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 June 30, 1998
---------------------
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
----- -----
2
PART I - FINANCIAL INFORMATION
ENSTAR INCOME PROGRAM II-1, L.P.
CONDENSED BALANCE SHEETS
========================================
December 31, June 30,
1997* 1998
----------- -----------
(Unaudited)
ASSETS:
Cash and cash equivalents $ 1,778,300 $ 1,665,800
Accounts receivable, less allowance of $11,000 and
$5,000 for possible losses 48,800 54,000
Prepaid expenses and other assets 351,000 358,900
Property, plant and equipment, less accumulated
depreciation and amortization of $4,419,300 and $2,732,000 3,765,500 3,979,900
Franchise cost, net of accumulated
amortization of $26,800 and $31,800 64,700 63,300
Deferred charges, net 6,800 6,700
----------- -----------
$ 6,015,100 $ 6,128,600
=========== ===========
LIABILITIES AND PARTNERSHIP CAPITAL
-----------------------------------
LIABILITIES:
Accounts payable $ 457,600 $ 266,600
Due to affiliates 192,200 197,600
----------- -----------
TOTAL LIABILITIES 649,800 464,200
----------- -----------
COMMITMENTS AND CONTINGENCIES
PARTNERSHIP CAPITAL (DEFICIT):
General partners (20,300) (17,300)
Limited partners 5,385,600 5,681,700
----------- -----------
TOTAL PARTNERSHIP CAPITAL 5,365,300 5,664,400
----------- -----------
$ 6,015,100 $ 6,128,600
=========== ===========
*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
June 30,
---------------------------
1997 1998
--------- ---------
REVENUES $ 748,100 $ 801,500
--------- ---------
OPERATING EXPENSES:
Service costs 218,900 222,700
General and administrative expenses 70,200 96,300
General Partner management fees
and reimbursed expenses 118,300 124,600
Depreciation and amortization 70,800 123,300
--------- ---------
478,200 566,900
--------- ---------
OPERATING INCOME 269,900 234,600
--------- ---------
OTHER INCOME (EXPENSE):
Interest income 39,100 20,300
Interest expense (2,900) (3,500)
--------- ---------
36,200 16,800
--------- ---------
NET INCOME $ 306,100 $ 251,400
========= =========
Net income allocated to General Partners $ 3,100 $ 2,500
========= =========
Net income allocated to Limited Partners $ 303,000 $ 248,900
========= =========
NET INCOME PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ 10.12 $ 8.31
========= =========
AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING PERIOD 29,936 29,936
========= =========
See accompanying notes to condensed financial statements.
-3-
4
ENSTAR INCOME PROGRAM II-1, L.P.
CONDENSED STATEMENTS OF OPERATIONS
========================================
Unaudited
-------------------------------
Six months ended
June 30,
-------------------------------
1997 1998
----------- -----------
REVENUES $ 1,486,200 $ 1,571,200
----------- -----------
OPERATING EXPENSES:
Service costs 432,700 452,300
General and administrative expenses 119,000 187,100
General Partner management fees
and reimbursed expenses 230,500 245,800
Depreciation and amortization 140,700 231,700
----------- -----------
922,900 1,116,900
----------- -----------
OPERATING INCOME 563,300 454,300
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 74,300 40,600
Interest expense (6,000) (6,800)
Other income 13,200 --
----------- -----------
81,500 33,800
----------- -----------
NET INCOME $ 644,800 $ 488,100
=========== ===========
Net income allocated to General Partners $ 6,400 $ 4,900
=========== ===========
Net income allocated to Limited Partners $ 638,400 $ 483,200
=========== ===========
NET INCOME PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ 21.33 $ 16.14
=========== ===========
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
-------------------------------
Six months ended
June 30,
-------------------------------
1997 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 644,800 $ 488,100
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 140,700 231,700
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses and other assets 34,200 (13,100)
Accounts payable and due to affiliates 386,000 (185,600)
----------- -----------
Net cash provided by operating activities 1,205,700 521,100
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (897,000) (437,300)
Increase in intangible assets (7,200) (7,300)
----------- -----------
Net cash used in investing activities (904,200) (444,600)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (189,000) (189,000)
----------- -----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 112,500 (112,500)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 2,849,600 1,778,300
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 2,962,100 $ 1,665,800
=========== ===========
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 six months ended June 30, 1998 and 1997 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 six months ended June 30, 1998 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 $40,100
and $78,600 for the three and six months ended June 30, 1998.
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. The Corporate General Partner
has contracted with Falcon Holding Group, L.P. ("FHGLP"), an affiliated
partnership, to provide corporate management services for the Partnership.
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 $84,500 and $167,200 for the three and six months ended
June 30, 1998. 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
$170,200 and $337,300 for the three and six months ended June 30, 1998.
Programming fees are included in service costs in the statements of operations.
-6-
7
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
=======================================
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.
-7-
8
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 cable programming service tier ("CPST") rates
will be terminated on March 31, 1999. Because cable service rate increases have
continued to outpace inflation under the FCC's existing regulations, the
Partnership expects Congress and the FCC to explore additional methods of
regulating cable service rate increases, including deferral or repeal of the
March 31, 1999 termination of CPST rate regulation. 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, 1997 for additional information regarding
such matters and the effect thereof on the Partnership's business.
RESULTS OF OPERATIONS
The Partnership's revenues increased from $748,100 to $801,500, or by
7.1%, and from $1,486,200 to $1,571,200, or by 5.7%, for the three and six
months ended June 30, 1998, as compared to the corresponding periods in 1997. Of
the $53,400 increase in revenues for the three months ended June 30, 1998, as
compared to the corresponding period in 1997, $41,400 was due to increases in
regulated service rates that were implemented by the Partnership in 1997 and
$12,000 was due to increases in other revenue producing items, including
advertising sales revenue and charges for franchise fees that the Partnership is
permitted to pass through to its customers. Of the $85,000 increase in revenues
for the six months ended June 30, 1998, as compared to the corresponding period
in 1997, $78,600 was due to increases in regulated service rates that were
implemented by the Partnership in 1997 and $13,600 was due to increases in other
revenue producing items as described above. These increases were partially
offset by a $7,200 decrease due to decreases in the number of subscriptions for
premium, tier and equipment rental services. As of June 30, 1998, the
Partnership had approximately 7,300 basic subscribers and 1,500 premium service
units.
-8-
9
ENSTAR INCOME PROGRAM II-1, L.P.
RESULTS OF OPERATIONS (CONTINUED)
Service costs increased from $218,900 to $222,700, or by 1.7%, and from
$432,700 to $452,300, or by 4.5%, for the three and six months ended June 30,
1998, as compared to the corresponding periods in 1997. Service costs represent
costs directly attributable to providing cable services to customers.
Programming fees accounted for the majority of the increase. Programming expense
increased primarily due to increases in rates charged by program suppliers.
General and administrative expenses increased from $70,200 to $96,300,
or by 37.2%, and from $119,000 to $187,100, or by 57.2%, for the three and six
months ended June 30, 1998, as compared to the corresponding periods in 1997.
The increases were primarily due to increases in marketing expenses and
professional fees, including audit expense.
Management fees and reimbursed expenses increased from $118,300 to
$124,600, or by 5.3%, and from $230,500 to $245,800, or by 6.6%, for the three
and six months ended June 30, 1998, as compared to the corresponding periods in
1997. Management fees increased in direct relation to increased revenues as
described above. Reimbursable expenses increased primarily due to higher
allocated personnel costs resulting from staff additions and wage increases.
Depreciation and amortization expense increased from $70,800 to
$123,300, or by 74.2%, and from $140,700 to $231,700, or by 64.7%, for the three
and six months ended June 30, 1998, as compared to the corresponding periods in
1997. The increases were the result of placing into service the Taylorville,
Illinois system rebuild.
Operating income decreased from $269,900 to $234,600, or by 13.1%, and
from $563,300 to $454,300, or by 19.4%, for the three and six months ended June
30, 1998, as compared to the equivalent periods in 1997, principally due to
increased depreciation and amortization expense and programming fees as
described above.
Interest income decreased from $39,100 to $20,300, or by 48.1%, and
from $74,300 to $40,600, or by 45.4%, for the three and six months ended June
30, 1998, as compared to the corresponding periods in 1997. The decreases were
primarily due to lower average cash balances available for investment.
Due to the factors described above, the Partnership's net income
decreased from $306,100 to $251,400, or by 17.9%, and from $644,800 to $488,100,
or by 24.3%, for the three and six months ended June 30, 1998, as compared to
the corresponding periods in 1997.
Based on its experience in the cable television industry, the
Partnership believes that operating income before depreciation and amortization
(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
-9-
10
ENSTAR INCOME PROGRAM II-1, L.P.
RESULTS OF OPERATIONS (CONTINUED)
companies. EBITDA as a percentage of revenues decreased from 45.5% to 44.7% and
from 47.4% to 43.7% during the three and six months ended June 30, 1998 as
compared to the corresponding periods in 1997. The decreases were primarily due
to higher programming fees, marketing expenses and professional fees as
described above. EBITDA increased from $340,700 to $357,900, or by 5.0%, and
from $704,000 to $686,000, or by 2.6%, during the three and six months ended
June 30, 1998, as compared to the corresponding periods in 1997.
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 June 30, 1998, 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 $2,500,000 under a provision of its franchise agreement
and is also rebuilding portions of its cable systems in surrounding communities
at an estimated additional cost of approximately $1,800,000. Construction costs
related to the entire rebuild approximated $2,784,300 as of December 31, 1997.
The Partnership has budgeted expenditures of approximately $1,500,000 in 1998 to
complete the rebuild. Rebuild construction costs approximated $356,500 during
the first six months of 1998. Other capital expenditures in the first six months
of 1998 included approximately $80,800 for the improvement and upgrade of other
assets. The Partnership is required to upgrade its system in the community of
Gillespie, Illinois under a provision of its franchise agreement. Expenditures
for the upgrade, beginning in 1999, are projected to total approximately
$725,000. The Partnership expects to complete the project by the required
deadline of December 31, 1999. Additionally, the Partnership is planning to
upgrade its cable system in Litchfield, Illinois beginning in 1999 at an
estimated cost of approximately $1,250,000. As a result of these planned capital
expenditures, the Partnership intends, if possible, to maintain cash reserves.
In the future, the Partnership may also need to borrow.
On September 30, 1997, Enstar Finance Company, LLC ("EFC"), a
subsidiary of the Corporate General Partner, obtained a secured bank facility of
$35 million from two agent banks in order to obtain funds that would in turn be
advanced to the Partnership and certain of the other partnerships managed by the
Corporate General Partner. The Partnership's maximum loan commitment is
approximately $799,600, which it will become eligible to borrow at such time as
the Partnership enters into a loan agreement with EFC. The partnership agreement
requires borrowings from an affiliate to be repaid within 12 months. Such funds
would be used to provide capital to fund future rebuild and upgrade
requirements.
Borrowings, if any, will bear interest at the lender's base rate (8.5%
at June 30, 1998) plus 0.625%, or at an offshore rate plus 1.875%. The
Partnership will be permitted to prepay amounts outstanding under the
-10-
11
ENSTAR INCOME PROGRAM II-1, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 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 not restrict the payment of distributions to
partners unless an event of default exists thereunder.
The Partnership paid distributions totaling $94,500 and $189,000 during
the three and six months ended June 30, 1998, and expects to continue to pay
distributions at this level during 1998. There can, however, be no assurances
regarding the level, timing or continuation of future distributions.
Beginning in August 1997, the Partnership elected to self-insure its
cable distribution plant and subscriber connections against property damage as
well as possible business interruptions caused by such damage. The decision to
self-insure was made due to significant increases in the cost of insurance
coverage and decreases in the amount of insurance coverage available.
While the Partnership has made the election to self-insure for these
risks based upon a comparison of historical damage sustained over the past five
years with the cost and amount of insurance currently available, there can be no
assurance that future self-insured losses will not exceed prior costs of
maintaining insurance for these risks. All of the Partnership's subscribers are
served by its 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 the Partnership's liquidity and
cash flows. The Partnership continues to purchase insurance coverage in amounts
its management views as appropriate for all other property, liability,
automobile, workers' compensation and other types of insurable risks.
The "Year 2000" issue refers to certain contingencies that could result
from computer programs being written using two digits rather than four to define
the year. Many existing computer systems, including certain of the Partnership's
computer systems, process transactions based on two digits for the year of the
transaction (for example, "98" for 1998). These computer systems may not operate
effectively when the last two digits become "00," as will occur on January 1,
2000.
The Corporate General Partner has commenced an assessment of the
Partnership's Year 2000 business risks and its exposure to computer systems, to
operating equipment which is date sensitive and to the interface systems of its
vendors and service providers. Based on a preliminary study, the Corporate
General Partner has concluded that certain of the Partnership's information
systems were not Year 2000 compliant and has elected to replace such software
and hardware with Year 2000 compliant applications and equipment, although the
decision to replace major portions of such software and hardware had previously
been made without regard to the Year 2000 issue. The Corporate General Partner
expects to install substantially all of the new systems in 1998, with the
remaining systems to be installed in the first half of 1999. The total
anticipated cost, including replacement software and hardware, will be borne by
FHGLP.
-11-
12
ENSTAR INCOME PROGRAM II-1, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
In addition to evaluating internal systems, the Partnership is
currently assessing its exposure to risks associated with its operating and
revenue generating equipment and has also initiated communications with
significant third party vendors and service suppliers to determine the extent to
which the Partnership's interface systems are vulnerable should those third
parties fail to solve their own Year 2000 problems on a timely basis. The
Partnership currently expects that the cost to replace non-compliant equipment
will be determined during the third quarter of 1998. Such costs will be borne by
the Partnership. There can be no assurance that the systems of other companies
on which the Partnership's systems rely will be timely converted and that the
failure to do so would not have an adverse impact on the Partnership's business.
The Partnership continues to closely monitor developments with its vendors and
service suppliers.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Cash provided by operating activities decreased by $684,600 for the six
months ended June 30, 1998 as compared with the corresponding period in 1997.
The Partnership used $571,600 more cash to pay liabilities owed to the Corporate
General Partner and third party creditors during the six months ended June 30,
1998 than in the first six months of 1997 due to differences in the timing of
payments. Receivables and prepaid expenses used $47,300 more cash in the six
months ended 1998 due to timing differences in receivable collections and in the
payment of prepaid expenses.
The Partnership used $459,600 less cash in investing activities in the
six months ended June 30, 1998 than in the corresponding six months of 1997,
primarily due to a $459,700 decrease in expenditures for tangible assets.
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, provided that the Partnership is able to increase its service
rates periodically, of which there can be no assurance.
-12-
13
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) None.
(b) The Registrant filed a Form 8-K dated April
16, 1998, in which it reported under Item 5
that an unsolicited offer to purchase
partnership units had been made without the
consent of the Corporate General Partner.
14
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 13, 1998 By: /s/ Michael K. Menerey
-------------------------
Michael K. Menerey,
Executive Vice President,
Chief Financial Officer and
Secretary