996.
Service costs represent costs directly attributable to providing cable services
to customers. The decrease for the quarter was principally due to increased
capitalization of labor and overhead costs related to the rebuild of the
Partnership's Taylorville, Illinois cable system. Programming expense accounted
for the majority of the increase in the first nine months of 1997 as compared to
the corresponding 1996 period. Programming expense increased primarily as a
result of higher rates charged by program suppliers.
General and administrative expenses decreased from $66,700 to $61,000,
or by 8.5%, and from $237,300 to $180,000, or by 24.1%, for the three and nine
months ended September 30, 1997 as compared to the corresponding periods in
1996. The decreases for the three and nine months were primarily due to
decreases in personnel costs and insurance premiums. Personnel costs decreased
due to the transfer of certain employees to the Corporate General Partner's
operations.
Management fees and reimbursed expenses increased from $100,600 to
$116,900, or by 16.2%, and from $280,000 to $347,400, or by 24.1%, for the three
and nine months ended September 30, 1997 as compared to the corresponding
periods in 1996. Management fees increased in direct relation to increased
revenues as described above. Reimbursable expenses increased primarily due to
higher allocated personnel costs resulting from the transfer of personnel to the
Corporate General Partner's staff from the Partnership's operations.
Operating income before income taxes, depreciation and amortization
(EBITDA) is a commonly used financial analysis tool for measuring and comparing
cable television companies in several areas, such as liquidity, operating
performance and leverage. EBITDA as a percentage of revenues increased from
47.6% to 53.3% and from 45.1% to 49.4% during the three and nine months ended
September 30, 1997 compared to the corresponding periods in 1996. The change was
primarily due to higher revenues. EBITDA increased from $333,000 to $401,900, or
by 20.7%, and from $908,900 to $1,105,900, or by 21.7%, during the three and
nine months ended September 30, 1997 compared to the corresponding periods in
1996. EBITDA should be considered in addition to and not as a substitute for net
income and cash flows determined in accordance with generally accepted
accounting principles as an indicator of financial performance and liquidity.
Depreciation and amortization expense increased from $59,500 to
$86,600, or by 45.6%, for the three months and decreased from $241,400 to
$227,300, or by 5.8%, for the nine months ended September 30, 1997 as compared
to the corresponding periods in 1996. The increase for the three months was the
result of placing into service a portion of the Taylorville, Illinois system
rebuild. The nine months' decrease was due to the effect of certain plant assets
becoming fully depreciated in 1996. Depreciation and amortization expense will
continue to increase significantly in future periods as remaining portions of
the system rebuild are placed into service.
-8-
9
ENSTAR INCOME PROGRAM II-1, L.P.
RESULTS OF OPERATIONS (CONTINUED)
Operating income increased from $273,500 to $315,300, or by 15.3%, and
from $667,500 to $878,600, or by 31.6%, for the three and nine months ended
September 30, 1997 as compared to the corresponding periods in 1996, principally
due to increased revenues as described above.
Interest income increased from $31,000 to $31,500, or by 1.6%, and from
$89,000 to $105,800, or by 18.9%, for the three and nine months ended September
30, 1997 as compared to the corresponding periods in 1996. These increases were
primarily due to a change in investment policy that yielded a greater return on
invested cash. Interest income also increased due to higher cash balances
available for investment.
Due to the factors described above, the Partnership's net income
increased from $306,500 to $342,100, or by 11.6%, and from $757,800 to $986,900,
or by 30.2%, for the three and nine months ended September 30, 1997 as compared
to the corresponding periods in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary objective, having invested its net offering
proceeds in cable systems, is to distribute to its 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 its cable systems.
At September 30, 1997, the Partnership had no debt outstanding. The
Partnership relies upon cash flow from operations to meet operating requirements
and fund necessary capital expenditures. Although the Partnership currently has
a significant cash balance, there can be no assurance that the Partnership's
cash flow will be adequate to meet its future liquidity requirements. The
Partnership is required to rebuild its Taylorville, Illinois cable system at an
estimated total cost of $2,490,000 as a condition of its franchise agreement and
is also rebuilding portions of its cable systems in surrounding communities at
an estimated additional cost of approximately $789,000. Rebuild construction
began in October 1996 and is expected to be completed in the second half of
1997. The Partnership has budgeted expenditures of $2,460,000 in 1997 to
complete the entire rebuild. Construction costs related to the rebuild
approximated $1,582,400 during the first nine months of 1997. Other capital
expenditures budgeted for 1997 include approximately $400,000 for the
improvement and upgrade of other assets. As a result, the Partnership intends,
if possible, to maintain cash reserves. In the future, the Partnership may also
need to borrow.
The Corporate General Partner had engaged in discussions with a number
of possible financing sources regarding the availability and terms of a bank
facility for the Partnership. These discussions were not successful. The
Corporate General Partner was generally advised that an individual facility of
the size needed by the Partnership is too small to interest most banks which
lend to the cable television industry. Accordingly, on June 6, 1997, the
Corporate General Partner and an affiliated partnership formed Enstar Finance
Company, LLC ("EFC"). On September 30, 1997, EFC obtained a secured bank
facility of $35 million from two agent banks in order to provide funds that
would in turn be advanced to the Partnership and certain of the other related
partnerships managed by the Corporate General Partner. The Partnership's maximum
loan commitment will approximate $799,600, which it becomes eligible to borrow
at such time as the Partnership enters into a loan agreement with EFC. The
partnership agreement requires borrowings from
-9-
10
ENSTAR INCOME PROGRAM II-1, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
an affiliate to be repaid within 12 months. Such funds would be used to provide
capital to fund future rebuild and upgrade requirements.
Based on discussions with prospective lenders, the Corporate General
Partner believes that this structure provides capital to the Partnership on
terms more favorable than could be obtained on a "stand-alone" basis, with the
possible exception of the short-term period permitted by the partnership
agreement. Advances by EFC under its partnership loan facilities are
independently collateralized by the individual partnership borrowers so that no
partnership is liable for borrowings made to other partnerships. Borrowings bear
interest at the lender's base rate (8.5% at September 30, 1997), as defined,
plus 0.625%, or at an offshore rate, as defined, plus 1.875%. The Partnership
will be permitted to prepay amounts outstanding under the facility at any time
without penalty, and will be able to reborrow throughout the term of the
facility up to the maximum commitment then available so long as no event of
default exists. The Partnership will also be required to pay a commitment fee of
0.5% per annum on the unused portion of its facility when it becomes eligible to
borrow, and an annual administrative fee.
The facility will contain certain financial tests and other covenants
including, among others, restrictions on incurrence of indebtedness,
investments, sale of assets, acquisitions and other covenants, defaults and
conditions. The facility will also contain restrictions on the payment of
distributions to partners if an event of default exists.
The Partnership paid distributions totaling $94,500 and $283,500 during
the three and nine months ended September 30, 1997, and expects to continue to
pay distributions at this level during the remainder of 1997. There can,
however, be no assurances regarding the level, timing or continuation of future
distributions.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Cash provided by operating activities decreased by $36,300 from
$1,190,900 to $1,154,600 for the nine months ended September 30, 1997 as
compared with the corresponding period in 1996. Changes in receivables, prepaid
expenses and other assets used $242,600 more cash in the first nine months of
1997 due to the timing of receivable collections and the payment of prepaid
expenses. The Partnership used $11,400 more cash to pay liabilities owed to the
General Partner and third party creditors during the nine months ended September
30, 1997 than in the comparable period of 1996 due to differences in the timing
of payments. Cash generated by Partnership operations increased by $217,700
after adding back non-cash depreciation and amortization charges.
The Partnership used $1,106,800 more cash in investing activities in
the nine months ended September 30, 1997 than in the corresponding nine months
of 1996, due to a $1,099,000 increase in expenditures for tangible assets,
partially offset by a $3,200 decrease in expenditures for intangible assets. The
Partnership received proceeds of $11,000 in the first half of 1996 related to
the sale of equipment and other assets.
-10-
11
ENSTAR INCOME PROGRAM II-1, L.P.
INFLATION
Certain of the Partnership's expenses, such as those for wages and
benefits, equipment repair and replacement, and billing and marketing generally
increase with inflation. However, the Partnership does not believe that its
financial results have been, or will be, adversely affected by inflation in a
material way.
-11-
12
ENSTAR INCOME PROGRAM II-1, L.P.
PART II. OTHER INFORMATION
ITEMS 1-5. Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.18 - Franchise agreement between Enstar
Communications Corporation and County of
Christian, IL.
(b) No reports on Form 8-K were filed during the quarter
for which this report is filed.
13
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: November 12, 1997 By: /s/ Michael K. Menerey
-----------------------------
Michael K. Menerey,
Chief Financial Officer
14
ENSTAR INCOME PROGRAM II-1, L.P.
EXHIBIT INDEX
Exhibit
Number Description
- ------
10.18 Franchise agreement between Enstar Communications Corporation and
County of Christian, IL.
E-1