<PAGE> 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 March 31, 1996
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 0-14505
Enstar Income Program II-2, L.P.
(Exact name of registrant as specified in its charter)
Georgia 58-1628872
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
10900 Wilshire Boulevard, 15th Floor, Los Angeles, CA 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 X 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
--- ---
<PAGE> 2
PART I - FINANCIAL INFORMATION
ENSTAR INCOME PROGRAM II-2, L.P.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1995* 1996
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 1,863,800 $ 2,320,400
Accounts receivable less allowance of $5,000 and
$5,800 for possible losses 68,900 32,100
Prepaid expenses and other 29,500 52,800
Cable materials, equipment and supplies 138,100 138,100
Property, plant and equipment, less accumulated depreciation
and amortization of $6,819,400 and $7,017,500 2,414,700 2,238,700
Franchise cost, less accumulated amortization
of $967,800 and $994,500 467,700 442,700
Deferred loan costs and other charges, net 44,000 42,100
----------- -----------
$ 5,026,700 $ 5,266,900
=========== ===========
LIABILITIES AND PARTNERSHIP CAPITAL
LIABILITIES:
Note payable $ 483,700 $ 483,700
Accounts payable 282,300 207,600
Due to affiliates 110,100 289,900
----------- -----------
TOTAL LIABILITIES 876,100 981,200
----------- -----------
COMMITMENTS AND CONTINGENCIES
PARTNERSHIP CAPITAL (DEFICIT):
General partners (32,200) (30,800)
Limited partners 4,182,800 4,316,500
----------- -----------
TOTAL PARTNERSHIP CAPITAL 4,150,600 4,285,700
----------- -----------
$ 5,026,700 $ 5,266,900
=========== ===========
</TABLE>
*As presented in the audited financial statements.
See accompanying notes to condensed financial statements.
-2-
<PAGE> 3
ENSTAR INCOME PROGRAM II-2, L.P.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Unaudited
------------------------
Three months ended
March 31,
------------------------
1995 1996
--------- ---------
<S> <C> <C>
REVENUES $ 757,800 $ 816,600
--------- ---------
OPERATING EXPENSES:
Service costs 234,600 272,200
General and administrative expenses 68,300 74,500
General Partner management fees
and reimbursed expenses 104,200 99,700
Depreciation and amortization 232,100 236,900
--------- ---------
639,200 683,300
--------- ---------
OPERATING INCOME 118,600 133,300
--------- ---------
OTHER INCOME (EXPENSE):
Interest income 14,300 20,400
Interest expense (18,700) (18,600)
--------- ---------
(4,400) 1,800
--------- ---------
NET INCOME $ 114,200 $ 135,100
========= =========
NET INCOME PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ 3.78 $ 4.48
========= =========
AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING PERIOD 29,880 29,880
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
-3-
<PAGE> 4
ENSTAR INCOME PROGRAM II-2, L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Unaudited
--------------------------
Three months ended
March 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 114,200 $ 135,100
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 232,100 236,900
Amortization of deferred loan costs 3,200 3,200
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses and other (76,300) 13,500
Accounts payable and due to affiliates 99,400 105,100
----------- -----------
Net cash provided by operating activities 372,600 493,800
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (54,100) (29,700)
Increase in intangible assets (8,400) (7,500)
----------- -----------
Net cash used in investing activities (62,500) (37,200)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 310,100 456,600
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,147,600 1,863,800
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 1,457,700 $ 2,320,400
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
-4-
<PAGE> 5
ENSTAR INCOME PROGRAM II-2, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
The accompanying condensed interim financial statements for the three
months ended March 31, 1996 and 1995 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 months ended March 31, 1996 are not necessarily indicative of results
for the entire year.
2. TRANSACTIONS WITH THE GENERAL PARTNER 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 fees approximated $40,800 for the
three months ended March 31, 1996.
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 $58,900 for
the three months ended March 31, 1996. Management fees and reimbursed expenses
due the Corporate General Partner are non-interest bearing.
The Partnership also receives certain system operating management
services from an affiliate of the Corporate General Partner in addition to the
Manager, due to the fact that there are no such employees directly employed by
one of the Partnership's cable systems. The Partnership reimburses the affiliate
for its allocable share of the affiliate's operational costs. The total amount
charged to the Partnership for these costs approximated $9,400 in the three
months ended March 31, 1996. No management fee is payable to the affiliate by
the Partnership and there is no duplication of reimbursed expenses and costs
paid to the Manager.
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 Partnership could negotiate for such
programming services on a stand-alone basis. The Partnership paid the affiliate
$178,500 for these programming services for the three months ended March 31,
1996. Programming fees are included in service costs in the statements of
operations for the three months ended March 31, 1996 and 1995.
-5-
<PAGE> 6
ENSTAR INCOME PROGRAM II-2, 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 are allocated 99% to the limited partners and
1% to the general partner.
4. RECLASSIFICATIONS
Certain 1995 amounts have been reclassified to conform to the 1996
presentation.
-6-
<PAGE> 7
ENSTAR INCOME PROGRAM II-2, L.P.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
On February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996 (the "1996 Telecom Act"). This statute
substantially changed the competitive and regulatory environment for
telecommunications providers by significantly amending the Communications Act of
1934, including certain of the rate regulation provisions previously imposed by
the Cable Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act"). Compliance with those rate regulations has had a negative impact on
the Partnership's revenues and cash flow. However, the Partnership believes that
recent policy decisions by the Federal Communications Commission (the "FCC")
will permit it to increase regulated service rates in the future in response to
specified historical and anticipated future cost increases, although certain
costs may continue to rise at a rate in excess of that which the Partnership
will be permitted to pass on to its customers. The 1996 Telecom Act provides
that certain of the rate regulations will be phased-out altogether in 1999.
Further, 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 completion of a significant
number of FCC rulemakings under the 1996 Telecom Act. There can be no assurance
as to what, if any, future 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 historic interim financial results as
described below are not necessarily indicative of future performance.
In addition to the information set forth in this report, reference is
made to the Partnership's Annual Report on Form 10-K for the year ended December
31, 1995 for additional information regarding regulatory matters and the effect
thereof on the Partnership's business.
RESULTS OF OPERATIONS
The Partnership's revenues increased from $757,800 to $816,600, or by
7.8%, for the quarter ended March 31, 1996 as compared to the corresponding
period in 1995. Of the $58,800 increase, $39,800 was due to increases in
regulated service rates permitted under the 1992 Cable Act that were implemented
by the Partnership in April 1995, $14,800 was due to increases in other revenue
producing items and $4,200 was due to increases in the number of subscriptions
for services.
Service costs increased from $234,600 to $272,200, or by 16.0%, for the
quarter ended March 31, 1996 as compared to the corresponding period in 1995.
Service costs represent costs directly attributable to providing cable services
to customers. Of the $37,600 increase, $13,400 was due to increases in
programming fees charged by program suppliers (including primary satellite
fees), $12,400 was due to an increase in copyright fees, $4,300 was due to
increases in franchise fees, $3,900 was due to a decrease in capitalization of
labor and overhead expense due to fewer capital projects in the 1996 period and
$3,600 was due to an increase in personnel costs. The increase in programming
fees was also due to expanded programming usage relating to channel line-up
restructuring and to retransmission consent arrangements implemented to comply
with the 1992 Cable Act.
-7-
<PAGE> 8
ENSTAR INCOME PROGRAM II-2, L.P.
RESULTS OF OPERATIONS (Concluded)
General and administrative expenses increased from $68,300 to $74,500,
or by 9.1%, for the quarter ended March 31, 1996 as compared to the
corresponding period in 1995. Of the $6,200 increase, $4,800 was due to an
increase in marketing expense, $2,900 was due to an increase in advertising
sales expense and $2,700 was due to an increase in professional fees. These
increases were partially offset by a $2,300 increase in the capitalization of
labor and overhead expense and a $1,800 decrease in customer billing expense.
Management fees and reimbursed expenses decreased from $104,200 to
$99,700, or by 4.3%, for the quarter ended March 31, 1996 as compared to the
corresponding period in 1995. Of the $4,500 decrease, $7,400 was due to lower
reimbursable expenses charged by the General Partner including lower allocated
marketing expense, personnel costs and telephone expense. This decrease was
partially offset by a $2,900 increase in management fees in direct relation to
increased revenues as described above.
Depreciation and amortization expense increased from $232,100 to
$236,900, or by 2.1%, for the quarter ended March 31, 1996 as compared to the
corresponding period in 1995 due to asset additions related to the upgrade of
the Partnership s plant.
Operating income increased from $118,600 to $133,300, or by 12.4%, for
the quarter ended March 31, 1996 compared to the corresponding period in 1995
primarily due to increases in revenues as described above.
Interest expense remained relatively unchanged decreasing from $18,700
to $18,600 for the quarter ended March 31, 1996 as compared to the corresponding
period in 1995.
Interest income increased from $14,300 to $20,400, or by 42.7% for the
quarter ended March 31, 1996 as compared to the corresponding period in 1995 due
to higher cash balances available for investment.
Due to the factors described above, the Partnership's net income
increased from $114,200 to $135,100, or by 18.3%, for the quarter ended March
31, 1996 as compared to the corresponding period in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The FCC's amended rate regulation rules were implemented during
the quarter ended September 30, 1994. Compliance with these rules has had a
negative impact on the Partnership's revenues and cash flow.
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, debt service and capital requirements
relating to the expansion, improvement and upgrade of its cable systems. The
Partnership relies upon the availability of cash generated
-8-
<PAGE> 9
ENSTAR INCOME PROGRAM II-2, L.P.
LIQUIDITY AND CAPITAL RESOURCES (Continued)
from operations and possible borrowings to fund its ongoing expenses, debt
service and capital requirements. In general, these requirements involve
expansion, improvement and upgrade of the Partnership's existing cable
television systems. The Partnership is required to rebuild one of its Illinois
cable systems at an estimated cost of approximately $1,475,000 as a condition of
a franchise renewal obtained. Construction will begin in the second quarter of
1996. Other capital expenditures budgeted for 1996 include approximately
$305,000 for the improvement and upgrade of other assets. Additionally, the
Corporate General Partner believes that it is essential for the Partnership to
preserve liquidity through retention of cash for a required rebuild of its cable
plant in Missouri at an estimated cost of approximately $1,100,000. Management
is continuing to evaluate these liquidity issues, including whether or not it
will be possible to resume paying distributions.
In December 1993, the Partnership obtained from a lender a $2,250,000
revolving bank credit agreement (the "Facility") maturing on September 30, 1997.
Loans under the Facility are secured by substantially all of the Partnership's
assets. Interest is payable at the Base Rate plus 1.5%. "Base Rate" means the
higher of the lender's prime rate or the Federal Funds Effective Rate plus 1/2%.
The Facility provides for quarterly reductions of the maximum commitment
beginning September 30, 1994, payable at the end of each fiscal quarter. The
Partnership is permitted to prepay amounts outstanding under the Facility at any
time without penalty, and is able to re-borrow throughout the term of the
Facility up to the maximum commitment then available so long as no event of
default exists. The Partnership is also required to pay a commitment fee of 1/2%
per annum on the unused portion of the Facility. The Facility contains certain
conditions, events of default and financial tests as well as other covenants
including, among others, restrictions on capital expenditures, incurrence of
indebtedness, distributions and investments, sale of assets and acquisitions.
The Partnership believes that it was in compliance with the Facility s loan
covenants as of March 31, 1996. The maximum amount available under the Facility
will decrease by $650,000 in 1996 to $1,050,000 and is payable in full during
1997. Repayment of principal is required to the extent the loan balance then
outstanding exceeds the maximum commitment, as adjusted. At March 31, 1996, the
outstanding loan balance under the Facility was $483,700.
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Operating activities provided $121,200 more cash in the three months
ended March 31, 1996 as compared with the corresponding period in 1995. The
increase was primarily due to an $89,800 decrease in receivables and other
assets. Cash generated by Partnership operations increased by $25,700 after
adding back non-cash depreciation and amortization charges. Increases in
accounts payable and due to affiliates used $5,700 less cash in the first three
months of 1996.
The Partnership used $25,300 less cash in investing activities in the
three months ended March 31, 1996 than in the corresponding three months of
1995, due to a $24,400 decrease in expenditures for tangible assets and a $900
increase for intangible assets.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues decreased from 46.3% during the first three months of
1995 to 45.3% in the corresponding 1996 quarter, primarily due to higher
programming expense and copyright fees. EBITDA increased from $350,700 to
$370,200, or by 5.6%, during the quarter ended March 31, 1996 compared to the
corresponding three months in 1995.
-9-
<PAGE> 10
ENSTAR INCOME PROGRAM II-2, L.P.
LIQUIDITY AND CAPITAL RESOURCES (Continued)
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 it is able to increase its service rates
periodically, of which there can be no assurance.
-10-
<PAGE> 11
ENSTAR INCOME PROGRAM II-2, L.P.
PART II. OTHER INFORMATION
ITEMS 1-5. Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) None
(b) No reports on Form 8-K were filed during the
quarter for which this report is filed.
<PAGE> 12
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-2, L.P.
a GEORGIA LIMITED PARTNERSHIP
-----------------------------
(Registrant)
By: ENSTAR COMMUNICATIONS CORPORATION
General Partner
Date: May 9, 1996 By: /s/ Michael K. Menerey
----------------------
Michael K. Menerey,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT MARCH 31, 1996, AND THE STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,320,400
<SECURITIES> 0
<RECEIVABLES> 37,900
<ALLOWANCES> 5,800
<INVENTORY> 138,100
<CURRENT-ASSETS> 0
<PP&E> 9,256,200
<DEPRECIATION> 7,017,500
<TOTAL-ASSETS> 5,266,900
<CURRENT-LIABILITIES> 497,500
<BONDS> 483,700
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,266,900
<SALES> 0
<TOTAL-REVENUES> 816,600
<CGS> 0
<TOTAL-COSTS> 683,300
<OTHER-EXPENSES> (20,400)
<LOSS-PROVISION> 5,300
<INTEREST-EXPENSE> 18,600
<INCOME-PRETAX> 135,100
<INCOME-TAX> 0
<INCOME-CONTINUING> 135,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 135,100
<EPS-PRIMARY> 4.48
<EPS-DILUTED> 0
</TABLE>
